OI S.A.
FORM 20-F
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As filed with the Securities and Exchange Commission on May 20, 2016
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(cid:133) REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
⌧ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2015
OR
(cid:133) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
(cid:133) SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 001-15256
OI S.A.
(Exact Name of Registrant as Specified in Its Charter)
N/A
(Translation of Registrant’s Name into English)
The Federative Republic of Brazil
(Jurisdiction of Incorporation or Organization)
Rua Humberto de Campos, 425
Leblon, Rio de Janeiro, RJ, Brazil 22430-190
(Address of Principal Executive Offices)
Flavio Nicolay Guimarães
Investor Relations Officer
Rua Humberto de Campos, 425
8º andar
Leblon, Rio de Janeiro, RJ, Brazil 22430-190
Tel: +55 21 3131-2918
invest@oi.net.br
OI S.A.
FORM 20-F
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(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to section 12(b) of the Act:
Title of Each Class
Common Shares, without par value, each represented by
American Depositary Shares
Preferred Shares, without par value, each represented by
American Depositary Shares
Name of Each Exchange on which Registered
New York Stock Exchange
New York Stock Exchange
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
The total number of issued and outstanding shares of each class of stock of Oi S.A. as of December 31, 2015 was:
519,751,658 common shares, without par value
155,915,486 preferred shares, without par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes (cid:133) No ⌧
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes (cid:133) No ⌧
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧ No (cid:133)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes (cid:133) No (cid:133)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See
definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer (cid:133) Accelerated filer ⌧ Non-accelerated filer (cid:133)
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this
filing:
U.S. GAAP ⌧
International Financial Reporting Standards as issued
by the International Accounting Standards Board (cid:133)
Other (cid:133)
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the
registrant has elected to follow. (cid:133) Item 17 (cid:133) Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes (cid:133) No ⌧
OI S.A.
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TABLE OF CONTENTS
PRESENTATION OF FINANCIAL AND OTHER INFORMATION
CAUTIONARY STATEMENT WITH RESPECT TO FORWARD-LOOKING STATEMENTS
PART I
Item 1.
Item 2.
Item 3.
Item 4.
Item 4A.
Item 5.
Item 6.
Item 7.
Item 8.
Item 9.
Item 10.
Item 11.
Item 12.
Identity of Directors, Senior Management and Advisers
Offer Statistics and Expected Timetable
Key Information
Information on the Company
Unresolved Staff Comments
Operating and Financial Review and Prospects
Directors, Senior Management and Employees
Major Shareholders and Related Party Transactions
Financial Information
The Offer and Listing
Additional Information
Quantitative and Qualitative Disclosures about Market Risk
Description of Securities Other Than Equity Securities
PART II
Defaults, Dividend Arrearages and Delinquencies
Item 13.
Material Modifications to the Rights of Security Holders and Use of Proceeds
Item 14.
Item 15.
Controls and Procedures
Item 16A. Audit Committee Financial Expert
Item 16B. Code of Ethics
Item 16C. Principal Accountant Fees and Services
Item 16D. Exemptions from the Listing Standards for Audit Committees
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Item 16F. Change in Registrant’s Certifying Accountant
Item 16G. Corporate Governance
Item 16H. Mine Safety Disclosure
PART III
Item 17.
Item 18.
Item 19.
SIGNATURES
Financial Statements
Financial Statements
Exhibits
i
Page
ii
v
1
1
1
1
32
92
93
140
157
164
174
182
205
206
208
208
208
208
209
209
209
210
211
211
211
213
214
214
214
214
OI S.A.
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PRESENTATION OF FINANCIAL AND OTHER INFORMATION
All references herein to “real,” “reais” or “R$” are to the Brazilian real, the official currency of Brazil. All references to “U.S.
dollars,” “dollars” or “US$” are to U.S. dollars.
On May 13, 2016, the exchange rate for reais into U.S. dollars was R$3.504 to US$1.00, based on the selling rate as reported by
the Central Bank of Brazil (Banco Central do Brasil), or the Brazilian Central Bank. The selling rate was R$3.905 to US$1.00 on
December 31, 2015, R$2.656 to US$1.00 on December 31, 2014 and R$2.343 to US$1.00 on December 31, 2013, in each case, as
reported by the Brazilian Central Bank. The real/U.S. dollar exchange rate fluctuates widely, and the selling rate on May 13, 2016
may not be indicative of future exchange rates. See “Item 3. Key Information—Exchange Rates” for information regarding exchange
rates for the real since January 1, 2010.
Solely for the convenience of the reader, we have translated some amounts included in “Item 3. Key Information—Selected
Financial Information” and in this annual report from reais into U.S. dollars using the selling rate as reported by the Brazilian Central
Bank on December 31, 2015 of R$3.905 to US$1.00. These translations should not be considered representations that any such
amounts have been, could have been or could be converted into U.S. dollars at that or at any other exchange rate.
Financial Statements
We maintain our books and records in reais. Our consolidated financial statements as of December 31, 2015 and 2014 and for
the three years ended December 31, 2015 are included in this annual report.
We prepare our consolidated financial statements in accordance with United States generally accepted accounting principles, or
U.S. GAAP. Based on our operating cash flows and the impact such operating cash flows have had on our liquidity, in combination
with the level of our indebtedness and the potential impact if we cannot satisfy certain financial covenants under our current debt
instruments in 2016, our independent registered public accounting firm has included an emphasis paragraph related to the substantial
doubt with respect to our ability to continue as a going concern in their report on our consolidated financial statements for the year
ended December 31, 2015. However, our financial statements have been prepared assuming we will continue to operate as a going
concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
We are also required to prepare financial statements in accordance with accounting practices adopted in Brazil, or Brazilian
GAAP, which are based on:
•
•
•
Brazilian Law No. 6,404/76, as amended by Brazilian Law No. 9,457/97, Brazilian Law No. 10,303/01, and Brazilian Law
No. 11,638/07, which we refer to collectively as the Brazilian Corporation Law;
the rules and regulations of the Brazilian Securities Commission (Comissão de Valores Mobiliários), or the CVM, and the
Brazilian Federal Accounting Council (Conselho Federal de Contabilidade); and
the accounting standards issued by the Brazilian Accounting Pronouncements Committee (Comitê de Pronunciamentos
Contábeis), or the CPC.
Certain Defined Terms
Unless otherwise indicated or the context otherwise requires:
•
•
all references to “our company,” “we,” “our,” “ours,” “us” or similar terms are to Oi S.A. and its consolidated subsidiaries;
all references to “Oi” are to Oi S.A.;
ii
OI S.A.
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•
•
•
•
•
•
•
all references to “TmarPart” are to Telemar Participações S.A., which, prior to the capital increase of Oi on May 5, 2014,
was the direct controlling shareholder of Oi and which merged with and into Oi on September 1, 2015;
all references to “Telemar” are to Telemar Norte Leste S.A., a wholly-owned subsidiary of Oi;
all references to “Pharol” are to Pharol, SGPS, S.A. (formerly known as Portugal Telecom, SGPS, S.A.);
all references to “PT Portugal” are to PT Portugal, SGPS, S.A., which we acquired on May 5, 2014 and sold on June 2,
2015;
all references to our Common ADSs are to American Depositary Shares, or ADSs, each representing five common shares
of our company, all references to our Preferred ADSs are to ADSs, each representing one preferred share of our company,
and all references to our ADSs are to our Common ADSs and Preferred ADSs;
all references to “Brazil” are to the Federative Republic of Brazil; and
all references to the “Brazilian government” are to the federal government of the Federative Republic of Brazil.
Acquisition and Disposition of PT Portugal
On May 5, 2014, we concluded a capital increase, which we refer to as the Oi capital increase, in which we issued
(1) 121,674,063 of our common shares and 280,483,641 of our preferred shares for an aggregate amount of R$8,250 million in cash,
and (2) 104,580,393 of our common shares and 172,025,273 of our preferred shares to Pharol in exchange for the contribution by
Pharol to our company of all of the shares of its subsidiary PT Portugal. PT Portugal provides a broad range of telecommunications
services in Portugal and owned significant interests in telecommunications companies in Angola, Cape Verde, Namibia, and São
Tomé and Principe in Africa and Timor-Leste in Asia.
On June 2, 2015, we sold all of the share capital of PT Portugal to Altice Portugal for a purchase price equal to the enterprise
value of PT Portugal of €6,900 million, subject to adjustments based on the financial debt, cash and working capital of PT Portugal
on the closing date, plus an additional earn-out amount of €500 million in the event that the consolidated revenues of PT Portugal and
its subsidiaries (as of the closing date) for any single year between the year ending December 31, 2015 and the year ending
December 31, 2019 is equal to or exceeds €2,750 million.
In connection with the closing, Altice Portugal disbursed €5,789 million, of which €869 million was utilized by PT Portugal to
prepay outstanding indebtedness in that amount, and €4,920 million were paid to our company in cash. As of December 31, 2015, we
had used R$8,682 million of the net cash proceeds of the PT Portugal Disposition for the prepayment of indebtedness of our
company, and as of the date of this annual report have used an additional R$5,350 million of these net cash proceeds for the
prepayment and repayment of indebtedness of our company. We expect to use the remainder of these net cash proceeds for the
repayment of indebtedness of our company.
In anticipation of the PT Portugal Disposition, PT Portugal transferred Portugal Telecom International Finance B.V., or PTIF, its
wholly-owned finance subsidiary, to Oi. As a result of the completion of the PT Portugal Disposition, the indebtedness of PTIF,
which had previously been classified as liabilities associated with assets held for sale in our consolidated financial statements, was
reclassified as indebtedness of our company. In addition, in connection with the PT Portugal Disposition, PTIF assumed all
obligations under PT Portugal’s outstanding 6.25% Notes due 2016.
In addition, PT Portugal transferred to Oi all of the outstanding share capital of PT Participações, SGPS, S.A., or PT
Participações, which holds:
iii
OI S.A.
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•
•
our 75% interest in Africatel Holding B.V., or Africatel, which holds our interests in telecommunications companies in
Africa, including telecommunications companies in Angola, Cape Verde, Namibia, and São Tomé and Principe; and
our interests in TPT—Telecomunicações Públicas de Timor, S.A., or TPT, which provides telecommunications,
multimedia and IT services in Timor Leste.
Share Splits
On August 15, 2012, we changed the ratio applicable to our Preferred ADS from three preferred shares per Preferred ADS to
one preferred share per Preferred ADS. All references to numbers of Preferred ADSs in this annual report have been adjusted to give
effect to this change in ratio.
On November 18, 2014, our shareholders acting in an extraordinary general shareholders meeting authorized (1) the reverse
split of all of our issued common shares into one common share for each 10 issued common shares, and (2) the reverse split of all of
our issued preferred shares into one preferred share for each 10 issued preferred shares. This reverse share split became effective on
December 22, 2014. There was no change in the ratio of our Common ADSs or Preferred ADSs in connection with this reverse share
split; each Common ADS continues to represent one of our common shares and each Preferred ADS continues to represent one of our
preferred shares. All references to numbers of shares of our company, dividend amounts of our company and earnings per share of
our company in this annual report have been adjusted to give effect to the 10-for-one reverse share split.
On February 1, 2016, we changed the ratio applicable to our Common ADSs from one common share per Common ADS to five
common shares per Common ADS. All references to numbers of Common ADSs in this annual report have been adjusted to give
effect to this change in ratio.
Market Share and Other Information
We make statements in this annual report about our market share and other information relating to the telecommunications
industry in Brazil. We have made these statements on the basis of information obtained from third-party sources and publicly
available information that we believe are reliable, such as information and reports from ANATEL, among others. Notwithstanding
any investigation that we may have conducted with respect to the market share, market size or similar data provided by third parties
or derived from industry or general publications, we assume no responsibility for the accuracy or completeness of any such
information.
Rounding
We have made rounding adjustments to reach some of the figures included in this annual report. As a result, numerical figures
shown as totals in some tables may not be arithmetic aggregations of the figures that precede them.
iv
OI S.A.
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CAUTIONARY STATEMENT WITH RESPECT TO FORWARD-LOOKING STATEMENTS
This annual report contains forward-looking statements. Some of the matters discussed concerning our business operations and
financial performance include forward-looking statements within the meaning of the U.S. Securities Act of 1933, as amended, or the
Securities Act, or the U.S. Securities Exchange Act of 1934, as amended, or the Exchange Act.
Statements that are predictive in nature, that depend upon or refer to future events or conditions or that include words such as
“expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates” and similar expressions are forward-looking statements.
Although we believe that these forward-looking statements are based upon reasonable assumptions, these statements are subject to
several risks and uncertainties and are made in light of information currently available to us.
Many important factors could cause our actual results to differ substantially from those anticipated in our forward-looking
statements, including, among other things:
•
•
•
•
•
•
•
•
•
•
•
•
our ability to continue as a going concern and the success of our efforts to optimize our liquidity and debt profile;
the effects of intense competition in Brazil and the other countries in which we have operations and investments;
material adverse changes in economic conditions in Brazil or the other countries in which we have operations and
investments;
the Brazilian government’s telecommunications policies that affect the telecommunications industry and our business in
Brazil in general, including issues relating to the remuneration for the use of our network in Brazil, and changes in or
developments of ANATEL regulations applicable to us;
the cost and availability of financing;
the general level of demand for, and changes in the market prices of, our services;
our ability to implement our corporate strategies in order to expand our customer base and increase our average revenue
per user;
political, regulatory and economic conditions in Brazil;
inflation in Brazil and fluctuations in exchange rates;
the outcomes of legal and administrative proceedings to which we are or become a party;
changes in telecommunications technology that could require substantial or unexpected investments in infrastructure or
that could lead to changes in our customers’ behavior; and
other factors identified or discussed under “Item 3. Key Information––Risk Factors.”
Our forward-looking statements are not guarantees of future performance, and our actual results or other developments may
differ materially from the expectations expressed in the forward-looking statements. As for forward-looking statements that relate to
future financial results and other projections, actual results will be different due to the inherent uncertainty of estimates, forecasts and
projections. Because of these uncertainties, potential investors should not rely on these forward-looking statements.
v
OI S.A.
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We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future
events or otherwise.
vi
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ITEM 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
Selected Financial Information
The following selected financial data should be read in conjunction with our consolidated financial statements (including the
notes thereto), “Item 5. Operating and Financial Review and Prospects” and “Presentation of Financial and Other Information.”
The following selected financial data have been derived from our consolidated financial statements. The selected financial data
as of December 31, 2015 and 2014 and for the years ended December 31, 2015, 2014 and 2013 have been derived from our audited
consolidated financial statements included in this annual report. The selected financial data as of December 31, 2013, 2012 and 2011
and for the years ended December 31, 2012 and 2011 have been derived from our consolidated financial statements that are not
included in this annual report.
We have included information with respect to the dividends and/or interest attributable to shareholders’ equity paid to holders of
our common shares and preferred shares since January 1, 2011 in reais and in U.S. dollars translated from reais at the commercial
market selling rate in effect as of the payment date under the caption “Item 8. Financial Information—Dividends and Dividend
Policy—Payment of Dividends.”
2015(1)
(in millions
of US$,
except per
share
amounts)
As of and For the Year Ended December 31,
2015
2014
2013
2012
2011
(in millions of reais, except per share amounts and as otherwise
indicated)
Income Statement Data:
Net operating revenue
Cost of sales and services
Gross profit
Operating expenses
Operating income (loss) before financial
income (expenses) and taxes
Financial income
Financial expenses
Financial income (expenses), net
Income (loss) of continuing operations
before taxes
Income tax and social contribution
Net income (loss) of continuing
operations
Net income (loss) of discontinued
operations, net of taxes
Net income (loss)
Other comprehensive income (loss)
Comprehensive income (loss)
Net income (loss) attributable to
controlling shareholders
US$ 7,005 R$ 27,354
(16,250)
11,104
(9,891)
(4,161)
2,844
(2,533)
R$ 28,247
(16,257)
11,990
(7,377)
311
1,374
(3,048)
(1,674)
(1,364)
(866)
1,213
5,365
(11,903)
(6,538)
(5,325)
(3,380)
(2,229)
(8,705)
4,613
1,345
(5,894)
(4,549)
64
(758)
(694)
(222)
(2,451)
(166)
(867)
(9,572)
(647)
US$(2,617) R$(10,219)
(4,086)
(4,780)
(14)
R$ (4,794)
R$ 28,422 R$ 28,141 R$ 27,907
(16,180)
11,727
9,016
(16,467)
11,955
(7,972)
(15,825)
12,316
8,579
3,983
1,375
(4,677)
(3,302)
681
(77)
604
—
604
34
R$
638 R$
3,737
2,332
(4,950)
(2,617)
1,120
(254)
866
—
866
(319)
547 R$
2,712
2,227
(5,697)
(3,471)
(759)
202
(557)
—
(557)
(133)
(690)
(2,346)
(9,159)
(4,782)
604
859
(296)
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As of and For the Year Ended December 31,
2015
2013
2014
2012
2011
(in millions of reais, except per share amounts and as otherwise
indicated)
Income Statement Data:
Net income (loss) attributable to non-controlling
shareholders
Net income (loss) applicable to each class of shares (2):
(106)
(413)
Common shares basic and diluted
Preferred shares and ADSs basic and diluted
US$(1,011) R$ (3,947)
(5,212)
(1,335)
Net income (loss) per share:
Common shares – basic and diluted
Preferred shares and ADSs – basic and diluted
Net income (loss) per share from continuing operations:
Common shares – basic and diluted
Preferred shares and ADSs – basic and diluted
Net income (loss) per share from discontinued
operations:
Common shares – basic and diluted
Preferred shares and ADSs – basic and diluted
Weighted average shares outstanding (in thousands):
Common shares – basic
Common shares – diluted
Preferred shares and ADSs – basic
Preferred shares and ADSs – diluted
(3.21)
(3.21)
(2.91)
(2.91)
0.30
0.30
—
—
—
—
(12.55)
(12.55)
(11.36)
(11.36)
(1.19)
(1.19)
314,518
314,518
415,321
415,321
1
R$ (1,569)
(3,213)
—
190
414
(261)
7
289
(296)
570 —
(7.76)
(7.76)
(1.13)
(1.13)
3.69
3.69
5.73
(6.49)
5.73 —
3.69
3.69
5.73
(6.49)
5.73 —
(6.63)
(6.63)
— — —
— — —
202,312
202,312
414,200
414,200
51,476 50,499 45,615
51,476 50,499 46,560
112,527 99,488 53,693
112,527 99,488 54,092
(1) Translated for convenience only using the selling rate as reported by the Brazilian Central Bank on December 31, 2015 for reais
(2)
into U.S. dollars of R$3.905=US$1.00.
In accordance with ASC 260, basic and diluted earnings per share have been calculated using the “two class method.” See
note 23 to our audited consolidated financial statements which are included in this annual report.
2015(1)
(in
millions of
US$,
except per
share
amounts)
As of and For the Year Ended December 31,
2015
2014
2013
2012
2011
(in millions of reais, except per share amounts and as otherwise
indicated)
Balance Sheet Data:
Cash and cash equivalents
Short-term investments
Trade accounts receivable, less allowance for
doubtful accounts
Assets held for sale
Total current assets
Property, plant and equipment, net
Non-current judicial deposits
Intangible assets, net
US$3,815 R$14,898 R$ 2,449 R$ 2,425 R$ 4,413 R$11,025
2,299
2,426
1,802
493
461
171
2,146
1,968
9,786
6.612
3,360
3,017
8,380
7,686
38,214
25,818
13,119
11,780
2
7,450
34,255
51,354
26,244
12,260
13,554
7,097
—
18,100
25,725
11,051
14,666
7,018
—
21,802
24,640
9,723
15,869
5,861
—
26,242
23,165
7,786
16,329
OI S.A.
FORM 20-F
RR Donnelley ProFile
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2015(1)
2015
2014
2013
2012
2011
As of and For the Year Ended December 31,
(in
millions of
US$,
except per
share
amounts)
(in millions of reais, except per share amounts and as otherwise
indicated)
25,438 99,335 110,741 78,727 78,647 81,382
191
3,024 11,810
745
6,557 25,605
12,305 48,048
21,175 82,688
5,490 21,438
4,263 16,646
3,958 15,456
4,464
4,600
3,114
4,159
27,178 — —
—
42,580 15,571 17,127 17,114
31,386 31,695 30,232 25,169
83,588 58,713 58,218 56,162
21,438
3,731
27,153 20,013 20,428 25,219
25,644 20,013 20,428 13,826
7,471
7,308
Total assets
Short-term loans and financings (including current portion of
long-term debt)
Liabilities of assets held for sale(2)
Total current liabilities
Long-term loans and financings
Total liabilities
Share capital
Shareholders’ equity
Shareholders’ equity attributable to controlling shareholders
Shareholders’ equity attributable to non-controlling
shareholders
305
1,191
1,509 — — 11,393
(1) Translated for convenience only using the selling rate as reported by the Brazilian Central Bank on December 31, 2015 for reais
into U.S. dollars of R$3.905=US$1.00.
(2) As of December 31, 2014, includes short-term loans and financings (including current portion of long-term debt) of R$1,935
million and long-term loans and financings of R$16,958 million that remained obligations of our company following the
completion of our sale of PT Portugal.
3
OI S.A.
FORM 20-F
Exchange Rates
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The Brazilian foreign exchange system allows the purchase and sale of foreign currency and the international transfer of reais
by any person or legal entity, regardless of the amount, subject to certain regulatory procedures.
Since 1999, the Brazilian Central Bank has allowed the U.S. dollar-real exchange rate to float freely, and, since then, the U.S.
dollar-real exchange rate has fluctuated considerably.
In the past, the Brazilian Central Bank has intervened occasionally to control unstable movements in foreign exchange rates. We
cannot predict whether the Brazilian Central Bank or the Brazilian government will continue to permit the real to float freely or will
intervene in the exchange rate market through the return of a currency band system or otherwise. The real may depreciate or
appreciate against the U.S. dollar and/or the euro substantially. Furthermore, Brazilian law provides that, whenever there is a
significant imbalance in Brazil’s balance of payments or there are serious reasons to foresee a significant imbalance, temporary
restrictions may be imposed on remittances of foreign capital abroad. We cannot assure you that such measures will not be taken by
the Brazilian government in the future. See “—Risk Factors—Risks Relating to Brazil—Restrictions on the movement of capital out
of Brazil may impair our ability to service certain debt obligations.”
The following table shows the commercial selling rate or selling rate, as applicable, for U.S. dollars for the periods and dates
indicated. The information in the “Average” column represents the average of the exchange rates on the last day of each month during
the periods presented.
Year
2011
2012
2013
2014
2015
Month
October 2015
November 2015
December 2015
January 2016
February 2016
March 2016
April 2016
May 2016 (1)
(1) Through May 13, 2016.
Source: Brazilian Central Bank
High
1.902
2.112
2.446
2.740
4.195
Reais per U.S. Dollar
Low Average Period End
1.671
1.535
1.959
1.702
2.161
1.953
2.354
2.197
3.339
2.575
1.876
2.044
2.343
2.656
3.905
Reais per U.S. Dollar
High
R$4.001
3.851
3.983
4.156
4.049
3.991
3.692
3.555
Low
R$3.739
3.701
3.748
3.986
3.865
3.559
3.451
3.465
4
OI S.A.
FORM 20-F
Risk Factors
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You should consider the following risks as well as the other information set forth in this annual report when evaluating an
investment in our company. In general, investing in the securities of issuers in emerging market countries, such as Brazil, involves a
higher degree of risk than investing in the securities of issuers in the United States. Additional risks and uncertainties not currently
known to us, or those that we currently deem to be immaterial, may also materially and adversely affect our business, results of
operations, financial condition and prospects. Any of the following risks could materially affect us. In such case, you may lose all or
part of your original investment.
General Risks Relating to the Telecommunications Industry
The telecommunications industry is subject to frequent changes in technology. Our ability to remain competitive depends on our
ability to implement new technology, and it is difficult to predict how new technology will affect our business.
Companies in the telecommunications industry must adapt to rapid and significant technological changes that are usually
difficult to anticipate. The mobile telecommunications industry in particular has experienced rapid and significant technological
development and frequent improvements in capacity, quality and data-transmission speed. Technological changes may render our
equipment, services and technology obsolete or inefficient, which may adversely affect our competitiveness or require us to increase
our capital expenditures in order to maintain our competitive position. For example, we have made significant investments in the last
three years in connection with the implementation of our UMTS (Universal Mobile Telecommunications System), or 3G, services,
and are making investments in the implementation of our LTE (Long Term Evolution), or 4G, services. In addition, we believe that in
the medium-term, personal mobility service providers in Brazil will experience increasing competition from over-the-top, or OTT,
providers, which provide content (such as WhatsApp, Skype and YouTube) over an internet connection rather than through a service
provider’s network. OTT providers will become increasingly competitive as customers shift from mobile voice and SMS
communications to internet-based voice and data communications through computers and smartphone or tablet applications such as
WhatsApp, Viber and Skype. Since November 2011, we have deployed a network of Wi-Fi hotspots in indoor public and commercial
sites, outdoor public spaces and residential access points. It is possible that alternative technologies may be developed that are more
advanced than those we currently provide. We may not obtain the expected benefits of our investments if more advanced technologies
are adopted by the market. Even if we adopt new technologies in a timely manner as they are developed, the cost of such technology
may exceed the benefit to us, and we cannot assure you that we will be able to maintain our level of competitiveness.
Our operations depend on our ability to maintain, upgrade and operate efficiently our accounting, billing, customer service,
information technology and management information systems and to rely on the systems of other carriers under co-billing
agreements.
Sophisticated information and processing systems are vital to our growth and our ability to monitor costs, render monthly
invoices for services, process customer orders, provide customer service and achieve operating efficiencies. We cannot assure you
that we will be able to operate successfully and upgrade our accounting, information and processing systems or that these systems
will continue to perform as expected. We have entered into co-billing agreements with each long-distance telecommunications
service provider that is interconnected to our networks in Brazil to include in our invoices the long-distance services rendered by
these providers, and these providers have agreed to include charges owed to us in their invoices. Any failure in our accounting,
information and processing systems, or any problems with the execution of invoicing and collection services by other carriers with
whom we have co-billing agreements, could impair our ability to collect payments from customers and respond satisfactorily to
customer needs, which could adversely affect our business, financial condition and results of operations.
Improper use of our networks could adversely affect our costs and results of operations.
We may incur costs associated with the unauthorized and fraudulent use of our networks, including administrative and capital
costs associated with detecting, monitoring and reducing the incidence of fraud. Fraud
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also affects interconnection costs and payments to other carriers for non-billable fraudulent roaming. Improper use of our network
could also increase our selling expenses if we need to increase our provision for doubtful accounts to reflect amounts we do not
believe we can collect for improperly made calls. Any increase in the improper use of our network in the future could materially
adversely affect our costs and results of operations.
Our operations are dependent upon our networks. A system failure could cause delays or interruptions of service, which could cause
us to suffer losses.
Failure in our networks, or their backup mechanisms, may result in service delays or interruptions and limit our ability to
provide customers with reliable service over our networks. Some of the risks to our networks and infrastructure include (1) physical
damage to access lines and long-distance optical cables; (2) power surges or outages; (3) software defects; (4) disruptions beyond our
control; (5) breaches of security; and (6) natural disasters. The occurrence of any such event could cause interruptions in service or
reduce capacity for customers, either of which could reduce our net operating revenue or cause us to incur additional expenses. In
addition, the occurrence of any such event may subject us to penalties and other sanctions imposed by ANATEL, and may adversely
affect our business and results of operations.
The mobile telecommunications industry and participants in this industry, including us, may be harmed by reports suggesting that
radio frequency emissions cause health problems and interfere with medical devices.
Media and other entities have suggested that the electromagnetic emissions from mobile handsets and base stations may cause
health problems. If consumers harbor health-related concerns, they may be discouraged from using mobile handsets. These concerns
could have an adverse effect on the mobile telecommunications industry and, possibly, expose mobile services providers to litigation.
We cannot assure you that further medical research and studies will refute a link between the electromagnetic emissions of mobile
handsets and base stations, including on frequency ranges we use to provide mobile services, and these health concerns. Government
authorities could increase regulation on electromagnetic emissions of mobile handsets and base stations, which could have an adverse
effect on our business, financial condition and results of operations. The expansion of our network may be affected by these perceived
risks if we experience problems in finding new sites, which in turn may delay the expansion and may affect the quality of our
services.
In July 2002, ANATEL enacted regulations that limit emission and exposure for fields with frequencies between 9 kHz and 300
GHz. On June 29, 2015, ANATEL commenced a public consultation regarding its proposed Regulatory Agenda for the 2015-2016
cycle, which, among other items, provides for the reevaluation of regulations regarding human exposure to radiofrequency
electromagnetic fields. Although we believe these regulations have not had a material impact on the business of our company to date,
the Brazilian government or ANATEL may enact new laws or regulations regarding electromagnetic emissions and exposure that
could have an adverse effect on our business.
Risks Relating to Our Company
We have a substantial amount of debt, which could restrict our financing and operating flexibility and have other adverse
consequences.
As of December 31, 2015, we had R$59,857 million aggregate principal amount of outstanding debt. We are subject to certain
financial covenants under the instruments that govern some of our indebtedness that limit our ability to incur additional debt. The
level of our consolidated indebtedness and the requirements and limitations imposed by these debt instruments could adversely affect
our financial condition or results of operations. In particular, the terms of some of these debt instruments restrict our ability, and the
ability of our subsidiaries, to:
•
•
•
incur additional debt;
grant liens;
pledge assets;
6
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FORM 20-F
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•
•
sell or dispose of assets; and
make certain acquisitions, mergers and consolidations.
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If we are unable to incur additional debt, we may be unable to invest in our business and make necessary or advisable capital
expenditures, which could reduce future net operating revenue and adversely affect our profitability. In addition, the cash required to
service our indebtedness reduces the amount available to us to make capital expenditures. If we are unable to generate operating cash
flows, we may not be able to continue servicing our debt.
Furthermore, some of our debt instruments include financial covenants that require Oi or Telemar to maintain certain specified
financial ratios. Prior to December 31, 2015, we executed temporary modifications of each of our debt instruments that contain
covenants requiring Oi to maintain specified levels of consolidated debt to consolidated EBITDA (other than the debt instruments
governing Oi’s 5th and 9th issuances of debentures), pursuant to which Oi was required to maintain a consolidated net debt to
consolidated EBITDA ratio, determined based on our financial statements prepared in accordance with Brazilian GAAP, of no more
than 6.0 to 1.0 as of December 31, 2015. Most of these temporary modifications continue to require Oi to maintain a consolidated net
debt to consolidated EBITDA ratio of no more than 6.0 to 1.0 for each of the fiscal quarters of 2016. Upon the expiration of these
temporary modifications, the consolidated debt to EBITDA ratio that Oi is required to maintain under each of these debt instruments
will be reduced to their pre-existing levels, the most restrictive of which will require that Oi maintain a consolidated debt to EBITDA
ratio of less than 4.0 to 1.0. Under each of these debt instruments, the creditor has the right to accelerate the debt if, at the end of any
applicable period we are not in compliance with the defined financial covenants ratios. We have repaid the principal amount
outstanding under Oi’s 5th and 9th issuances of debentures in the aggregate amount of R$23 million.
Our debt facilities with BNDES contained a number of financial covenants (including ratios with respect to shareholders equity
to total assets and consolidated debt to EBITDA) that were measured on a semi-annual basis on June 30 and December 31. Under
these debt facilities, noncompliance with two or more of these covenants in one semi-annual period would automatically trigger the
right of BNDES to retain proceeds (in an amount equivalent to three times our next amortization payment under each debt facility
with BNDES) from receivables otherwise payable to us in reserve accounts pledged for the benefit of BNDES until such time as the
breach is cured.
On June 30, 2015, we were not in compliance with the covenants in each of our debt facilities with BNDES that require Oi to
maintain a shareholder’s equity to EBITDA ratio of at least 0.25 to 1 and a consolidated debt to EBITDA ratio of less than 4.0 to 1.
As a result, BNDES, had the right to retain proceeds from receivables in reserve accounts pledged for the benefit of BNDES, as
described above. In November, 2015, we and BNDES amended the terms of each of our debt facilities with BNDES. As a result of
these amendments, (1) the consolidated debt to consolidated EBITDA ratio, determined based on our financial statements prepared in
accordance with Brazilian GAAP, that Oi was required to maintain was increased to 6.0 to 1.0 for the December 31, 2015
measurement date, (2) the measurement period under each of these debt facilities was reduced to quarterly periods, and (3) BNDES
has the right to accelerate the debt under each of these debt facilities, at the end of any applicable period, we are not in compliance
with two or more of the financial covenants contained in these debt facilities.
We were in compliance with each of the financial covenants applicable the debt instruments to which Oi and its subsidiaries are
a party as of December 31, 2015 (other than the debt instruments governing Oi’s 5th and 9th issuances of debentures). We are seeking
waivers from those creditors for which these temporary modifications do not cover all measurement periods to and including the
periods ending on December 31, 2016. We cannot provide investors with any assurance that these waivers will be obtained. In the
event that we are unable to obtain waivers of the anticipated breaches of these covenants in these debt instruments, or identify and
implement financial and strategic alternatives to optimize our liquidity and debt profile, we may be unable to meet our obligations
under these debt instruments in the event that the creditors under these debt instruments seek to enforce their available remedies.
Under the Trust Deed governing each of the Bonds issued by PTIF (other than the PTIF 6.25% Notes due 2016), or the PTIF
Bonds, we were required to file audited financial statements of PTIF as of and for the year ended December 31, 2014 with the Dutch
Chamber of Commerce no later than January 31, 2016. On April 29, 2016, Citicorp Trustee Company Limited, the trustee under this
Trust Deed, or the PTIF Trustee, delivered a written notice to PTIF and Oi noting that the failure of PTIF to provide the 2014 audited
financial statements constituted a potential event of default under the PTIF Bonds and requesting the delivery of those financial
statements. PTIF is continuing to work with its auditor to complete the preparation of its 2014 audited financial statements as soon as
possible.
7
OI S.A.
FORM 20-F
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The PTIF Trustee has notified PTIF that if PTIF fails to deliver the financial statements on or prior to May 29, 2016 and the
PTIF Trustee determines that this failure is materially prejudicial to the interests of the holders of the PTIF Bonds, the PTIF Trustee
could declare that the PTIF Bonds are immediately due and repayable. Under the terms of the PTIF Bonds, the PTIF Trustee is not
obliged to exercise its discretion to declare any PTIF Bonds immediately due and repayable or to take any other action to enforce the
rights of the holders of the PTIF Bonds unless it shall have been indemnified to its satisfaction and specifically directed or requested
to do so by a requisite percentage of the holders of the PTIF Bonds in accordance with the terms and conditions of the PTIF Bonds.
The instruments governing a substantial portion of our indebtedness contain cross-acceleration clauses and the occurrence of an
event of default under one of these instruments, could trigger an event of default under other indebtedness or enable the creditors
under other indebtedness to accelerate that indebtedness or those obligations. Were a substantial amount of our outstanding
indebtedness to be accelerated, we may not have sufficient funds to repay such debt when due.
If we are unable to meet our debt service obligations or comply with our debt covenants, we could be forced to renegotiate or
refinance our indebtedness or seek additional equity capital. In this circumstance, we may be unable to obtain financing on
satisfactory terms, or at all.
On March 9, 2016, we announced that we had retained PJT Partners as our financial advisor to assist us in evaluating financial
and strategic alternatives to optimize our liquidity and debt profile. On April 25, 2016, we entered into a customary non-disclosure
agreement with Moelis & Company, who acts as advisor for a diverse ad hoc group of holders of the bonds issued by Oi and its
subsidiaries, as an initial step towards discussions of a potential restructuring of its indebtedness.
For more information regarding the debt instruments of our company and our indebtedness as of December 31, see “Item 5.
Operating and Financial Review and Prospects—Liquidity and Capital Resources.”
Our independent registered public accounting firm has indicated that our financial condition raises substantial doubt as to our
ability to continue as a going concern.
Based on our operating cash flows and the impact such operating cash flows have had on our liquidity, in combination with the
level of our indebtedness and the potential impact if we cannot satisfy certain financial covenants under our current debt instruments
in 2016, our independent registered public accounting firm has included an emphasis paragraph related to the substantial doubt with
respect to our ability to continue as a going concern in their report on our consolidated financial statements for the year ended
December 31, 2015. However, our financial statements have been prepared assuming we will continue to operate as a going concern,
which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. If we become unable to
continue as a going concern, we may seek the protection of the courts through a judicially supervised reorganization (recuperação
judicial) proceeding in Brazil or liquidate our assets, and the values we receive for our assets in liquidation or dissolution could be
significantly lower than the values reflected in our consolidated financial statements. The reaction of investors and others to the
inclusion of a going concern statement by our auditors, our operating cash flows and questions regarding our potential inability to
continue as a going concern may cause others to choose not to deal with us due to concerns about our ability to meet our contractual
obligations and may materially adversely affect our share price and our ability to continue to execute our business plans, raise new
capital and/or make our scheduled debt payments on a timely basis or at all.
Because our cash flows from operating activities are negative, and are expected to continue to be negative through 2016, we will
likely need to meet our obligations and fund our working capital with cash on hand and proceeds from existing amounts available
under our financing facilities.
Our cash flows from operations were negative in 2015, and based on our current plans, we expect our cash flows from operating
activities to remain negative through 2016. Our current projections are based on a number of key assumptions relating to, among
other things, attainment of traffic volume targets, customer base, launching of
8
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bundled products attractive to customers, service sales prices, foreign exchange fluctuation and the success of the efforts to identify
and implement financial and strategic alternatives to optimize the liquidity and debt profile. If any of our assumptions are not borne
out or are otherwise not correct, our cash flows from operations could be significantly lower than expected. As a result, our cash
flows from operating activities could continue to be negative and our capital expenditures and debt service obligations could exceed
our cash flows from operations beyond 2016 and for an extended period of time. There can be no assurance that we will succeed in
executing on our plans or that we will generate positive cash flows from operations or cash flows from operations sufficient to cover
our capital expenditures and debt service obligations in the future.
We plan to maintain a significant level of capital expenditures in order to continue to pursue our business plans. Additionally,
based on our current level of debt, we are obligated to make payments of cash interest and principal in the aggregate amount of
R$15,282 million during 2016. In addition, we need to pay cash taxes and fund our working capital.
Because of the combined impact of our recent and projected results of operations, our non-investment grade credit rating, the
inclusion of the going concern statement in the report of our independent registered public accounting firm, restrictions in our current
debt and/or general conditions in the financial and credit markets, our access to the capital markets is likely to be limited or
nonexistent. As a result, we will need to meet our obligations and fund our working capital with cash on hand and proceeds from
existing amounts available under our financing facilities. We may not be able to meet our obligations or other means for any
significant period of time, and as a result, if we are unable to successfully restructure our debt on terms satisfactory to our company,
we may not be able to execute our business plan or meet our obligations. If we become unable to meet our obligations, we may seek
the protection of the courts through a judicially supervised reorganization (recuperação judicial) proceeding in Brazil.
Any downgrade in the ratings of our company or our debt securities would likely result in increased interest and other financial
expenses related to our borrowings and debt securities and could reduce our liquidity.
Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc., or Standard & Poor’s, Moody’s Investors
Service, or Moody’s, and Fitch, Inc., or Fitch, maintain ratings of our company and our debt securities. Currently, Standard & Poor’s,
Moody’s and Fitch maintain ratings of our company on a local and a global basis. On a global basis, Standard & Poor’s maintains a
foreign currency rating for our company of “CCC-,” Moody’s maintains a foreign currency rating for our company of “Caa1,” and
Fitch maintains a foreign currency rating for our company of “CCC.” Our export credit facility guaranteed by Exportkreditnämnden,
or EKN, contained a requirement that we prepay all outstanding amounts in the event that our credit rating was downgraded below
Ba2 by Moody’s or BB by Fitch. As a result of the actions by these rating agencies, we were required to prepay the outstanding
principal amount under this export credit agreement of R$202 million in April 2016. Any decision by these agencies to downgrade
the ratings of our company or of our debt securities in the future would likely result in increased interest and other financial expenses
relating to our borrowings and debt securities and the inclusion of financial covenants in the instruments governing new indebtedness,
and could significantly reduce our ability to obtain such financing on satisfactory terms or in amounts required by us.
We rely on strategic suppliers of equipment, materials and services necessary for our operations and expansion. If these suppliers fail
to provide equipment, materials or services to us on a timely basis, we could experience disruptions, which could have an adverse
effect on our revenues and results of operations.
We rely on a few strategic suppliers of equipment, materials and services, including Nokia Solutions and Networks do Brasil
Telecomunicações Ltda., or Nokia Solutions, Huawei do Brasil Telecomunicações Ltda., or Huawei, Ericsson Telecomunicações
S.A., or Ericsson, and A.R.M. Engenharia Ltda., or A.R.M. Engenharia, to provide us with equipment, materials and services that we
need in order to expand and to operate our business in Brazil. There are a limited number of suppliers with the capability of providing
the mobile network equipment and fixed-line network platforms that our operations and expansion plans require or the services that
we require to maintain our extensive and geographically widespread networks. In addition, because the supply of mobile network
equipment and fixed-line network platforms requires detailed supply planning and this equipment is technologically complex, it
would be difficult for our company to replace the suppliers of this equipment. Suppliers of cables that we need to extend and maintain
our networks may suffer capacity constraints or difficulties in obtaining the raw materials required to manufacture these cables. As a
result, we are exposed to risks associated with these suppliers,
9
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including restrictions of production capacity for equipment and materials, availability of equipment and materials, delays in delivery
of equipment, materials or services, and price increases. If these suppliers or vendors fail to provide equipment, materials or service to
us on a timely basis or otherwise in compliance with the terms of our contracts with these suppliers, we could experience disruptions
or declines in the quality of our services, which could have an adverse effect on our revenues and results of operations, and we might
be unable to satisfy the requirements contained in our concession and authorization agreements.
As a result of our financial condition, suppliers of the equipment, materials and services necessary for our operations and expansion
may require further assurances from us in order to continue doing business with us.
We believe that our suppliers may take our financial condition, particularly to the extent that it is perceived to impact our ability
to continue to make timely payments to them, into account when deciding whether to continue or begin providing equipment and
services to us. During 2015, our operating cash flows have been negatively affected by a number of factors. If suppliers or potential
suppliers who are aware of our deteriorating financial situation become concerned that we will be unable to continue to perform under
our agreements or make timely payments, they may require advance payments, financial guarantees or other assurances before they
provide equipment, materials or services to us or may refuse to provide equipment, materials or services to us at all. If suppliers were
to do so, our ability to expand and maintain our networks or operate our business may be impaired, which could have an adverse
effect on our financial condition or results of operations.
We are subject to numerous legal and administrative proceedings, which could adversely affect our business, results of operations
and financial condition.
We are subject to numerous legal and administrative proceedings. It is difficult to quantify the potential impact of these legal
and administrative proceedings. We classify our risk of loss from legal and administrative proceedings as “probable,” “possible” or
“remote.” We make provisions for probable losses but do not make provisions for possible and remote losses. As of December 31,
2015, we had provisioned R$4,435 million for probable losses relating to various tax, labor and civil legal and administrative
proceedings against us. As of December 31, 2015, we had claims against us of R$24,048 million in tax proceedings, R$780 million in
labor proceedings and R$1,238 million in civil proceedings with a risk of loss classified as “possible” for which we had made no
provisions.
We are not required to disclose or record provisions for proceedings in which our management judges the risk of loss to be
remote. However, the amounts involved in certain of the proceedings in which we believe our risk of loss is remote could be
substantial. Consequently, our losses could be significantly higher than the amounts for which we have recorded provisions.
If we are subject to unfavorable decisions in any legal or administrative proceedings and the losses in those proceedings
significantly exceed the amount for which we have provisioned or involve proceedings for which we have made no provision, our
results of operations and financial condition may be materially adversely affected. Even for the amounts recorded as provisions for
probable losses, a judgment against us would have an effect on our cash flow if we are required to pay those amounts. Unfavorable
decisions in these legal proceedings may, therefore, reduce our liquidity and adversely affect our business, financial condition and
results of operations. For a more detailed description of these proceedings, see “Item 8. Financial Information—Legal Proceedings.”
The minority shareholder of Africatel has asserted that our acquisition of PT Portugal triggered its right to require us to purchase its
shares of Africatel under the Africatel shareholders’ agreement. If we are required to purchase this interest in Africatel, it will divert
resources that could otherwise be deployed to reduce indebtedness or make investments under our business plan. If any such
purchase is funded through our incurrence of additional debt, there would be a material adverse effect on our consolidated leverage.
We indirectly own 75% of the share capital of Africatel. Samba Luxco S.à.r.l., an affiliate of Helios Investors L.P., or Samba
Luxco, owns the remaining 25%. Africatel holds all of our interests in telecommunications companies in sub-Saharan Africa,
including our interests in Unitel, Cabo Verde Telecom, S.A. in Cape Verde, Mobile Telecommunications Limited in Namibia, and
CST Companhia Santomense de Telecomunicações S.A.R.L. in São Tomé and Príncipe, among others. Pharol, our subsidiaries
Africatel GmbH & Co. KG, or Africatel GmbH, and PT Ventures SGPS S.A., or PT Ventures, and Samba Luxco are parties to a
shareholders’
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agreement, which we refer to as the Africatel shareholders’ agreement.
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On September 16, 2014, our subsidiary, Africatel GmbH, which directly holds our interest in Africatel, received a letter from
Samba Luxco in which Samba Luxco claimed that Oi’s acquisition of PT Portugal was deemed a change of control of Pharol under
the Africatel shareholders’ agreement, and that this change of control entitled Samba Luxco to exercise a put right under the Africatel
shareholders’ agreement at the fair market equity value of Samba Luxco’s Africatel shares. In the letter, Samba Luxco purported to
exercise the alleged put right and thereby require Africatel GmbH to acquire its shares in Africatel.
On September 26, 2014, Africatel GmbH responded to Samba Luxco stating that there had not been any action or event that
would trigger the right to exercise the put option under the Africatel’s shareholders’ agreement and that Africatel GmbH intended to
challenge Samba Luxco’s purported exercise of the put option. On the same date, we issued a Material Fact disclosing Samba
Luxco’s purported exercise of the put option, our understanding that the exercise of the put option is not applicable, and that our
board of directors had authorized our management to take the necessary actions to sell our interest in Africatel.
On November 12, 2014, the International Court of Arbitration of the International Chamber of Commerce notified Africatel
GmbH that Samba Luxco had commenced arbitral proceedings against Africatel GmbH to enforce its purported put right or, in the
alternative, certain other rights and claims allegedly arising out of Oi’s acquisition of PT Portugal. Africatel GmbH presented its
answer to Samba Luxco’s request for arbitration on December 15, 2014. The arbitral tribunal was constituted on March 12, 2015 and
the proceedings are ongoing. Africatel GmbH intends to continue to vigorously defend these proceedings.
If we were to acquire the interest of Samba Luxco in Africatel as a result of the exercise of Samba Luxco’s purported put right
under the Africatel shareholders’ agreement, our acquisition of this interest would reduce the resources that would be available to us
to reduce our outstanding indebtedness or pursue other investment opportunities. If any such purchase were to be funded through our
incurrence of additional debt, the consolidated leverage of our company could increase materially, which could have a material
adverse effect on our financial condition and results of operations.
We have indemnification obligations with respect to the PT Exchange and the PT Portugal Disposition that could materially
adversely affect our financial position.
In the Exchange Agreement that we entered into with Pharol under which we transferred defaulted commercial paper of Rio
Forte to Pharol in exchange for the delivery to our company of common shares and preferred shares of our company as described
under “Item 4. Information on the Company—Our Recent History and Development—Rio Forte Defaults and PT Exchange,” we
agreed to indemnify Pharol against any loss arising from Pharol’s contingent or absolute tax or anti-trust obligations in relation to the
assets contributed to our company in the Oi Capital Increase described under “Item 5. Operating and Financial Review and
Prospects—Overview—Oi Capital Increase and Acquisition of PT Portugal,” and from Pharol’s management activities, with
reference to acts or triggering events occurring on or prior to May 5, 2014, excluding any losses incurred by Pharol as a result of the
financial investments in the Rio Forte commercial paper and the acquisition of the Rio Forte commercial paper from Oi under the
Exchange Agreement.
In the Share Purchase Agreement under which we sold PT Portugal in the PT Portugal Disposition, we agreed to indemnify
Altice Portugal for breaches of our representations and warranties under the Share Purchase Agreement, subject to certain customary
procedural and financial limitations. There can be no assurance that we will not be subject to significant claims under these
indemnification provisions and if we are subject to such claims under these indemnification provisions, we could be required to pay
significant amounts, which would have an adverse effect on our financial condition.
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We are subject to potential liabilities relating to our third-party service providers, which could have a material adverse effect on our
business, financial condition and results of operations.
We are subject to potential liabilities relating to our third-party service providers in Brazil. Such potential liabilities may involve
claims by employees of third-party service providers in Brazil directly against us as if we were the direct employer of such
employees, as well as claims against us for secondary liability for, among other things, occupational hazards, wage parity or overtime
pay, in the event that such third-party service providers fail to meet their obligations to their employees. We have not recorded any
provisions for such claims, and significant judgments against us could have a material adverse effect on our business, financial
condition and results of operations.
We are subject to delinquencies of our accounts receivables. If we are unable to limit payment delinquencies by our customers, or if
delinquent payments by our customers increase, our financial condition and results of operations could be adversely affected.
Our business significantly depends on our customers’ ability to pay their bills and comply with their obligations to us. During
2015, we recorded provisions for doubtful accounts in the amount of R$721 million, or 2.6% of our net operating revenue, primarily
due to subscribers’ delinquencies. As of December 31, 2015, our provision for doubtful accounts was R$561 million.
ANATEL regulations prevent us from implementing certain policies that could have the effect of reducing delinquency of our
customers in Brazil, such as service restrictions or limitations on the types of services provided based on a subscriber’s credit record.
If we are unable to successfully implement policies to limit delinquencies of our Brazilian subscribers or otherwise select our
customers based on their credit records, persistent subscriber delinquencies and bad debt will continue to adversely affect our
operating and financial results.
In addition, if the Brazilian economy declines due to, among other factors, a reduction in the level of economic activity, an
increase in inflation or an increase in domestic interest rates, a greater portion of our customers may not be able to pay their bills on a
timely basis, which would increase our provision for doubtful accounts and adversely affect our financial condition and results of
operations.
Our commitment to meet the obligations of our Brazilian employees’ pension plans, managed by Fundação Sistel de Seguridade
Social and Fundação Atlântico de Seguridade Social may be higher than what is currently anticipated, and therefore, we may be
required to make additional contributions of resources to these pension plans or to record liabilities or expenses that are higher than
currently recorded.
As sponsors of certain private employee pension plans in Brazil, which are managed by Fundação Sistel de Seguridade Social,
or Sistel, and Fundação Atlântico de Seguridade Social, or FATL, our subsidiaries cover the actuarial deficits of these pension benefit
plans, which provide guaranteed benefits to our retirees in Brazil and guaranteed future benefits to our current Brazilian employees at
the time of their retirement. As of December 31, 2015, our Brazilian pension benefit plans had an aggregate deficit of R$544 million.
Our commitment to meet these deficit obligations may be higher than we currently anticipate, and we may be required to make
additional contributions or record liabilities or expenses that are higher than we currently record, which may adversely affect our
financial results. If the life expectancy of the beneficiaries should exceed the life expectancies included in the actuarial models, the
level of our contributions to these plans could increase. If the managers of these plans should suffer losses on the investments of the
assets of these plans, we would be required to make additional contributions to these plans in order for these plans to be able to
provide the agreed benefits. Any increase in the level of our contributions to these plans as a result of an increase in life expectancy or
a decline in investment returns could have a material adverse effect on our financial condition or results of operations. For a more
detailed description of our Brazilian pension plans, see “Item 6. Directors, Senior Management and Employees—Employees—
Employee Benefits—Pension Benefit Plans.”
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Risks Relating to Our Brazilian Operations
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Our Residential Services business faces competition from mobile services and other fixed-line service providers, which may adversely
affect our revenues and margins.
Our Residential Services business, which provides local and long-distance fixed-line voice, fixed-line data, or broadband, and
subscription television, or Pay-TV, services to our residential customers, as well as bundles of these services together with mobile
services, faces competition from:
•
•
mobile services, as reductions in interconnection tariffs, which have led to more robust mobile package offerings, have
driven the traffic migration trend of fixed-to-mobile substitution;
other fixed-line voice service providers, primarily Empresa Brasileira de Telecomunicações – Embratel (a subsidiary of
América Móvil S.A.B. de C.V., or América Móvil, one of the leading telecommunications service providers in Latin
America), or Embratel, and GVT S.A. (a subsidiary of Telefônica Brasil S.A., or Telefônica Brasil, the largest
telecommunications operator in Brazil), or GVT;
•
other broadband service providers, including Net Serviços de Comunicação S.A., or Net (a subsidiary of América Móvil,
our primary competitor in the broadband services market); Companhia Paranense de Energia – Copel, or Copel, and
Companhia Energética de Minas Gerais – CEMIG, or Cemig Telecom, which provide fiber optic infrastructure; and
smaller regional broadband service providers; and
•
other Pay-TV service providers, including our primary competitor SKY Brasil Serviços Ltda., or SKY, and Net.
Based on information available from ANATEL, from December 31, 2012 to December 31, 2015, the number of fixed lines in
service (including the number fixed lines provided to our SME and Corporate Services customers) in our service areas (all of Brazil
other than the state of São Paulo) declined from 27.7 million to 27.2 million. As of December 31, 2015, based on information
available from ANATEL, (1) we had a market share of 56.4% of the total fixed lines in service in Region I of Brazil and a market
share of 52.9% of the total fixed lines in service in Region II of Brazil (in each case, including the fixed lines provided to our SME
and Corporate Services customers); (2) Embratel had a market share of 25.3% of the total fixed lines in service in Region I and a
market share of 18.4% of the total fixed lines in service in Region II; and (3) GVT had a market share of 9.9% of the total fixed lines
in service in Region I and a market share of 23.4% of the total fixed lines in service in Region II.
As a result of competition from mobile services, we expect (1) the number of our fixed lines in service to experience a slow
decline, as some of our customers eliminate their fixed-line services in favor of mobile services, and (2) the use of existing fixed lines
for making voice calls to decline, as customers replace fixed-line calls in favor of calls on mobile phones as a result of the emergence
of “all-net” plans, which allow a customer to make calls to any fixed-line or mobile device of any operator for a flat monthly fee. The
rate at which the number of fixed lines in service in our service areas, a large majority of which are used by our residential customers,
may decline depends on many factors beyond our control, such as economic, social, technological and other developments in Brazil.
Because we derive a significant portion of our net operating revenue from our Residential Services business, the reduction in the
number of our fixed lines in service has negatively affected and is likely to continue to negatively affect our net operating revenue
and margins.
Our broadband services in Brazil face strong competition from Embratel and Telefônica Brasil, which have market shares of
32.5% and 28.7% for broadband services in Brazil, respectively, according to data from ANATEL. As of January 2016, we had a
market share of 25.1% for broadband services in Brazil, according to data from ANATEL. Embratel provides local fixed-line services
to residential customers through Net’s cable network in the portions of Regions I and II where Net provides cable television service.
Telefônica Brasil provides local fixed-line services through its own network and through its subsidiary GVT’s network. The primary
drivers of competition in the broadband industry are speed and price, with discounts typically offered in the form of bundled services.
Net and Telefônica Brasil each offer broadband services at higher speeds than ours and both offer integrated voice, broadband and
subscription television services, typically as bundles, to the residential services market through a
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single network infrastructure. Future offerings by our competitors that are aggressively priced or that offer additional services could
have an adverse effect on our net operating revenue and our results of operations.
The primary providers of Pay-TV services in the regions in which we provide residential services are, SKY, which provides
direct-to-home, or DTH, service, and América Móvil, which provides DTH service through Embratel under the “Claro TV” brand and
Pay-TV services using coaxial cable through Net. We offer DTH services throughout the regions in which we provide residential
services. Future changes in satellite technology may result in one of our competitors utilizing new satellites for DTH services that
have higher capacities or better quality of service, which could adversely affect our net operating revenue and may adversely affect
our results of operations.
Our primary competitors for residential services, Embratel and Telefônica Brasil, are each controlled by multinational
companies that may have more significant financial and marketing resources, and greater abilities to access capital on a timely basis
and on more favorable terms, than our company. In addition, we compete in our service areas with smaller companies that have been
authorized by ANATEL to provide local fixed-line services. Increased competition from these small, regional companies may require
us to increase our marketing expenses and our capital expenditures, which would lead to a decrease in our profitability. For a detailed
description of our competition in the residential services market in Brazil, see “Item 4: Information on the Company—Competition—
Residential Services.”
Our Personal Mobility Services business faces strong competition from fixed-line service providers other mobile services providers
and internet data providers, which may adversely affect our revenues and margins.
The mobile services market in Brazil is extremely competitive. Our Personal Mobility Services business, which provides post-
paid and pre-paid mobile voice services and post-paid and pre-paid mobile data communications services, faces competition from
large competitors such as (1) TIM Participações S.A., or TIM, (2) Telefônica Brasil, which markets its mobile services under the
brand name “Vivo,” and (3) Claro S.A., a subsidiary of América Móvil, or Claro. As of December 31, 2015, based on information
regarding the total number of subscribers as of that date available from ANATEL, we had a market share of 18.6% of the total
number of mobile subscribers (including subscribers in our SME and Corporate Services), ranking behind Telefônica Brasil with
28.4%, TIM with 25.7% and Claro with 25.6%. Telefônica Brasil, TIM and Claro are each controlled by multinational companies that
may have more significant financial and marketing resources, and greater abilities to access capital on a timely basis and on more
favorable terms, than our company.
Our ability to generate revenues from our Personal Mobility Services business depends on our ability to continue to maintain or
increase the ARPU generated by our customer base, retain or increase the size of our customer base, improve the perception of the
quality of our services and encourage the migration of our customers to our 3G and 4G networks through our offers of attractive data
packages that take advantage of the structural shift from voice to data usage. The recent trend towards SIM card consolidation,
reversing the trend of customers using multiple SIM cards to participate in on-net calling plans and the demand for more aggressive
data packages in the pre-paid market may result in a decline in the size of our customer base. The increased use of instant internet
messaging and Voice over Internet Protocol, or VoiP, services on smartphone applications such as WhatsApp may result in a
migration from voice to data services, which could have an adverse effect on the size and profitability of our customer base.
Acquiring each additional personal mobility customer entails costs, including sales commissions and marketing costs. Recovering
these costs depends on our ability to retain such customers. Therefore, high rates of customer churn could have a material adverse
effect on the profitability of our Personal Mobility Services business. During the year ended December 31, 2015, the average
customer churn rate in our Personal Mobility Services business, representing the number of subscribers whose service was
disconnected during each month, whether voluntarily or involuntarily, divided by the number of subscribers at the beginning of such
month, was 12.4%.
We have experienced increased pressure to reduce our mobile rates in response to pricing competition. This pricing competition
often takes the form of special promotional packages, which may include, among other things, mobile handset subsidies and traffic
usage promotions. We no longer offer handset subsidies for new customers, and competing with the service plans and promotions
offered by our competitors may cause an increase in our marketing expenses and customer-acquisition costs, which has adversely
affected our result of operations during some periods in the past and could continue to adversely affect our results of operations. Our
inability to compete effectively with these packages could result in our loss of market share and adversely affect our net operating
revenue and
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profitability. For a detailed description of our competition in the personal mobility services market in Brazil, see “Item 4: Information
on the Company—Competition—Personal Mobility Services.”
Our SME and Corporate Services business faces strong competition from other mobile, fixed-line and information technology
services providers, which may adversely affect our revenues and margins.
Our SME and Corporate Services business provides a la carte and bundled fixed-line voice and data services, mobile voice and
data services and information technology services to our small- and medium-sized enterprise, or SME, and corporate customers, as
well as interconnection, network usage and traffic transportation services to other telecommunications providers. The competition
risks relating to the fixed-line and mobile services we provide to our SME and corporate customers are similar to those relating to the
fixed-line and mobile services we provide to our residential and personal mobility customers, respectively.
The Brazilian recession has had a significant negative effect on our operating revenue and margins as SMEs generally, including
our customers, have reduced the size of their businesses and in some cases ceased operations, and a number of our Corporate
customers have reduced their telecommunications spending as part of their overall cost-cutting efforts. Because we derive a
significant portion of our net operating revenue from our SME and Corporate Services business, the loss of a significant number of
SME or corporate customers would adversely affect our net operating revenue and may adversely affect our results of operations. For
a detailed description of our competition in the business and corporate market in Brazil, see “Item 4: Information on the Company—
Operations in Brazil—Competition—SME and Corporate Services.”
Our long-distance services in Brazil face significant competition, which may adversely affect our revenues.
In Brazil, unlike in the United States and elsewhere, a caller chooses its preferred long-distance carrier for each long-distance
call, whether originated from a fixed-line telephone or a mobile handset, by dialing such carrier’s long-distance carrier selection code
(Código de Seleção de Prestadora). The long-distance services market in Brazil has become less competitive as a result of ongoing
reductions in the interconnection rates, as mandated by ANATEL. The proliferation of all-net service plans, particularly for mobile
services, offers unlimited long-distance calls and data combination plans that have reduced the relevance of long-distance services for
mobile services. As a result, competition for long-distance services in Brazil is limited to fixed-line voice services. We compete with
Telefônica Brasil, which is the incumbent fixed-line service provider in the State of São Paulo. Competition in the Brazilian fixed-
line long-distance market may require us to increase our marketing expenses and/or provide services at lower rates than those we
currently expect to charge for such services. Competition in the Brazilian fixed-line long-distance market has had and could continue
to have a material adverse effect on our revenues and margins.
The Brazilian telecommunications industry is highly regulated. Changes in laws and regulations may adversely impact our business.
The Brazilian telecommunications industry is highly regulated by ANATEL. ANATEL regulates, among other things, rates,
quality of service and universal service goals, as well as competition among telecommunications service providers. Changes in laws
and regulations, grants of new concessions, authorizations or licenses or the imposition of additional universal service obligations,
among other factors, may adversely affect our business, financial condition and results of operations. For example, in July 2014
ANATEL approved rules under which interconnection rates charged by our company for the use of our fixed-line and mobile
networks would be reduced over a period of years until they were set at rates based on a long-run incremental cost methodology. As a
result, the mobile interconnection rates for Regions I, II and III declined by 25% each in February 2014, 33.3% each in February 2015
and 40.0%, 35.2% and 27.6%, respectively, in February 2016, with additional cuts approved through 2019. In addition, ANATEL
approved cuts for most of our fixed interconnection rates ranging from 9.1% and 20.0% in February 2016, with additional cuts
approved through 2019. These regulations will have adverse effects on our revenues, although as a result of reductions in our costs
and expenses for these services that we acquire from other telecommunications providers, we cannot predict with certainty the effects
that these regulations will have on our results of operations.
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We cannot predict whether ANATEL, the Brazilian Ministry of Communications (Ministério das Comunicações) or the
Brazilian government will adopt other telecommunications sector policies in the future or the consequences of such policies on our
business or the business of our competitors.
Our local fixed-line and domestic long-distance concession agreements in Brazil are subject to periodic modifications by ANATEL
and we cannot assure you that the modifications to these concession agreements will not have adverse effects on our company.
We provide fixed-line telecommunications services in our Brazilian service areas pursuant to concession agreements with the
Brazilian government. These concession agreements expire on December 31, 2025, and may be amended by the parties every five
years prior to the expiration date. In connection with each five-year amendment, ANATEL has the right, following public
consultations, to impose new terms and conditions in response to changes in technology, competition in the marketplace and domestic
and international economic conditions.
Our obligations under our concession agreements may be subject to revision in connection with each future amendment. On
June 27, 2014, ANATEL opened a public comment period for the revision of the terms of our concession agreements. The comment
period, which ended on December 26, 2014, was opened for comments on certain topics such as service universalization, rates and
fees, among others. We submitted our comments during this period. Throughout 2015, ANATEL, the Brazilian Ministry of
Communications and telecommunications service providers met regularly to discuss possible amendments to each of the concession
agreements granted by ANATEL, including ours, and the implications of the developments and demands in the telecommunications
sector in recent years. In September 2015, the Ministry of Communications created a working group, consisting of three members
from each of ANATEL and the Ministry of Communications, to evaluate the status of the concessions and propose guidelines for the
amendment of the concession agreements. In November 2015, the Ministry of Communications opened public consultation on the
new regulatory framework for telecommunications. The Ministry of Communications has extended the deadline for contributions on
multiple occasions. In April 2016, the Ministry of Communications, based on the working group’s findings, issued a decree
addressing guidelines for the establishment of a new regulatory framework for telecommunications, which will be implemented by
ANATEL through the conclusion of the concession amendments. The guidelines provide for, among other things, the expansion of
broadband services (including in rural regions), the elimination of the reversibility of assets, and an extension of the term of our
concessions, which are currently scheduled to expire in 2025. As a result of the publication of these guidelines, ANATEL requested a
further postponement of the review of our concession agreements, which was granted. As a result of this extension, the review of our
concession agreements is currently scheduled to occur by December 2016.
We cannot assure you that any future amendments to our concession agreements, including the amendments now expected to be
made in 2016, will not impose requirements on our company that will require us to undertake significant capital expenditures or will
not modify the rate-setting procedures applicable to us in a manner that will significantly reduce the net operating revenue that we
generate from our Brazilian fixed-line businesses. If the amendments to our Brazilian concession agreements have these effects, our
business, financial condition and results of operations could be materially adversely affected.
Our local fixed-line and domestic long-distance concession agreements expire on December 31, 2025 and we cannot assure you that
our bids for new concessions upon the expiration of our existing concessions will be successful or that the pending expiration of these
concessions will not have adverse effects on our ability to finance our operations.
Our concession agreements will expire on December 31, 2025. We expect the Brazilian government to offer new concessions in
competitive auctions prior to the expiration of our existing concession agreements. We may participate in such auctions, but our
existing fixed-line and domestic long-distance concession agreements will not entitle us to preferential treatment in these auctions. If
we do not secure concessions for our existing service areas in any future auctions, or if such concessions are on less favorable terms
than our current concessions, our business, financial condition and results of operations would be materially adversely affected. In
addition, based on the current scheduled expiration of our concession agreements and the uncertainty that term of these concessions
will be extended, investors may be unwilling to make investments in our company on terms that are attractive to our
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company, or at all. Our inability to raise capital in the equity or debt markets on favorable terms, or at all, could have a materially
adverse effect on our business, financial condition and results of operations.
Our local fixed-line and domestic long-distance concession agreements in Brazil, as well as our authorizations to provide personal
mobile services in Brazil, contain certain obligations, and our failure to comply with these obligations may result in various fines and
penalties being imposed on us by ANATEL.
Our local fixed-line and domestic long-distance concession agreements in Brazil contain terms reflecting the General Plan on
Universal Service Goals (Plano Geral de Metas de Universalização), the General Plan on Quality Goals (Plano Geral de Metas de
Qualidade) and other regulations adopted by ANATEL, the terms of which could affect our financial condition and results of
operations. Our local fixed-line concession agreements in Brazil also require us to meet certain network expansion, quality of service
and modernization obligations in each of the Brazilian states in our service areas. In the event of noncompliance with ANATEL
targets in any one of these states, ANATEL can establish a deadline for achieving the targeted level of such service, impose penalties
and, in extreme situations, terminate the applicable concession agreement for noncompliance with our quality and universal service
obligations. See “Item 4: Information on the Company—Regulation of the Brazilian Telecommunications Industry—Regulation of
Fixed-Line Services.”
On an almost weekly basis, we receive inquiries from ANATEL requiring information from us on our compliance with the
various service obligations imposed on us by our concession agreements. If we are unable to respond satisfactorily to those inquiries
or comply with our service obligations under our concession agreements, ANATEL may commence administrative proceedings in
connection with such noncompliance. We have received numerous notices of the commencement of administrative proceedings from
ANATEL, mostly due to our inability to achieve certain targets established in the General Plan on Quality Goals and the General Plan
on Universal Service Goals, among others. As of December 31, 2015, we had recorded provisions in the amount of R$1,149 million
in connection with fines sought to be imposed by ANATEL, including fines which we are contesting through judicial proceedings. In
the event that we are unsuccessful in obtaining final approval of the inclusion of the R$5 billion of fines and claims we have proposed
to be included in the Terms of Adjustment of Conduct (“Termos de Ajuste de Conduta”) program, or the TAC program, we could be
required to constitute an additional provision of the portion of these fines and claims for which we have not previously established a
provision. Additional fines from ANATEL, the establishment of an additional provision or fines in excess of the provisioned amount
could adversely impact our financial condition and results of operations. See “Item 4. Information on the Company—Regulation of
the Brazilian Telecommunications Industry” and “Item 8. Financial Information—Legal Proceedings—Civil Claims Relating to Oi
S.A. and Our Brazilian Operations—Administrative Proceedings.”
In addition, our authorizations to provide personal mobile services contain certain obligations requiring us to meet network
scope and quality of service targets. If we fail to meet these obligations, we may be fined by ANATEL until we are in full compliance
with our obligations and, in extreme circumstances, our authorizations could be revoked by ANATEL. For example, on July 23,
2012, ANATEL temporarily suspended our ability to accept new customers for our mobile services in the States of Amazonas,
Amapá, Mato Grosso do Sul, Roraima and Rio Grande do Sul due to ANATEL’s perception of our failure to meet capital investment
and quality of service commitments in those states. This suspension lasted for approximately two weeks until we were able to propose
new quality of service goals to ANATEL. See “Item 4. Information on the Company—Regulation of the Brazilian
Telecommunications Industry—Regulation of Mobile Services—Obligations of Personal Mobile Services Providers.”
We may be unable to implement our plans to expand and enhance our existing networks in Brazil in a timely manner or without
unanticipated costs, which could hinder or prevent the successful implementation of our business plan and result in revenues and net
income being less than expected.
Our ability to achieve our strategic objectives depends in large part on the successful, timely and cost-effective implementation
of our plans to expand and enhance our networks in Brazil. Factors that could affect this implementation include:
•
our ability to generate cash flow or to obtain future financing necessary to implement our projects;
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•
•
•
•
delays in the delivery of telecommunications equipment by our vendors;
the failure of the telecommunications equipment supplied by our vendors to comply with the expected capabilities;
the failure to obtain licenses necessary for our projects; and
delays resulting from the failure of third-party suppliers or contractors to meet their obligations in a timely and cost-
effective manner.
Although we believe that our cost estimates and implementation schedule are reasonable, we cannot assure you that the actual
costs or time required to complete the implementation of these projects will not substantially exceed our current estimates. Any
significant cost overrun or delay could hinder or prevent the successful implementation of our business plan and result in revenues
and net income being less than expected.
Risks Relating to Our African and Asian Operations
We may be unable to dispose of our interest in Africatel for a consideration that exceeds its carrying value in our financial statements
or at all. Any impairment of the fair market value at which we record our indirect investment in Unitel in our financial statements
would have a material adverse effect on our financial condition and results of operations.
On September 16, 2014, our board of directors authorized our management to take the necessary measures to market our shares
in Africatel, representing 75% of the share capital of Africatel. As a result, as of December 31, 2014 and 2015, we recorded the assets
and liabilities of Africatel as held-for sale, although we do not record Africatel as discontinued operations in our income statement
due to the immateriality of the effects of Africatel on our results of operations. We have engaged a financial advisor to assist us with
marketing and selling our interest in Africatel.
As of December 31, 2015, we recorded in our consolidated financial statements as assets held for sale R$7,686 million relating
to our interest in Africatel and TPT, including R$2,042 million of accrued dividends owed to our company by Unitel and R$3,436
million representing the fair market value of Africatel’s 25% interest in Unitel, and recorded as liabilities directly associated with
assets held for sale of R$745 million relating to our interest in Africatel and TPT. We are currently engaged in negotiations with the
other shareholders of Unitel to seek alternatives for the realization of the value of our investment in Unitel.
We may not be able to sell our interest in Africatel for consideration that exceeds the book value of our interest in Africatel, or
at all. The book value of our indirect investment in Unitel is subjected to testing for impairment when events or changes in
circumstances indicate that the value of our indirect investment in Unitel may be lower than the fair market value at which we carry
this investment. For the year ended December 31, 2015, we recorded a R$408 million loss as a result of our review of the fair value of
our investment in Unitel. Any further impairment of our indirect investment in Unitel may result in a material adverse effect on our
financial condition and operating results.
We cannot assure you as to when PT Ventures will realize the accounts receivable recorded with respect to the declared and unpaid
dividends owed to PT Ventures by Unitel or when PT Ventures will receive dividends that may have been declared with respect to
2014 or may be declared with respect to succeeding fiscal years.
Since November 2012, PT Ventures has not received any payments for outstanding amounts owed to it by Unitel with respect to
dividends declared by Unitel for the fiscal years ended December 31, 2012 and 2011, and the extraordinary dividends declared by
Unitel in November 2010 based on its 2005 results of operations and free reserves held in 2006 through 2009. Based on the dividends
declared by Unitel for those fiscal years, PT Ventures is entitled to receive the total amounts of US$187.5 million (R$732.2 million)
with respect to fiscal year 2013, US$190.0 million (R$742.0 million) with respect to fiscal year 2012, US$190.0 million (R$742.0
million) with respect to fiscal year 2011, and US$157.5 million (R$615.0 million) with respect to the dividends declared in
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2010. As of the date of this annual report, PT Ventures has only received US$63.7 million (R$248.7 million) of its share of the
dividends declared by Unitel in 2010, and has not received any amount in respect of dividends declared by Unitel with respect to
fiscal years 2011, 2012 or 2013.
On March 25, 2014, Unitel issued a statement claiming that PT Ventures is not listed on the shareholders’ register of Unitel, and
that the board of directors of Unitel had notified Pharol about the existence of an irregularity, which purportedly resulted in Unitel
being unable to distribute dividends to PT Ventures until the resolution of this irregularity. On June 3, 2014, the Angolan National
Foreign Investment Agency endorsed the updating of PT Ventures’ name (formerly Portugal Telecom Internacional, SGPS, S.A.) in
its Foreign Investment Certificate, confirming the current corporate name of the PT Ventures and thus remedying the irregularity
alleged by Unitel’s board of directors.
At a general meeting of the shareholders of Unitel held on May 13, 2015, the other shareholders discussed the financial
statements as well as the payment of dividends with respect to fiscal year 2014. The other Unitel shareholders did not permit PT
Ventures to attend and participate in this shareholders’ meeting alleging that they did not acknowledge PT Ventures as a Unitel
shareholder. As a result, PT Ventures has filed a suit against Unitel with an Angolan court seeking to nullify and cancel all actions
purportedly taken by the May 13, 2015 shareholders’ meeting. PT Ventures has received a draft of the minutes of this meeting but has
not received the final version. The draft minutes indicate that Unitel declared dividends in the amount of US$490.0 million
(R$1,913.5 million), of which PT Ventures’ share amounts to US$122.5 million (R$478.4 million). Because we have not received
fully executed minutes of this meeting, and because we are seeking to annul the actions taken by this meeting, we have not recorded
our share of these dividends in our financial statements.
On several occasions, PT Ventures has requested an explanation from Unitel about its failure to pay to PT Ventures its share of
the declared dividends. As of the date of this annual report, PT Ventures has not received a satisfactory explanation regarding this
failure to pay, nor has PT Ventures received reliable indications as to the expected timing of the payment of the accrued dividends. As
a result, PT Ventures has filed a suit against Unitel with an Angolan court seeking to collect its share of the dividends declared by
Unitel in 2010, 2011, 2012 and 2013, together with interest thereon. As a result of our institution of this suit, in 2015 we recognized a
provision with respect to the unpaid dividends of US$132.2 million (R$516.2 million).
We cannot assure you that we will be successful in this suit, as to the timing, of the payment of the accrued dividends to our
company, or whether we will be able to receive dividends that have been declared with respect to fiscal year 2013 or may have been
declared with respect to fiscal year 2014 or that may be declared by Unitel in the future. Our inability to receive these dividends could
have a material adverse impact on the fair value of our investment in Unitel, our financial position and our results of operations.
The other shareholders of Unitel have claimed that they believe that Pharol’s sale of a minority interest in Africatel to our company
did not comply with the Unitel shareholders’ agreement.
The Unitel shareholders’ agreement provides a right of first refusal to the other shareholders of Unitel if any shareholder desires
to transfer any or all of its shares of Unitel, other than transfers to certain affiliated companies. This agreement also provides that if
any shareholder breaches a material obligation under the Unitel shareholders’ agreement, the other shareholders will have a right to
purchase the breaching shareholder’s stake in Unitel at its net asset value.
On March 14, 2016, the other shareholders of Unitel initiated an arbitration proceeding against PT Ventures, claiming that
Pharol’s sale of a minority interest in Africatel to our company did not comply with the Unitel shareholders’ agreement. The other
shareholders of Unitel had previously made the same claim as a counterclaim in the arbitration started by PT Ventures on October 13,
2015, but then withdrew that counterclaim. PT Ventures disputes the other shareholders’ interpretation of the relevant provisions of
the Unitel shareholders’ agreement, and we believe that the relevant provisions of the Unitel shareholders’ agreement apply only to a
transfer of Unitel shares by PT Ventures itself.
PT Ventures is seeking to consolidate this arbitration proceeding with the separate arbitration proceeding brought by PT
Ventures against the other shareholders of Unitel. We intend to defend against the allegation by
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Unitel’s other shareholders vigorously. If a binding decision by the arbitral tribunal were rendered ruling in favor of the interpretation
of the Unitel shareholders’ agreement proposed by the other Unitel shareholder, PT Ventures could be required to sell its interest in
Unitel for a value significantly lower than the amount that we record in our financial statements with respect to our indirect
investment in Unitel. The sale of PT Ventures’ interest in Unitel in these circumstances could have a material adverse impact on our
financial condition and results of operations.
The other shareholders of Unitel have prevented PT Ventures from exercising its rights to appoint the chief executive officer and a
majority of the board of directors of Unitel.
Under the Unitel shareholders’ agreement, PT Ventures is entitled to appoint three of the five members of Unitel’s board of
directors and its chief executive officer. Under the Unitel shareholders’ agreement, the appointment of the chief executive officer of
Unitel is subject to the approval of the holders of 75% of Unitel’s shares. However, the other shareholders of Unitel have failed to
vote to elect the directors nominated by PT Ventures at Unitel’s shareholders’ meetings, and as a result, PT Ventures’ representation
on Unitel’s board of directors was reduced to a single director in June 2006, and the chief executive officer of Unitel has not been PT
Ventures’ appointee since June 2006.
On July 22, 2014, the only member of Unitel’s board of directors that had been appointed by PT Ventures resigned from his
position, and the other shareholders of Unitel have not permitted PT Ventures to appoint a replacement. In November 2014, the other
shareholders of Unitel stated to PT Ventures that its rights as a shareholder of Unitel had been purportedly suspended in October
2012, although these other shareholders have not indicated any legal basis for this alleged suspension. At a general shareholders
meeting of Unitel held on December 15, 2014, an election of members of the board of directors of Unitel was held. At this meeting,
Unitel’s other shareholders claimed that PT Ventures was not entitled to vote as a result of the alleged suspension of its rights as a
shareholder of Unitel in October 2012, and they refused to elect the member nominated by PT Ventures to Unitel’s board of directors.
As of the date of this annual report, no nominee of PT Ventures serves on the Unitel board of directors.
On October 13, 2015, PT Ventures initiated an arbitration proceeding against the other shareholders of Unitel as a result of the
violation by those shareholders of a variety of provisions of the Unitel shareholders’ agreement, including the provisions entitling PT
Ventures to nominate the majority of the members of the board of directors of Unitel and its chief executive officer. Vidatel Ltd., one
of the other shareholders, presented its answer to PT Ventures’ request for arbitration on January 8, 2016. The arbitral tribunal was
constituted on April 14, 2016 and the proceedings are ongoing.
Unitel has granted loans to a related party and entered into a management contract with a third-party without the approval of PT
Ventures.
Under the Unitel shareholders’ agreement, the shareholders of Unitel and their affiliates are not permitted to enter into any
contracts with Unitel unless the contracts are approved by a resolution of Unitel’s board of directors adopted by at least four members
of its board of directors. As a result of the inability of PT Ventures to appoint members of the Unitel board of directors, PT Ventures
is unable to effectively exercise its implied veto right over related party transactions of Unitel.
Between May and October 2012, Unitel made disbursements to Unitel International Holdings B.V. of €178.9 million (R$760.4
million) and US$35.0 million (R$136.7 million) under a “Facility Agreement” entered into between Unitel and Unitel International
Holdings B.V., or Unitel Holdings. Unitel Holdings is controlled by Mrs. Isabel dos Santos, an indirect shareholder of Unitel and a
member of the board of directors of Unitel. PT Ventures abstained when the consolidated financial statements of Unitel that included
these transactions were approved by the other Unitel shareholders at a shareholders meeting.
In addition, Unitel has recognized the payment of a management fee of US$155.7 million (R$608.0 million) payable to a third-
party in its individual financial statements for the year ended December 31, 2013 prepared in accordance with Angolan GAAP.
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In September and November 2015, PT Ventures commenced litigation in the British Virgin Island and the Netherlands against
Unitel Holdings and other entities concerning the related party transactions with Unitel.
Despite requests, PT Ventures has been unable to obtain documents and other information concerning transactions between
Unitel and Unitel International Holdings B.V., including any transactions that Unitel may have entered into in addition to those
described above from 2012 and 2013. We have evidence that Unitel made additional loans to related parties in 2013 that were not
approved in accordance with the terms of the Unitel shareholders’ agreement. We have not been able to obtain information with
regard to the existence of similar transactions conducted in 2014 and 2015.
We cannot assure you that we will be able to prevent Unitel from taking actions that should require the approval of the members
of the Unitel board of directors nominated by PT Ventures, including approving related party transactions with the other shareholders
of Unitel that we believe are detrimental to the financial condition and results of operations of Unitel. The use of the resources of
Unitel in this manner could have a material adverse impact on the financial position and results of operations of Unitel and therefore
the value of our investment in Unitel.
On October 13, 2015, PT Ventures initiated an arbitration proceeding against the other shareholders of Unitel as a result of the
violation by those shareholders of a variety of provisions of the Unitel shareholders’ agreement, including the provisions that would
have entitled PT Ventures to veto these related party transactions.
The other shareholders of Unitel have attempted to dilute our indirect ownership of Unitel through a capital increase in which we
could be technically unable to participate, and have called shareholders’ meetings at which they have indicated the desire to
unilaterally amend the by-laws of Unitel and the Unitel shareholders’ agreement.
At a general shareholders meeting of Unitel held on December 15, 2014, the other shareholders of Unitel voted to increase
Unitel’s share capital and alter the nominal value of its shares. The details of this capital increase are obscure to us as they were not
included in the prior notice for this meeting nor were they discussed in detail during this meeting. Additional details of this capital
increase have been included in draft minutes of this meeting provided to PT Ventures and it appears that, although PT Ventures has
determined to subscribe to its pro rata share of this capital increase to avoid dilution of its interest in Unitel, payment of the
subscription price may be proposed under conditions that would not permit PT Ventures to obtain the necessary foreign exchange
approvals prior to the date on which payment would be due. PT Ventures has filed a suit in Angolan court to annul the approval of the
Unitel capital increase at this shareholders’ meeting.
The agenda of this general shareholders meeting of Unitel included amendments to Unitel’s by-laws and purported amendments
to Unitel shareholders’ agreement, in addition to other matters that may have been raised at the shareholders’ meeting itself, which
included investments by Unitel in Zimbabwe and a study in order to implement a corporate reorganization of Unitel. We have not
been provided of the details of the proposed by-law amendments nor of any purported amendments to the Unitel shareholders’
agreement. The December 15, 2014 meeting was suspended without any action taken on these items. PT Ventures has filed a suit in
Angolan court to annul all resolutions taken during this general shareholders meeting, including the approval of investments by Unitel
in Zimbabwe and a study in order to implement a corporate reorganization of Unitel.
We cannot assess the impact to Unitel or our company of the matters considered at the December 15, 2014 general shareholders’
meeting of Unitel or the proposed amendments to Unitel’s by-laws and purported amendments to the Unitel shareholders’ agreement
as we have not been provided with sufficient details to appropriately analyze these matters. We note that there appears to be no legal
authority for the other shareholders of Unitel to amend the Unitel shareholders’ agreement through actions taken at a general meeting
of shareholders, as this agreement is an agreement among the parties thereto. Should the other shareholders approve actions
detrimental to Unitel or our investment in Unitel, these actions could have a material adverse impact on the financial position and
results of operations of Unitel and therefore the value of our investment in Unitel.
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Unitel’s concession to operate in Angola has expired and has not yet been renewed.
Unitel’s concession to provide mobile telecommunications services in Angola expired in April 2012. We cannot provide you
with any assurances regarding the terms under which the Angolan National Institute of Telecommunications (Instituto Angolano das
Comunicações), or INACOM, would grant a renewal of this concession, if at all. A failure of Unitel to obtain a renewal of this
concession could have a material adverse effect on the ability of Unitel to continue to provide mobile telecommunications services in
Angola, which would have a material adverse effect on Unitel’s financial position and results of operations and the value of our
investment in Unitel.
Adverse political, economic and legal conditions in the African and Asian countries in which we have acquired investments may
hinder our ability to receive dividends from our African and Asian subsidiaries and investments.
The governments of many of the African and Asian countries in which we have investments have historically exercised, and
continue to exercise, significant influence over their respective economies and legal systems. Countries in which we have investments
may enact legal or regulatory measures that restrict the ability of our subsidiaries and investees to make dividend payments to us.
Similarly, adverse political or economic conditions in these countries may hinder our ability to receive dividends from our
subsidiaries and investees. Historically, Pharol has received dividends from the African and Asian subsidiaries and investees that we
have acquired, however, a limitation on our ability to receive a material portion of those dividends could adversely affect our cash
flows and liquidity.
In addition, our investments in these regions are exposed to political and economic risks that include, but are not limited to,
exchange rate and interest rate fluctuations, inflation and restrictive economic policies and regulatory risks that include, but are not
limited to, the process for the renewal of licenses and the evolution of regulated retail and wholesale tariffs. In addition, our ventures
in African and Asian markets face risks associated with increasing competition, including due to the entrance of new competitors and
the rapid development of new technologies.
The development of partnerships in these markets raises risks related to the ability of the partners to jointly operate the assets.
Any inability of our company and our partners to operate these assets may have a negative impact on our strategy and all of these
risks may have material effects on our results of operations.
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, results of operations and
financial condition.
We are a Brazilian corporation and a majority of our operations and customers are located in Brazil. Accordingly, our financial
condition and results of operations are substantially dependent on Brazil’s economy. The Brazilian government frequently intervenes
in the Brazilian economy and occasionally makes significant changes in policy and regulations. The Brazilian government’s actions
to control inflation and implement macroeconomic policies have often involved increases in interest rates, wage and price controls,
currency devaluations, blocking access to bank accounts, imposing capital controls and limits on imports, among other things. We do
not have any control over, and are unable to predict, which measures or policies the Brazilian government may adopt in the future.
Our business, results of operations and financial condition may be adversely affected by changes in policies or regulations, or by
other factors such as:
•
•
•
•
•
•
political instability;
devaluations and other currency fluctuations;
inflation;
price instability;
interest rates;
liquidity of domestic capital and lending markets;
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•
•
•
•
•
•
energy shortages;
exchange controls;
changes to the regulatory framework governing our industry;
monetary policy;
tax policy;
other political, diplomatic, social and economic developments in or affecting Brazil, including with respect to alleged
unethical or illegal conduct of certain figures in the Brazilian government and legislators, which are currently under
investigation.
Uncertainty over whether possible changes in policies or rules affecting these or other factors may contribute to economic
uncertainties in Brazil and to heightened volatility in the Brazilian securities markets and securities issued abroad by Brazilian
issuers. The President of Brazil has considerable power to determine governmental policies and actions that relate to the Brazilian
economy and, consequently, affect the operations and financial performance of businesses such as our company. We can offer no
assurances that the policies that may be implemented by the Brazilian federal or state governments will not adversely affect our
business, results of operations and financial condition.
In addition, protests, strikes and corruption scandals have led to a fall in confidence and a political crisis. For example, Brazilian
markets have been experiencing heightened volatility due to the uncertainties derived from the ongoing “Lava Jato” investigation,
which is being conducted by the Office of the Brazilian Federal Prosecutor, and its impact on the Brazilian economy and political
environment. Members of the Brazilian federal government and of the legislative branch, as well as senior officers of certain
Brazilian private and state-owned companies, have faced allegations of political corruption. These government officials and senior
officers allegedly accepted bribes by means of kickbacks on contracts granted by major state-owned companies to several
infrastructure, oil and gas and construction companies. The profits of these kickbacks allegedly financed the political campaigns of
the main political parties in Brazil that were unaccounted for or not publicly disclosed, as well as served to personally enrich the
recipients of the bribery scheme. As a result of the ongoing “Lava Jato” investigation, a number of senior politicians, including
congressman and officers of the major state-owned companies in Brazil resigned or have been arrested. The potential outcome of the
“Lava Jato” investigation is uncertain, but it has already adversely affected the Brazilian markets and trading prices of securities
issued by Brazilian issuers. We cannot predict whether the “Lava Jato” investigation will lead to further political and economic
instability or whether new allegations against government officials or other companies in Brazil will arise in the future.
Furthermore, on December 2, 2015, the Brazilian Congress opened impeachment proceedings against Brazilian President Dilma
Rousseff for allegedly breaking federal budget laws during her re-election campaign in 2014. On May 12, 2016, the Brazilian
Congress voted to suspend President Rousseff from office for a period of up to 180 days during which time the Brazilian Senate will
conduct an impeachment trial. Vice-President Michel Temer will serve as acting President of Brazil during this period. We cannot
predict the outcome of President Rousseff’s impeachment trial or its effect on the Brazilian economy. Moreover, there is strong
popular pressure and several legal and administrative proceedings for the revocation of the mandate or resignation of the Head of the
Brazilian House of Representatives, which have led to further uncertainties. The political crisis prompted by these investigations and
proceedings could worsen the economic conditions in Brazil and adversely affect our results of operations and financial condition.
Depreciation of the real may lead to substantial losses on our liabilities denominated in or indexed to foreign currencies.
During the four decades prior to 1999, the Brazilian Central Bank periodically devalued the Brazilian currency. Throughout this
period, the Brazilian government implemented various economic plans and used various exchange rate policies, including sudden
devaluations (such as daily and monthly adjustments), exchange controls, dual exchange rate markets and a floating exchange rate
system. Since 1999, exchange rates have been set by the market. The exchange rate between the real and the U.S. dollar has varied
significantly in recent years. For example, the real/U.S. dollar exchange rate increased from R$1.9554 per U.S. dollar on
December 31, 2000 to R$3.5333 on December 31, 2002. The real appreciated against the U.S. dollar by 4.3% during 2010, and has
depreciated by 8.9% against the U.S. dollar during 2012, by 14.6% during 2013, by 13.4% during 2014 and by 47.1% during 2015. In
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addition, the real appreciated against the Euro by 10.4% during 2010, and has depreciated by 10.7% against the Euro during 2012, by
19.7% during 2013, was substantially unchanged during 2014 and depreciated by 31.7% in 2015.
A significant amount of our financial liabilities are denominated in or indexed to foreign currencies, primarily U.S. dollars and
Euros. As of December 31, 2015, R$47,372 million of our consolidated financial indebtedness was denominated in currencies other
than the real. When the real depreciates against foreign currencies, we incur losses on our liabilities denominated in or indexed to
foreign currencies, such as our U.S. dollar-denominated and Euro-denominated long-term debt and foreign currency loans, and we
incur gains on our monetary assets denominated in or indexed to foreign currencies, as the liabilities and assets are translated into
reais. If significant depreciation of the real were to occur when the value of such liabilities significantly exceeds the value of such
assets, including any financial instruments entered into for hedging purposes, we could incur significant losses, even if the value of
those assets and liabilities has not changed in their original currency. In addition, a significant depreciation in the real could adversely
affect our ability to meet certain of our payment obligations. A failure to meet certain of our payment obligations could trigger a
default under certain financial covenants in our debt instruments, which could have a material adverse effect on our business and
results of operations. Historically, we have maintained currency swaps and non-deliverable forwards to manage our exposure to most
of our foreign currency debt. During 2016, in connection with our consideration of potential plans to restructure our indebtedness, we
have not rolled over our non-deliverable forwards and have selectively settled several of our long-term currency swaps. As a result,
our exposure to foreign currency fluctuations has increased substantially. If we are able to restructure our indebtedness in a manner
satisfactory to our company, we expect the increased exposure to foreign currency fluctuations to be temporary. In the event that
these expectations are not met, the effects of foreign currency fluctuations on our debt instruments could have a material adverse
effect on our financial condition and results of operations.
A portion of our capital expenditures and operating leases require us to acquire assets or use third-party assets at prices
denominated in or linked to foreign currencies, some of which are financed by liabilities denominated in foreign currencies,
principally the U.S. dollar and the Euro. We generally do not hedge against risks related to movements of the real against foreign
currencies. To the extent that the value of the real decreases relative to the U.S. dollar or the Euro, it becomes more costly for us to
purchase these assets or services, which could adversely affect our business and financial performance.
Depreciation of the real relative to the U.S. dollar could create additional inflationary pressures in Brazil by increasing the price
of imported products and requiring recessionary government policies, including tighter monetary policy. On the other hand,
appreciation of the real against the U.S. dollar may lead to a deterioration of the country’s current account and balance of payments,
as well as to a dampening of export-driven growth.
If Brazil experiences substantial inflation in the future, our margins and our ability to access foreign financial markets may be
reduced. Government measures to curb inflation may have adverse effects on the Brazilian economy, the Brazilian securities market
and our business and results of operations.
Brazil has, in the past, experienced extremely high rates of inflation, with annual rates of inflation reaching as high as 2,708% in
1993 and 1,093% in 1994. Inflation and some of the Brazilian government’s measures taken in an attempt to curb inflation have had
significant negative effects on the Brazilian economy.
Since the introduction of the real in 1994, Brazil’s inflation rate has been substantially lower than in previous periods. However,
actions taken in an effort to control inflation, coupled with speculation about possible future governmental actions, have contributed
to economic uncertainty in Brazil and heightened volatility in the Brazilian securities market. More recently, Brazil’s rates of
inflation, as measured by the General Market Price Index — Internal Availability (Índice Geral de Preços — Disponibilidade
Interna), or IGP-DI, published by Fundação Getúlio Vargas, or FGV, were 5.0% in 2011, 8.1% in 2012, 5.5% in 2013, 3.8% in 2014
and 10.7% in 2015. According to the Broad Consumer Price Index (Índice Nacional de Preços ao Consumidor Ampliado), or IPCA,
published by the Brazilian Institute for Geography and Statistics (Instituto Brasileiro de Geografia e Estatística), or IBGE, the
Brazilian consumer price inflation rates were 6.5% in 2011, 5.8% in 2012, 5.9% in 2013, 6.4% in 2014 and 10.7% in 2015.
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If Brazil experiences substantial inflation in the future, our costs may increase and our operating and net margins may decrease.
Although ANATEL regulations provide for annual price increases for most of our services in Brazil, such increases are linked to
inflation indices, discounted by increases in our productivity. During periods of rapid increases in inflation, the price increases for our
services may not be sufficient to cover our additional costs and we may be adversely affected by the lag in time between the
incurrence of increased costs and the receipt of revenues resulting from the annual price increases. Inflationary pressures may also
curtail our ability to access foreign financial markets and may lead to further government intervention in the economy, including the
introduction of government policies that may adversely affect the overall performance of the Brazilian economy.
Fluctuations in interest rates could increase the cost of servicing our debt and negatively affect our overall financial performance.
Our financial expenses are affected by changes in the interest rates that apply to our floating rate debt. As of December 31,
2015, we had, among other consolidated debt obligations, R$8,950 million of loans and financings that were subject to the London
Interbank Offered Rate, or LIBOR, R$6,361 million of loans and financings and debentures that were subject to the Interbank
Certificate of Deposit (Certificado de Depósito Interbancário), or CDI, rate, an interbank rate, R$3,151 million of loans and
financings and debentures that were subject to the Long-Term Interest Rate (Taxa de Juros de Longo Prazo), or TJLP, a long-term
interest rate, and R$1,515 million of loans and financings that were subject to the IPCA.
The TJLP includes an inflation factor and is determined quarterly by the National Monetary Council (Conselho Monetário
Nacional). In particular, the TJLP and the CDI rate have fluctuated significantly in the past in response to the expansion or
contraction of the Brazilian economy, inflation, Brazilian government policies and other factors. For example, the CDI increased
from 6.90% per annum as of December 31, 2012 to 9.77% per annum as of December 31, 2013, increased to 11.57% per annum as of
December 31, 2014 and increased to 14.13% per annum as of December 31, 2015. A significant increase in any of these interest rates,
particularly the CDI rate, could adversely affect our financial expenses and negatively affect our overall financial performance.
The market value of securities issued by Brazilian companies is influenced by the perception of risk in Brazil and other countries,
which may have a negative effect on the trading price of our common shares, preferred shares and ADSs and may restrict our access
to international capital markets.
Economic and market conditions in other countries and regions, including the United States, the European Union and emerging
market countries, may affect to varying degrees the market value of securities of Brazilian issuers. Although economic conditions in
these countries and regions may differ significantly from economic conditions in Brazil, investors’ reactions to developments in these
other countries may have an adverse effect on the market value of securities of Brazilian issuers, the availability of credit in Brazil
and the amount of foreign investment in Brazil. Crises in the European Union, the United States and emerging market countries have
at times resulted in significant outflows of funds from Brazil and may diminish investor interest in securities of Brazilian issuers,
including our company. This could materially and adversely affect the market price of our securities, and could also make it more
difficult for us to access the capital markets and finance our operations in the future on acceptable terms or at all.
Restrictions on the movement of capital out of Brazil may impair our ability to service certain debt obligations.
Brazilian law provides that whenever there exists, or there is a serious risk of, a material imbalance in Brazil’s balance of
payments, the Brazilian government may impose restrictions for a limited period of time on the remittance to foreign investors of the
proceeds of their investments in Brazil as well as on the conversion of the real into foreign currencies. The Brazilian government
imposed such a restriction on remittances for approximately six months in 1989 and early 1990. The Brazilian government may in the
future restrict companies from paying amounts denominated in foreign currency or require that any such payment be made in reais.
Many factors could affect the likelihood of the Brazilian government imposing such exchange control restrictions, including the
extent of Brazil’s foreign currency reserves, the availability of sufficient foreign exchange on the date a payment is due, the size of
Brazil’s debt service burden relative to the economy as a whole, and political constraints to which Brazil may be subject. There can
be no certainty that the Brazilian government will not take such measures in the future.
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A more restrictive policy could increase the cost of servicing, and thereby reduce our ability to pay, our foreign currency-
denominated debt obligations and other liabilities. As of December 31, 2015, our foreign-currency denominated debt was R$47,372
million and represented 78.4% of our consolidated indebtedness. If we fail to make payments under any of these obligations, we will
be in default under those obligations, which could reduce our liquidity as well as the market price of our common shares, preferred
shares and ADSs.
In addition, a more restrictive policy could hinder or prevent the Brazilian custodian of the common shares and preferred shares
underlying our ADSs or holders who have exchanged our ADSs for the underlying common shares or preferred shares from
converting dividends, distributions or the proceeds from any sale of such shares into U.S. dollars and remitting such U.S. dollars
abroad. In such an event, the Brazilian custodian for our common shares and preferred shares will hold the reais that it cannot convert
for the account of holders of our ADSs who have not been paid. Neither the custodian nor The Bank of New York Mellon, as
depositary of our ADS programs, which we refer to as the depositary, will be required to invest the reais or be liable for any interest.
Risks Relating to Our Common Shares, Preferred Shares and ADSs
Holders of our common shares, preferred shares or ADSs may not receive any dividends or interest on shareholders’ equity.
According to our by-laws and the Brazilian Corporation Law, we must generally pay our shareholders at least 25% of our
annual net income as dividends or interest on shareholders’ equity, as calculated and adjusted under Brazilian GAAP. This adjusted
net income may be capitalized, used to absorb losses or otherwise retained as allowed under Brazilian GAAP and may not be
available to be paid as dividends or interest on shareholders’ equity. Holders of our common shares or Common ADSs, may not
receive any dividends or interest on shareholders’ equity in any given year due to the dividend preference of our preferred shares.
Additionally, the Brazilian Corporation Law allows a publicly traded company like ours to suspend the mandatory distribution of
dividends in any particular year if our board of directors informs our shareholders that such distributions would be inadvisable in
view of our financial condition or cash availability. Holders of our preferred shares or Preferred ADSs may not receive any dividends
or interest on shareholders’ equity in any given year if our board of directors makes such a determination or if our operations fail to
generate net income.
Our preferred shares and Preferred ADSs have limited voting rights and are not entitled to vote to approve corporate transactions,
including mergers or consolidations of our company with other companies, or the declaration of dividends.
Under the Brazilian Corporation Law and our by-laws, holders of our preferred shares and, consequently, our Preferred ADSs,
are not entitled to vote at meetings of our shareholders, except in very limited circumstances. These limited circumstances directly
relate to key rights of the holders of preferred shares, such as modifying basic terms of our preferred shares or creating a new class of
preferred shares with superior rights. Holders of preferred shares without voting rights are entitled to elect one member and his or her
respective alternate to our board of directors and our fiscal council. Holders of our preferred shares and Preferred ADSs are not
entitled to vote to approve corporate transactions, including mergers or consolidations of our company with other companies, or the
declaration of dividends. See “Item 10. Additional Information—Description of Our Company’s By-laws—Voting Rights.”
Holders of our ADSs may find it difficult to exercise their voting rights at our shareholders’ meetings.
Under Brazilian law, only shareholders registered as such in our corporate books may attend our shareholders’ meetings. All
common shares and preferred shares underlying our ADSs are registered in the name of the depositary. ADS holders may exercise the
voting rights with respect to our common shares and the limited voting rights with respect to our preferred shares represented by our
ADSs only in accordance with the deposit agreements relating to our ADSs. There are practical limitations upon the ability of the
ADS holders to exercise their voting rights due to the additional steps involved in communicating with ADS holders. For example,
we are required to publish a notice of our shareholders’ meetings in certain newspapers in Brazil. To the extent that holders of our
common shares or preferred shares are entitled to vote at a shareholders’ meeting, they will be able to exercise their voting rights by
attending the meeting in person or voting by proxy. By contrast, holders of the ADSs may receive notice of a shareholders’ meeting
by mail from the depositary if we notify the depositary of the shareholders’
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meeting and request the depositary to inform ADS holders of the shareholders’ meeting. To exercise their voting rights, ADS holders
must instruct the depositary on a timely basis. This noticed voting process will take longer for ADS holders than for holders of our
common shares or preferred shares. If the depositary fails to receive timely voting instructions for all or part of our ADSs, the
depositary will assume that the holders of those ADSs are instructing it to give a discretionary proxy to a person designated by us to
vote their ADSs, except in limited circumstances.
In the circumstances in which holders of our ADSs have voting rights, they may not receive the voting materials in time to
instruct the depositary to vote our common shares or preferred shares underlying their ADSs. In addition, the depositary and its agents
are not responsible for failing to carry out voting instructions of the holders of our ADSs or for the manner of carrying out those
voting instructions. Accordingly, holders of our ADSs may not be able to exercise voting rights, and they will have no recourse if the
common shares or preferred shares underlying their ADSs are not voted as requested.
Holders of our common shares, preferred shares or ADSs in the United States may not be entitled to the same preemptive rights as
Brazilian shareholders have, pursuant to Brazilian legislation, in the subscription of shares resulting from capital increases made by
us.
Under Brazilian law, if we issue new shares in exchange for cash or assets as part of a capital increase, subject to certain
exceptions, we must grant our shareholders preemptive rights at the time of the subscription of shares, corresponding to their
respective interest in our share capital, allowing them to maintain their existing shareholding percentage. We may not legally be
permitted to allow holders of our common shares, preferred shares or ADSs in the United States to exercise any preemptive rights in
any future capital increase unless (1) we file a registration statement for an offering of shares resulting from the capital increase with
the U.S. Securities and Exchange Commission, or SEC, or (2) the offering of shares resulting from the capital increase qualifies for
an exemption from the registration requirements of the Securities Act. At the time of any future capital increase, we will evaluate the
costs and potential liabilities associated with filing a registration statement for an offering of shares with the SEC and any other
factors that we consider important in determining whether to file such a registration statement. We cannot assure the holders of our
common shares, preferred shares or ADSs in the United States that we will file a registration statement with the SEC to allow them to
participate in any of our capital increases. As a result, the equity interest of such holders in our company may be diluted.
If holders of our ADSs exchange them for common shares or preferred shares, they may risk temporarily losing, or being limited in,
the ability to remit foreign currency abroad and certain Brazilian tax advantages.
The Brazilian custodian for the common shares and preferred shares underlying our ADSs must obtain an electronic registration
number with the Brazilian Central Bank to allow the depositary to remit U.S. dollars abroad. ADS holders benefit from the electronic
certificate of foreign capital registration from the Brazilian Central Bank obtained by the custodian for the depositary, which permits
it to convert dividends and other distributions with respect to the common shares or preferred shares into U.S. dollars and remit the
proceeds of such conversion abroad. If holders of our ADSs decide to exchange them for the underlying common shares or preferred
shares, they will only be entitled to rely on the custodian’s certificate of registration with the Brazilian Central Bank for five business
days after the date of the exchange. Thereafter, they will be unable to remit U.S. dollars abroad unless they obtain a new electronic
certificate of foreign capital registration in connection with the common shares or preferred shares, which may result in expenses and
may cause delays in receiving distributions. See “Item 10. Additional Information—Exchange Controls.”
Also, if holders of our ADSs that exchange our ADSs for our common shares or preferred shares do not qualify under the
foreign investment regulations, they will generally be subject to less favorable tax treatment of dividends and distribution on, and the
proceeds from any sale of, our common shares or preferred shares. See “Item 10. Additional information—Exchange Controls” and
“Item 10. Additional Information—Taxation—Brazilian Tax Considerations.”
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Holders of our ADSs may face difficulties in protecting their interests because, as a Brazilian company, we are subject to different
corporate rules and regulations and our shareholders may have fewer and less well-defined rights.
Holders of our ADSs are not direct shareholders of our company and are unable to enforce the rights of shareholders under our
by-laws and the Brazilian Corporation Law.
Our corporate affairs are governed by our by-laws and the Brazilian Corporation Law, which differ from the legal principles that
would apply if we were incorporated in a jurisdiction in the United States, such as the State of Delaware or New York, or elsewhere
outside Brazil. Even if a holder of our ADSs surrenders its ADSs and becomes a direct shareholder, its rights as a holder of our
common shares or preferred shares under the Brazilian Corporation Law to protect its interests relative to actions by our board of
directors may be fewer and less well-defined than under the laws of those other jurisdictions.
Although insider trading and price manipulation are crimes under Brazilian law, the Brazilian securities markets are not as
highly regulated and supervised as the U.S. securities markets or the markets in some other jurisdictions. In addition, rules and
policies against self-dealing or for preserving shareholder interests may be less well-defined and enforced in Brazil than in the United
States and certain other countries, which may put holders of our common shares, preferred shares and ADSs at a potential
disadvantage. Corporate disclosures also may be less complete or informative than those of a public company in the United States or
in certain other countries.
Brazilian bankruptcy laws may be less favorable to you than bankruptcy and insolvency laws in other jurisdictions.
If we are unable to pay our indebtedness, then we may become subject to bankruptcy proceedings in Brazil. The bankruptcy
laws of Brazil currently in effect are significantly different from, and may be less favorable to creditors than, those of certain other
jurisdictions. Any judgment obtained against us in Brazilian courts in respect of any payment obligations under our debt instruments
normally would be expressed in the real equivalent of the U.S. dollar amount of such sum at the exchange rate in effect (1) on the
date of actual payment, (2) on the date on which such judgment is rendered, or (3) on the date on which collection or enforcement
proceedings are started against us. Consequently, in the event of our bankruptcy, all of our debt obligations that are denominated in
foreign currency, will be converted into reais at the prevailing exchange rate on the date of declaration of our bankruptcy by the
court.
We are exempt from some of the corporate governance requirements of the New York Stock Exchange.
We are a foreign private issuer, as defined by the SEC for purposes of the Exchange Act. As a result, for so long as we remain a
foreign private issuer, we will be exempt from, and you will not be provided with the benefits of, some of the corporate governance
requirements of The New York Stock Exchange, or the NYSE. We are permitted to follow practice in Brazil in lieu of the provisions
of the NYSE’s corporate governance rules, except that:
•
•
•
•
we are required to have an audit committee that satisfies the requirements of Rule 10A-3 under the Exchange Act;
we are required to disclose any significant ways in which our corporate governance practices differ from those followed by
domestic companies under NYSE listing standards;
our chief executive officer is obligated to promptly notify the NYSE in writing after any of our executive officers becomes
aware of any non-compliance with any applicable provisions of the NYSE corporate governance rules; and
we must submit an executed written affirmation annually to the NYSE. In addition, we must submit an interim written
affirmation as and when required by the interim written affirmation form specified by the NYSE.
The standards applicable to us are considerably different than the standards applied to U.S. domestic issuers. Although
Rule 10A-3 under the Exchange Act generally requires that a listed company have an audit committee of
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its board of directors composed solely of independent directors, as a foreign private issuer, we are relying on a general exemption
from this requirement that is available to us as a result of the features of Brazilian law applicable to our fiscal council. In addition, we
are not required to, among other things:
•
•
•
•
have a majority of independent members of our board of directors;
have a compensation committee or a nominating or corporate governance committee of our board of directors;
have regularly scheduled executive sessions with only non-management directors; or
have at least one executive session of solely independent directors each year.
We intend to rely on some or all of these exemptions. As a result, you will not be provided with the benefits of certain corporate
governance requirements of the NYSE.
We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and similar antibribery laws outside of the
United States.
The U.S. Foreign Corrupt Practices Act, or the FCPA, and similar anti-bribery laws in other jurisdictions generally prohibit
companies and their intermediaries from making improper payments to government officials or other persons for the purpose of
obtaining or retaining business. Recent years have seen a substantial increase in anti-bribery law enforcement activity, with more
frequent and aggressive investigations and enforcement proceedings by both the U.S. Department of Justice and the SEC, increased
enforcement activity by non-U.S. regulators, and increases in criminal and civil proceedings brought against companies and
individuals. Our policies mandate compliance with these anti-bribery laws. We operate, through our businesses, in countries that are
recognized as having governmental and commercial corruption. We cannot assure you that our internal control policies and
procedures will protect us from reckless or criminal acts committed by our employees, the employees of any of our businesses, or
third party intermediaries. In the event that we believe or have reason to believe that our employees or agents have or may have
violated applicable anti-corruption laws, including the FCPA, we may be required to investigate or have outside counsel investigate
the relevant facts and circumstances, which can be expensive and require significant time and attention from senior management.
Violations of these laws may result in criminal or civil sanctions, inability to do business with existing or future business partners
(either as a result of express prohibitions or to avoid the appearance of impropriety), injunctions against future conduct, profit
disgorgements, disqualifications from directly or indirectly engaging in certain types of businesses, the loss of business permits or
other restrictions which could disrupt our business and have a material adverse effect on our business, financial condition, results of
operations or liquidity.
Holders of our ADSs may face difficulties in serving process on or enforcing judgments against us and other persons.
We are organized under the laws of Brazil, and all of the members of our board of directors, our executive officers and our
independent registered public accountants reside or are based in Brazil. The vast majority of our assets and those of these other
persons are located in Brazil. As a result, it may not be possible for holders of our ADSs to effect service of process upon us or these
other persons within the United States or other jurisdictions outside Brazil or to enforce against us or these other persons judgments
obtained in the United States or other jurisdictions outside Brazil. In addition, because substantially all of our assets and all of our
directors and officers reside outside the United States, any judgment obtained in the United States against us or any of our directors or
officers may not be collectible within the United States. Because judgments of U.S. courts for civil liabilities based upon the U.S.
federal securities laws may only be enforced in Brazil if certain conditions are met, holders may face greater difficulties in protecting
their interests in the case of actions by us or our board of directors or executive officers than would shareholders of a U.S.
corporation.
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Brazilian tax laws may have an adverse impact on the taxes applicable to the disposition of our common shares, preferred shares and
ADSs.
According to Law No. 10,833, enacted on December 29, 2003, if a nonresident of Brazil disposes of assets located in Brazil, the
transaction will be subject to taxation in Brazil, even if such disposition occurs outside Brazil or if such disposition is made to another
nonresident. A disposition of our ADSs between nonresidents, however, involves the disposal of a non-Brazilian asset and in
principle is currently not subject to taxation in Brazil. Nevertheless, in the event that the concept of “disposition of assets” is
interpreted to include the disposition between nonresidents of assets located outside Brazil, this tax law could result in the imposition
of withholding taxes in the event of a disposition of our ADSs made by nonresidents of Brazil. Due to the fact that as of the date of
this annual report Law No. 10,833/2003 has no judicial guidance as to its application, we are unable to predict whether an
interpretation applying such tax laws to dispositions of our ADSs between nonresidents could ultimately prevail in Brazilian courts.
See “Item 10. Additional Information—Taxation—Brazilian Tax Considerations.”
We believe we were a passive foreign investment company for our taxable year ended December 31, 2015, which could result in
adverse U.S. federal income tax consequences to U.S. Holders of our American depository shares or ordinary shares.
We will be classified as a passive foreign investment company, or PFIC, in any taxable year if either: (1) 50% or more of the
fair market value of our gross assets (determined on the basis of a quarterly average) for the taxable year produce passive income or
are held for the production of passive income, or (2) 75% or more of our gross income for the taxable year is passive income. As a
publicly traded foreign corporation we intend for this purpose to treat the aggregate fair market value of our gross assets as being
equal to the aggregate value of our outstanding stock plus the total amount of our liabilities (“market capitalization”) and to treat the
excess of the fair market value of our assets over their book value as a nonpassive asset to the extent attributable to our nonpassive
income. Based on the market price of our common shares and preferred shares and the composition of our assets, we believe we were
a PFIC for U.S. federal income tax purposes for our taxable year ended December 31, 2015. Furthermore, unless the value of our
common shares and preferred shares increases and/or we invest a substantial amount of our cash and other passive assets in assets that
produce active income, there is a significant risk we will be a PFIC for our taxable year ending December 31, 2016. The application
of the PFIC rules is subject to uncertainty in several respects, and we must make a separate determination after the close of each
taxable year as to whether we were a PFIC for such year. Because we believe we were a PFIC for our taxable year ended
December 31, 2015, certain adverse U.S. federal income tax consequences could apply to a U.S. investor who holds our common
shares, preferred shares or ADSs with respect to any “excess distribution” received from us and any gain from a sale or other
disposition of our common shares, preferred shares or ADSs, and U.S. investors also may be subject to additional reporting
obligations with respect to our common shares, preferred shares or ADSs. We do not intend to provide the information necessary for
the U.S. investor to make a qualified electing fund election with respect to our common shares, preferred shares or ADSs. See “Item
10. Additional Information—Taxation – U.S. Federal Income Tax Considerations – Passive Foreign Investment Company Rules.”
The relative volatility and illiquidity of the Brazilian securities markets may adversely affect holders of our common shares, preferred
shares and ADSs.
The Brazilian securities markets are substantially smaller, less liquid and more volatile than major securities markets in the
United States. The BM&FBOVESPA, which is the principal Brazilian stock exchange, had a market capitalization of R$1.9 trillion
(US$490 billion) as of December 31, 2015 and an average daily trading volume of R$6.8 billion (US$2.1 billion) for 2015. In
comparison, aggregate market capitalization of the companies (including U.S. and non-U.S. companies) listed on the NYSE was
US$17.8 trillion as of December 31, 2015 and the NYSE recorded an average daily trading volume of US$64.0 billion for 2015.
There is also significantly greater concentration in the Brazilian securities markets. The ten largest companies in terms of market
capitalization represented approximately 51% of the aggregate market capitalization of the BM&FBOVESPA as of December 31,
2015. The ten most widely traded stocks in terms of trading volume accounted for approximately 44% of all shares traded on the
BM&FBOVESPA in 2015. These market characteristics may substantially limit the ability of holders of our ADSs to sell the
preferred shares underlying our ADSs at a price and at a time when they wish to do so and, as a result, could negatively impact the
market price of our ADSs themselves.
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The imposition of IOF taxes may indirectly influence the price and volatility of our common shares, preferred shares and ADSs.
Brazilian law imposes the Tax on Foreign Exchange Transactions, or the IOF/Exchange Tax, on the conversion of reais into
foreign currency and on the conversion of foreign currency into reais. Brazilian law also imposes the Tax on Transactions Involving
Bonds and Securities, or the IOF/Securities Tax, due on transactions involving bonds and securities, including those carried out on a
Brazilian stock exchange.
In October 2009, the Brazilian government imposed the IOF/Exchange Tax at a rate of 2.0% in connection with inflows of funds
related to investments carried out by non-Brazilian investors in the Brazilian financial and capital markets with the objective of
slowing the pace of speculative inflows of foreign capital into the Brazilian market and the appreciation of the real against the U.S.
dollar. The rate of the IOF/Exchange Tax generally applicable to foreign investments in the Brazilian financial and capital markets
was later increased to 6.0%. In December 2011, the rate of the IOF/Exchange Tax applicable to several types of investments was
reduced back to zero percent. As of the date of this annual report, all investments in the Brazilian financial and capital markets are
subject to the IOF/Exchange Tax rate of zero percent.
In November 2009, the Brazilian government also established that the rate of the IOF/Securities Tax would apply to the transfer
of shares with the specific purpose of enabling the issuance of ADSs. In December 2013, the rate of the IOF/Securities Tax applicable
to transactions involving the issuance of ADSs was reduced to zero percent.
The imposition of these taxes may discourage foreign investment in shares of Brazilian companies, including our company, due
to higher transaction costs, and may negatively impact the price and volatility of our ADSs and common shares on the NYSE and the
BM&FBOVESPA.
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ITEM 4.
INFORMATION ON THE COMPANY
Overview
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We are one of the principal integrated telecommunications service providers in Brazil with approximately 70.0 million revenue
generating units, or RGUs, as of December 31, 2015. We operate throughout Brazil and offer a range of integrated
telecommunications services that include fixed-line and mobile telecommunication services, network usage (interconnection), data
transmission services (including broadband access services), Pay-TV (including as part of double-play, triple-play and quadruple-play
packages), internet services and other telecommunications services for residential customers, small, medium and large companies and
governmental agencies. We own approximately 363,000 kilometers of installed fiber optic cable, distributed throughout Brazil. Our
mobile network covers areas in which approximately 88.7% of the Brazilian population lives and works. According to ANATEL, as
of December 31, 2015, we had an 18.6% market share of the Brazilian mobile telecommunications market and, as of December 31,
2015, we had a 34.7% market share of the Brazilian fixed-line market. As part of our convergence strategy, we offer more than one
million Wi-Fi hotspots in public places, such as airports and shopping malls.
Our traditional Residential Services business in Brazil includes (1) local and long-distance fixed-line voice services and public
telephones, in accordance with the concessions granted to us by ANATEL, (2) broadband services, (3) Pay-TV services, and
(4) network usage services (interconnection). We are the largest fixed-line telecommunications companies in Brazil in terms of total
number of lines in service as of December 31, 2015. We are the principal fixed-line telecommunications services provider in our
service areas, comprising the entire territory of Brazil other than the State of São Paulo, based on our 14.9 million fixed lines in
service as of December 31, 2015, with a market share of 55.0% of the total fixed lines in service in our service areas as of
December 31, 2015.
We offer a variety of high-speed broadband services in our fixed-line service areas, including services offered by our
subsidiaries BrT Serviços de Internet S.A., or BrTI, and Brasil Telecom Comunicação Multimídia Ltda. Our broadband services
primarily utilize Asymmetric Digital Subscriber Line, or ADSL, technology. As of December 31, 2015, we had 5.8 million ADSL
subscribers, representing 62% of our fixed lines in service as of that date.
We offer Pay-TV services under our Oi TV brand. We deliver Pay-TV services throughout our residential service areas using
DTH satellite technology.
Our Personal Mobility Services business offers mobile telecommunications services throughout Brazil, as well as network usage
services (interconnection). Based on our 48.1 million mobile subscribers as of December 31, 2015, we believe that we are one of the
principal mobile telecommunications service providers in Brazil. Based on information available from ANATEL, as of December 31,
2015 our market share was 18.6% of the total number of mobile subscribers in Brazil.
Our SME and Corporate Services business provide voice and data services to our SME and corporate customers throughout
Brazil.
As a result of our acquisition in May 2014 of all of the operating assets then held by Pharol, except interests held directly or
indirectly in TmarPart and our company, and subsequent to our sale in June 2015 of PT Portugal, we hold significant interests in
telecommunications companies in Angola, Cape Verde, Namibia, São Tomé and Principe in Africa and Timor Leste in Asia. Our
interests in telecommunications companies in Africa are held through Africatel, in which we own a 75% interest. Our interests in
telecommunications companies in Timor Leste are held through TPT, in which we own a 76.14% interest. On September 16, 2014,
our board of directors authorized our management to take the necessary measures to market our shares in Africatel, representing 75%
of the share capital of Africatel. In addition, on June 17, 2015, our board of directors authorized our management to take the
necessary measures to market our shares in TPT, representing 76.14% of the share capital of TPT. As a result, as of December 31,
2014 and 2015, we recorded the assets and liabilities of Africatel and TPT as held-for sale, although we do not record Africatel or
TPT as discontinued operations in our income statement due to the immateriality of the effects of Africatel and TPT on our results of
operations. Due to the many risks involved in the ownership of these interests, particularly our interest in Unitel, we cannot predict
when a sale of these assets may be completed.
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Our principal executive office is located at Rua Humberto de Campos No. 425, 6 1/2th floor–Leblon, 22430-190 Rio de Janeiro,
RJ, Brazil, and our telephone number at this address is (55-21) 3131-2918.
Our Recent History and Development
Adoption of Transformation Plan
Following the change in our senior management in 2014, we developed a plan to pursue business growth through innovative
solutions that focus on enhancing our customers’ experience rather than merely selling our services, which we refer to as the
Transformation Plan. The Transformation Plan emphasizes interdepartmental collaboration and the development of integrated
solutions that we believe will result in a cost-efficient, sustainable business with a focus on client satisfaction. The initiatives of the
Transformation Plan are grouped under four pillars: Digitalization, Convergence, Data and Cost Control all aiming to provide the
customer with a better experience. Digitalization refers to the process of making certain of our services available electronically, either
through applications for smartphones or on our website enhancing the relationship with our customers. Convergence refers to
offerings of combined services, such as the bundled offerings that we launched during 2015, including the following plan portfolios:
Oi Total in the Residential business; Oi Mais and Oi Livre in the Personal Mobility Services business; and Oi Mais Empresas in the
SME and Corporate Services business. Offering all products under one package provides better customer satisfaction and higher
loyalty and margins, essential to any capital intensive and competitive market. Data refers to the growing customer demand for larger
data packages with unrestricted use. Cost Control refers to various measures we are undertaking to reduce our costs and expenses and
maximize the efficiency and sustainability of our operations. The solutions we developed in connection with the Transformation Plan
were based on a comprehensive study of our customers’ telecommunications needs, with a view to improve the way our customers
communicate.
In December 2014, we created a department tasked with monitoring and supporting the execution of the Transformation Plan,
which we refer to as the Transformation Project Department. The Transformation Project Department consists of a team of employees
from various departments, was initially led by a chief transformation project officer, who oversaw the process and reported directly to
our chief executive officer. During 2015, members of the Transformation Project Department team met with senior management on a
weekly basis to discuss progress on the more than 300 initiatives developed pursuant to the Transformation Plan. In late 2015, we
created a strategy and new business department, which we refer to as the Strategy and New Business Department, which
supplemented the Transformation Project Department’s role with respect to initiatives related to new business, human resources,
communications, marketing and digitalization. In February 2016, the Strategy and New Business Department took over the chief
transformation project officer’s role of overseeing the Transformation Project Department.
The Transformation Plan was divided into two key phases, each of which can be summarized by four key goals. The first phase
focused on short-term solutions designed to enable our company to remain competitive in a challenging macroeconomic environment.
The four key goals of the first phase of the Transformation Plan are: (1) cost savings, (2) working capital improvements, (3) customer
profitability improvements, and (4) optimization of our organizational structure. First phase initiatives included reductions in
operating expenses, optimization of capital expenditures, reductions in working capital costs, changes in marketing strategies and
pricing models and reductions in head-count related costs, such as overtime pay and travel expenses. We implemented several first
phase initiatives during the first quarter of 2015, including the renegotiation of 69% of the number of contracts slated for
renegotiation, the reduction of the number of vehicles in our fleet by 13% and the reduction of headcount-related expenses by 37%, as
compared to the fourth quarter of 2014.
The second phase consists of end-to-end initiatives designed to integrate our departments and enable our company to provide
integrated service to our customers. The four key goals of the second phase of the Transformation Plan are: (1) process and
organizational efficiency, (2) commercial and operational productivity, (3) cross-departmental improvement and (4) enhanced
customer experience. Second phase initiatives combine elements of each of the pillars of the Transformation Plan to seek to deliver
integrated solutions to our customers. An example of a second phase initiative was the transformation of our call center operations,
which was accomplished by revising our customer complaint procedures and creating a specialized team of specially trained call
center professional to handle all downgrade requests. This initiative involved changes to and collaboration among multiple
departments within our company. We began implementing second phase initiatives in the second quarter of 2015 and will continue to
do so. As of December 31, 2015, approximately 87% of the initiatives we developed pursuant to the Transformation Plan had been
implemented. The remaining initiatives, many of which are more complex and require more time to become fully operational, are in
the process of being implemented. We believe that the
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Transformation Plan initiatives were the most significant factors that led to increases in our revenues per RGU in 2015, the decline in
operating expenses per RGU and a 17% reduction in customer complaint calls in 2015, in each case as compared to 2014.
Outsourcing of Mobile Handset and Tablet Inventory and Distribution Management
In September 2015, we entered into an agreement with Allied S.A., or Allied, a technology equipment distributor in Brazil,
pursuant to which Allied has agreed to manage the purchase, distribution and sale of mobile handsets and tablets exclusively to our
sales channels. We remain responsible for the strategic management of the supply chain, the relationship with our sales channels and
the choice of our handset portfolio. We entered into this agreement with Allied as part of our effort to further accelerate sales and the
migration of our mobile customer base to 3G and 4G smartphones, improve logistics efficiencies associated with the supply of mobile
handsets and tablets to our sales channels, reduce logistics and warehousing costs and reduce the working capital used in carrying
handset and tablet inventories.
Rio Forte Defaults and PT Exchange
Prior to the Oi capital increase, Pharol’s then wholly-owned subsidies PTIF and PT Portugal subscribed to an aggregate of
€897 million principal amount of commercial paper of Rio Forte Investments S.A., or Rio Forte, that matured in July 2014. As a
result of our acquisition of PT Portugal as part of the Oi capital increase, we became the creditor under this commercial paper.
On July 15 and 17, 2014, Rio Forte defaulted on the commercial paper held by PTIF and PT Portugal. On July 22, 2014, Rio
Forte filed a petition for controlled management with the courts of Luxembourg after concluding that it was not in a position to fulfill
the obligations resulting from certain debts that had matured in July 2014. Rio Forte’s request was rejected on October 17, 2014. The
Luxembourg Commercial Court denied Rio Forte’s request for controlled management on October 17, 2014 and declared Rio Forte
bankrupt on December 8, 2014.
On September 8, 2014, we, TmarPart, Pharol and our subsidiaries PT Portugal and PTIF, entered into the Exchange Agreement,
or the PT Exchange Agreement, and a stock option agreement, or the PT Option Agreement. On the same date, we, Pharol and
TmarPart executed a terms of commitment agreement, which we refer to as the Terms of Commitment Agreement. For more
information regarding the PT Option Agreement and the Terms of Commitment Agreement, see “Item 7. Major Shareholders and
Related Party Transactions— Related Party Transactions.”
On March 24, 2015, PT Portugal assigned its rights under the PT Exchange Agreement and the PT Option Agreement to PTIF.
On March 27, 2015, PT Portugal assigned all of its rights and obligations under the Rio Forte commercial paper that it owned to
PTIF.
Under the PT Exchange Agreement, we agreed to transfer the defaulted Rio Forte commercial paper to Pharol and Pharol agreed
to deliver to us an aggregate of 47,434,872 of our common shares and 94,869,744 of our preferred shares, representing 16.9% of our
outstanding share capital, including 17.1% of our outstanding voting capital prior to giving effect to the PT Exchange.
On March 30, 2015, the transactions contemplated by the PT Exchange Agreement were completed through the transfer of Rio
Forte commercial paper in the aggregate amount of €897 million to Pharol in exchange for 47,434,872 of our common shares and
94,869,744 of our preferred shares.
Sale of PT Portugal
On June 2, 2015, we sold all of the share capital of PT Portugal to Altice Portugal for a purchase price equal to the enterprise
value of PT Portugal of €6,900 million, subject to adjustments based on the financial debt, cash and working capital of PT Portugal
on the closing date, plus an additional earn-out amount of €500 million in the event that the consolidated revenues of PT Portugal and
its subsidiaries (as of the closing date) for any single year between the year ending December 31, 2015 and the year ending
December 31, 2019 is equal to or exceeds €2,750 million.
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In connection with the closing, Altice Portugal disbursed €5,789 million, of which €869 million was utilized by PT Portugal to
prepay outstanding indebtedness in that amount, and €4,920 million were paid to our company in cash. As of December 31, 2015, we
had used R$8,682 million of the net cash proceeds of the PT Portugal Disposition for the prepayment of indebtedness of our
company, and as of the date of this annual report have used an additional R$5,350 million of these net cash proceeds for the
prepayment and repayment of indebtedness of our company. We expect to use the remainder of these net cash proceeds for the
repayment of indebtedness of our company.
In anticipation of the PT Portugal Disposition, PT Portugal transferred PTIF, its wholly-owned finance subsidiary, to Oi. As a
result of the completion of the PT Portugal Disposition, the indebtedness of PTIF, which had previously been classified as liabilities
associated with assets held for sale in our consolidated financial statements, was reclassified as indebtedness of our company. In
addition, in connection with the PT Portugal Disposition, PTIF assumed all obligations under PT Portugal’s outstanding 6.25% Notes
due 2016.
In addition, PT Portugal transferred to Oi all of the outstanding share capital of PT Participações, which holds our direct and
indirect interests in Africatel and TPT, which provides telecommunications, multimedia and IT services in Timor Leste.
Issuance of €600 Million of 5.625% Notes due 2021 and Tender for PTIF and Oi Notes
In June 2015, our wholly-owned subsidiary Oi Brasil Holdings Coöperatief U.A., issued and sold 5.625% notes due 2021 in the
aggregate principal amount of €600 million. We used €321.54 million of the proceeds of these notes to repurchase €56.92 million
aggregate principal amount of PTIF’s 5.625% Notes due 2016, €115.88 million aggregate principal amount of PTIF’s 4.375% Notes
due 2017 and €148.74 million aggregate principal amount of Oi’s 5.125% Notes due 2017 that we had offered to purchase in a
contemporaneous tender offer. We used the remaining net proceeds of the issuance of these notes to repay or prepay other
indebtedness of our company.
Alternative Share Structure and Corporate Ownership Simplification
On March 31, 2015, the shareholders of TmarPart acting at a pre-meeting (reunião prévia) of the shareholders of TmarPart
(1) unanimously approved the adoption of an alternative share structure, after analyzing options and taking into consideration the
obstacles to the completion of the previously announced merger of shares of Oi and TmarPart, and (2) authorized the managements of
TmarPart and Oi to begin taking the applicable steps to implement the alternative share structure. The alternative share structure was
intended to achieve many of the primary purposes of the merger of shares of Oi and TmarPart, including the adoption by our
company of the best corporate governance practices required by BM&FBovespa’s Novo Mercado segment and the elimination of the
control of Oi through the various shareholders’ agreements governing Oi, while maintaining the goal of implementing a transaction
that would result in the listing of the shares of Oi on the Novo Mercado.
The implementation of the alternative share structure consisted of the corporate ownership simplification transactions (described
below), the adoption of new by-laws of our company, the election of a new board of directors of our company, and a voluntary share
exchange through which holders of our preferred shares were entitled to exchange their preferred shares for our common shares.
On September 1, 2015, we and several of our direct and indirect shareholders undertook the following transactions, which we
refer to collectively as the corporate ownership simplification transactions:
•
•
•
•
•
•
•
AG Telecom merged with and into PASA;
LF Tel merged with and into EDSP;
PASA and EDSP merged with and into Bratel Brasil;
Valverde merged with and into TmarPart;
Venus RJ Participações S.A., Sayed RJ Participações S.A. and PTB2 S.A. merged with and into Bratel Brasil;
Bratel Brasil merged with and into TmarPart; and
TmarPart merged with and into our company.
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In connection with these transactions, all of the shareholders’ agreements to which we were an intervening party and through which
the direct and indirect shareholders of TmarPart had rights to influence our management and operations were terminated. In the
merger of TmarPart with and into Oi, the net assets of TmarPart, in the amount of R$122.4 million were merged into the
shareholders’ equity of Oi and as a result of the merger, TmarPart ceased to exist. The merger of TmarPart with and into Oi also
resulted in the transfer to the shareholders’ equity of Oi of goodwill derived from the acquisition of equity interest recorded by Bratel
Brasil, AG Telecom, LF Tel, and TmarPart, in accordance with applicable Brazilian law. In the merger of TmarPart with and into Oi,
shareholders of TmarPart received the same number of shares of Oi as were held by TmarPart immediately prior to the merger of
TmarPart with and into Oi in proportion to their holdings in TmarPart. No withdrawal rights for the holders of shares of Oi were
available in connection with the merger of TmarPart with and into Oi.
At an extraordinary shareholders meeting of our company held on September 1, 2015, our shareholders (1) adopted amended
by-laws for our company that were intended to increase the corporate governance standards applicable to our company as well as to
limit the voting rights of holders of a large concentration of common shares, and (2) elected a new board of directors with terms of
office until the shareholders’ meeting that approves our financial statements for the year ending December 31, 2017. For more
information about our amended by-laws, see “Item 10. Additional Information— Description of Our Company’s By-laws.” For more
information about the members of our board of directors, see “Item 6. Directors, Senior Management and Employees—Board of
Directors.”
On October 8, 2015, we completed a voluntary share exchange under which we had offered (1) the holders of our preferred
shares (including preferred shares represented by the Preferred ADSs), the opportunity to convert their preferred shares into our
common shares at a ratio of 0.9211 common shares for each preferred share, plus cash in lieu of any fractional share, and (2) the
holders of the Preferred ADSs the opportunity to exchange their Preferred ADSs for Common ADSs at a ratio of 0.9211 Common
ADSs for each Preferred ADS, plus cash in lieu of any fractional Common ADS. Holders of 314,250,655 of our outstanding preferred
shares tendered their shares for conversion or exchange of the related ADSs. Each of Pharol and Caravelas participated in the
voluntary share exchange and surrendered all of its preferred shares for conversion. As a result of the voluntary share exchange,
314,250,655 of our outstanding preferred shares were cancelled and in exchange we issued 289,456,278 of our common shares.
Acquisition of Telemont
In October 2015, we acquired the operations in Rio de Janeiro of Telemont Engenharia de Telecomunicações S.A., or Telemont.
We had entered into a services agreement with Telemont in January 2012 for installation, operation, and corrective and preventive
maintenance in connection with our external plant and associated equipment, public telephones, and fiber optic and data
communication networks (including broadband access services) in the State of Rio de Janeiro.
Exclusivity Agreement with LetterOne
In October 2015, we entered into an exclusivity agreement with LetterOne Technology (UK) LLP, or LetterOne, with respect to
the negotiation of a potential transaction for the specific purpose of allowing a consolidation in the Brazilian telecommunications
industry involving a potential business combination with TIM. As part of the potential transaction, LetterOne proposed to make a
capital contribution of up to US$4.0 billion in our company, contingent on the completion of the consolidation transaction. On
February 25, 2016, we were notified by LetterOne that it had been informed by TIM that the latter was no longer interested in
proceeding with the negotiations of a business combination with our company and that without TIM’s involvement, LetterOne could
not proceed with transaction as previously planned.
Engagement of PJT Partners
On March 9, 2016, we announced that we had retained PJT Partners as our financial advisor to assist us in evaluating financial
and strategic alternatives to optimize our liquidity and debt profile. On April 25, 2016, we entered into a customary non-disclosure
agreement with Moelis & Company, who acts as advisor for a diverse ad
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hoc group of holders of the bonds issued by Oi and its subsidiaries, as an initial step towards discussions of a potential restructuring
of its indebtedness.
Acquisition of A.R.M.
We had entered into a services agreement with A.R.M. Engenharia in October 2012 for installation, operation and corrective and
preventive maintenance in connection with our external plant and associated equipment, public telephones, and fiber optic and data
communication networks (including broadband access services) in the States of Maranhão, Piauí, Ceará, Rio Grande do Norte,
Paraíba, Pernambuco, Alagoas, Sergipe, Bahia, Amazonas, Roraima, Pará, Amapá, Rio Grande do Sul, Paraná and Santa Catarina.
In April and May 2016, we acquired A.R.M. Engenharia’s operations in the States of Rio Grande do Sul, Santa Catarina and
Paraná, and we are managing those operations. Also in May 2016, we entered into an agreement with the shareholders of A.R.M.
Engenharia to acquire the totality of the shares issued by ARM Engenharia. The completion of the transaction is subject to customary
conditions precedent, including the completion of financial and legal due diligence and approval by the Administrative Council for
Economic Defense.
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g81z55
The following chart presents our corporate structure and principal operating subsidiaries as of May 13, 2016.
Operations in Brazil
Our concessions and authorizations from the Brazilian government allow us to provide:
•
•
•
fixed-line telecommunications services in Regions I and II of Brazil;
long-distance telecommunications services throughout Brazil;
mobile telecommunications services in Regions I, II and III of Brazil;
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•
•
data transmission services throughout Brazil; and
direct to home (DTH) satellite television services throughout Brazil.
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In addition, we have authorizations to provide fixed-line local telecommunications services in Region III.
Region I consists of 16 Brazilian states located in the northeastern and part of the northern and southeastern regions. Region I
covers an area of approximately 5.4 million square kilometers, which represents approximately 64% of the country’s total land area
and accounted for 40.3% of Brazil’s GDP in 2011. The population of Region I was 105.3 million as of 2011, which represented
54.7% of the total population of Brazil as of that date. In 2011, per capita income in Region I was approximately R$15,869, varying
from R$7,836 in the State of Piauí to R$28,696 in the State of Rio de Janeiro.
Region II consists of the Federal District and nine Brazilian states located in the western, central and southern regions. Region II
covers an area of approximately 2.9 million square kilometers, which represents approximately 33.5% of the country’s total land area
and accounted for approximately 27.1% of Brazil’s GDP in 2011. The population of Region II was 45.5 million as of 2011, which
represented 23.7% of the total population of Brazil as of that date. In 2011, per capita income in Region II was approximately
R$24,668, varying from R$11,782 in the State of Acre to R$63,020 in the Federal District.
Region III consists of the State of São Paulo. Region III covers an area of approximately 248,000 square kilometers, which
represents approximately 2.9% of the country’s total land area and accounted for approximately 32.6% of Brazil’s GDP in 2011. The
population of Region III was 41.6 million as of 2011, which represented 21.6% of the total population of Brazil as of that date. In
2011, per capita income in Region III was approximately R$32,449.
The following table sets forth key economic data, compiled by IBGE, for the Federal District and each of the Brazilian states.
State
Region I:
Rio de Janeiro
Minas Gerais
Bahia
Pernambuco
Espírito Santo
Pará
Ceará
Amazonas
Maranhão
Rio Grande do Norte
Paraíba
Alagoas
Sergipe
Piauí
Amapá
Roraima
Subtotal
Region II:
Rio Grande do Sul
Paraná
Population
(in millions)
(2011)
Population
per
Square
Kilometer
(2011)
% of GDP
(2011)
GDP per
Capita
(in reais)
(2011)
28,696
19,573
11,340
11,776
27,542
11,494
10,314
18,244
7,853
11,287
9,349
9,079
12,536
7,836
13,105
15,105
368.7
33.6
25.0
90.2
77.0
6.2
57.3
2.3
20.0
60.6
67.2
113.2
95.4
12.5
4.8
2.1
11.2
9.3
3.9
2.5
2.4
2.1
2.1
1.6
1.3
0.9
0.9
0.7
0.6
0.6
0.2
0.2
40.3
38.1
52.7
6.4
5.8
24,563
22,770
16.1
19.7
14.1
8.9
3.5
7.7
8.5
3.5
6.6
3.2
3.8
3.1
2.1
3.1
0.7
0.5
105.3
10.7
10.5
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txpg040
State
Santa Catarina
Goiás
Mato Grosso
Federal District
Mato Grosso do Sul
Rondônia
Tocantins
Acre
Subtotal
Region III (State of São Paulo)
Total
Source: IBGE.
Population
(in millions)
(2011)
Population
per
Square
Kilometer
(2011)
6.3
6.1
3.1
2.6
2.5
1.6
1.4
0.7
45.5
41.6
192.4
66.3
17.9
3.4
448.3
6.9
6.6
5.0
4.5
167.5
GDP per
Capita
(in reais)
(2011)
26,761
18,299
23,218
63,020
19,875
17,659
12,891
11,782
32,449
% of GDP
(2011)
4.1
2.7
1.7
4.0
1.2
0.7
0.4
0.2
27.1
32.6
100.0
Set forth below is a map of Brazil showing the areas in Region I, Region II and Region III.
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Our business, financial condition, results of operations and prospects depend in part on the performance of the Brazilian
economy. See “Item 3. Key Information—Risk Factors — Risks Relating to Brazil.”
Our Services
We provide a variety of telecommunications services to the residential market, the personal mobility market and the SME and
corporate markets throughout Brazil.
Residential Services
Our primary services to the residential market are fixed-line voice, broadband and Pay-TV services. We offer these services on
an a la carte basis and as bundles, including bundles with other services including our mobile voice services and our mobile data
communications services. In the Residential Services business, we view the household, rather than an individual, as our customer, and
our offerings–particularly our bundled offerings–are designed to meet the needs of the household as a whole.
We identified cost savings and customer profitability initiatives as two of the pillars of the first phase of the Transformation
Plan, which phase was largely implemented in 2015. As a result, we decreased our commercial efforts throughout the year in order to
reduce sales expenses and capital expenditures. In late 2015, however,we increased commercial efforts by launching several plans
aimed at reducing costs and offering more comprehensive services to our customers at higher prices. These higher-value offerings
increased our ARPU in the residential services business even as our customer base decreased.
Also in 2015, our Residential Services business launched a series of initiatives aimed at increasing convergence among our
product offerings, one of the key pillars of the Transformation Plan. As a result, offerings of our bundled services took on increasing
importance, as they provide a better and more integrated experience for our customers while also increasing our ARPU.
Bundled Services
Our bundled services offerings adopted as part of the Transformation Plan have focused on increasing our profitability by
providing a more comprehensive mix of higher-value services to our customers. In 2015, we focused our efforts on upselling and
cross-selling our services to existing customers, enhancing existing customer loyalty and attracting new customers by offering higher-
value services such as the bundled services in the “Oi Total” and “Oi Conta Total” portfolios. We believe that these measures,
together with oursimplified plan offeringsin the Residential Services business, resulted in an ARPU increase for each of our
residential services (fixed-line voice, broadband and Pay-TV services) in 2015.
In addition, we believe bundled offerings build customer loyalty and serve to reduce churn rates as compared to standalone
services. Certain bundles offer incentives such as free installation of fixed-line and broadband services, free modem and Wi-Fi and
access to certain smartphone applications for up to three months free of charge. We believe that a bundle that contains more services
can be more appealing to a customer than, for example, standalone broadband services at faster speeds. Both Embratel and Telefônica
Brasil offer broadband services at higher speeds than us. However, neither company has a quadruple-play bundle, such as Oi Total
Completo, that combines fixed-line voice, broadband, Pay-TV and mobile services. By developing unique, multi-product bundles
with joint installation, integrated billing and unified customer service, we set ourselves apart from other service providers. We believe
that being at the forefront of multi-product offerings allows us to remain competitive, maintain our customers’ loyalty and provide
higher-value services.
Oi Total
In 2015, we launched Oi Total, a residential services bundle designed to increase our market penetration and profitability by
attracting new customers and offering a higher number of servicers per user. Each Oi Total plan includes fixed-line voice and
broadband services with speeds of up to 35 Mbps through VDSL. Certain Oi Total plans also include Pay-TV and/or mobile services.
Oi Total Completo, for example, is our quadruple-play package
41
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR greaj0nd
NYC
17-May-2016 02:00 EST
ˆ200F4SiTVNl2p866nŠ
4*
0C
200F4SiTVNl2p866n
171431 TX 42
HTM
ESS
Page 1 of 1
that includes fixed-line voice, broadband, Pay-TV, as well as mobile services. The integrated processes (including single billing, joint
installation and unified customer service) of Oi Total have also allowed us to generate greater operational efficiencies, thereby
reducing our operating costs. By December 2015, Oi Total had been launched in 13 Brazilian states (Espírito Santo, Goiás, Mato
Grosso do Sul, Mato Grosso, Acre, Amazonas, Rondônia, Roraima, Tocantins, Rio Grande do Norte, Sergipe, Santa Catarina and
Ceará) and the Federal District. As of December 31, 2015, 75.6% of our fixed-line customers subscribed to one of the plans in our
Oi Total portfolio. In March 2016, we launched Oi Total in the remaining Brazilian states where we offer fixed-line services.
Our Oi Total portfolio reinforces our convergence strategy, which is one of the pillars of the Transformation Plan. Oi Total
embodies the multi-product concept, bringing a unique, complete and convenient experience for our customers by offering a single
sale, joint installation, integrated billing in a single bill, and unified customer service. The mobile voice services offered by Oi Total
include the all-net model for voice and robust data packages also offered by Oi Livre and Oi Mais, in addition to offering extensive
movie, TV and internet content that is available for streaming anytime, anywhere through Oi Play, our content platform that is free of
charge for all of our customers. Since its launch in September 2015, Oi Play has shown potential for growth and future revenue
generation.
Oi Conta Total
In addition to the launch of Oi Total, we continued to offer our legacy Oi Conta Total portfolio in 2015. Oi Conta Total is a
triple-play plan that provides fixed-line and mobile voice services, broadband services, mobile data and unlimited text messages to
subscribers of any provider. In addition, Oi Conta Total provides unlimited long-distance calls to our fixed-line and mobile
subscribers (except for the low-cost version of this plan, Conta Total Light). On December 31, 2015, 11% of our fixed-line customers
subscribed to one of the plans in the Oi Conta Total portfolio.
Our Oi Conta Total plan permits subscribers to make unlimited local calls to any of our fixed-line or mobile customers and
includes an allowance of minutes selected by the customer for use to make long-distance calls and local calls to customers of other
service providers. Subscribers also elect the speed of their fixed-line broadband service, which is available under this plan at speeds
ranging from 2 Mbps to 15 Mbps. Subscribers to this plan are entitled to access our Oi Wi-Fi hotspots, and subscribers who elect
speeds of 5 Mbps or greater are provided with a complimentary wireless router. Subscribers can elect add-on features for this plan,
including mobile data plans, unlimited text messages to subscribers of any provider and unlimited long-distance calls to our fixed line
or mobile customers.
As part of our emphasis on offering bundled services that increase profitability and build customer loyalty, in 2015 we also
offered our Oi Conta Total Smartphone plan, which has the same structure as Oi Conta Total but included our Oi Smartphone data
plan and unlimited text messages. Subscribers to this plan receive a smartphone, mini-modem or tablet at a subsidized price and are
able to access our network of Oi Wi-Fi hotspots.
In March 2016, we discontinued offering Oi Conta Total as an independent portfolio and moved these offerings under the
umbrella of Oi Total under the brand name Oi Total Conectado.
Pay-TV and Broadband Bundles
Subscribers to our internet protocal Pay-TV, IP TV, service may subscribe to our Oi TV Mais HD package, together with a
broadband subscription at 100 Mbps, or our Oi TV Mega HD package, together with a broadband subscription at 200 Mbps.
Subscriptions to our IP TV packages are only available in areas in which we have deployed our fiber-to-the-home, or FTTH, network.
In addition to our service bundles, we have a la carte offerings for fixed-line voice, broadband, and Pay-TV services as
described below.
42
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR brzoj0nd
NYC
Fixed-Line Voice Services
17-May-2016 15:49 EST
ˆ200F4SiTVNpPzlLguŠ
5*
0C
200F4SiTVNpPzlLgu
171431 TX 43
HTM
ESS
Page 1 of 1
As of December 31, 2015, we had 14.4 million local fixed-line customers in our fixed-line service areas (including customers of
our SME and Corporate Services). Local fixed-line services include installation, monthly subscription, metered services, collect calls
and supplemental local services. Metered services include local calls that originate and terminate within a single local area and calls
between separate local areas within specified metropolitan regions which, under ANATEL regulations, are charged as local calls.
ANATEL recently changed the geographic classification of local areas and currently has divided our fixed-line service areas into
approximately 4,400 local areas.
Under our concession agreements, we are required to offer two local fixed-line plans to users: the Basic Plan per Minute (Plano
Básico de Minutos) and the Mandatory Alternative Service Plan (Plano Alternativo de Serviços de Oferta Obrigatória), each of
which includes installation charges, monthly subscription charges, and charges for local minutes. As of December 31, 2015, 13.6% of
our fixed-line customers subscribed to the Basic Plan per Minute or the Mandatory Alternative Service Plan.
Calls within Brazil that are not classified as local calls are classified as domestic long-distance calls. We provide domestic long-
distance services for calls originating from fixed-line devices in Region I and Region II through our network facilities in São Paulo,
Rio de Janeiro and Belo Horizonte and through interconnection agreements with other telecommunications providers, both fixed-line
and mobile, that permit us to interconnect directly with their networks. We provide international long-distance services originating
from fixed-line devices in our fixed-line service areas through agreements to interconnect our network with those of the main
telecommunications service providers worldwide.
In addition to the Basic Plan per Minute and the Mandatory Alternative Service Plan, we offer a variety of alternative fixed-line
plans that are designed to meet our customers’ usage profiles. As of December 31, 2015, 86.4% of our fixed-line customers
subscribed to alternative plans, including our bundled plans.
Our Oi Fixo portfolio of fixed-line, voice-only plans provides a range of options, including unlimited on-net or all-net calls from
fixed-line to fixed-line (depending on the plan), as well as on-net and off-net calls to mobile devices at pre-established rates.
We own and operate public telephones throughout our fixed-line service regions. As of December 31, 2015, we had
approximately 651,000 public telephones in service, all of which are operated by pre-paid cards.
Broadband Services
We provide broadband services to residential customers in our fixed-line service areas. As of December 31, 2015, we offered
broadband services in 4,699 municipalities and had 5.7 million broadband customers in our fixed-line service areas (including
customers of our SME and Corporate Services). We offer ADSL services through ADSL modems installed using our customers’
conventional lines, which permit customers to use the telephone line simultaneously with the internet. Customers pay a fixed monthly
subscription fee, irrespective of their actual connection time to the internet.
We offer broadband a la carte subscriptions to customers that do not subscribe to our bundled services plans at speeds ranging
from 2 Mbps to 35 Mbps. To attract customers to this service, we offer new subscribers complementary anti-virus software and
backup services, as well as a free wireless router with subscriptions at speeds of 5 Mbps or more.
We periodically offer promotions designed to encourage our existing broadband customers to migrate to plans offering higher
speeds and to attract new customers to our broadband services. In some cases, we encourage our customers to migrate to higher
broadband plans by providing broadband at faster speeds for the same prices as existing plans. This improvement of service without
an increase in cost furthers our goals of improving the perception of quality of our services, enhancing the customer experience and
enhancing customer loyalty.
We continue to strategically invest in areas where we see the greatest potential for sales and growth. Our two primary
competitors in broadband services, Embratel and Telefônica Brasil, both offer broadband at higher speeds
43
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR nakpj0ma
NYC
16-May-2016 07:51 EST
ˆ200F4SiTVNfnr!Zg)Š
2*
0C
200F4SiTVNfnr!Zg)
171431 TX 44
HTM
ESS
Page 1 of 1
than our offerings. As a result, in 2015 we devoted a substantial portion of our capital expenditures in investments to our network to
increase the available broadband speeds that we are able to offer in order to attract new customers and enhance the loyalty of our
existing customer base, which was a significant factor in the increase in our ARPU from broadband services during 2015.
In September 2015, we launched high-speed VDSL broadband service with offers ranging from 15 to 35 Mbps. We expect to be
able to offer even greater speeds as we continue to invest in our broadband network infrastructure.
Pay-TV Services
We offer Pay-TV services under our Oi TV brand. We deliver Pay-TV services throughout our fixed-line service areas using our
DTH satellite network. In December 2012 and January 2013, we began to offer IP TV services through our FTTH network in Rio de
Janeiro and Belo Horizonte, respectively. As of December 31, 2015, we had approximately 1.2 million subscribers to our Pay-TV
services. As of December 31, 2015, approximately 11.5% of households with our residential services subscribed to Oi TV.
We offer three packages of Pay-TV services: (1) Oi TV Start HD with 118 channels, including 20 high-definition, or HD,
channels, (2) Oi TV Mix HD with 158 channels, including 43 HD channels, and (3) Oi TV Total HD with 183 channels, including 53
HD channels. Subscribers to each of these packages have the option to customize the package through the purchase of additional
channels featuring films offered by HBO/MAX and Telecine and sports offered by Futebol. Although these packages are available for
a la carte purchase, we promote these packages, and approximately 65% of our subscribers for these packages purchase them as part
of a bundle with our broadband and/or fixed-line voice services.
Personal Mobility Services
Our Personal Mobility Services business is comprised of post-paid and pre-paid mobile voice services and post-paid and pre-
paid mobile data communications services. As of December 31, 2015, we had an aggregate of approximately 45.9 million subscribers
for our mobile services, including subscribers to our bundled plans. As of December 31, 2015, 85.2% of our personal mobility voice
customers subscribed to pre-paid plans and 14.8% subscribed to post-paid plans.
As part of our efforts under the Transformation Plan to increase profitability and enhance our customers’ experience, in 2015 we
launched three new portfolios of mobile services plans: Oi Mais for the post-paid market, Oi Livre for the pre-paid market and Oi
Mais Controle as a hybrid solution. All of these plans provide simpler options, data allowances without usage restrictions, and (with
the exception Oi Mais Controle Básico, the basic Oi Mais Controle plan) all-net minutes. The introduction of these new offerings is
part of our convergence strategy as these plans combine voice and data packages across our entire portfolio. This combination of
voice and data packages encourages our customers to maintain voice services as part of their packages, which reduces that rate of
decline of our customer base for fixed-line voice services. In addition, since our 3G and 4G networks offer greater capacity to meet
the growing demand for data, we intend to accelerate the migration of users from 2G to 3G and from 3G to 4G by encouraging sales
of 3G/4G smartphones and by including more data allowances in our new mobile offers. We believe these measures will enhance our
customers’ experience and provide a better perception of the quality of our services.
Mobile Voice and Data Services
Post-Paid Services
Post-paid customers pay a monthly subscription fee and are billed on a monthly basis for services provided during the previous
month. Post-paid plans include voice mail, caller ID, conference calling, call forwarding, calls on hold and special services. We
believe that our new offerings in the post-paid market enable us to improve revenues and market share by offering a mix of services
to the post-paid market at more attractive prices.
44
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR enrig0ma
NYC
16-May-2016 14:05 EST
ˆ200F4SiTVNhJlJggtŠ
3*
0C
200F4SiTVNhJlJggt
171431 TX 45
HTM
ESS
Page 1 of 1
In November 2015, we launched the Oi Mais portfolio for the post-paid market. Oi Mais plans offer a substantial increase in the
size of data packages with no usage restrictions, all-net minutes to call customers of any operator anywhere in Brazil and a reduced
one-time tariff for calls made to customers of any operator in Brazil in excess of the monthly plan allowance. We believe the
introduction of all-net plans will eliminate the community effect among voice customers using such plans. Moreover, we believe our
new data packages, which contain more data and no usage restrictions, will allow us to satisfy the growing demand from our
customers for increased and unrestricted data usage.
Oi Mais plans range from R$79.90 per month to R$149.90 per month. They provide between 250 minutes and 3,000 minutes of
calls and offer between 3 GB and 10 GB of 4G data to be used freely (including on social networking sites). All Oi Mais plans offer
access to Oi Wi-Fi and unlimited text messaging to customers of any operator.
We continue to offer Oi Conta Conectado 50, our traditional portfolio of plans, which provides an unlimited on-net mobile plan
for local and long distance voice services and an all-net plan for fixed-line services. The Oi Conta Conectado 50 plan also provides a
limited off-net voice package for mobile calls to customers of other operators and 500 MB of data. In December 2015, we stopped
offering new subscriptions to the low-cost plan Oi Conta 100, which offered voice only (no data) to our customers. As of
December 31, 2015, Oi Conta Conectado represented 84% of our total post-paid base.
Pre-Paid Services
Pre-paid customers activate their cellular numbers through the purchase and installation of a SIM card in their mobile handsets.
Our pre-paid customers are able to add credits to their accounts through point-of-sale machines, ATMs, Apple and Android
applications installed on their mobile devices such as Minha Oi and Recarga Oi using a credit card, our toll-free number or the
purchase of pre-paid cards at a variety of prices. These credits are valid for a fixed period of time following activation and can be
extended when additional credits are purchased.
After conducting a comprehensive ten-month study of the telecommunications consumption habits in Brazil, in November 2015
we launched our Oi Livre portfolio for the pre-paid market, which includes significant increases in data allowances and a flat fee for
all-net calls (with the exception of Oi Livre Por Dia, our per-day pre-paid mobile plan) to customers of any operator in Brazil. This
initiative changes the mobile service market in Brazil, disrupting the original pre-paid model in which customers acquired SIM cards
from different operators and used the respective SIM card for on-net calls with that particular operator in an effort to avoid paying
high rates for off-net calls.
The launch of Oi Livre was a strategic move given the recent reductions in interconnection tariffs in Brazil. It also follows a
global trend and adopts a model widely used in developed markets such as the United States and Europe. In addition, we believe the
increase in data allowances satisfies the growing customer demand for larger data packages that allow access to the great variety of
applications available for smartphones.
Oi Livre allows flexibility to our pre-paid consumers by offering monthly, weekly, daily and per-minute plans. Our monthly
plan has a 300 minute allowance for calls to all Brazilian landlines and mobile subscribers, plus a 1GB data package and 500 text
messages for R$40 per month. Our weekly plan includes a 75 minute allowance for calls to all Brazilian landlines and mobile
subscribers, plus a 400MB data package and 300 text messages for R$10 per week. We also offer a weekly plan for those who still
value unlimited on-net calls, which includes a 250MB data package and 300 text messages for R$8 per week. Our daily plan has
unbundled voice and data packages, each of which is available for less than R$1 per day. Finally, we offer a per minute plan with 60
MB daily for data usage and text messages, and calls to any landline or mobile subscriber in Brazil for R$0.30 per minute. Our
monthly and weekly plans have a higher ARPU relative to our other plans, and they help us to achieve the objectives set forth in the
Transformation Plan. Since its launch, Oi Livre has acquired 6.2 million customers and, as of December31, 2015, Oi Livre
represented 15.9% of our total pre-paid base.
Under our pre-paid voice plans, our customers may exchange the credits they purchase for additional services, such as:
45
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR nakpj0ma
NYC
16-May-2016 07:52 EST
ˆ200F4SiTVNfnu$sgUŠ
2*
0C
200F4SiTVNfnu$sgU
171431 TX 46
HTM
ESS
Page 1 of 1
•
•
•
Bônus Extra, which permits our customers to purchase additional minutes for local or long-distance calls to our fixed-line
or mobile subscribers at discounted rates;
Pacote de Dados, which permits our customers to purchase a specified data allowance for use on their handsets; and
Pacote de SMS, which permits our customers to purchase the ability to send a specified number of text messages.
In keeping with the Transformation Plan’s focus on cost control and increasing profitability, throughout 2015 we disconnected
inactive users of our pre-paid plans, which reduced FISTEL taxes, which are calculated based on the number of our active
subscribers, resulting in an increase in the profitability of our customer base. We intend to continue to disconnect inactive users
periodically.
Hybrid Services
The hybrid voice services market presents strategic value for our company because it combines advantages of pre-paid
offerings, such as the absence of bad debt and a favorable impact on working capital, with advantages of post-paid offerings, such as
a heavier consumption profile. We improve our revenues and market share through the offer of hybrid plans by consolidating
customer recharges in our hybrid plans’ SIM cards and by improving the mix of offerings to the post-paid market.
In November 2015, we launched the Oi Mais Controle portfolio of plans for customers who wish to combine the cost savings of
our post-paid plans with the self-imposed limits of our pre-paid plans. Oi Mais Controle subscribers have similar benefits as the Oi
Mais customers, such as data packages with no usage restrictions, unlimited text messaging and (with the exception of the Oi Mais
Controle Básico plan) all-net minutes to call customers of any operator anywhere in Brazil. We believe these new data packages,
which contain more data and no usage restrictions, will allow us to satisfy the growing demand from our customers for increased and
unrestricted data usage.
The Oi Mais Controle plans range from R$34.90 per month to R$54.90 per month. They offer between 1GB and 2GB of data to
be used freely (including on social networking sites), between 250 and 500 all-net minutes (with the exception of the Oi Mais
Controle Básico plan), and unlimited text messaging to customers of any operator (with the exception of the Oi Mais Controle Básico
plan). If customers require additional credits under the Oi Mais Controle plans, they can be purchased through point of sale machines
in retail stores, ATMs or mobile applications such as Minha Oi and Recarga Oi.
The Oi Mais Controle Básico plan allows customers to make unlimited local and long-distance calls to our mobile and fixed-
line subscribers (on-net calls) and offers 1GB of data. Customers can also purchase credits that can be used for calls to customers of
other providers (off-net calls) and other add-on services.
Until November 2015, we offered hybrid plans under the brand name Oi Controle, which lack bad debt risk and have a
favorable impact on working capital. Oi Controle allows customers to make unlimited local and long-distance calls to our mobile and
fixed-line subscribers (on-net calls) and purchase credits that can be used for calls to customers of other providers (off-net calls) and
other add-on services. Oi Controle is composed of five plans. One of the plans, Oi Controle Voz, offers a credit of R$10.90 for
customer use on a pay-as-you go plan in addition to the above benefits. The other four plans include mobile data, unlimited text
messages to our mobile customers, limited voice and text message plans to customers of other operators and access to our Wi-Fi
hotspots. In keeping with the Transformation Plan’s focus on cost control and profitability of the customer base, in the second half of
2015 we disconnected all inactive users of our hybrid Oi Controle plan, which reduced certain unnecessary costs. As of December 31,
2015, Oi Controle represented 41% of our total post-paid base.
46
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR nakpj0ma
NYC
Mobile Data Only Services
16-May-2016 07:52 EST
ˆ200F4SiTVNfnw726<Š
2*
0C
200F4SiTVNfnw726<
171431 TX 47
HTM
ESS
Page 1 of 1
We offer post-paid and pre-paid mobile data communications services to customers who seek to access the internet through our
network using mobile devices, including smartphones or tablets and laptop computers with the aid of a mini-modem. As with our
post-paid voice plans, our post-paid mobile internet customers pay a monthly subscription fee and are billed on a monthly basis for
services provided during the previous month. We also offer internet access for a daily fee to customers who do not subscribe to a
monthly plan. In December 2014, we began the practice of blocking access to data services for pre-paid customers who exceeded
their data allowances. For post-paid data packages, we continue to throttle the speed of service for customers who exceed their data
allowances.
Post-Paid Services
We offer a variety of post-paid mobile data communications plans that provide data allowances from 300 MB to 10 GB for
smartphones and from 300 MB to 10 GB for tablets and laptop computers and provide data transmission at speeds of 1 Mbps (3G
network) or 5 Mbps (4G network). In addition to data traffic, our post-paid mobile internet plans for use with mobile devices include
allowances for text messages. Our post-paid mobile internet plans for smartphones are available to our Oi Conta and Oi Mais
customers. Our post-paid mobile internet plans for tablets and laptop computers are sold on a stand-alone basis or, in some cases,
through our Oi Conta Total voice and data bundle. Subscribers to our post-paid mobile internet plans for smartphones, tablets and
laptop computers also receive free access to our network of Wi-Fi hotspots. In addition to these post-paid plans, subscribers can
purchase anti-virus software and backup data storage services.
Pre-Paid Services
We offer two pre-paid mobile data communications plans: through mobile devices and through the purchase and installation of a
SIM card in a mini-modem or tablet. Our pre-paid customers are able to add credits to their accounts through the purchase of pre-paid
credits at prices that vary based on the data allowance purchased (from 5MB to 1GB) and duration (daily, weekly and monthly).
Value-Added Services
The value-added services we provide include voice, text and data applications, including voicemail, caller ID, and other
services, such as personalization (video downloads, games, ring tones and wallpaper), text messaging subscription services
(horoscope, soccer teams and love match), chat, mobile television, location-based services and applications (mobile banking, mobile
search, email and instant messaging). Applications such as the ones described below contributed an increase in revenues from value-
added services during 2015.
Oi Apps Club: A subscription-based marketplace for highly rated Android apps, Oi Apps Club provides customers unlimited
access to download apps, charged to the customer’s Oi bill rather than a credit card.
Oi Conselheiros: In this service, renowned and famous professionals in different areas of expertise known as “Oi’s
Ambassadors” endorse exclusive content covering travel, fashion, cooking, celebrities and music, among others.
Oi Para Aprender: Oi’s mobile learning platform, which provides a variety of courses and tips regarding languages, entrance
examinations, job assessments, how to develop a home office business and software lessons, among others.
Our value-added services are developed by third-party application or content providers and offered to our customers. On
average, these providers receive 35% of the net revenues generated by the services they develop and or provide to our customers.
47
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR nakpj0ma
NYC
SME and Corporate Services
16-May-2016 07:52 EST
ˆ200F4SiTVNfnxJKg8Š
2*
0C
200F4SiTVNfnxJKg8
171431 TX 48
HTM
ESS
Page 1 of 1
In the SME and corporate services market we serve SME and corporate customers. We offer a variety of services to these
customers, including our core fixed-line, broadband and mobile services, as well as our value-added services, advanced voice services
and commercial data transmission services. For our corporate customers, we also offer information technology services, such as
network management and security, Smartoffice, Smartcloud, anti-distributed denial of service and machine-to-machine products,
which enable communication between a product and its control center or database (such as a car and its GPS navigation system), in
order to expand our revenue sources from corporate customers beyond voice services, increase customer loyalty and ensure greater
revenue predictability.
The implementation of the Transformation Plan throughout 2015, coupled with the declining macroeconomic conditions in
Brazil, has prompted certain changes in our portfolios and recent offerings. SMEs are more vulnerable to economic instability than
our more established corporate customers, so there has been a reduction in our SME customer base as a result of SMEs going out of
business. Our corporate customers, while better able to survive the current economic instability, often respond by reducing their
economic activity and tightening their budgets for telecommunications products and services.
In addition, in a move to better align our products with the needs of our consumers, and to increase customer satisfaction, we
have taken a “back-to-basics” approach to product and service offerings and, as a result, developed simpler, more predictable flat-rate
plans that enable the customer to better understand, project and plan for upcoming expenses. Furthermore, our sales focus has shifted
to upgrading existing contracts, which has not required us to make any additional investments.
Services for SMEs
We offer SME services similar to those offered to our residential and personal mobility customers, including fixed-line and
mobile voice services, and fixed-line and mobile broadband services. We also recently launched FTTH plans for SMEs in December
2015. In addition, we offer SMEs:
•
•
•
advanced voice services, primarily 0800 (toll free) services, as well as voice portals where customers can participate in
real-time chats and other interactive voice services;
dedicated internet connectivity and data network services; and
value-added services, such as help desk support that provides assistance for technical support issues, web services with
hosting, e-mail tools and website builder and security applications.
In general, our sales team works with our SME customer to determine that customer’s telecommunications needs and negotiates
a package of services and pricing structure that is best suited to its needs. In December 2015, we launched Oi Mais Empresas for
SMEs. Oi Mais Empresas provides 4G voice and mobile data and fixed-line (voice and broadband) services for a flat fee. This
simplified portfolio is easier to understand, purchase and use, fostering a better relationship with the SME. The flat rate model
eliminates billing issues and disputes and reduces the risk of default by the SME. Concurrently, as part of our digitalization efforts set
forth in the Transformation Plan, we launched the Oi Mais Empresas app, a fully digital customer channel through a smartphone
application that can be downloaded at no cost at Apple Store or Google Play. The Oi Mais Empresas app provides exclusive service
to SMEs, enabling them to acquire services, upgrade their contract plan and make requests and track the status of those requests, such
as repairs and bill copies, among others, all using a smartphone. We made the same improvements and enabled the same
functionalities as the Oi Mais Empresas app on our website, enabling our customers to perform the same functions from a computer.
The creation of the Oi Mais Empresas app and website improvements, changed the way our customers communicate and reinforced
our commitment to simplify our product portfolios and better understand our customers’ needs.
We continue to service our SME customers with a variety of legacy mobile plans, including our Oi Equipe Flat plan for groups
of employees, our Oi Empresa Especial plan for individual users in an SME and our Oi Controle
48
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR cruzm2ma
NYC
16-May-2016 10:06 EST
ˆ200F4SiTVNgRyH06HŠ
3*
0C
200F4SiTVNgRyH06H
171431 TX 49
HTM
ESS
Page 1 of 1
plan which, similarly to our residential fixed-line plan, is designed to permit an SME to control usage of mobile minutes.
Services for Corporate Customers
We offer corporate customers all of the services offered to our SME customers. In addition, we provide a variety of customized,
high-speed data transmission services through various technologies and means of access to corporate customers. Our principal data
transmission services for Corporate customers are:
•
•
•
we act as the internet service provider for our Corporate customers, connecting their networks to the internet;
SLD, under which we lease dedicated lines to corporate customers for use in private networks that link different corporate
websites; and
IP services which consist of dedicated internet connection, as well as Virtual Private Network, or VPN, services that enable
our customers to connect their private intranet and extranet networks to deliver videoconferencing, video/image
transmission and multimedia applications.
We provide these services at data transmission speeds of 2 Mbps to 10 Gbps.
We also offer information technology infrastructure services to our corporate customers, seeking to offer them end-to-end
solutions through which we are able to provide and manage their connectivity and information technology needs. For example, we
offer Oi SmartCloud, a suite of data processing and data storage services that we perform through our five cyber data centers located
in Brasília, São Paulo, Curitiba and Porto Alegre. In addition, through these data centers, we provide hosting, collocation and IT
outsourcing services, permitting our customers to outsource their IT infrastructures to us or to use these centers to provide backup for
their IT systems.
We also offer the following four major service groups through Oi SmartCloud, which operate through our five cyber data
centers:
•
•
•
•
collaborative solutions, a hosting and sharing platform that provides employees with access to company documents;
business applications, an in-memory computing platform for large amounts of data;
Oi Gestão Mobilidade, a mobile device management service focused on providing logistics and security solutions relating
to mobile devices; and
security, a centralized, anti-spam filtering solution for corporate email.
We also offer various services based on IT applications:
•
•
•
fleet management services, which provide a management system for fleet monitoring and location targeting, economies of
scale for fuel costs, driver profile analysis and kilometer control for maintenance;
workforce management, which provides a system with web and mobile applications to monitor and control the workforce
in the field and optimize routes and control logistics activities; and
digital content management (corporate TV platform and queue management), which provides a digital signage platform
with queue management solutions, creating a powerful marketing tool for companies that have interactions with customers
at points of sale.
49
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR nakpj0ma
NYC
16-May-2016 07:52 EST
ˆ200F4SiTVNfn!Mfg]Š
2*
0C
200F4SiTVNfn!Mfg]
171431 TX 50
HTM
ESS
Page 1 of 1
Our Oi Smart Office service provides a system to control daily work and productivity of employees working remotely, including
through the use of biometrics. The platform offers a connection between the home environment and the corporate network, providing
unified communication options including chat, voice, video, conferencing and document sharing along with corporate applications for
cloud computing.
In response to the reduced demand for traditional telecommunications services due to the challenging macroeconomic
environment in Brazil, we have focused our new offerings in 2015 on information technology infrastructure services. As of
December 31, 2015, approximately 15% of our corporate customers had contracted for at least one information technology service. In
2015, our revenues from information technology offerings increased as compared to 2014.
In order to provide complete solutions to our corporate clients, we have entered into service agreements for the joint supply of
international data services with a number of important international data services providers. These commercial relationships with
international data services providers are part of our strategy of offering telecommunications services packages to our customers.
Services for Other Telecommunications Providers
We offer specialized services to other telecommunications providers, primarily consisting of interconnection to our networks,
network usage charges for the use of portions of our long-distance network, traffic transportation through our physical infrastructure,
and RAN sharing agreements.
Interconnection and Network Usage Charges
All telecommunications services providers in Brazil are required, if technically feasible, to make their networks available for
interconnection on a non-discriminatory basis whenever a request is made by another telecommunications services provider.
Interconnection permits a call originated on the network of a requesting local fixed-line, mobile or long-distance service provider’s
network to be terminated on the local fixed-line or mobile services network of the other provider.
We are authorized to charge for the use of our local fixed-line network on a per-minute basis for (1) all calls terminated on our
local fixed-line networks in Regions I and II that originate on the networks of other mobile and long-distance service providers, and
(2) all long-distance calls originated on our local fixed-line networks in Regions I and II that are carried by other long-distance
service providers.
Conversely, other local fixed-line service providers charge us interconnection fees (1) to terminate calls on their local fixed-line
networks that are originated on our mobile or long-distance networks, and (2) for long-distance calls originated on their local fixed-
line networks that are carried by our long-distance network.
In addition, we charge network usage fees to long-distance service providers and operators of trunking services that connect
switching stations to our local fixed-line networks. We are authorized to charge for the use of our long-distance network on a per-
minute basis for all calls that travel through a portion of our long-distance networks for which the caller has not selected us as the
long-distance provider. Conversely, other long-distance service providers charge us interconnection fees on a per-minute basis for all
calls that travel through a portion of their long-distance networks for which the caller has selected us as the long-distance provider.
We are authorized to charge for the use of our mobile network on a per-minute basis for all calls terminated on our mobile
network that originate on the networks of other local fixed-line, mobile and long-distance service providers. Conversely, other mobile
services providers charge us interconnection fees to terminate calls on their mobile networks that are originated on our local fixed-
line, mobile or long-distance networks. The amounts that we charge and owe for these interconnections with respect to SMEs have
reduced dramatically, however, as a result of the recent reductions in interconnection tariffs mandated by ANATEL. The pricing for
services to our corporate customers are not immediately affected by the ANATEL reductions. Rather, these rate reductions are only
reflected in the negotiation and pricing of new contracts.
50
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR brzoj0nd
NYC
Transportation
17-May-2016 15:49 EST
ˆ200F4SiTVNpP!uc6YŠ
3*
0C
200F4SiTVNpP!uc6Y
171431 TX 51
HTM
ESS
Page 1 of 1
We provide Industrial Exploitation of Dedicated Lines (Exploração Industrial de Linha Dedicada), or EILD, services under
which we lease trunk lines to other telecommunications services providers, primarily mobile services providers, which use these trunk
lines to link their radio base stations to their switching centers.
Long-distance and mobile services providers may avoid paying long-distance network usage charges to us by establishing an
interconnection to our local fixed-line networks. In order to retain these customers of our long-distance services, we offer a long-
distance usage service, called national transportation, under which we provide discounts to our long-distance network usage fees
based on the volume of traffic and geographic distribution of calls generated by a long-distance or mobile services provider.
We also offer international telecommunications service providers the option to terminate their Brazilian inbound traffic through
our network, as an alternative to Embratel and TIM. We charge international telecommunications service providers a per-minute rate,
based on whether a call terminates on a fixed-line or mobile telephone and the location of the local area in which the call terminates.
Rates
Our rates for local fixed-line services, domestic long-distance services, mobile services, interconnection, EILD and SLD
services are subject to regulation by ANATEL, subject to certain exceptions relating to the rates we charge under alternative fixed-
line and mobile plans that we are authorized to offer to our customers. For information on ANATEL regulation of our rates, see “—
Telecommunications Regulation—Regulation of the Brazilian Telecommunications Industry.”
Many of the services we provide charge on a per-minute basis. For these services, we charge for calls based on the period of use.
The charge unit is a tenth of a minute (six seconds), and rounding is permitted to the next succeeding tenth of a minute. There is a
minimum charge period of 30 seconds for every call. For local fixed-line to fixed-line calls during off-peak hours, charges apply on a
per-call basis, regardless the duration of the call.
Fixed-Line Rates
Local Rates
Our revenues from local fixed-line services consist mainly of monthly subscription charges, charges for local calls and charges
for the activation of lines for new subscribers or subscribers that have changed addresses. Monthly subscription charges are based on
the plan to which the customer subscribes and whether the customer is a residential, commercial or trunk line customer.
Under our concession agreements, we are required to offer two local fixed-line plans to users: the Basic Plan per Minute and the
Mandatory Alternative Service Plan, each of which includes installation charges, monthly subscription charges, and charges for local
minutes. The monthly subscription fees under the Basic Plan per Minute and the Mandatory Alternative Service Plan vary in
accordance with the subscribers’ profiles, as defined in the applicable ANATEL regulations. As of December 31, 2015, 13.6% of our
local fixed-line customers subscribed to the Basic Plan per Minute or the Mandatory Alternative Service Plan.
In addition to the Basic Plan per Minute and the Mandatory Alternative Service Plan, we are permitted to offer non-
discriminatory alternative plans to the basic service plans. The rates for applicable services under these plans (e.g., monthly
subscription rates and charges for local and long-distance calls) must be submitted for ANATEL approval prior to the offering of
those plans to our customers. In general, ANATEL does not raise objections to the terms of these plans. As of December 31, 2015,
86.4% of our local fixed-line customers subscribed to alternative plans.
On an annual basis, ANATEL increases or decreases the maximum rates that we are permitted to charge for our basic service
plans. ANATEL increased the rates that we may charge by an average of 0.55% as of February 8,
51
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR lunaa1ma
NYC
16-May-2016 08:01 EST
ˆ200F4SiTVNfqPCmgWŠ
3*
0C
200F4SiTVNfqPCmgW
171431 TX 52
HTM
ESS
Page 1 of 1
2013, decreased the rates that we may charge by an average of 0.10% as of April 18, 2014, and increased the rates that we may
charge by an average of 3.6% as of June 13, 2015. In addition, we are authorized to adjust the rates applicable to our alternative plans
annually by no more than the rate of inflation, as measured by the IST. Discounts from the rates set in basic service plans and
alternative service plans may be granted to customers without ANATEL approval.
Local Fixed Line-to-Mobile Rates (VC-1) and Mobile Long Distance Rates (VC-2 and VC-3)
When one of our fixed-line customers makes a call to a mobile subscriber of our company or another mobile services provider
that terminates in the mobile registration area in which the call was originated, we charge our fixed-line customer per-minute charges
for the duration of the call based on rates designated by ANATEL as VC-1 rates. In turn, we pay the mobile services provider a per-
minute charge based on rates designated by ANATEL as VU-M rates for the use of its mobile network in completing the call. Rates
for long-distance calls that originate or terminate on mobile telephones are based on whether the call is an intrasectorial long-distance
call, which is charged at rates designated by ANATEL as VC-2 rates, or an intersectorial long-distance call, which is charged at rates
designated by ANATEL as VC-3 rates. If the caller selects one of our carrier selection codes for the call, we receive the revenues
from the call and must pay interconnection fees to the service providers that operate the networks on which the call originates and
terminates. VC-1, VC-2 and VC-3 rates, collectively, the “VC Rates” vary depending on the time of the day and day of the week, and
are applied on a per-minute basis.
On an annual basis, ANATEL may increase or decrease the maximum VC Rates that we are permitted to charge. In February
2012, ANATEL ordered us to reduce our VC Rates by approximately 10%, although we are appealing the timing of the application of
this rate decrease to our company as our VC Rates was increased in Region I by 1.54% in accordance with our application for this
increase in February 2012.
ANATEL has changed our VC-1 rates as follows:
•
•
•
•
In February 2014, reduced by approximately 18% and 33.5% in Regions I and II, respectively.
In August 2014, increased by approximately 1.5% and 3.3% in Regions I and II, respectively.
In February 2015, reduced by approximately 21.8% and 21.3% in Regions I and II, respectively.
In August 2015, increased by approximately 5.5% in Regions I and II.
ANATEL has changed our VC-2 and VC-3 rates as follows:
•
•
•
•
In February 2014, reduced our VC-2 rate by 12.1% and 27.5% in Regions I and II, respectively, and reduced our VC-3 rate
by approximately 10.6% and 26.4% in Regions I and II, respectively.
In August 2014, increased both our VC-2 and VC-3 rates by approximately 1.5% and 3.1% in Regions I and II,
respectively.
In February 2015, reduced our VC-2 rate by 13.6% and 12.4% in Regions I and II, respectively, and reduced our VC-3 rate
by approximately 11.8% and 10.8% in Regions I and II, respectively.
In August 2015, increased both our VC-2 and VC-3 rates by approximately 5.5% in Regions I and II.
As a result of the substantial reductions in VC Rates over the past several years, and in keeping with our strategy of simplifying
our portfolios to enhance the customer experience, in 2015 we launched several fixed-line and mobile plans that allow all-net calls for
a flat fee. All-net plans eliminate the effect of VC Rate reductions on our customers’ telephone bills and simplify the billing process.
52
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR lunaa1ma
NYC
Fixed Line-to-Fixed-Line Long Distance Rates
16-May-2016 08:01 EST
ˆ200F4SiTVNfqQN#6oŠ
3*
0C
200F4SiTVNfqQN#6o
171431 TX 53
HTM
ESS
Page 1 of 1
If a caller selects one of our carrier selection codes for a long-distance call that originates and terminates on fixed-line
telephones, we receive the revenues from the call and must pay interconnection fees to the service providers that operate the networks
on which the call originates and terminates. Rates for these long-distance calls are based on the physical distance separating callers
(which are categorized by four distance ranges), time of the day and day of the week, and are applied on a per-minute basis for the
duration of the call. Rates on these calls are applied on a per-minute basis.
On an annual basis, ANATEL increases or decreases the maximum domestic fixed line-to-fixed line long-distance rates that we
are permitted to charge. ANATEL increased the rates that our company and Telemar may charge by an average of 0.55% as of
February 8, 2013, 0.65% as of April 18, 2014, and 3.6% as of June 13, 2015. Discounts from the domestic fixed line-to-fixed line
long-distance rates approved by ANATEL may be granted to customers without ANATEL approval.
Mobile Rates
Mobile telecommunications service in Brazil, unlike in the United States, is offered on a “calling-party-pays” basis under which
a mobile subscriber pays only for calls that he or she originates (in addition to roaming charges paid on calls made or received outside
the subscriber’s home registration area). A mobile subscriber receiving a collect call is also required to pay mobile usage charges.
Our revenues from mobile services consist mainly of charges for local and long-distance calls paid by our pre-paid and post-
paid mobile subscribers and monthly subscription charges paid by our post-paid plan subscribers. Monthly subscription charges are
based on a post-paid subscriber’s service plan. If one of our mobile subscribers places or receives a call from a location outside of his
or her home registration area, we are permitted to charge that customer the applicable roaming rate. We offer basic service plans
(post-paid and pre-paid), as well as non-discriminatory alternatives to the basic service plans. As of December 31, 2015, fewer than
1% of our mobile customers subscribed to our basic plans (post-paid or pre-paid); substantially all of our post-paid and pre-paid
customers subscribed to non-discriminatory alternative plans to the basic service plans.
Although subscribers of a plan cannot be forced to migrate to new plans, existing plans may be discontinued as long as all
subscribers of the discontinued plan receive a notice to that effect and are allowed to migrate to new plans within six months of such
notice.
We charge for all mobile calls made by our pre-paid customers, and for mobile calls made by our post-paid customers in excess
of their allocated monthly number of minutes, on a per-minute basis.
Rates under our mobile plans may be adjusted annually by no more than the rate of inflation, as measured by the IGP-DI. These
rate adjustments occur on the anniversary dates of the approval of the specific plans. Discounts from the rates set in basic service
plans and alternative service plans may be granted to customers without ANATEL approval. The rate of inflation as measured by the
IGP-DI was 5.5% in 2013, 3.8% in 2014, and 10.7% in 2015.
Network Usage (Interconnection) Rates
Fixed-Line Networks
Our revenues from the use of our local fixed-line networks consist primarily of payments on a per-minute basis, which are
charged at rates designated by ANATEL as TU-RL rates, from:
•
•
long-distance service providers to complete calls terminating on our local fixed-line networks;
long-distance service providers for the transfer to their networks of calls originating on our local fixed-line networks; and
53
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR lunaa1ma
NYC
16-May-2016 08:01 EST
ˆ200F4SiTVNfqRZCgrŠ
3*
0C
200F4SiTVNfqRZCgr
171431 TX 54
HTM
ESS
Page 1 of 1
•
mobile services providers to complete calls terminating on our local fixed-line networks.
Fixed-line service providers are not permitted to charge other fixed-line service providers for local fixed-line calls originating on their
local fixed-line networks and terminating on the other provider’s local fixed-line networks. TU-RL rates vary depending on the time
of the day and day of the week, and are applied on a per-minute basis.
Our revenues from the use of our long-distance networks consist primarily of payments on a per-minute basis, which are
charged at rates designated by ANATEL as TU-RIU rates, from other long-distance carriers that use a portion of our long-distance
networks to complete calls initiated by callers that have not selected us as the long-distance provider. TU-RIU rates for intrasectorial
calls are designated by ANATEL as TU-RIU1 rates, and TU-RIU rates for intersectorial calls are designated by ANATEL as TU-
RIU2 rates.
TU-RIU rates vary depending on the time of the day and day of the week, and are applied on a per-minute basis. Since
January 1, 2013, the TU-RIU rates of Oi and Telemar have been equal to 20% of their respective domestic fixed line-to-fixed line
long-distance rates for such calls.
In July 2014, ANATEL approved a rule for the definition of maximum fixed reference rates, including TU-RL and TU-RIU, for
entities with significant market power, such as our company, based on a long-run incremental cost methodology. Under this rule, TU-
RL and TU-RIU reference rates will decline from 2016 through 2019 when TU-RL and TU-RIU reference rates reflecting the long-
run incremental cost methodology will apply.
Mobile Networks
Our revenues from the use of our mobile networks consist primarily of payments on a per-minute basis from (1) local fixed-line,
long-distance and mobile services providers to complete calls terminating on our mobile networks, and (2) long-distance service
providers for the transfer to their networks of calls originating on our mobile networks.
The terms and conditions of interconnection to our mobile networks, including the rates charged to terminate calls on these
mobile networks, which are designated by ANATEL as VU-M rates, commercial conditions and technical issues, may be freely
negotiated between us and other mobile and fixed-line telecommunications service providers, subject to compliance with regulations
established by ANATEL relating to traffic capacity and interconnection infrastructure that must be made available to requesting
providers, among other things. We must offer the same VU-M rates to all requesting service providers on a nondiscriminatory basis.
We apply VU-M charges on a per-minute basis.
Under ANATEL regulations, in December 2013 ANATEL established the maximum VU-M rate of R$0.33 per minute that is
applicable in the event that providers could not agree upon the VU-M applicable in their interconnection agreements. Under the
General Plan on Competition Targets (Plano Geral de Metas de Competição), in February 2014 the VU-M rate was reduced to 75%
of the maximum VU-M rate established by ANATEL in December 2013, and in February 2015 the VU-M rate was reduced to 50%
of the maximum VU-M rate established by ANATEL in December 2013. In July 2014, ANATEL approved a rule for the definition of
maximum VU-M reference rates for entities with significant market power, such as our company, based on a long-run incremental
cost methodology. Under this rule, VU-M reference rates will decline from 2016 through 2019 when VU-M reference rates reflecting
the long-run incremental cost methodology will apply.
Data Transmission Rates
Broadband services, IP services and frame relay services are deemed to be value-added services under ANATEL regulations
and, therefore, the rates and prices for these services are not subject to regulation and are market-driven. We offer broadband services
subscriptions at prices that vary depending on the download speeds available under the purchased subscription.
A significant portion of our revenues from commercial data transmission services are generated by monthly charges for EILD
and SLD services, which are based on contractual arrangements for the use of part of our networks. Under ANATEL regulations,
because we are deemed to have significant market power in the fixed-line
54
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR lunaa1ma
NYC
16-May-2016 08:01 EST
ˆ200F4SiTVNfqShW6-Š
3*
0C
200F4SiTVNfqShW6-
171431 TX 55
HTM
ESS
Page 1 of 1
services business, we are required to make publicly available the forms of agreements that we use for EILD and SLD services,
including the applicable rates, and are only permitted to offer these services under these forms of agreements. ANATEL publishes
reference rates for these services and if one of our customers objects to the rates that we charge for these services, that customer is
entitled to seek to reduce the applicable rate through arbitration before ANATEL.
In May 2014, ANATEL approved a standard for setting maximum values for EILD services based on a long-run incremental
cost methodology. In July 2014, ANATEL published reference rates for EILD services that contain a single reference table which
will be valid from 2016 until 2020. Under ANATEL regulations, EILD reference rates will decline from 2016 through 2020 when
EILD reference rates reflecting the long-run incremental cost methodology will apply. In addition, under the General Plan of
Competition Targets, companies with significant market, such as our company, are required to present a public offer every six months
including standard commercial conditions, which is subject to approval by ANATEL.
Our revenue from IP services is based on the number of data ports to which the customer is granted access. Our revenue from
frame relay services consists mainly of charges for access to the data transmission network and metered service charges based on the
amount of data transmitted. Such services are offered as pay-per-use or volume-based packages. Our revenue from cyber data center
services is generally based on contractual arrangements that are tailored to the specific services provided.
DTH and IP TV Services Rates
DTH and IP TV services are deemed to be conditional access services under the private regime, which Oi provides pursuant to
authorizations. As a result, the rates and prices for these services are not subject to regulation and are market-driven. We offer DTH
and IP TV subscriptions at prices that vary depending on the content of the subscription package. We offer basic subscription
packages for our Oi TV services, as well as a variety of premium packages which allow subscribers to tailor the content that they
receive to their individual tastes.
Marketing and Distribution
During 2015, we incurred R$406 million in marketing expenses in our Brazilian operations. On a company-wide basis, we focus
our marketing efforts on strengthening the “Oi” brand, reinforcing the image of the convergence of the integrated company. We also
engage in marketing programs to support our Residential Services, our Personal Mobility Services and our SME and Corporate
Services.
We advertise through a diverse array of media outlets as part of our strategy to reach all types and classes of customers and
potential customers. We use television, radio, billboards, exterior signage, telemarketing, direct mail and internet advertising to
market our fixed-line, mobile, long-distance, broadband and subscription television services. We use our branded assets in advertising
campaigns, such as the “Orelhão Mágico” Christmas campaign, in which children are able to place calls to Santa Claus from our
telephone booths. We sponsor sporting events and individual athletes, as well as cultural events, such as fashion shows and popular
music concerts. The goal of our marketing initiatives is to increase brand awareness of our company as a convergent provider capable
of meeting all of the telecommunications needs of our customers and expand the use of our distribution channels to increase net
operating revenue.
Our principal marketing expenditures to support our Residential Services were designed to:
•
•
•
promote our bundled plans, such as Oi Total and Oi Conta Total as part of our effort to expand our customer base;
promote cross-selling of our services, including by promoting our bundled plans and higher value offers, as part of our
effort to increase the profitability and enhance the loyalty of the existing customer base
expand our Oi fixed-line and Oi TV customer bases with offers through our other services.
55
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR greaj0nd
NYC
17-May-2016 02:01 EST
ˆ200F4SiTVNl2%r4gSŠ
4*
0C
200F4SiTVNl2%r4gS
171431 TX 56
HTM
ESS
Page 1 of 1
Our principal marketing expenditures to support our Personal Mobility Services were designed to:
•
•
promote our pre-paid mobile services via ad campaigns on television and digital media with a focus on our weekly
packages and the launch of 4G technology on pre-paid plans;
promote our post-paid mobile plans, primarily Oi Mais and Oi Mais Controle, as well as 4G data services at higher speeds,
through specific marketing campaigns and mobile device subsidies (through our Oi Pontos program, which provides
existing post-paid customers with a phone credit based on amount spent in the preceding 12-month period, to be applied as
a credit against the price of a new mobile device), as part of our effort to increase our market share in mobile services; and
•
expand our 4G internet customer base, focusing on geographic regions covered by the National Broadband Plan.
In 2015, our SME and Corporate Services business did not engage in any marketing initiatives for its products and services.
Instead, our ongoing marketing efforts in our SME and Corporate Services business include:
•
•
•
press releases for launches of new products and services;
client events, including attendance at fairs and conferences; and
other day-to-day marketing.
Distribution Channels
We distribute our services through channels focused on three separate sectors of the telecommunications services market:
(1) residential customers, including customers of our mobile services to whom we sell bundled plans; (2) personal mobility customers
that purchase our mobile services independently of our bundled plans; and (3) business and corporate customers.
Residential Services
Our distribution channels for residential customers are focused on sales of fixed-line services, including voice, broadband
services and Oi TV, and post-paid mobile services. As part of the restructuring of our distribution channels, we have begun to provide
more extensive training to our employees and the employees of third-party sales agents and have revised our commission structures to
incentivize selective sales of bundled and higher-value plans and services that generate higher ARPU and reduce customer churn
rates. As of December 31, 2015, the principal distribution channels that we used for sales to residential customers were:
•
•
•
•
our own network of stores, which included 197 “Oi” branded stores.
approximately 300 “Oi” franchised service stores and kiosks located in the largest shopping malls and other high density
areas throughout Brazil.
approximately 270 stores located throughout our service areas that primarily sell telecommunications products and services
and have entered into exclusivity agreements with us.
our telemarketing sales channel, which is operated by our call center and other third-party agents and consists of
approximately 1,650 sales representatives that answer more than 1.2 million calls per month. This channel provides us with
the ability to pro-actively reach new customers, thereby increasing our client base and revenues, and also receives calls
prompted by our offers made in numerous types of media.
•
our “teleagents” channel, which consists of approximately 300 local sales agents that operate in specific regions and
complement our telemarketers.
56
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR greaj0nd
NYC
17-May-2016 02:03 EST
ˆ200F4SiTVNl36TQg}Š
4*
0C
200F4SiTVNl36TQg}
171431 TX 57
HTM
ESS
Page 1 of 1
•
•
door-to-door sales calls made by our sales force of approximately 1,900 salespeople trained to sell our services throughout
Brazil in places where customers generally are not reachable by telemarketing.
our e-commerce sites through which customers may purchase a variety of our services.
Our distribution channels for personal mobility customers are focused on sales of mobile services to post-paid customers and
pre-paid customers, including mobile broadband customers. As part of the restructuring of our distribution channels, our distribution
channels for our post-paid personal mobility services have converged with our distribution channels for residential services. As of
December 31, 2015, the principal distribution channels that we used for sales of our pre-paid personal mobility services were:
•
•
•
approximately 10,000 stores that are part of large national chains which sell our SIM cards and pre-paid mobile cards;
approximately 23 multibrand distributors that distribute our SIM cards and pre-paid mobile cards to approximately
179,000 pharmacies, supermarkets, newsstands and similar outlets; and
our website, through which our pre-paid customers may recharge their SIM cards.
SME and Corporate Services
We have established separate distribution channels to serve small and medium-sized enterprise, or SMEs, and large enterprises,
or corporate customers. We market a variety of services to SMEs, including our core fixed-line, broadband and mobile services, as
well as our value-added services, advanced voice services and commercial data transmission services. We have five regional offices
from which approximately 100 employees supervise our marketing efforts to SMEs and our third-party sales force serving this sector.
We also have begun to provide more extensive training to our employees and the employees of third-party sales agents. As of
December 31, 2015, the principal distribution channels that we use to market our services to SMEs were:
•
•
approximately 100 “Oi” exclusive agents with approximately 800 door-to-door sales consultants that are dedicated to
understanding and addressing the communications needs of our existing and prospective SME customers.
our telemarketing sales channel, which consists of three agents that use approximately 350 sales representatives that are
specifically trained to discuss the business needs of our prospective SME customers to make sales calls, as well as
representatives in our call center and representatives at call centers under contract with us to receive calls from existing and
prospective SME customers to sell services to new customers and promote higher-value and additional services to existing
customers. In addition, our telemarketing channel utilizes approximately 300 customer retention representatives.
We market our entire range of services to corporate customers through our own direct sales force which meets with current and
prospective corporate customers to discuss the business needs of these enterprises and design solutions intended to address their
communications needs. Our client service model focuses on post-sale service and we regularly discuss service needs and
improvements through calls and meetings with our customers. As of December 31, 2015, our corporate sales team, including post-
sale service personnel, was composed of approximately 1,250 employees operating in six regional offices.
Billing and Collection
Residential Services
We send each of our Residential Services customers a monthly bill covering all the services provided during the prior monthly
period. Customers are grouped in billing cycles based on the date their bills are issued. Each bill separately itemizes service packages,
local calls, long-distance calls, calls terminating on a mobile network, toll-free services and other services such as call waiting,
voicemail and call forwarding. We have agreements with several
57
OI S.A.
FORM 20-F
RR Donnelley ProFile
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11.9.13
NCR greaj0nd
NYC
17-May-2016 02:04 EST
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banks for the receipt and processing of payments from our Residential Services customers. A variety of businesses, such as lottery
houses, drugstores and grocery stores, accept payments from our Residential Services customers as agents for these banks.
We are required to include in our monthly Residential Services bills charges incurred by our customers for long-distance
services provided by other long-distance service providers upon the request of these providers. We have billing agreements with each
long-distance telecommunications service provider that interconnects with our networks under which we bill our customers for any
long-distance calls originated on our network that are carried by another long-distance service provider and transfer the balance to the
relevant provider after deducting any access fees due for the use of our network.
Payments of Residential Services bills are due within an average of 15 days after the billing date. We charge late-payment
interest at a rate of 1% per month plus a one-time late charge of 2% of the amount outstanding.
ANATEL regulations permit us to restrict outgoing calls made by a Residential Services customer when the customer’s account
is more than 31 days past due, restrict incoming calls received by a Residential Services customer when the customer’s account is
more than 61 days past due, and disconnect a Residential Services customer when the customer’s account is more than 91 days past
due, provided in each case that 15-days’ prior notice has been given to that customer prior to the imposition of each restriction. The
disconnection process thus comprises several stages, including customer notification regarding the referral of their delinquency to
credit bureaus, before the Residential Services customer may be ultimately disconnected due to non-payment. Notices range from
voice messages to active calls for negotiation with the customer. Our collection system enables us to access delinquent subscribers’
accounts according to their payment profile. This profile takes into consideration, among other things, the length of subscription, the
outstanding balance of the account and the longest payment delays.
Personal Mobility Services
We bill our post-paid Personal Mobility Services customers on a monthly basis and itemize charges in the same manner as we
bill our Residential Services customers. In addition, the monthly bills also provide details regarding minutes used and roaming
charges. Payments are due within an average of 15 days after the billing date. We charge late-payment interest at a rate of 1% per
month plus a one-time late charge of 2% of the amount outstanding. As with our Residential Services business, we have agreements
with several banks for the receipt and processing of payments from our post-paid Personal Mobility Services customers. A variety of
businesses, such as lottery houses, drugstores and grocery stores, accept payments from our post-paid Personal Mobility Services
customers as agents for these banks.
ANATEL regulations permit us to partially suspend services to a post-paid Personal Mobility Services customer when the
customer’s account is more than 15 days past due, restrict all incoming calls received and outgoing calls made by a post-paid Personal
Mobility Services customer when the customer’s account is more than 45 days past due, and cancel services to a post-paid Personal
Mobility Services customer when the customer’s account is more than 90 days past due, provided in each case that 15-days’ prior
notice has been given to that customer prior to the imposition of each restriction. The cancellation process thus comprises several
stages, including customer notification regarding the referral of their delinquency to credit bureaus, before services to the post-paid
Personal Mobility Services customer may be ultimately cancelled due to non-payment. Notices range from text messages to active
calls for negotiation with the customer. Our collection system enables us to access delinquent subscribers’ accounts according to their
payment profile. This profile takes into consideration, among other things, the length of subscription, the outstanding balance of the
account and the longest payment delays. We have also implemented an information tool to assist with account management that is
designed to warn subscribers of high outstanding amounts due and unpaid.
58
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR lunaa1ma
NYC
16-May-2016 08:01 EST
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Customers of our pre-paid Personal Mobility Services can only use a paid service if they have enough active credits in their
accounts to do so. In order to acquire credits, customers must recharge their SIM cards in one of our many points of sales. Services
are charged directly from the customer´s accounts and are free of bad-debt risk.
Network and Facilities
Our Brazilian networks are comprised of physical and logical infrastructures through which we provide fully-integrated
services, whether fixed-line or mobile, voice, data or image, thereby optimizing available resources. We monitor our networks
remotely from our centralized national network operations center in Rio de Janeiro. Network operating and configuration platforms,
located at the network operations center, perform failure monitoring, database and configuration management, security management
and performance analysis for each network.
Access Networks
Our Brazilian access networks connect our customers to our signal aggregation and transportation networks. We have a large
number of network access points, including twisted copper pair wires to residences and commercial buildings, fiber optic lines to
residences and commercial buildings, wireless transmission equipment and Wi-Fi hotspots. Our fixed-line networks are fully
digitalized.
Voice and data signals that originate through fixed-line access points are routed through Multi-service Access Nodes, or
MSANs, to our aggregation networks, or are rerouted to our aggregation networks through Digital Subscriber Line Access
Multiplexer, or DSLAM, equipment which split the voice signal from the digital signal which is transmitted using ADSL or VDSL
technology. We are engaged in a long-term program to update our MSAN equipment to DSLAM equipment as demand for data
services increases. As of December 31, 2015, approximately 90% of our fixed-line network had been updated to support ADSL2+ or
VDSL2 and we provided ADSL or VDSL2 services in 4,476 municipalities.
ADSL technology allows high-speed transmission of voice and data signals on a single copper wire pair for access to the
network. Since voice transmission through telephone lines uses only one of many available frequency bands, the remaining frequency
bands are available for data transmission. Our network supports ADSL2+ and VDSL2, or very-high-bitrate digital subscriber line,
technologies. ADSL2+ is a data communications technology that allows data transmission at speeds of up to 24 Mbps downstream
and 1 Mbps upstream, which is much faster than data transmission through conventional ADSL. ADSL2+ permits us to offer a wider
range of services than ADSL, including IP TV. VDSL2 is a DSL technology providing faster data transmission, up to 100 Mbps
(downstream and upstream), permitting us to support high bandwidth applications such as HDTV, VoIP and broadband internet
access, over a single connection.
We are engaged in a long-term program to upgrade portions of our fixed-line access networks with optical fiber networks based
on gigabit passive optical network, or GPON, technology to support VDSL2 service and facilitate our offering of our Oi TV service.
The implementation of this technology permits us to provide broadband with speeds up to 100 Mbps to residential customers and up
to 1 Gbps to commercial customers.
For our non-residential customers, we have a fully integrated and managed network providing access for networks based on
internet protocol, or IP, and Asynchronous Transfer Mode, or ATM, protocol over legacy copper wire through which are able to
provide:
•
•
•
symmetric and transparent access to Frame Relay services at speeds from 64 kbps to 1.5 Mbps;
symmetrical access with PPP (Point to Point) for the Internet connection services at speeds from 64 kbps to 1.5 Mbps; and
symmetrical access with PPP (Point to Point) to provide connection services for virtual private networks, or VPNs, through
Multiprotocol Label Switching, or MPLS, protocol at speeds from 64 kbps to 1.5 Mbps.
59
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR lunaa1ma
NYC
16-May-2016 08:01 EST
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The following table sets forth selected information about our fixed-line networks as of the dates and for the periods indicated.
As of and For Year Ended
December 31,
2014
2015
2013
Installed access lines (in millions)
Access lines in service (in millions)
Public telephones in service (in thousands)
Broadband access lines in service (in millions)
27.5
14.9
651.7
5.9
28.0
16.3
653.3
6.1
28.3
17.7
655.6
6.1
Mobile devices access our GSM (Global System for Mobile Communications), or 2G, mobile networks on frequencies of 900
MHz/1800 MHz, our 3G mobile networks on frequencies of 2100 MHz and our 4G mobile networks on frequencies of 2500 MHz.
Our 2G access points use General Packet Radio Service, or GPRS, which allows speeds in the range of 115 kilobytes per second
(Kbps), and Enhanced Data Rates for Global Evolution, or EDGE, which allows speeds in the range of 230 Kbps, to send and receive
data signals. Our 3G access points use high speed packet access, or HSPA, which allows speeds in the range of 14.2 Mbps, to send
and receive data signals. Our 4G access points use 10+10 MHz and 2x2 Multiple Input Multiple Output, which allows speeds in the
range of 75 Mbps, to send and receive data signals. Voice and data signals sent and received through our 2G and 3G access points are
routed to our aggregation networks. Our mobile networks have unique data core and are fully integrated with our fixed-line data
networks.
As of December 31, 2015, our 2G mobile access networks, consisting of 13,777 active radio base stations, covered 3,386
municipalities, or 93% of the urban population of Brazil. We have GPRS coverage in 100% of the localities covered and EDGE
coverage in all state capitals.
As of December 31, 2015, our 3G mobile access networks, consisting of 9,265 active radio base stations, covered 1,288
municipalities, or 79% of the urban population of Brazil. We have HSPA coverage in all state capitals.
As of December 31, 2015, our 4G access networks, consisting of 5,213 active radio base stations, covered 133 municipalities, or
51% of the urban population of Brazil.
In addition to these mobile access networks, we also operate Wi-Fi hotspots in public areas such as coffee shops, airports and
shopping centers. Since 2012, we have provided outdoor urban wireless networks, including in the neighborhoods of Copacabana and
Ipanema in the city of Rio de Janeiro. As of December 31, 2015, our Wi-Fi network consisted of over two million hotspots, with
broadband access compatible with over two million access points provided by Fon Wireless Ltd., or Fon, which allows our customers
to access Fon lines worldwide.
Aggregation Networks
Voice and data signals sent through our access network are routed through our aggregation networks to digital switches which
connect voice calls and route digital signals to their destinations. Portions of our aggregation network use conventional copper trunk
lines to connect our access network to our switches and transportation networks. We use ATM protocol to permit high speed
transmission of these signals. Other portions of our aggregation network use fiber optic cable to connect our access network to our
switches and transportation networks using Synchronous Digital Hierarchy, or SDH, protocol. In large metropolitan areas where the
density of access point results in increased demand, we have deployed Metro Ethernet networks. We are currently deploying Metro
Ethernet networks in additional cities to serve rising customer demand. Our Metro Ethernet networks are fully-integrated
management systems and provide:
•
•
ethernet data services from 4 Mbps up to 1 Gbps for point-to-point and multipoint dedicated access;
ethernet access services from 4 Mbps up to 1 Gbps for IP access and MPLS/VPN access;
60
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FORM 20-F
RR Donnelley ProFile
ncrdoc1
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•
•
•
aggregation network services for ADSL2+ and VDSL2 platforms;
aggregation network services for GPON platforms; and
DWDM systems for services above 1Gbps to prevent overbooking our Metro Ethernet network.
Historically, we have used ATM protocol to transport digital signals through our access network from non-residential customers
that require dedicated bandwidth to our switching stations. Our ATM networks have a fully-integrated management system and
provide:
•
•
•
frame relay data services (a data transmission service using fast protocols based on direct use of transmission lines) from
64 Kbps up to 2 Mbps;
ATM data services supporting access rates from 2 Mbps to 622 Mbps; and
aggregation network services for ADSL2+ platforms.
In response to changing customer needs, we converted elements of our network that use ATM and SDH protocols, that permit us
to offer dedicated bandwidth to our customers, to MPLS protocol, which supports IP and permits the creation of VPNs through our
MetroEthernet networks.
We have begun to use MPLS-TP capable devices that have been designed to interface with our existing Metro Ethernet Network
to increase the bandwidth of our networks to support our 4G network data traffic and replace our legacy SDH networks.
Transportation Networks
We have a nationwide long-distance backbone, consisting of an optical fiber network that connects the Federal District and all
state capitals in Brazil. This fiber network supports high capacity Dense Wavelength Division Multiplex, or DWDM, systems that can
operate with up to 80 channels at 10 and 40 Gbps. In 2015, we completed the implementation of a new Optical Transport
Network/DWDM, or OTN/DWDM network, with 100 Gbps links that connect 11 capitals, including São Paulo, Rio de Janeiro,
Brasília and Belo Horizonte. This new OTN/DWDM network spreads over approximately 30,000 km of optical cables. Our optical
network is complemented by microwave links to reach smaller cities and towns.
Most of the large urban areas of our fixed-line service areas are also connected by our fiber optic cable networks. Our
transmission infrastructure connects our digital switches to four international gateway switches: two in Rio de Janeiro, one in Curitiba
and one in Brasília.
We employ automatic traffic protection to improve the reliability of our network and increase its traffic capacity. The network is
fully supervised and operated by management systems that allow rapid response to customer service requests and reduce the recovery
time in case of failures.
We operate an internet backbone network and a fully IP-routed network, which provides a backbone for all internet dedicated
services and VPN offerings. Our internet backbone connects to the public internet via international links that we maintain abroad.
We have implemented an address control and name resolution system for our IP networks with the objective of optimizing
resources and improving the availability of internet access services.
Our transportation network is directly interconnected to the national and international long-distance networks of all long-
distance service providers operating in Regions I, II and III and all mobile services providers in Regions I, II and III.
61
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FORM 20-F
Satellite Network
RR Donnelley ProFile
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We have deployed an expanded range of satellite-based services to comply with our public service obligations to the rural and
remote areas of Brazil, including the Amazon rainforest region. These satellite services include internet access and access to corporate
data applications. As of December 31, 2015, our satellite network covered approximately 5,165 localities in 26 states and the Federal
District and provided voice and data services.
In 2000, we began the implementation of the land-based segment of our respective satellite networks in order to extend
transmission to remote areas in the states of Acre, Paraná, Rondônia, Rio Grande do Sul, Santa Catarina, Pará, Amazonas, Amapá and
Roraima, as well as to other areas with limited access to telecommunications services due to geographical conditions, such as Mato
Grosso, Mato Grosso do Sul, Goiás and Tocantins. The satellite network comprises satellite earth stations located in less-populated
rural areas, as well as hub stations in the cities of Brasília, Manaus, Boa Vista, Macapá, Belém, Santarém, Marabá, Rio de Janeiro and
Porto Velho. These satellite networks use digital technology and began operating in August 2000. The fiber optic and satellite
backbones are interconnected in Brasília, Belém, Manaus, Rio de Janeiro and Porto Velho. The integration of the land-based segment
of our satellite network allows us to provide fixed-line and mobile voice service to our subscribers in any location in our fixed-line
service areas.
Hispamar Satellite S.A., or Hispamar, a Spanish-Brazilian consortium created in November 1999 by Hispasat (the leading
satellite telecommunications provider in the Iberian Peninsula), and our company operates the Amazonas 2 and Amazonas 3
satellites, which were manufactured by Astrium (EADS Space Company). In December 2002, we entered into an agreement with
Hispasat that granted and transferred to Hispamar the rights to exploit geostationary orbital position 61 degrees west, and we acquired
a minority equity stake in Hispamar.
In 2009, the Amazonas 2 satellite was launched and this satellite commenced commercial operations in early 2010. The
Amazonas 2 satellite was manufactured by Astrium and launched into geostationary orbit of 61 degrees West. This satellite provides
both C and KU band transponders and on-board switching, with an expected useful life of 15 years. The Amazonas 2 satellite is
owned by a subsidiary of Hispasat and Hispamar has been granted the right to operate and lease all of the transponder’s space
segment on this satellite.
The Amazonas 3 satellite was launched and commenced commercial operations in early 2013. The Amazonas 3 satellite was
manufactured by Space Systems/Loral and launched into geostationary orbit of 61 degrees West. This satellite provides both C and
KU band transponders, with an expected useful life of 15 years. The Amazonas 3 satellite is owned by Hispamar, a subsidiary of
Hispasat, which operates and leases the transponder’s entire space segment on this satellite.
We lease transponders from:
•
•
•
Hispamar with 754 MHz of capacity, in the C band, on the Amazonas 3 satellite and 540 MHz of capacity in the C band on
the Amazonas 2 satellite to provide voice and data services through 653 remote switches covering 390 municipalities;
Hispamar with 98.3 Mhz of capacity, in the KU band, on the Amazonas 3 satellite and 576 Mhz of capacity in the KU
band on the Amazonas 2 satellite to provide voice and data services to approximately 3,028 localities; and
Intelsat Satellite with 68 MHz of capacity, in the C band, on the IS-905 satellite to transport voice and data signals from
Macapá to Rio de Janeiro and Boa Vista to Rio de Janeiro.
As part of our goal to maximize investments and allocate resources to certain strategic developments, in 2015 we focused on the
expansion of our backbone infrastructure. We now service more areas through our fixed line infrastructure, which reduced the
number of satellites needed to comply with our public service obligations. As a result, we terminated leases and operations for the
following satellites:
62
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FORM 20-F
RR Donnelley ProFile
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NYC
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•
•
Intelsat Satellite with 122 MHz of capacity, in the C band, on the IS-805 satellite and 648 MHz of capacity in the C band
on the IS 10-02 satellite to transport voice and data signals from Manaus to Rio de Janeiro; and
SES New Skies with 108 MHz of capacity, in the KU band, on the SES-4 satellite to provide voice and data services
throughout Brazil.
DTH Network
We historically provide our DTH services through a satellite uplink located in Lurin, Peru which receives, encodes and transmits
the television signals to satellite transponders. We lease these facilities and license the related technology from a subsidiary of
Telefónica. We lease transponders for the delivery of these television signals to our subscribers from Telefónica. We have leased 216
Mhz of capacity in the KU band on the Amazonas 3 satellite and 36 Mhz of capacity in the KU band on the Amazonas 2 satellite to
provide DTH services.
In December 2013, we started providing DTH services through our own head-end located in Rio de Janeiro, Alvorada - Barra da
Tijuca, which receives, encodes and transmits television signals for satellite transponders. We lease transponders for the delivery of
these television signals to our subscribers from SES New Skies. We have leased 1.5 GHz of capacity in the KU-band, on the SES-6
satellite to provide DTH services throughout Brazil.
Our customers lease satellite dishes and set-top boxes from us as part of their subscriptions to our Oi TV services.
IP TV Network
We offer IP TV services in the cities of Rio de Janeiro and Belo Horizonte through our FTTH network. For customers who have
the IP TV service, we also offer OTT services, which provide customers with access to different content on different devices (mobile
phones, tablets and computers).
Fixed-Line and Mobile Tower Leases
In December 2012, we entered into an operating lease agreement with Sumbe to lease space to install our equipment on 1,200
communications towers and rooftop antennae of Sumbe. The monthly payments under this operating lease agreement reflect a base
rental amount specified in the agreement, adjusted annually by the positive variation of IPCA. This operating lease has a 15-year term
and is automatically renewable for successive 12-month periods unless any party to the agreement provides 60-day prior written
notice terminating such renewal.
In April 2013, we entered into an operating lease agreement with São Paulo Cinco Locação de Torres Ltda. to lease space to
install our equipment on 2,113 fixed-line communications towers of São Paulo Cinco Locação de Torres Ltda. The monthly payments
under this operating lease agreement reflect a base rental amount specified in the agreement, adjusted annually by the positive
variation of IPCA. This operating lease has a 20-year term that commenced upon completion of the assignment of the right to lease
space and install equipment on the fixed-line communication towers, and is renewable for another 20 years.
In April 2013, we entered into an operating lease agreement with BR Towers SPE 3 S.A. to lease space to install our equipment
on 2,113 fixed-line communications towers of with BR Towers SPE 3 S.A. The monthly payments under this operating lease
agreement reflect a base rental amount specified in the agreement, adjusted annually by the positive variation of IPCA. This operating
lease has a 20-year term that commenced upon completion of the assignment of the right to lease space and install equipment on the
fixed-line communication towers, and is renewable for another 20 years.
In July 2013, we entered into an operating lease agreement with SBA Torres Brasil Ltda. to lease space to install our equipment
on 2,113 fixed-line communications towers of São Paulo Cinco Locação de Torres Ltda. The monthly payments under this operating
lease agreement reflect a base rental amount specified in the agreement, adjusted annually by the positive variation of IPCA. This
operating lease has a 20-year term that commenced upon
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RR Donnelley ProFile
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completion of the assignment of the right to lease space and install equipment on the fixed-line communication towers, and is
renewable for another 20 years.
In December 2013, we entered into an operating lease agreement with Caryopoceae to lease space to install our equipment on
2,007 communications towers and rooftop antennae of Caryopoceae. The monthly payments under this operating lease agreement
reflect a base rental amount specified in the agreement, adjusted annually during the first seven years of the lease by the greater of
6.5% or the positive variation of IPCA, and adjusted annually thereafter by the positive variation of IPCA. This operating lease has a
15-year term and is automatically renewable for successive 60-month periods unless any party to the agreement provides 60-day prior
written notice terminating such renewal.
In June 2014, we entered into an operating lease agreement with Tupã Torres to lease space to install our equipment on 1,641
communications towers and rooftop antennae of Tupã Torres. The monthly payments under this operating lease agreement reflect a
base rental amount specified in the agreement, adjusted annually during the first seven years of the lease by the greater of 6.5% or the
positive variation of IPCA, and adjusted annually thereafter by the positive variation of IPCA. This operating lease has a 15-year term
and is automatically renewable for successive 60-month periods unless any party to the agreement provides 60-day prior written
notice terminating such renewal.
Infrastructure Sharing Agreements
2G and 3G Networks
In April 2014, we and TIM entered into a memorandum of understanding under which we agreed to the joint construction,
implementation and reciprocal assignment of elements of our respective 2G and 3G network infrastructure.
4G Network
We currently are party to two Radio Access Network, or RAN, sharing agreements with other operators. RAN sharing enables
operators to share the same physical network, each using its own frequency spectrum resources, thus reducing the deployment costs
in proportion to each operator’s respective coverage requirements while maintaining all of the characteristics of an individual network
with respect to our customers. RAN sharing makes use of 3GPP standard features, permitting full technical support. As a result, RAN
sharing agreements allow us to reduce operating expenses and capital expenditures, a key priority of the Transformation Plan.
In November 2012, we entered into a memorandum of understanding with TIM under which we agreed to the joint use of
elements of our 4G network under a RAN sharing model pursuant to which we have invested in (and provided TIM with access to)
infrastructure in certain cities, while TIM has invested in (and provided us with access to) infrastructure in other cities. In late 2013,
we and TIM extended this memorandum of understanding to additional cities and revised certain obligations of each party under the
memorandum of understanding, which we refer to as the 2013 RAN Sharing Agreement. The 2013 RAN Sharing Agreement has a
term of 15 years. Under the 2013 RAN Sharing Agreement, we offer 4G technology to over 80% of urban areas in all Brazilian
capital cities and cities with over 500,000 inhabitants. In 2015, we expanded the 2013 RAN Sharing Arrangement with TIM to cities
with over 200,000 inhabitants, approximately 133 municipalities covered by 4G technology, and we began a RAN sharing
arrangement with Vivo in five municipalities, which we expect to expand during 2016 and succeeding years.
In June 2015, we entered into a memorandum of understanding under which we agreed to the joint use of elements of the 4G
network under a RAN sharing model pursuant to which Oi, TIM, and Vivo agreed to invest proportionally (50% Vivo, 25% Oi and
25% TIM) in sites in certain cities based on each operators’ respective coverage obligations, which we refer to as the 2015 RAN
Sharing Agreement. The 2015 RAN Sharing Agreement has a term of 12 years. In early 2016, ANATEL required the inclusion of
additional clauses in the agreement allowing an additional operator to be added. This agreement covers 32 cities in 2015, 150 cities in
2016 and 525 cities in 2017.
64
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FORM 20-F
RR Donnelley ProFile
NY8690AM021466
11.9.13
NCR brzoj0nd
NYC
Network Maintenance
19-May-2016 17:16 EST
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Our external plant and equipment maintenance, installation and network servicing are performed by third-party service
providers. We employ our own team of technicians for the maintenance of our internal plant and equipment.
In January 2012, we entered into a services agreement with Telemont for installation, operation, and corrective and preventive
maintenance in connection with our external plant and associated equipment, public telephones, and fiber optic and data
communication networks (including broadband access services) in the State of Rio de Janeiro. In October 2012, we entered into a
services agreement with Telemont for installation, operation, and corrective and preventive maintenance in connection with our
external plant and associated equipment, public telephones, and fiber optic and data communication networks (including broadband
access services) in the States of Minas Gerais, Espírito Santo, Mato Grosso, Mato Grosso do Sul, Tocantins, Acre, Rondônia and
Goiás and the Federal District. The total estimated payments during the five-year terms of these contracts are expected to be R$6.6
billion. In October 2015, we acquired all of the operations of Telemont related to our installation, operation, and corrective and
preventive maintenance services in connection with our external plant and associated equipment, public telephones, and fiber optic
and data communication networks (including broadband access services) in the State of Rio de Janeiro.
In October 2012, we entered into a services agreement with A.R.M. Engenharia for installation, operation and corrective and
preventive maintenance in connection with our external plant and associated equipment, public telephones, and fiber optic and data
communication networks (including broadband access services) in the States of Maranhão, Piauí, Ceará, Rio Grande do Norte,
Paraíba, Pernambuco, Alagoas, Sergipe, Bahia, Amazonas, Roraima, Pará, Amapá, Paraná and Santa Catarina. The total estimated
payments under this contract are R$6.3 billion during the five-year term of this contract. In April and May 2016, we acquired A.R.M.
Engenharia’s operations in the States of Rio Grande do Sul, Santa Catarina and Paraná, and we are managing those operations. Also
in May 2016, we entered into an agreement with the shareholders of A.R.M. Engenharia to acquire the totality of the shares issued by
ARM Engenharia. The completion of the transaction is subject to customary conditions precedent, including the completion of
financial and legal due diligence and approval by the Administrative Council for Economic Defense.
In May 2013 and June 2013, we internalized our installation, operations, and corrective and preventive maintenance services in
connection with our fixed-line telecommunications services, mobile telecommunications services, data transmission services
(including broadband access services), satellite services, buildings, access ways and towers. These services had previously been
provided by Nokia Solutions and Alcatel-Lucent Brasil S.A.
Through our wholly-owned subsidiary, Serede, we perform installation, operation, and corrective and preventive maintenance
services in connection with our external plant and associated equipment, public telephones, and fiber optic and data communication
networks (including broadband access services) in the States of Rio de Janeiro and Rio Grande do Sul.
Competition
The Brazilian telecommunications industry is highly competitive. The competitive environment is significantly affected by key
trends, including technological and service convergence, market consolidation and combined service offerings by service providers.
See “Item 5. Operating and Financial Review and Prospects—Principal Factors Affecting Our Financial Condition and Results of
Operations—Effects of Competition on the Rates that We Realize and the Discounts We Record.”
Residential Services
We are the leading provider of residential services in Regions I and II of Brazil with 14.9 million fixed lines in service
(including the number fixed lines provided to our SME and Corporate Services customers) as of December 31, 2015. Based on
information available from ANATEL, as of December 31, 2015, we had a market share of 56.4% of the total fixed lines in service in
Region I (including the number fixed lines provided to our SME and Corporate Services customers) and a market share of 52.9% of
the total fixed lines in service in Region II (including the number fixed lines provided to our SME and Corporate Services customers).
Our principal competitors for fixed-
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line services are (1) Embratel, which had a market share of 25.3% of the total fixed lines in service in Region I and a market share of
18.4% of the total fixed lines in service in Region II as of December 31, 2015, based on information available from ANATEL, and
(2) GVT, which had a market share of 9.9% of the total fixed lines in service in Region I and a market share of 23.4% of the total
fixed lines in service in Region II as of December 31, 2015, based on information available from ANATEL.
We face competition from other telecommunications services providers, particularly from mobile telecommunications services
providers, which has led to traffic migration from fixed-line traffic to mobile traffic and the substitution of mobile services in place of
fixed-line services, encouraged by the prevalence of all-net packages and offers of aggressively-priced packages from some mobile
telecommunications service providers. The decrease in interconnection rates has discouraged the construction of new fixed-line
networks. In addition, the decrease in interconnection rates has led to decreases in market prices for telecommunications services by
enabling telecommunications service providers that use the local fixed-line networks of incumbent fixed-line providers, such as our
company, to offer lower prices to their customers. We and other companies have combatted this trend by offering subscriptions with
unlimited calling privileges at the same or similar prices to mitigate the pricing pressure. Finally, our competitors have begun
competing in the consumer market with bundles or services targeted to the needs of lower income customers.
Mobile
We expect to continue to face competition from mobile services providers, which represent the main source of competition in
our Residential Services business. As of December 31, 2015, there were 129.3 million mobile subscribers (including our mobile
customers) in Region I, an 8.9% decrease over December 31, 2014, and there were 64.0 million mobile subscribers (including our
mobile customers) in Region II, a 9.6% decrease over December 31, 2014, based on information available from ANATEL. In
addition, due to the proliferation of all-net service plans, particularly for mobile services, which offer unlimited long-distance calls
and data combination plans, we believe that we may be vulnerable to traffic migration as customers with both fixed-line and mobile
telephones use their mobile devices to make calls to other mobile subscribers.
Fixed Line
Embratel provides local fixed-line services to residential customers through the cable network owned by its subsidiary Net in the
portions of Regions I and II where Net provides cable television service. As a result, Net is able to offer cable television, broadband
and telephone services as a bundle at a very competitive price. We also expect competition from Embratel to increase in certain cities
in our service areas where the volume of demand is attractive.
We also compete in the State of São Paulo with Telefônica Brasil, which is the incumbent fixed-line service provider in the
State of São Paulo. Telefônica Brasil has been increasing its competitive activities in Regions I and II, expanding its fiber optic
network in high-income residential areas and increasing its services to low- and medium-size businesses. We expect competition from
Telefônica Brasil to increase in certain cities in our service areas where the volume of demand is attractive.
Competition from long-distance fixed-line service providers has decreased as a result of recent reductions in interconnections
tariffs. The proliferation of all-net plans by fixed-line and mobile services providers that include free minutes for calls to subscribers
of any operator have and may continue to adversely impact our revenues from fixed-line long-distance calls if our fixed-line
customers choose to migrate to mobile services for long-distance communications and/or cancel their fixed-line services. Moreover,
new technologies that serve as alternatives to traditional long-distance telephone calls, such as VoIP and instant internet messaging,
have captured part of Brazil’s long-distance traffic.
Broadband
Cable television providers that offer broadband services, particularly Net and Telefônica Brasil, represent our principal
competition in the broadband market. Both Embratel and Telefônica Brasil offer broadband services at
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higher speeds than our offerings, and they offer integrated packages, consisting of subscription television, broadband and voice
telephone services to cable television subscribers who, in general, have more purchasing power than other consumers. Net and
Telefônica Brasil offer strong competition for fixed broadband services in municipalities that have the highest concentration of
purchasing power.
In addition, we compete in our service areas with smaller companies that have been authorized by ANATEL to provide fixed-
line services, such as voice and broadband. Although regional broadband service providers do not have the same national footprint as
national operators, they have established networks in the regions in which they operate and often have a market share of 20-30% of
broadband customers.
Pay-TV
In Brazil, the high quality programming of television broadcasters has resulted in aggregate ratings for these broadcasters of
approximately 60% of viewers and has limited the perceived value of subscription television. As a result, the subscription television
market in Brazil has a low penetration compared to developed countries and even to other South American countries such as
Argentina, Chile and Mexico. Penetration rates by subscription television have grown from approximately 8% of Brazilian
households in 2005 to approximately 32% in 2015. According to information available from ANATEL, the Brazilian subscription
television market decreased by 2.1% to 19.1 million subscribers as of December 31, 2015 from 19.5 million subscribers as of
December 31, 2014.
The primary providers of subscription television services in the regions in which we provide Residential Services are SKY,
which provides DTH services, and América Móvil, which provides DTH service through Embratel under the “Claro TV” brand and
provides subscription television services using coaxial cable through Net. We offer DTH subscription television services throughout
the regions in which we provide Residential Services.
We deliver Oi TV through our fiber optic network using an internet protocol, or IP TV, in the cities of Rio de Janeiro and Belo
Horizonte, respectively.
Personal Mobility Services
The mobile telecommunications services market in Brazil is characterized by intense competition among providers of mobile
telecommunications services. We compete primarily with Telefônica Brasil, which markets its mobile services under the brand name
“Vivo,” TIM and Claro, each of which provides services throughout Brazil.
As of December 31, 2015, based on information available from ANATEL (which includes SME and Corporate Services
subscribers), we had a market share of 18.6% of the total number of mobile subscribers in Brazil, ranking behind Telefônica Brasil
with 28.4%, TIM with 25.7% and Claro with 25.6%. As of December 31, 2015, based on information available from ANATEL, the
competitive landscape for mobile services was as follows: in Region I, we had a market share of 24.3% of the total number of mobile
subscribers, ahead of Telefônica Brasil and behind TIM with 25.1% and Claro with 24.7%; in Region II, we had a market share of
14.4% of the total number of mobile subscribers, ranking behind Telefônica Brasil with 32.0%, TIM with 26.8% and Claro with
26.7%; and in Region III, we had a market share of 12.2% of the total number of mobile subscribers, ranking behind Telefônica
Brasil with 33.1%, Claro with 26.1% and TIM with 25.7%.
Competition in Mobile Voice and Data Communications Services
Competitive efforts in the pre-paid and post-paid personal mobility services market generally take the form of traffic subsidies
and aggressive discounts on data packages. We no longer offer handset subsidies (with the exception of the Oi Pontos program,
which provides credit to existing post-paid customers to be used on the purchase of a new mobile device), but we do compete on the
basis of traffic subsidies, all-net plans that eliminate the community effect of traditional telecommunications services in Brazil and
discounts on data packages. The aggressiveness of promotions is generally driven by the desire of the operator offering the promotion
to increase market share; however, these promotions generally are for a short duration as the pricing terms offered are not sustainable
over the long term.
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Studies of telecommunications consumption habits in Brazil show that, given budget restrictions caused by the macroeconomic
situation, users have shifted away from owning a SIM card from each of the operators (in response to traditional on-net plans that
offer substantial discounts for calls to the same operator) and have begun to consolidate telecommunications services on a the SIM
card that offers the best data package. This trend will result in a decline in the overall customer base for pre-paid services, which will
require operators to offer increasingly comprehensive data packages at aggressive discounts in order to maintain and potentially
increase their customer bases.
Our launches of the Oi Mais, Oi Mais Controle and Oi Livre portfolios have kept us on the forefront of competition in the
mobile services market. We believe our innovative flat rate pricing, all-net model for voice services and text messaging, and robust
data packages at competitive rates enable us to satisfy the growing customer demand for simpler product offerings and greater access
to data.
In addition, we believe that in the medium-term, personal mobility service providers in Brazil will experience increasing
competition from OTT providers, as customers shift from mobile voice and SMS communications to internet-based voice and data
communications through computers and smartphone or tablet applications such as WhatsApp, Viber and Skype. Since November
2011, we have deployed a network of Wi-Fi hotspots, which is composed of sub networks that are accessible from (1) indoor public
and commercial sites, such as coffee shops, airports and shopping centers, (2) outdoor public spaces and (3) residential access points
of our fixed-line customers that share access points in association with Fon. As of December 31, 2015, our Wi-Fi network consisted
of over two million hotspots, with broadband access compatible with over two million access points provided by Fon, which allows
our customers to access Fon lines worldwide. Our data customers (both mobile and fixed) have unlimited access to our Wi-Fi
hotspots, extending our mobile coverage and improving customer experience.
Competition in Mobile Data Only Services
Studies of telecommunications consumption habits in Brazil show that users are demanding more data for use in social
networking sites and smartphone applications such as WhatsApp. This shift from voice to data consumption affects our Personal
Mobility Services business in two ways: (1) it enables customers to use data to communicate with anyone anywhere in the world via
internet instant messaging systems available on smartphone applications such as WhatsApp, and (2) it enables consumers to use data
to call anyone anywhere in the world using the VoiP capabilities available in such smartphone applications.
Following a study of the telecommunications consumption habits in Brazil, in November 2015 we launched our Oi Livre
portfolio, a set of innovative offerings with significant increase in data allowances and a flat fee for all-net calls (with the exception of
Oi Livre Por Dia) to customers of any operator in Brazil. This initiative changes the mobile service market in Brazil and the manner
in which our customers communicate, disrupting the original pre-paid model in which customers acquired SIM cards from different
operators and used the respective SIM for on-net calls with that particular operator in an effort to avoid paying high rates for off-net
calls.
In the post-paid mobile data communications market, our primary competitors are Telefônica Brasil, Claro and TIM. As of
December 31, 2015, based on information available from ANATEL, which includes SME and Corporate Services subscribers, we had
a market share of 11.9% of the total number of post-paid mobile data subscribers in Brazil (including hybrid data plan subscribers),
ranking behind Telefônica Brasil with 42.4%, Claro with 22.7% and TIM with 18.5%. We believe that our most direct competitor in
this market is TIM, whose customer acquisition and retention strategy of offering traffic subsidies, all-net plans and aggressive
discounts on data packages most closely resembles ours. On the other hand, Vivo and Claro, whose prices are typically higher than
those of the other mobile data service providers in the market, primarily focus on the high-end consumer market.
In the pre-paid mobile data communications market, our primary competitors are also Telefônica Brasil, Claro and TIM. As of
December 31, 2015, based on information available from ANATEL, which includes SME and Corporate Services subscribers, we had
a market share of 21.3% of the total number of pre-paid mobile data subscribers in Brazil, ranking behind Telefônica Brasil with
22.9%, Claro with 26.7% and TIM with 28.5%. As in the post-paid mobile data communications market, we believe that our most
direct competitor in the pre-paid mobile data communications market is TIM, who offer plans similar to Oi Livre.
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Recent reductions in the interconnections rates for Regions I, II and III have resulted in lower costs for long-distance services,
both to us and to our customers. As a result, we and TIM have introduced “all-net” voice and messaging plans that allow customers to
call anywhere in Brazil for a flat rate. Nearly all the plans in our recently launched Oi Mais, Oi Mais Controle and Oi Livre portfolios
offer all-net calling and text messaging services, which capitalized on the reductions in interconnection rates and simplified our
portfolios, thereby eliminating the community effect. We believe that the introduction of all-net plans, coupled with more robust and
data packages that allow consumers to use smartphones applications more freely, have substantially reduced competition in the
mobile long-distance services market.
SME and Corporate Services
The competition risks relating to the fixed-line and mobile services we provide to our SME customers are similar to those
relating to the fixed-line and mobile services we provide to our residential and personal mobility customers. The competition risks
relating to the fixed-line and mobile services we provide to our corporate customers are also similar.
In recent years, there has been a shift among SME and corporate services providers toward value-added services. With the
exception of the Oi Mais Empresas app and web service, our value-added products and services for the SME segment are
substantially similar to those offered by our competitors, and we rely on client service and customer satisfaction to maintain existing
customers and attract new customers. Our principal competitors for both core and value-added services for SME and corporate
customers are Embratel, Telefônica Brasil and TIM, as well as smaller niche companies.
The Brazilian recession has had a significant negative effect on our operating revenue and margins as SMEs generally, including
our customers, have reduced the size of their businesses and in some cases ceased operations. In addition, a number of our Corporate
customers have reduced their telecommunications spending as part of their overall cost-cutting efforts.
Concessions, Authorizations and Licenses
Under the General Telecommunications Law and ANATEL regulations, the right to provide telecommunications services is
granted either through a concession under the public regime or an authorization under the private regime. For additional details
regarding the rights and obligations of service providers operating under the public regime and the private regime, see “—
Telecommunication Regulations—Regulation of the Brazilian Telecommunications Industry— Concessions and Authorizations.” We
operate under:
•
•
•
•
a concession to provide local fixed-line services in Region I (other than the 57 municipalities in the State of Minas Gerais
that are excluded from the concession area of Region I) and a concession to provide local fixed-line services in Region II
(other than the nine municipalities in the States of Goiás, Mato Grosso do Sul and Paraná that are excluded from the
concession area of Region II);
a concession to provide domestic long-distance services in Region I (other than the 57 municipalities in the State of Minas
Gerais that are excluded from the concession area of Region I) and a concession to provide domestic long-distance services
in Region II (other than the nine municipalities in the States of Goiás, Mato Grosso do Sul and Paraná that are excluded
from the concession area of Region II);
authorizations to provide personal mobile services in Regions I, II and III;
authorizations to provide local fixed-line services and domestic long-distance services in (1) the 57 municipalities in the
State of Minas Gerais that are excluded from the concession area of Region I, (2) the nine municipalities in the States of
Goiás, Mato Grosso do Sul and Paraná that are excluded from the concession area of Region II, and (3) Region III;
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•
•
•
authorizations to provide international long-distance services originating anywhere in Brazil;
authorizations to provide Multimedia Communication Services (Serviço de Comunicação Multimídia) throughout Brazil;
and
an authorization to provide subscription television services throughout Brazil.
These concessions and authorizations allow us to provide specific services in designated geographic areas and set forth certain
obligations with which we must comply.
Fixed-Line and Domestic Long-Distance Services Concession Agreements
We have entered into concession agreements with ANATEL that govern our concessions to provide (1) fixed-line services in the
Federal District and each of the states of Regions I and II and (2) domestic long-distance services originating from the Federal
District and each of the states of Regions I and II. Each of our fixed-line and domestic long-distance concession agreements:
•
•
•
•
•
•
expires on December 31, 2025;
sets forth the parameters that govern adjustments to our rates for fixed-line services;
requires us to comply with the network expansion obligations set forth in the General Plan on Universal Service Goals;
requires us to implement electronic billing systems;
sets forth the conditions under which ANATEL may access information from us; and
requires us to pay fines for systemic service interruptions.
In addition to the above, each of our concession agreements for fixed-line services requires us to comply with certain quality of
service obligations set forth in these concession agreements as well as the quality of service obligations set forth in the General Plan
on Quality Goals.
Each of our fixed line concessions requires payment of biannual fees equal to 2.0% of our net operating revenue that is derived
from the provision of local fixed-line services (excluding taxes and social contributions) during the immediately preceding year,
while allowing us to apply the amount of such fees to finance the expanded service obligations created by the amended General Plan
on Universal Service Goals in lieu of making payment to ANATEL. Similarly, each of our domestic long-distance concessions
requires payment of biannual fees equal to 2.0% of our net operating revenue that is derived from the provision of domestic long-
distance services (excluding taxes and social contributions) during the immediately preceding year.
These concession agreements also required us to provide transmission lines connecting our fiber-optic internet backbones to
municipalities in our concession areas in which we did not provide internet service, which we refer to as backhaul. Under these
concession agreements, we were obligated to set up backhaul in 3,252 municipalities in Regions I and II. The facilities that we
constructed to meet these obligations are considered to be property that is part of our concessions and will therefore revert to the
Brazilian government on January 1, 2026.
These concession agreements provide that ANATEL may modify their terms in 2015 and 2020 and may revoke them prior to
expiration under the circumstances described under “—Telecommunications Regulation—Regulation of the Brazilian
Telecommunications Industry—Regulation of Fixed-Line Services—Termination of a Concession.” The modification right permits
ANATEL to impose new terms and conditions in response to changes in technology, competition in the marketplace and domestic
and international economic conditions. ANATEL is obligated to engage in public consultation in connection with each of these
potential modifications.
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On June 27, 2014, ANATEL opened a public comment period for the 2015 revision of the terms of our concession agreements.
The comment period, which ended on December 26, 2014, was opened for comments on certain topics such as service
universalization, rates and fees, among others. We submitted our comments during this period. Throughout 2015, ANATEL, the
Brazilian Ministry of Communications and telecommunications service providers met regularly to discuss possible amendments to
each of the concession agreements granted by ANATEL, including ours, and the implications of the developments and demands in
the telecommunications sector in recent years. In September 2015, the Ministry of Communications created a working group,
consisting of three members from each of ANATEL and the Ministry of Communications, to evaluate the status of the concessions
and propose guidelines for the amendment of the concession agreements. In November 2015, the Ministry of Communications
opened public consultation on the new regulatory framework for telecommunications. The Ministry of Communications has extended
the deadline for contributions on multiple occasions. In April 2016, the Ministry of Communications, based on the working group’s
findings, issued a decree addressing guidelines for the establishment of a new regulatory framework for telecommunications, which
will be implemented by ANATEL through the conclusion of the concession amendments. The guidelines provide for, among other
things, the expansion of broadband services (including in rural regions), the elimination of the reversibility of assets, and an extension
of the term of our concessions, which are currently scheduled to expire in 2025. As a result of the publication of these guidelines,
ANATEL requested a further postponement of the review of our concession agreements, which was granted. As a result of this
extension, the review of our concession agreements is currently scheduled to occur by December 2016.
For more information regarding the regulation of our fixed-line services, the General Plan on Universal Service Goals and the
General Plan on Quality Goals, see “—Telecommunications Regulation—Regulation of the Brazilian Telecommunications
Industry— Regulation of Fixed-Line Services.”
2G Radio Frequency Licenses
We hold five licenses to use radio frequency spectrum to provide 2G services in Regions I and II and four in Region III. These
licenses grant us permission to use the applicable radio spectrum for 15 years from the date of the authorization agreement under
which they are granted and are renewable for additional 15-year terms. Upon renewal of any of these licenses and on every second
anniversary of such renewal, we will be required to pay an amount equal to 2.0% of our prior year’s net operating revenue from
personal mobile services. The initial terms of our radio frequency spectrum licenses expire between 2016 and 2022.
Our authorization agreements are subject to network scope and service performance obligations set forth in these authorization
agreements. Under these obligations we are required to service all municipalities in Brazil with a population in excess of 100,000. A
municipality is considered “serviced” when the covered service area contains at least 80% of the urban area in the municipality. Our
failure to meet these targets may result in the imposition of penalties established in ANATEL regulations and, in extreme
circumstances, in termination of our personal mobile services authorizations by ANATEL. As of the date of this annual report, we
have satisfied the network scope and service performance obligations set forth in these authorization agreements; however, we have
not yet received ANATEL’s inspection report.
3G Radio Frequency Licenses
We hold five licenses to use radio frequency spectrum to provide 3G services in Regions I, II and III. Each of these licenses
grants us permission to use the applicable radio spectrum for 15 years from the date of grant and is renewable for additional 15-year
terms. We will be required to pay an amount equal to 2.0% of our prior year’s net operating revenue from personal mobile services
upon renewal of the license and on every second anniversary of the renewal. The initial terms of these licenses expire in 2023.
These radio frequency licenses include network scope obligations. Under these obligations, we are currently required to
(1) provide service to 459 municipalities that did not have mobile services at the time these licenses were granted with either 2G or
3G mobile telecommunications services, (2) provide 3G service to all state capitals in Brazil, the Federal District and all
municipalities with a population in excess of 200,000 inhabitants, (3) provide 3G service to all of the municipalities covered by these
licenses with a population in excess of 100,000, and (4) provide 3G service to 50% of all of the municipalities with a population
between 30,000 and 100,000. In addition, we will be
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required to provide 3G service to 60% of the municipalities, including 641 specified municipalities, covered by these licenses with a
population less than 30,000 by 2016.
A municipality is considered “serviced” when the covered service area contains at least 80% of the urban area in the
municipality. Our failure to meet these targets may result in the imposition of penalties established in ANATEL regulations and, in
extreme circumstances, in termination of our 3G frequency licenses by ANATEL. As of the date of this annual report, we have
satisfied the network scope and service performance obligations set forth in these licenses; however, we have not yet received
ANATEL’s inspection report.
4G Radio Frequency Licenses
We hold three licenses to use radio frequencies in 2.5 GHz sub-bands to provide 4G services in Regions I, II and III. Each of
these licenses grants us permission to use the applicable radio spectrum for 15 years from the date of grant and is renewable for
additional 15-year terms. We will be required to pay an amount equal to 2.0% of our prior year’s net operating revenue from 4G
services upon renewal of the license and on every second anniversary of the renewal. The initial terms of these licenses expire in
2027.
These radio frequency licenses include network scope obligations. Under these obligations, we are currently required to provide:
•
•
•
•
4G service in all state capitals, municipalities with a population in excess of 200,000 and the Federal District;
voice services in the 450 MHz spectrum and data services at minimum upload speeds of 128 kbps and download speeds of
256 kbps and a minimum monthly allowance of 250 MB in 384 municipalities in the States of Goiás, Mato Grosso, Mato
Grosso do Sul, Rio Grande do Sul and the Federal District;
unlimited data services at minimum upload speeds of 256 kbps and download speeds of 128 kbps to rural schools in 384
municipalities in the States of Goiás, Mato Grosso, Mato Grosso do Sul, Rio Grande do Sul and the Federal District; and
make our fixed-line network available to other telecommunications service providers to allow them to comply with their
obligations under the General Plan on Universal Service Goals in 962 municipalities in the States of Goiás, Mato Grosso,
Mato Grosso do Sul, Rio Grande do Sul and the Federal District.
In addition, we will be required to:
•
•
•
•
•
•
provide 4G service to all of the municipalities covered by these licenses with a population in excess of 100,000 by
December 31, 2016;
provide 4G service to all of the municipalities covered by these licenses with a population between 30,000 and 100,000 by
December 31, 2017;
provide 4G service to 30% of the municipalities covered by these licenses with a population less than 30,000 by
December 31, 2017;
provide 4G service to 60% of the municipalities covered by these licenses with a population less than 30,000 by
December 31, 2018;
provide 4G service to all of the municipalities covered by these licenses with a population less than 30,000 by
December 31, 2019;
offer voice services in the 450 MHz spectrum and data services at minimum upload speeds of 256 kbps and download
speeds of 1Mbps and a minimum monthly allowance of 500 MB in 962 in the States of Goiás, Mato Grosso, Mato Grosso
do Sul, Rio Grande do Sul and the Federal District by December 31, 2017; and
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•
provide unlimited data services at minimum upload speeds of 256 kbps and download speeds of 128 kbps to rural schools
in 962 municipalities in the States of Goiás, Mato Grosso, Mato Grosso do Sul, Rio Grande do Sul and the Federal District
by December 31, 2017.
In addition, our 4G radio frequency licenses impose minimum investment obligations in domestic technologies. At least 65% of
the cost of all goods, services, equipment, telecommunications systems and data networks that we purchase to meet our 4G service
obligations must developed in Brazil. This minimum requirement will increase to 70% between January 1, 2017 and December 31,
2022.
Our failure to meet these targets may result in the imposition of penalties established in ANATEL regulations and, in extreme
circumstances, in termination of our 4G frequency licenses by ANATEL. As of the date of this annual report, we have satisfied the
network scope and service performance obligations set forth in these licenses.
Fixed-Line Services Authorization Agreements
We have entered into authorization agreements with ANATEL that govern our authorizations to provide local fixed-line services
in and domestic long-distance services originating from (1) the 57 municipalities in the State of Minas Gerais that are excluded from
the concession area of Region I, (2) the nine municipalities in the States of Goiás, Mato Grosso do Sul and Paraná that are excluded
from the concession area of Region II, and (3) Region III. These authorizations do not have termination dates and require us to
comply with certain quality of service obligations set forth in the General Plan on Quality Goals.
We have also entered into authorization agreements with ANATEL that govern our authorizations to provide international long-
distance services originating from anywhere in Brazil. These authorizations do not have termination dates and require us to comply
with quality of service obligations set forth in the General Plan on Quality Goals.
Multimedia Communication Services Authorization Agreements
We have Multimedia Communication Services authorizations, which superseded our prior Telecommunications Network
Transportation Services (Serviço de Rede de Transporte de Telecomunicações) authorizations, permitting us to provide high speed
data service.
The Multimedia Communication Services authorizations became effective in May 2003 and cover the same geographical areas
as our concession agreements. In April 2008, in connection with the amendments to our fixed-line services concessions, we agreed to
provide internet service free of charge until December 31, 2025 to all urban schools in the areas of our concession agreements.
Term of Commitment to Adhere to National Broadband Plan
On June 30, 2011, we entered into a Term of Commitment (Termo de Compromisso) with ANATEL and the Ministry of
Communications to formalize our voluntary commitment to adhere to the terms of the National Broadband Plan, created in May 2010
by Executive Decree No. 7,175/10 with the goal to make broadband access available at low cost, regardless of technology, throughout
Brazil. Pursuant to the Term of Commitment, we are required to offer (1) broadband services with minimum upload and download
capabilities to retail customers in certain sectors of Region I and II for a maximum price of R$35 per month (or R$29.90 in ICMS-
exempt states), plus fees, and (2) access to our broadband infrastructure to certain wholesale customers, including small businesses
and municipalities, in certain sectors of Region I and II for a maximum price of R$1,253 per 2 Mbps per month and a one-time
installation fee, while observing all quality standards under ANATEL regulations. Both retail and wholesale services are subject to
certain network capacity limits and need only be provided at the demand of the customer. Pursuant to the Term of Commitment, we
have offered the required services to all eligible retail and wholesale customers since the date of its execution and have gradually
increased the capacities offered to wholesale customers since November 2011. We have been obligated to provide the maximum
capacities established by the Term of Commitment to eligible wholesale customers since June 30, 2015. In addition, the Term of
Commitment requires that we:
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•
•
•
provide one public internet access point for the first 20,000 inhabitants and one additional access point for each subsequent
10,000 inhabitants, with a limit of six access points, at a speed of 2 Mbps, in each municipality that has only satellite
service, free of charge and upon demand of such municipality;
adequately advertise the services contemplated by the Term of Commitment and present to the Ministry of
Communications semi-annual reports detailing our marketing efforts; and
make our best efforts to offer broadband services to retail customers at speeds of up to 5 Mbps, reaching the largest
possible number of municipalities.
The Term of Commitment will expire on December 31, 2016.
Subscription Television Authorization Agreement
In November 2008, we entered into an authorization agreement with ANATEL that governs our use of satellite technology to
provide DTH satellite television services throughout Brazil. The authorization agreement permits us to provide DTH satellite
television services for 15 years and is renewable for an additional 15-year term in exchange for a fee to be agreed upon between us
and ANATEL.
Under this authorization, we are required to furnish equipment to certain public institutions, to make channels available for
broadcasting by specified public institutions, and to comply with quality of service obligations set forth in applicable ANATEL
regulations.
In December 2012, ANATEL granted our request to convert our DTH authorization agreement into a Conditional Access
Service authorization allowing us to provide nationwide subscription television services through any technology, including satellite,
wireline and coaxial cable. The Conditional Access Service authorization agreement authorized us to offer the services to be
governed by such agreement, including IP TV. In accordance with the ANATEL resolution that approved the Conditional Access
Service regime, our Conditional Access Service authorization prohibits us from creating television content or owning more than 30%
of a company that creates content. We are also required to carry a certain percentage of Brazilian programming, including open
channels and public access channels.
Research and Development
We conduct independent innovation, research and development in areas of telecommunications services but historically we have
not independently developed new telecommunications technologies. We depend primarily on suppliers of telecommunications
equipment for the development of new technology.
As a condition to ANATEL’s approval of Telemar’s acquisition of control of our company in January 2009, Telemar agreed to
make annual investments in innovation, research and development through 2018 in amounts equal to at least 50% of the amounts of
its contributions to the Fund for the Technological Development of Telecommunications (Fundo para o Desenvolvimento
Tecnológico das Telecomunicações), or FUNTTEL. To fulfill this obligation, as well as to centralize our innovation, research and
development activities and programs, in 2009, we created a division to manage innovation, research and development with the
mission of coordinating and promoting efforts and projects that it develops.
Our technology laboratory performs a variety of functions, such as operation support systems, business support systems and
information security. We conduct trials of technologies from different vendors in this laboratory to evaluate these technologies for
deployment.
Since 2009, we have executed cooperation agreements with the following national research centers: Technological Projects,
Research and Studies Coordination Foundation (Fundação Coordenação de Projetos, Pesquisas e Estudos Tecnológicos –
COPPETEC), Telecommunications Research and Development Foundation (Fundação Centro de Pesquisa e Desenvolvimento em
Telecomunicações - CPqD),
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and PUC-RJ. We have also executed cooperation agreements with Brazilian national telecommunications suppliers which develop
technology in Brazil, such as Nokia AsGa S.A., Digitel S.A. – Indústria Eletrônica and Padtec S.A. Since 2009, we have signed more
than 10 such cooperation agreements.
In order to achieve our goals on innovation investments, in 2015, we intensified the process for the exploration of innovative
services and activities concerning innovation, research and development to promote our innovation ecosystem.
Our investments in innovation, research and development totaled R$20 million in 2015, R$16 million in 2014 and R$13 million
in 2013.
Property, Plant and Equipment in Brazil
Our principal Brazilian properties, owned and leased, are located in Regions I and II. As of December 31, 2015, the net book
value of our property, plant and equipment in Brazil was R$25,817 million. Our main equipment in Brazil consists of transmission
equipment, trunking and switching stations (including local, tandem and transit telephone exchanges), metallic and fiber-optic cable
networks and lines, underground ducts, posts and towers, data communication equipment, network systems and infrastructure
(including alternating and direct current supply equipment) and motor-generator groups.
As of December 31, 2015, of the net book value of our property, plant and equipment in Brazil, transmission and other
equipment represented 52.2%; infrastructure, primarily underground ducts, post and towers, cables and lines represented 22.7%;
automatic switching equipment represented 7.8%; buildings represented 7.2%; work in progress represented 6.4%; and other fixed
assets represented 3.8%.
All Brazilian property, plant and equipment that are essential in providing the services described in our concession agreements
are considered “reversible assets,” which means that, should our concession agreements expire or terminate without being renewed,
these assets will automatically revert to ANATEL. There are no other encumbrances that may affect the utilization of our property,
plant and equipment. For more details, see note 14 to our consolidated financial statements.
Intellectual Property
We believe the trademarks that identify us and our Brazilian businesses are important for us, and as a result, we have taken steps
to protect them before the Brazilian Patent and Trademark Office (Instituto Nacional de Propriedade Industrial), or BPTO. As of
December 31, 2015, we had 1,126 trademarks registered by the BPTO and 684 pending trademark applications. Our main trademark
used in Brazil, “Oi,” is registered by the BPTO in several classes, which allows us to use this trademark in a variety of markets in
which we operate, including in connection with our fixed-line, mobile and broadband services. Among the various registered
trademarks 36 are being contested by third parties. In addition, 173 of our pending trademark applications have been challenged by
third parties.
As of December 31, 2015, we had 1,239 domain names registered by the Center of Information and Coordination of Dot Br –
NIC. Br, the agency responsible for registering domain names in Brazil. The information included on our websites or that might be
accessed through our websites is not included in this annual report and is not incorporated into this annual report by reference.
As of December 31, 2015, the BPTO had granted 12 patents, utility models or industrial designs in the name of our company.
We had also filed 18 patent applications, which are currently being examined by the BPTO. Requests for technical examination have
been submitted to the BPTO for all of these pending patent applications. Once the examination is concluded, BPTO will issue an
official decision accepting or rejecting the application, which will be published in the Official Gazette. If granted, the patent will be
enforced for 20 years beginning from filing date.
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Pursuant to requirements in our Brazilian concession agreements, we maintain the following insurance policies: (1) all risk
property insurance covering all insurable assets pertaining to the concessions; (2) loss of profit insurance covering lost profits
deriving from property damage and business interruption; and (3) performance bond insurance to assure compliance with our
obligations related to quality of service and universal service targets set forth in our concession agreements.
In addition to the above policies, we maintain civil liability insurance in Brazil. Our assets that are of material value and/or
exposed to high degrees of risks are also insured. All of our insurance coverage was purchased from highly rated insurance
companies in Brazil.
We believe that our current insurance coverage is suitable to our Brazilian operations.
Social Responsibility
In 2001, we created Oi Futuro, a corporate social responsibility institute that has been designated a Public Interest Organization
(Organização da Sociedade Civil de Interesse Público) by the Brazilian Ministry of Justice (Ministério da Justiça). Oi Futuro
develops and supports cultural, sustainability and educational programs using information technology and communications to
promote social inclusion and human development.
Oi Futuro operates two cultural centers and a telecommunications museum in Rio de Janeiro. Oi Futuro also manages the
“Programa Oi de Patrocínios Culturais Incentivados,” which sponsored more than 100 projects through a public selection in 2015.
Oi Futuro supports and develops educational projects using new communication and information technologies to transform the
classroom environment and prepare young people from low-income communities for future jobs. Oi Futuro’s diverse initiatives
include (1) the Advanced Education Center (Núcleo Avançado em Educação), or NAVE, a public vocational high school established
through a public-private partnership with campuses in Rio de Janeiro and Recife, and (2) the “Oi Kabum!” Arts and Technology
School (Oi Kabum! Escola de Arte e Tecnologia) with campuses in Rio de Janeiro, Recife, Belo Horizonte and Salvador. In 2015,
more than 4,000 students participated in both educational programs (NAVE and Oi Kabum!) and through partnership with other
public schools.
Since 2009, NAVE has been consistently recognized by Microsoft as one of the most innovative schools in the world. The
NAVE Rio was the only Brazilian school invited by Qatar Foundation to participate in the WISE (World Innovation Summit for
Education) Book, one of the most relevant publications worldwide in the field of innovation and education in 2014. In 2015, NAVE
was recognized by the Award Rio+Entrepreneur (Rio + Empreendedor) for its contribution to the economic and social development
of the State of Rio de Janeiro.
Oi Futuro supports social-environmental programs through its Oi Novos Brasis program, which focuses on community
development, environmental and biodiversity projects. In 2015, more than 8,800 people benefited from these programs. In addition,
in 2015, Oi Futuro supported 20 projects through the Public Funds for Childhood and Adolescence (FIA - Fundos Públicos da
Infância e da Adolescência) and sports projects.
We contributed R$24 million in each of 2015, 2014 and 2013 to these projects and programs.
Operations in Africa
In 2006, PT Ventures formed Africatel Holdings B.V., or Africatel, and subsequently (1) contributed to Africatel its equity
interests in (a) Unitel, which operates in Angola, and (b) Cabo Verde Telecom, S.A., or CVTelecom, which operates in Cape Verde,
among others, and (2) acquired (a) 34% of the equity interests in Mobile Telecommunications Limited, or MTC, which operates in
Namibia, and (b) 51% of the equity interest in CST – Companhia Santomense de Telecomunicações S.A.R.L., or CST, which
operated in São Tomé and Príncipe. In 2007, PT Ventures sold 22% of the equity interests in Africatel to Samba Luxco, an affiliate of
Helios Investors L.P., or Helios, a private equity firm operating in sub-Saharan Africa, and entered into a shareholders’ agreement
with Samba Luxco regarding governance and liquidity rights relating to Africatel. In 2008, PT Ventures transferred
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its equity interests in Africatel to Pharol, which sold an additional 3% of the equity interests in Africatel to Samba Luxco. In 2009,
Pharol sold 100% of the equity interests in PT Ventures to Africatel.
As of December 31, 2015, in addition to its interests in Unitel, MTC, CVTelecom and CST, Africatel owns Directel—Listas
Telefónicas Internacionais, Lda., or Directel, which publishes telephone directories and operates related data bases in Angola, Cabo
Verde, Mozambique, Uganda and Kenya.
As a result of our acquisition of PT Portugal in May 2014 and PT Portugal’s transfer of all of the outstanding share capital of PT
Participações, which holds our direct and indirect interests in Africatel and TPT, to Oi in connection with our sale of PT Portugal, we
own 75% of the equity interests in Africatel. Pharol, our subsidiaries PT Ventures and Africatel GmbH & Co KG, of Africatel GmbH,
and Samba Luxco are parties to a shareholders’ agreement under which we have ownership and management control of Africatel,
which we refer to as the Africatel shareholders’ agreement.
On September 16, 2014, our subsidiary, Africatel GmbH, which directly holds our interest in Africatel, received a letter from
Samba Luxco in which Samba Luxco claimed that Oi’s acquisition of PT Portugal was deemed a change of control of Pharol under
the Africatel shareholders’ agreement, and that this change of control entitled Samba Luxco to exercise a put right under the Africatel
shareholders’ agreement at the fair market equity value of Samba Luxco’s Africatel shares. In the letter, Samba Luxco purported to
exercise the alleged put right and thereby require Africatel GmbH to acquire its shares in Africatel.
On September 26, 2014, Africatel GmbH responded to Samba Luxco stating that there had not been any action or event that
would trigger the right to exercise the put option under the Africatel’s shareholders’ agreement and that Africatel GmbH intended to
challenge Samba Luxco’s purported exercise of the put option. On the same date, we issued a Material Fact disclosing Samba
Luxco’s purported exercise of the put option, our understanding that the exercise of the put option is not applicable, and that our
board of directors had authorized our management to take the necessary actions to sell our interest in Africatel.
On November 12, 2014, the International Court of Arbitration of the International Chamber of Commerce notified Africatel
GmbH that Samba Luxco had commenced arbitral proceedings against Africatel GmbH to enforce its purported put right or, in the
alternative, certain other rights and claims allegedly arising out of Oi’s acquisition of PT Portugal. Africatel GmbH presented its
answer to Samba Luxco’s request for arbitration on December 15, 2014. The arbitral tribunal was constituted on March 12, 2015 and
the proceedings are ongoing. Africatel GmbH intends to continue to vigorously defend these proceedings.
Unitel, Angola
In 2000, PT Ventures, then a wholly-owned subsidiary of Pharol, acquired 25% of the share capital of Unitel, a 2G mobile
operator in Angola. Unitel began operations in Luanda in 2001. In connection with this investment, PT Ventures entered into a
shareholders’ agreement with the other shareholders of Unitel regarding governance and liquidity rights relating to Unitel, and dispute
resolution provisions. In 2007, Pharol contributed its shares of PT Ventures to Africatel. As a result of our acquisition of PT Portugal
in May 2014 and PT Portugal’s transfer of all of the outstanding share capital of PT Participações to Oi in connection with our sale of
PT Portugal, we have an 18.75% economic interest in Unitel. We account for this investment as an asset held-for-sale.
MTC, Namibia
In 2006, Pharol entered into an agreement to acquire 34% of the capital of MTC, a Namibian mobile operator, from Namibia
Post and Telecom Holdings, a state-controlled entity, or NPTH. In connection with this transaction, Pharol entered into a
shareholders’ agreement with NPTH regarding governance and liquidity rights relating to MTC that allowed Pharol to set and control
the financial and operating policies of MTC. In 2006, Pharol assigned its rights to acquire the capital of MTC and its rights under the
shareholders’ agreement to Africatel. As a result of our acquisition of PT Portugal in May 2014 and PT Portugal’s transfer of all of
the outstanding share capital of PT Participações to Oi in connection with our sale of PT Portugal, we fully consolidate MTC in our
consolidated financial statements.
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As of December 31, 2015, MTC had 2.4 million customers, of which 93.7% were customers under pre-paid plans.
MTC was established in 1994 and provides mobile telecommunications services under the terms of a 15-year technology- and
service-neutral concession granted in March 2012 that replaced its earlier licenses. Under the terms of this concession, MTC is
permitted to offer 2G, 3G and 4G services. MTC commenced offering 4G services in Windhoek, the capital of Namibia, in May 2012
and, as of December 31, 2015, MTC provided 4G services to 65% of cities in Namibia.
In 2006, a license was granted to Powercom to provide mobile telecommunications services in Namibia. Powercom commenced
operations in 2007. In November 2012, Telecom Namibia, the incumbent provider of fixed-line telecommunications services in
Namibia and a wholly-owned subsidiary of NPTH, acquired Powercom. Telecom Namibia re-launched Powercom’s portfolio of
service plans under the brand “TN Mobile” in August 2013. In November 2013, TN Mobile began offering 4G services in Windhoek
and other urban areas.
During 2015, MTC focused its marketing efforts and commercial activity on selling new pre-paid plans with increased data
packages in an effort to differentiation itself from its competitors and promoting the upselling of new pricing plans aimed at
increasing usage and revenues.
CVTelecom, Cape Verde
PT Ventures owns 40% of the share capital of CVTelecom, a provider of fixed-line and mobile services in the Cabo Verde
Islands. In 2000, PT Ventures, entered into a shareholders’ agreement with the other shareholders of CVTelecom, regarding
governance and liquidity rights relating to CVTelecom, which allowed PT Ventures to set and control the financial and operating
policies of CVTelecom. As a result of our acquisition of PT Portugal, we fully consolidated CVTelecom in our financial statements as
of December 31, 2014. In November 2014, the Government of Cape Verde, which is a shareholder of CVTelecom, notified us that as
a result of our acquisition of PT Portugal, the shareholders’ agreement governing CVTelecom had been terminated. At a general
shareholders’ meeting of CVTelecom in March 2015, we were only able to elect three of the seven members of the board of directors
of CVTelecom. In March 2015, we commenced arbitration proceedings disputing this interpretation of the shareholders’ agreement,
and we intend to vigorously defend our rights under the shareholders’ agreement. We are currently engaged in negotiations with the
other shareholder of CVTelecom to seek an alternative resolution of this dispute. As a result of this dispute, for dates and periods
ending after January 1, 2015, we have recorded our interest in CVTelecom under the equity method.
As of December 31, 2015, CVTelecom had approximately 54,200 fixed-lines in service, which represents approximately 10.6
fixed main lines per 100 inhabitants. As of December 31, 2015, CVTelecom had approximately 404,000 active mobile telephone
cards.
CVTelecom was established in 1995 and provides fixed-line and mobile telecommunications services under the terms of a 25-
year license granted in 1996. In December 2011, CVTelecom was granted a license to provide 3G services in Cabo Verde. In May
2012, CVTelecom’s connection to the West African Cable System, a submarine cable which connects CVTelecom’s network to
networks in West Africa and Europe, began operating.
In 2006, the National Communications Agency (Agência Nacional das Comunicações) granted the second license to provide
fixed-line and mobile telecommunications services in Cabo Verde to T Plus S.A., or T Plus, which commenced operations under the
brand “T+” in December 2007. In December 2011, T Plus was granted a license to provide 3G services in Cabo Verde. In October
2012, a controlling interest in T Plus was acquired by Unitel Holdings, which is controlled by Mrs. Isabel dos Santos.
During 2014, CVTelecom launched several commercial offers, both mobile and fixed lines, aimed at promoting usage and
customer loyalty, including: (1) the development of a youth segment, based on the “Powa Swag” service, (2) the launch of several
voice promotions, such as “Di Borla Domingão,” and (3) the development of “ ZAP,” an NPlay offer. As of December 31, 2015,
broadband and IPTV customers represented 28.2% and 10.9% of CVTelecom’s fixed line customer base, respectively.
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Africatel owns 51.0% of the share capital of CST, which provides fixed and mobile services in São Tomé and Principe. As of
December 31, 2015, CST had approximately 155,300 mobile customers.
CST was established in 1989 and provides fixed-line and mobile telecommunications services under the terms of a 20-year
license granted in 2007. CST began offering 3G services in São Tomé and Principe in March 2012 anticipating the connection of its
network to the Africa Coast to Europe submarine cable which was inaugurated at the end of 2012. In March 2013, the General
Regulatory Authority (Autoridade Geral de Regulação), the telecommunications regulator in São Tomé and Principe granted the
second license to provide fixed-line and mobile telecommunications services in São Tomé and Principe to Unitel Holdings, which is
controlled by Mrs. Isabel dos Santos. The second operator commenced commercial activity in July 2014.
During 2015, CST worked on several initiatives designed to promote its commercial brand and customer loyalty in order to
mitigate the effects of the new competitor. In addition, CST also launched a new data link between the islands of São Tomé and
Principe, which increased the capacity more than nine times compare to the previous link connecting the two islands.
Regulation of the Brazilian Telecommunications Industry
Overview
Our business, including the nature of the services we provide and the rates we charge, is subject to comprehensive regulation
under the General Telecommunications Law and a comprehensive regulatory framework for the provision of telecommunications
services promulgated by ANATEL. We provide fixed-line, domestic and international long-distance and mobile telecommunications
services under concessions, authorizations and licenses that were granted by ANATEL and allow us to provide specified services in
designated geographic areas, as well as set forth certain obligations with which we must comply. See “— Concessions,
Authorizations and Licenses.”
ANATEL is a regulatory agency that was established in July 1997 pursuant to the General Telecommunications Law and the
Regulamento da Agência Nacional de Telecomunicações. ANATEL oversees our activities and enforces the General
Telecommunications Law and the regulations promulgated thereunder. ANATEL is administratively independent and is financially
autonomous. ANATEL is required to report on its activities to the Brazilian Ministry of Communications. ANATEL has authority to
propose and to issue regulations that are legally binding on telecommunications service providers. ANATEL also has the authority to
grant concessions and licenses for all telecommunications services, other than broadcasting services. Any regulation or action
proposed by ANATEL is subject to a period of public comment, which may include public hearings, and ANATEL’s decisions may
be challenged administratively before the agency itself or through the Brazilian judicial system.
Concessions and Authorizations
Under the General Telecommunications Law and ANATEL regulations, the right to provide telecommunications services is
granted either through a concession under the public regime (as discussed below) or an authorization under the private regime (as
discussed below). A concession is granted for a fixed period of time following a public auction and is generally renewable only once.
An authorization is granted for an indeterminate period of time and public auctions are held for some authorizations. These
concessions and authorizations allow service providers to provide specific services in designated geographic areas, set forth certain
obligations with which the service providers must comply and require equal treatment of customers by the service providers.
The three principal providers of fixed-line telecommunications services in Brazil, Telefônica Brasil, Embratel and our company,
provide these services under the public regime. In addition, CTBC and Sercomtel, which are secondary local fixed-line
telecommunications service providers, operate under the public regime. All of the other providers of fixed-line telecommunications
services and all providers of personal mobile services and data transmission services in Brazil operate under the private regime.
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Providers of public regime services are subject to more obligations and restrictions than providers of private regime services.
Under Brazilian law, providers of public regime services are subject to certain requirements with respect to services such as network
expansion and network modernization. Additionally, the rates that public regime service providers may charge customers are subject
to ANATEL supervision. Another distinctive feature of public concessions is the right of the concessionaire to maintain certain
economic and financial standards, which are calculated based on the rules set forth in our concession agreements and was designed
based on a price cap model. The concessions are granted for a fixed period of time and are generally renewable only once.
Our concession agreements provide that ANATEL may modify their terms in 2015 and 2020 and may revoke them prior to
expiration under the circumstances described below under “—Termination of a Concession.” The modification right permits
ANATEL to impose new terms and conditions in response to changes in technology, competition in the marketplace and domestic
and international economic conditions. ANATEL is obligated to engage in public consultation in connection with each of these
potential modifications.
On June 27, 2014, ANATEL opened a public comment period for the 2015 revision of the terms of our concession agreements.
The comment period, which ended on December 26, 2014, was opened for comments on certain topics such as service
universalization, rates and fees, among others. We submitted our comments during this period. Throughout 2015, ANATEL, the
Brazilian Ministry of Communications and telecommunications service providers met regularly to discuss possible amendments to
each of the concession agreements granted by ANATEL, including ours, and the implications of the developments and demands in
the telecommunications sector in recent years. In September 2015, the Ministry of Communications created a working group,
consisting of three members from each of ANATEL and the Ministry of Communications, to evaluate the status of the concessions
and propose guidelines for the amendment of the concession agreements. In November 2015, the Ministry of Communications
opened public consultation on the new regulatory framework for telecommunications. The Ministry of Communications has extended
the deadline for contributions on multiple occasions. In April 2016, the Ministry of Communications, based on the working group’s
findings, issued a decree addressing guidelines for the establishment of a new regulatory framework for telecommunications, which
will be implemented by ANATEL through the conclusion of the concession amendments. The guidelines provide for, among other
things, the expansion of broadband services (including in rural regions), the elimination of the reversibility of assets, and an extension
of the term of our concessions, which are currently scheduled to expire in 2025. As a result of the publication of these guidelines,
ANATEL requested a further postponement of the review of our concession agreements, which was granted. As a result of this
extension, the review of our concession agreements is currently scheduled to occur by December 2016.
Providers of private regime services, although not generally subject to the requirements concerning continuity and universality
of service and network modernization, are subject to certain network expansion and quality of service obligations set forth in their
respective authorizations.
Under the concession agreements and authorizations, each of the service providers is required to comply with the provisions of
(1) the General Plan on Universal Service Goals that was adopted by ANATEL in June 2003, (2) the General Plan on Quality Goals
that was adopted by ANATEL in June 2003, and (3) the General Plan on Competition Targets that was adopted by ANATEL in
November 2012. Regulatory provisions are included in the relevant concession agreements and authorizations, and the service
providers are subject to public service principles of continuity, changeability and equal treatment of customers.
In addition, ANATEL is authorized to direct and control the provision of services, to apply penalties and to declare the
expiration of the concession and the return of assets from the concessionaire to the government authority upon termination of the
concession.
Regulation of Fixed-Line Services
Rate Regulation
Under the concession agreements, public regime service providers are required to offer basic local fixed-line plans to users.
Rates for long-distance services originated and terminated on fixed lines vary in accordance with certain criteria. The concession
agreements establish a price-cap mechanism for annual rate adjustments for basic
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service plans and domestic long-distance rates based on formulas set forth in each provider’s concession agreement. The formula
provides for two adjustments to the price cap based on the local rate basket, the long-distance rate basket and the use of a price index.
The price cap is first revised upward to reflect increases in inflation, as measured by an index, then ANATEL applies a productivity
discount factor, or Factor X, which reduces the impact of the rate readjustment provided by the index.
ANATEL has calculated the sector’s weighted average productivity rate. As of the date of this annual report, Factor X is equal
to (1) 50% of the increase in the weighted average productivity rate of public regime providers, plus (2) 75% of a factor calculated by
ANATEL that is designed to reflect cost optimization targets for the telecommunications industry as a whole. If the weighted average
productivity rate is negative, ANATEL will not allow an annual adjustment in excess of the IST.
ANATEL has proposed new regulations under which it would modify the Factor X applicable to the determination of rate
increases available to public concessionaires providing fixed-line services. ANATEL expected to launch a public consultation process
relating to these proposed regulations during 2016.
A provider may increase rates for individual services within the local rate basket or the long-distance rate basket by up to 5%
more than the IST so long as the rates for other services in that rate basket are reduced to the extent necessary to ensure that the
weighted average increase for the entire rate basket does not exceed the permitted annual rate adjustment.
A provider may also offer alternative plans in addition to the basic service plan. Alternative plans must be submitted for
ANATEL’s approval. The rates offered under the alternative plans may be adjusted annually based on the IST.
For information on our rates and service plans, see “—Rates.”
General Plan on Universal Service Goals
The General Plan on Universal Service Goals was approved by ANATEL in June 2011. The General Plan on Universal Service
Goals sets forth the principal network expansion and modernization obligations of the public regime providers.
Public regime providers are subject to network expansion requirements under the General Plan on Universal Service Goals,
which are revised by ANATEL from time to time. No subsidies or other supplemental financings are anticipated to finance our
network expansion obligations. Our failure to meet the network expansion and modernization obligations established by the General
Plan on Universal Service Goals or in our concession agreements may result in fines and penalties of up to R$50 million, as well as
potential revocation of our concessions.
The General Plan on Universal Service Goals, as amended, requires the following, among other things:
•
•
•
local fixed-line service providers to provide individual access to fixed-line voice services to economically disadvantaged
segments of the Brazilian population within their service areas, through programs to be established and regulated by
ANATEL;
local fixed-line service providers to provide public telephones in urban areas within their service areas, including in
localities with a population in excess of 100, and to install residential fixed lines within seven days of a request in localities
with a population in excess of 300; and
local and long-distance fixed-line providers that obtain authorizations to use radio spectrum in the 450 Mhz band to
provide universal service in rural and remote areas, as well as to provide individual and group access to fixed-line voice
services.
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The General Plan on Universal Service Goals is expected to be amended again in 2016 In connection with the amendments to the
concession agreements.
Service Restrictions
Pursuant to regulations in effect as of the date of this annual report, public regime providers are subject to certain restrictions on
alliances, joint ventures and mergers and acquisitions with other public regime providers, including:
•
•
a prohibition on holding more than 20% of the voting shares of more than one other provider of public regime services;
and
a restriction on mergers between regional fixed-line service providers.
In December 2010, ANATEL adopted new regulations eliminating the limitation on the number of authorizations to provide
subscription television services. In September 2011, Law No. 12,485 became effective, which creates a new legal framework for
subscription television services in Brazil, replacing and unifying the previously existing regulatory provisions that governed various
forms of subscription television services, such as cable television, Multichannel Multipoint Distribution Service, or MMDS, and
DTH. The principal provisions of Law No. 12,485:
•
•
•
•
•
allow fixed-line telephone concessionaires, such as us, who previously were allowed to provide subscription television
services using only MMDS and DTH technologies, to enter the cable television market in Brazil;
remove existing restrictions on foreign capital investments in cable television providers;
establish minimum quotas for domestic content programming on every television channel;
limit the total and voting capital held by broadcast concessionaires and authorized providers, and in television
programmers and producers, with headquarters in Brazil to 30%; and
prohibit telecommunications service providers with collective interests from acquiring rights to disseminate images of
events of national interest and from hiring domestic artistic talent.
The framework established by Law No. 12,485 increased the availability and lower the price of subscription television services in
Brazil, through increased competition among providers, and improve the quality, speed and availability of broadband internet services
as a result of the expected proliferation of fiber optic cables used to transmit cable television.
In March 2012, ANATEL adopted new regulations under which the authorizations to provide various existing subscription
television services have been consolidated into authorizations to provide a newly-defined service called Conditional Access Service.
Under these regulations, authorizations to provide Conditional Access Service apply to private telecommunications services, the
receipt of which are conditioned on payment by subscribers, for the distribution of audiovisual contents in the form of packages,
individual channels and channels with required programming, by means of any communications technology, processes, electronic
means or protocols. An authorization granted by ANATEL to provide Conditional Access Service will be valid for the entire
Brazilian territory, however, the provider must indicate in its application for an authorization the localities that it will service. In
December 2012, ANATEL granted our request to convert our DTH authorization agreement into a Conditional Access Service
authorization. In September 2014, we entered into a Conditional Access Service authorization agreement with ANATEL that
authorized us to offer the services to be governed by such agreement, including IP TV.
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FORM 20-F
RR Donnelley ProFile
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Termination of a Concession
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ANATEL may terminate the concession of any public regime telecommunications service provider upon the occurrence of any
of the following:
•
•
•
•
•
•
•
•
•
an extraordinary situation jeopardizing the public interest, in which case the Brazilian government is authorized to start
rendering the services set forth under the concession in lieu of the concessionaire, subject to congressional authorization
and payment of adequate indemnification to the owner of the terminated concession;
termination by the provider (through an agreement with ANATEL or pursuant to legal proceedings) as a consequence of an
act or omission of the Brazilian government that makes the rendering of the services excessively burdensome to the
provider;
annulment of the concession due to a contractual term, which is deemed by subsequent law to be illegal;
material failure to comply with the provider’s universalization targets;
failure to meet insurance requirements set forth in the concession agreement;
a split-up, spin-off, amalgamation, merger, capital reduction or transfer of the provider’s control without ANATEL’s
authorization;
the transfer of the concession without ANATEL’s authorization;
the dissolution or bankruptcy of the provider; or
an extraordinary situation in which Brazilian government intervention, although legally permissible, is not undertaken, as
such intervention would prove to be inconvenient, unnecessary or would result in an unfair benefit to the provider.
In the event a concession is terminated, ANATEL is authorized to administer the provider’s properties and its employees in
order to continue rendering services.
General Plan on Quality Goals
The General Plan on Quality Goals was approved by ANATEL in June 2003 and became effective in January 2006. Each fixed-
line service provider operating under the public regime or the private regime must comply with the provisions of the General Plan on
Quality Goals. All costs related to compliance with the quality goals established by the General Plan on Quality Goals must be borne
exclusively by the service provider. The General Plan on Quality Goals establishes minimum quality standards with regard to:
•
•
•
•
•
•
modernization of the network;
responses to repair requests;
responses to change of address requests;
rate of call completion;
operator availability;
availability of services to customers;
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•
•
•
•
personal services to customers;
issuance of bills;
responses to mail received from customers; and
quality of public telephones.
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These quality standards are measured according to the definitions and quality indicators established by ANATEL. Every month,
fixed-line service providers are required to report their compliance with quality goals to ANATEL. Additionally, they are obligated to
provide ANATEL with an in-depth report and analysis on each quality goal that is not satisfied. ANATEL may also collect such data
from fixed-line service providers at any time without prior notice. Fixed-line service providers that fail to meet quality goals
established by ANATEL may be subject to warnings, fines, intervention by ANATEL, temporary suspensions of service or
cancellation of their concessions and authorizations.
ANATEL measures the performance of fixed-line service providers in each individual state in which they operate. As a result,
the performance of fixed-line service providers in any particular state may not meet one or more quality performance targets even if
such service provider’s overall performance is satisfactory. Therefore, fixed-line service providers, including us, could be subject to
fines or penalties as a result of the failure to meet the quality performance targets in one or more particular states.
Our failure to meet the quality of service obligations established by the General Plan on Quality Goals or in our concession
agreements may result in fines and penalties of up to R$40 million.
General Plan on Competition Targets
The General Plan on Competition Targets, which was approved by ANATEL and became effective in November 2012,
contemplates the creation of one entity to manage information about telecommunications networks, act as an intermediary in
contracts between telecommunications providers and supervise the offering of wholesale data traffic services. The General Plan on
Competition Targets also addresses a variety of other matters relating to both fixed-line and mobile service providers, including
criteria for the evaluation of telecommunications providers to determine which providers have significant market power, regulations
applicable to the wholesale markets for trunk lines, backhaul, access to internet backbone and interconnection services, and
regulations related to partial unbundling and/or full unbundling of the local fixed-line networks of the public regime service
providers.
The General Plan on Competition Targets imposes stricter restrictions on providers that are deemed to have significant market
power in a particular geographic area, ranging from a neighborhood within a municipality to the entire national territory. In order to
determine whether a provider has significant market power, ANATEL established criteria that consider:
•
•
•
•
that provider’s market share in particular mobile interconnection markets and personal mobile services market;
the economies of scope and scale available to that provider;
that provider’s dominance over infrastructure that is not economically viable to duplicate; and
that provider’s concurrent operations in the wholesale and retail markets.
Infrastructure Sharing
Prior to the adoption of the General Plan on Competition Targets, ANATEL had established rules for partial unbundling of the
local fixed-line networks of the public regime service providers, which we refer to as “line sharing,” and which (1) limited the rates
service providers can charge for line sharing, and (2) addressed related
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RR Donnelley ProFile
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matters such as co-location space requirements. Co-location means that a service provider requesting unbundling may place its
switching equipment in or near the local exchange of the service provider whose network the requesting service provider wishes to
use and may connect to the network at this local exchange.
The General Plan on Competition Targets requires public regime service providers that have significant market power to share
their fixed-line network infrastructure with other providers, including their local fixed-line access networks. Providers that are
deemed to have significant market power must offer (1) full unbundling of their copper wire or coaxial cable access networks, and
(2) partial unbundling of their broadband networks to accommodate bitstreams of up to 10 Mbps. The methodology by which the
wholesale prices for these services will be determined will be established by ANATEL. We expect that ANATEL will commence a
public consultation process with respect thereto during the second half of 2016.
Providers with significant market power must also share their passive infrastructure, such as telecommunications towers, with
other service providers at prices determined by bilateral negotiations between the providers.
Interconnection Regulations Applicable to Personal Mobile Services Providers
The General Plan on Competition Targets established regulations for the rates charged by mobile service providers to terminate
calls on their mobile networks (the VU-M rate). The General Plan on Competition Targets established a reference value for VU-M
rates of providers that are deemed to hold significant market power and determined that beginning in 2016, VU-M rates will be
determined on the basis of costs. In July 2014, ANATEL approved a rule for the definition of maximum VU-M reference rates for
entities with significant market power, such as our company, based on a long-run incremental cost methodology. Under this rule, VU-
M reference rates will decline from 2016 through 2019 when VU-M reference rates reflecting the long-run incremental cost
methodology will apply.
The General Plan on Competition Targets established that the VU-M would be paid only when the traffic out of a network in a
given direction was greater than (1) 80% of the total traffic exchanged until February 23, 2015, and (2) 60% of the total traffic
exchanged from February 24, 2015 to February 23, 2016. After February 24, 2016, each mobile service provider would be entitled to
collect the VU-M on all calls for which its network was used to originate or terminate the call.
In February 2015, ANATEL revised the General Plan on Competition Targets regulation relating to the VU-M applicable to the
relationship between companies with significant market power and companies without significant market power. Under the revised
regulations, the dates and percentages applicable to the VU-M partial bill-and-keep system were revised so that the VU-M will be
paid only when the traffic out of a network in a given direction is greater than:
•
•
•
•
75% of the total traffic exchanged until February 23, 2016;
65% of the total traffic exchanged until February 23, 2017;
55% of the total traffic exchanged until February 23, 2018; and
50% of the total traffic exchanged until February 23, 2019.
The full billing system is scheduled to come into effect on February 24, 2019.
Roaming
Under the General Plan on Competition Targets, a mobile service provider with significant market power, such as our company,
must offer roaming services to other mobile providers without significant market power at the maximum rate that the mobile service
provider with significant market power is permitting ANATEL to offer such services to its retail customers.
85
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FORM 20-F
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Regulation of Mobile Services
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In September 2000, ANATEL adopted regulations that established operating rules for providers under the personal mobile
service (Serviço Móvel Pessoal) regime. The regulations permitted ANATEL to grant authorizations to provide mobile
telecommunications services under the personal mobile service regime. For purposes of the personal mobile service regulations,
Brazil is divided into three service regions covering the same geographic areas as the concessions for fixed-line telecommunications
services.
Auction of 3G Spectrum
In preparation for auctions of spectrum in Bands F, G, I and J (2.1 GHz), the use of which allows personal mobile services
providers to offer 3G services to their customers, ANATEL issued regulations that divide the Brazilian territory into nine regions for
purposes of operations using these frequency bands. In December 2007, ANATEL auctioned radio frequency licenses to operate on
each of these frequency bands in each of the nine regions and the related licenses to use these frequency bands. In this auction, we
acquired the radio frequency licenses necessary to offer 3G services in two of the nine regions delineated by ANATEL for 3G
services (corresponding to Regions II under the personal mobile services regime) and TNL PCS acquired radio frequency licenses
necessary to offer 3G services in six of the nine regions delineated by ANATEL for 3G services (corresponding to Regions I and III
under the personal mobile services regime, other than an area that consists of 23 municipalities in the interior of the State of São
Paulo that includes the city of Franca and surrounding areas).
Authorizations to Use 450MHz Band and 2.5 GHz Band
In preparation for auctions of the 450MHz band and 2.5 GHz band, the use of which allows personal mobile services providers
to offer 4G services to their customers, ANATEL issued regulations that divided the Brazilian territory into three regions for purposes
of providing personal mobile services. In June 2012, ANATEL auctioned radio frequency licenses to operate and the related licenses
to use the frequency bands in the following manner: (1) four national lots for 2.5 GHz bands, each accompanied by a regional band of
450 MHz, and (2) 132 regional lots for 2.5GHz bands. In this auction, we acquired (1) one of the national lots for 2.5 GHz and the
corresponding regional lot of 450MHz to provide rural broadband services in the States of Goiás, Mato Grosso, Mato Grosso do Sul,
Rio Grande do Sul and the Federal District, and (2) 11 regional lots for 2.5 GHz bands to provide personal mobile services in the
following areas: interior of Ceará, the capital or Roraima(and its metropolitan area), the State of Amapá, the capital of Bahia (and its
metropolitan area), interior of the Pará, the capital of Pernambuco (and its metropolitan area), interior of Paraná, the capital of Rio
Grande do Sul (and its metropolitan area), the City of Jaguarão (and its metropolitan area) and the capital of São Paulo (and its
metropolitan area). ANATEL is currently reviewing whether the obligations that should have been met by the end of 2015, as set out
in the auction for the 2.5 GHz and 450 MHz frequencies have been met. In December 2015, ANATEL and CADE approved the RAN
Sharing Agreement between Telefônica Brasil, TIM and Oi for the construction, implementation and mutual assignment of network
tools to support personal mobile services (voice and broadband) in the 2.5 GHz band, among others, in order to ensure compliance
with the scope of commitments between 2015 and 2017 and the expansion of 4G coverage in municipalities with a population over
30,000. ANATEL rejected the proposal to conduct RAN sharing in conurbations, however, because it detected interference in the
service. As a result, ANATEL will not allow RAN sharing in municipalities experiencing interference until a solution has been found.
Obligations of Personal Mobile Services Providers
As a telecommunications service provider, we are subject to requirements concerning network expansion and quality of service,
as established in applicable regulations and in our personal mobile services authorizations. If we fail to meet these obligations, we
may be fined, subject to a maximum penalty of R$50 million, until we are in full compliance with our obligations. While it is possible
for an authorization to be revoked for non-compliance with these obligations, there are no precedents for such a revocation.
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Quality of Service Obligations
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Our personal mobile services authorizations impose obligations on us to meet quality of service standards relating to our
network’s ability to make and receive calls, call failure rates, capacity to handle peak periods, failed interconnection of calls and
customer complaints. ANATEL defines this quality of service standards, and we must report information in connection with such
standards to ANATEL.
To restructure the process of assessing the quality of mobile service, with the inclusion of new processes and measurement of
new indicators to check the quality of mobile broadband and the quality perceived by the user, and the modernization of existing
indicators, ANATEL approved the Regulation for the Management of Quality of Provision of Personal Mobile Service (Regulamento
de Gestão da Qualidade da Prestação de Serviço Móvel Pessoal), or SMP-RGQ. The SMP-RGQ provides for the assessment of the
network connection and their respective data transmission rate, assessing aspects of availability, stability and connection speed for the
data network. Targets are defined as 80% of speed hired (on average per month) by users and 40% of the instant speed, according to
the definitions of the Resolution 575/2011.
Interconnection Regulations
Under the General Telecommunications Law, all telecommunications service providers are required, if technically feasible, to
make their networks available for interconnection on a non-discriminatory basis whenever a request is made by another
telecommunications service provider. Interconnection permits a call originated on the network of a requesting fixed-line or personal
mobile services provider’s network to be terminated on the fixed-line or personal mobile services network of the other provider.
ANATEL has adopted General Rules on Interconnection (Regulamento Geral de Interconexão) to implement these requirements.
Interconnection Regulations Applicable to Fixed-Line Providers
Interconnection fees are charged at a rate per minute of use of a fixed-line provider’s network. Interconnection rates charged by
a fixed-line provider to terminate a call on its local network (the TU-RL rate) or intercity network (the TU-RIU rate) are subject to a
price cap established by ANATEL. The price cap for interconnection rates varies from service provider to service provider based on
the retail prices of each service provider.
Fixed-line service providers must offer the same TU-RL and TU-RIU rates to all requesting providers on a nondiscriminatory
basis. The price caps on interconnection rates are adjusted annually by ANATEL at the same time that rates for local and long-
distance calls are adjusted.
Under ANATEL regulations, fixed-line service providers are not able to charge other fixed-line service providers for local
fixed-line calls originating on their local fixed-line networks and terminating on the other provider’s local fixed-line networks.
In August 2012, the TU-RIU rates were reduced to 25% of the applicable domestic fixed line rates for calls with more than
300 km, and in January 2013, TU-RIU rates were reduced to 20% of the applicable domestic fixed line rates for such calls.
In July 2014, ANATEL approved a rule for the definition of maximum fixed reference rates, including TU-RL and TU-RIU, for
entities with significant market power, such as our company, based on a long-run incremental cost methodology. Under this rule, TU-
RL and TU-RIU reference rates will decline from 2016 through 2019 when TU-RL and TU-RIU reference rates reflecting the long-
run incremental cost methodology will apply.
Interconnection Regulations Applicable to Personal Mobile Services Providers
Interconnection fees are charged at a flat rate per minute of use of a personal mobile services provider’s network. The terms and
conditions of interconnection agreements of all personal mobile services providers, including the rates charged by the operator of the
network to terminate a call on its mobile network (the VU-M rate), commercial conditions and technical issues, are freely negotiated
between mobile and fixed-line telecommunications
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service providers, subject to compliance with regulations established by ANATEL relating to traffic capacity and interconnection
infrastructure that must be made available to requesting providers, among other things.
Personal mobile services providers must offer the same VU-M rate to all requesting providers on a nondiscriminatory basis.
Interconnection agreements must be approved by ANATEL before they become effective and they may be rejected if they are
contrary to the principles of free competition and the applicable regulations. If the providers cannot agree upon the terms and
conditions of interconnection agreements, ANATEL may determine terms and conditions by arbitration. Since no agreement with
fixed-line service providers could be reached regarding VU-M rates when we began offering personal mobile services, ANATEL set
the initial VU-M rates.
Personal mobile services providers negotiate annual rate increases for their VU-M charges with the fixed-line
telecommunications providers. If the providers cannot agree upon the terms and conditions of annual rate increases, ANATEL may
determine the annual rate increases by arbitration.
Under ANATEL regulations, in December 2013 ANATEL established the maximum VU-M rate of R$0.33 per minute that is
applicable in the event that providers could not agree upon the VU-M applicable in their interconnection agreements. Under the
General Plan on Competition Targets, in February 2014 the VU-M rate was reduced to 75% of the maximum VU-M rate established
by ANATEL in December 2013, and in February 2015 the VU-M rate was reduced to 50% of the maximum VU-M rate established
by ANATEL in December 2013. In July 2014, ANATEL approved a rule for the definition of maximum VU-M reference rates for
entities with significant market power, such as our company, based on a long-run incremental cost methodology. Under this rule, VU-
M reference rates will decline from 2016 through 2019 when VU-M reference rates reflecting the long-run incremental cost
methodology will apply.
Consumer Protection Regulation
In March 2014, ANATEL published a regulation approving the General Regulation on Telecommunications Customers Rights
(Regulamento Geral de Direitos do Consumidor de Serviços de Telecomunicações), a single regulation for the telecommunications
sector with general rules for customer service, billing, and service offers, which are applicable to fixed, mobile, broadband and Pay-
TV customers. This regulation establishes a period ranging from 120 days to 24 months from the date of publication for entering into
compliance with the new rules. Most of the new rules that expand the rights of those who use the telecommunications services
entered into force on July 8, 2014.
Number Portability Regulations
Number portability is the ability of a customer to move to a new home or office or switch service providers while retaining the
same fixed-line or mobile telephone number. ANATEL’s General Regulation of Portability (Regulamento Geral de Portabilidade)
establishes general rules regarding portability of fixed-line and mobile telephone numbers. These regulations permit fixed-line
customers to retain their telephone numbers if they become customers of a different fixed-line service provider in the same
municipality or if they move to a new home or office in the same municipality. Personal mobile services customers are permitted to
retain their telephone numbers if they change their service plan or if they become customers of a different personal mobile services
provider within the same registration area. Each telecommunications provider has been required to contract a third-party management
entity to manage all procedures relating to number portability.
Regulation of Data Transmission and Internet Services
Under Brazilian regulation, ISPs are deemed to be suppliers of value-added services and not telecommunications service
providers. Value-added services are considered an activity that adds features to a telecommunications service supported by such
value-added services. Telecommunications service providers are permitted to render value-added services through their own
networks. In addition, ANATEL regulations require all telecommunications service providers and cable television operators to grant
network access to any party interested in providing value-added services, including internet access, on a non-discriminatory basis,
unless not technically feasible.
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ANATEL has adopted regulations applicable to fixed-line service providers with significant market power. Under these
regulations, these providers are required to make the forms of agreements that they use for EILD and SLD services publicly available,
including the applicable rates, and are only permitted to offer these services under these forms of agreement. ANATEL publishes
reference rates for these services, and if a customer of one of these providers objects to the rates which that provider charges for these
services, the customer is entitled to seek to reduce the applicable rate through arbitration before ANATEL.
In May 2014, ANATEL approved a standard for setting maximum values for EILD services based on a long-run incremental
cost methodology. Reference rates for EILD services were published containing a single reference table which will be valid from
2016 until 2020. Under this ANATEL regulation, EILD reference rates will decline from 2016 through 2020 when EILD reference
rates reflecting the long-run incremental cost methodology will apply. In addition, under the General Plan of Competition Targets,
companies with significant market, such as our company, are required to present a public offer every six months including standard
commercial conditions, which is subject to approval by ANATEL.
Multimedia Communications Service Quality Management Regulations
In June 2011, the President of Brazil issued Executive Decree No. 7,512/11, which mandated ANATEL to take the necessary
regulatory measures to establish quality standards for broadband internet services. In compliance with such decree, on October 31,
2011, ANATEL published a resolution approving the Multimedia Communications Service Quality Management Regulations
(Regulamentação de Gestão da Qualidade do Serviço de Comunicação Multimídia), or the Regulations, which identify network
quality indicators and establish performance goals for multimedia communications service providers, including broadband internet
service providers, with more than 50,000 subscribers. Such providers will be required to collect representative data using dedicated
equipment installed at the site of each network connection and be subject to periodic measurements to ensure their compliance with
such regulations, including:
•
•
•
individual upload and download speeds of at least 40% of contracted speeds per measurement for at least 95% of all
measurements;
average upload and download speeds of at least 80% of contracted speeds for all measurements; and
individual round-trip latencies for fixed-line connections of up to 80 milliseconds per measurement for at least 95% of the
measurements.
To increase transparency, customers must be provided with specialized software at no cost to measure their own network
quality, although such customer-generated measurements will not be included in official calculations. In addition to ensuring network
quality standards, service providers must hire specialized companies to measure customer service and customer satisfaction
indicators, including complaint resolution, customer service personnel competence, customer perceptions relating to billing and
quality of technical support staff. Service providers must comply with the above-mentioned quality standards beginning on the
thirteenth month following implementation of such regulations. Failure to meet such standards will subject non-compliant service
providers to sanctions.
National Broadband Plan
On June 30, 2011, we entered into a Term of Commitment (Termo de Compromisso) with ANATEL and the Ministry of
Communications to formalize our voluntary commitment to adhere to the terms of the National Broadband Plan, created in May 2010
by Executive Decree No. 7,175/10 with the goal to make broadband access available at low cost, regardless of technology, throughout
Brazil. Pursuant to the Term of Commitment, we are required to offer (1) broadband services with minimum upload and download
capabilities to retail customers in certain sectors of Region I and II for a maximum price of R$35 per month (or R$29.90 in ICMS-
exempt states), plus fees, and (2) access to our broadband infrastructure to certain wholesale customers, including small businesses
and municipalities, in certain sectors of Region I and II for a maximum price of R$1,253 per 2 Mbps per month and a one-time
installation fee, while observing all quality standards under ANATEL regulations. Both retail and wholesale services are subject to
certain network capacity limits and need only be provided at the demand of the
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customer. Pursuant to the Term of Commitment, we have offered the required services to all eligible retail and wholesale customers
since the date of its execution and have gradually increased the capacities offered to wholesale customers since November 2011. We
have been obligated to provide the maximum capacities established by the Term of Commitment to eligible wholesale customers
since June 30, 2015. In addition, the Term of Commitment requires that we:
•
•
•
provide one public internet access point for the first 20,000 inhabitants and one additional access point for each subsequent
10,000 inhabitants, with a limit of six access points, at a speed of 2 Mbps, in each municipality that has only satellite
service, free of charge and upon demand of such municipality;
adequately advertise the services contemplated by the Term of Commitment and present to the Ministry of
Communications semi-annual reports detailing our marketing efforts; and
make our best efforts to offer broadband services to retail customers at speeds of up to 5 Mbps, reaching the largest
possible number of municipalities.
The Term of Commitment will expire on December 31, 2016.
Legal Framework for the Use of the Internet (Internet Bill of Rights)
In April 2014, President Dilma Rousseff approved the Legal Framework for the Use of the Internet (Marco Civil da Internet), or
the Internet Framework, which establishes the principles, guarantees, rights and duties for the use of the Internet in Brazil. The bill
sets forth a number of guidelines and rules to be observed by internet and application service providers, such as the protection of
privacy, the protection of personal data, the preservation and guarantee of net neutrality, the liability for damages caused by content
generated or published by third parties and the storage and disclosure of usage logs. Certain parts of the Internet Framework went into
effect on June 23, 2014 and others will become effective on the adoption of implementing regulations.
Under the Internet Framework, a presidential decree will be enacted to regulate the law’s provisions, and enacting specific rules
regarding network traffic management techniques. The Brazilian Internet Steering Committee (Comitê Gestor da Internet) and
ANATEL will express their opinion on the decree after public hearings. Brazil’s Ministry of Justice has also launched a public debate
on the main themes related to this law.
Other Regulatory Matters
Regulatory Agenda 2015-2016
On June 29, 2015, ANATEL put in public consultation its proposed Regulatory Agenda for the 2015-2016 cycle, and revocation
of the General Plan of the Telecommunication Regulatory Update in Brazil (PGR). The agenda contained 33 topics of interest to the
sector, which should have final approval or some progress in 2015 and 2016. The listed items include: Civil Rights Framework for
Internet, Revision of the Concession Agreement and General Plan on Universal Service Goals, review of the quality management
model, review of spectrum management model, review the arrangements and scope of telecommunications services, review of the
regulation of the SeAC (Serviço de Acesso Condicionado) and review of regulatory reversible assets.
New Regulatory Framework
On November 23, 2015, the Ministry of Communications opened public consultation on the new regulatory framework for
telecommunications. The consultation is based on a series of questions under four basic axes: purpose of the public policy, universal
policy, public regime versus the private regime and public concession. The Ministry of Communications has extended the deadline
for contributions on multiple occasions. In April 2016, the Ministry of Communications issued a decree addressing guidelines for the
establishment of a new regulatory framework for telecommunications, which will be implemented by ANATEL through the
conclusion of the concession amendments. The guidelines provide for, among other things, the expansion of broadband services
(including in rural regions), the elimination of the reversibility of assets, and an extension of the term of our concessions, which
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are currently scheduled to expire in 2025. As a result of the publication of these guidelines, ANATEL requested a further
postponement of the review of our concession agreements, which was granted. As a result of this extension, the review of our
concession agreements is currently scheduled to occur by December 2016.
Environmental and Other Regulatory Matters in Brazil
As part of our day-to-day operations, we regularly install ducts for wires and cables and erect towers for transmission antennae.
We may be subject to federal, state and/or municipal environmental licensing requirements due to the installation of cables along
highways and railroads, over bridges, rivers and marshes and through farms, conservation units and environmental preservation areas,
among other places. As of the date of this annual report, we have been required to obtain environmental licenses for the installation of
transmission towers and antennae in several municipalities with no material impact on our operations. However, there can be no
assurances that other state and municipal environmental agencies will not require us to obtain environmental licenses for the
installation of transmission towers and antennae in the future or that such a requirement would not have a material adverse effect on
the installation costs of our network or on the speed with which we can expand and modernize our network.
We must also comply with environmental legislation regarding the management of solid waste. According to resolutions
adopted by the National Environmental Council (Conselho Nacional do Meio Ambiente), companies responsible for the treatment and
final disposal of solid industrial waste, special waste and solid urban waste are subject to environmental licensing. Should the waste
not be disposed of in accordance with standards established by environmental legislation, the company generating such waste may be
held jointly and severally liable with the company responsible for waste treatment for any damage caused. Also, in all states where
we operate, we have implemented management procedures promoting the recycling of batteries, transformers and fluorescent lamps.
In addition, we are subject to ANATEL regulations that impose limits on the levels and frequency of the electromagnetic fields
originating from our telecommunications transmissions stations.
We believe that we are in compliance with ANATEL standards as well as with all applicable environmental legislation and
regulations. We are currently not involved in any administrative or judicial proceeding involving material liability for environmental
damage.
Disclosure Pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act
Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012 added Section 13(r) to the Exchange Act.
Section 13(r) requires an issuer to disclose in its annual or quarterly reports filed with the SEC whether the issuer or any of its
affiliates has knowingly engaged in certain activities, transactions or dealings with the Government of Iran, relating to Iran or with
designated natural persons or entities involved in terrorism or the proliferation of weapons of mass destruction during the period
covered by the annual or quarterly report. Disclosure is required even when the activities were conducted outside the United States by
non-U.S. entities and even when such activities were conducted in compliance with applicable law.
In December 2011, we entered into a roaming agreement with MTN Irancell. Pursuant to such roaming agreement, our
customers are able to roam in MTN Irancell’s network (outbound roaming) and customers of MTN Irancell are able to roam in our
network (inbound roaming). For outbound roaming, we pay MTN Irancell roaming fees for use of their network by our customers,
and for inbound roaming MTN Irancell pays us roaming fees for use of our network by its customers.
Our inbound and outbound roaming services with MTN Irancell were launched commercially in October and November 2012,
respectively. During 2015, we recorded revenues of R$2,529 and expenses of R$2,383 in connection with this roaming agreement.
We do not maintain any bank accounts in Iran. All payments in connection with our international roaming agreements are
effected through our bank accounts in London.
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The purpose of all of these agreements is to provide our customers with coverage in areas where we do not own networks. For
that purpose, we intend to continue maintaining these agreements.
We also provide telecommunications services in the ordinary course of business to the Embassy of Iran in Brasilia. We recorded
gross revenues and net profits of less than R$6,000 from these services in 2015. As one of the primary providers of
telecommunications services in Brasilia, we intend to continue providing such services, as we do to the embassies of many other
nations.
ITEM 4A. UNRESOLVED STAFF COMMENTS
Not applicable.
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ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion of our financial condition and results of operations should be read in conjunction with our
consolidated financial statements as of December 31, 2015 and 2014 and for the three years ended December 31, 2015, which are
included in this annual report, as well as with the information presented under the sections entitled “Presentation of Financial and
Other Information” and “Item 3. Key Information—Selected Financial Information.”
The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ
materially from those discussed in the forward-looking statements as a result of various factors, including those set forth in
“Forward-Looking Statements” and “Item 3. Key Information—Risk Factors.”
Overview
We are one of the principal integrated telecommunications service providers in Brazil with approximately 70.0 million RGUs as
of December 31, 2015. We operate throughout Brazil and offer a range of integrated telecommunications services that include fixed-
line and mobile telecommunication services, network usage (interconnection), data transmission services (including broadband access
services), Pay-TV (including as part of double-play, triple-play and quadruple-play packages), internet services and other
telecommunications services for residential customers, small, medium and large companies and governmental agencies. We own
approximately 363,000 kilometers of installed fiber optic cable, distributed throughout Brazil. Our mobile network covers areas in
which approximately 88.7% of the Brazilian population lives and works. According to ANATEL, as of December 31, 2015, we had
an 18.6% market share of the Brazilian mobile telecommunications market and, as of December 31, 2015, we had a 34.7% market
share of the Brazilian fixed-line market. As part of our convergence strategy, we offer more than one million Wi-Fi hotspots in public
places, such as airports and shopping malls. In 2015, we recorded net operating revenue of R$27,354 million and net loss of
R$9,572 million.
Our results of operations and financial condition have been and will be significantly influenced in future periods by the Oi
capital increase, the acquisition of PT Portugal and the disposition of PT Portugal. In addition, our results of operations for the years
ended December 31, 2015, 2014 and 2013 and our financial condition as of December 31, 2015 and 2014 have been influenced, and
our future results of operations and financial condition will continue to be influenced, by a variety of factors, including:
•
•
•
•
•
•
the evolution of Brazilian GDP, which declined by an estimated 3.8% in 2015, and grew by 0.1% in 2014 and 2.3% in
2013, which we believe affects demand for our services and, consequently, our net operating revenue;
the number of our fixed lines in service, which declined to 14.9 million as of December 31, 2015 from 15.8 million as of
December 31, 2014 (excluding fixed-line customers of our discontinued operations), and the percentage of our fixed-line
customers that subscribe to our alternative plans which increased to 86.4% as of December 31, 2015 from 84.5% as of
December 31, 2014;
the number of our mobile customers, which declined to 48.1 million as of December 31, 2015 from 50.9 million as of
December 31, 2014 (excluding fixed-line customers of our discontinued operations);
the number of our fixed-line customers that subscribe to our broadband services, which declined to 5.1 million as of
December 31, 2015 from 5.9 million as of December 31, 2015 and December 31, 2014 (excluding fixed-line customers of
our discontinued operations);
the number of our Pay-TV customers, which remained stable at 1.2 million as of December 31, 2015 and 2014 (excluding
fixed-line customers of our discontinued operations);
the increased competition in the Brazilian market for telecommunications services, which affects the amount of the
discounts that we offer on our service rates and the quantity of services that we offer at promotional rates;
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•
•
•
inflation rates in Brazil, which were 10.6% in 2015 and 5.72% in 2014, as measured by the IST, and the resulting
adjustments to our regulated rates in Brazil, as well as the effects of inflation on our real-denominated debt that is indexed
to take into account the effects of inflation or bears interest at rates that are partially adjusted for inflation;
our compliance with our quality of service obligations under the General Plan on Quality Goals and our network expansion
and modernization obligations under the General Plan on Universal Service Goals and our concession agreements, the
amount of the fines assessed against us by ANATEL for alleged failures to meet these obligations and our success in
challenging fines that we believe are assessed in error;
changes in the exchange rates of the real against (1) the U.S. dollar, including the 47.0% depreciation of the real against
the U.S. dollar during 2015 and the 13.4% depreciation of the real against the U.S. dollar during 2014, and (2) the Euro,
including the 31.7% depreciation of the real against the Euro during 2015, which has affected our financial expenses as a
result of exchange variations on our indebtedness denominated in U.S. dollars and Euros, and the cost in reais of a
substantial portion of the network equipment that we purchase for our capital expenditure projects, the prices of which are
denominated in U.S. dollars or are U.S. dollar-linked; and
•
the level of our outstanding indebtedness, fluctuations in LIBOR and benchmark interest rates in Brazil, principally the
CDI rate and the TJLP rate, which affects our interest expenses on our floating rate debt.
Our financial condition and liquidity is influenced by a variety of factors, including:
•
•
•
•
•
•
our ability to generate cash flows from our operations;
prevailing Brazilian and international interest rates, which affect our debt service requirements;
our ability to borrow funds from Brazilian and international financial institutions and to sell our debt securities in the
Brazilian securities markets, which is influenced by a number of factors discussed below;
the success of our program to monetize non-core assets;
our capital expenditure requirements, primarily relating to a variety of projects designed to expand and upgrade our data
transmission networks, our mobile services networks, our voice transmission networks, our information technology
equipment and our telecommunications services infrastructure; and
the requirement under the Brazilian Corporation Law and our by-laws that we pay dividends on an annual basis in an
amount equal to at least 25% of our adjusted net income, unless our board of directors deems it inconsistent with our
financial position.
Oi Capital Increase and Acquisition of PT Portugal
On May 5, 2014, we concluded a capital increase, which we refer to as the Oi capital increase, in which we issued
(1) 121,674,063 of our common shares and 280,483,641 of our preferred shares for an aggregate amount of R$8,250 million in cash,
and (2) 104,580,393 of our common shares and 172,025,273 of our preferred shares to Pharol in exchange for the contribution by
Pharol to our company of all of the shares of its subsidiary PT Portugal. PT Portugal provides a broad range of telecommunications
services in Portugal and owned significant interests in telecommunications companies in Angola, Cape Verde, Namibia, and São
Tomé and Principe in Africa and Timor-Leste in Asia.
Disposition of PT Portugal
On June 2, 2015, we sold all of the share capital of PT Portugal to Altice Portugal for a purchase price equal to the enterprise
value of PT Portugal of €6,900 million, subject to adjustments based on the financial debt, cash and working capital of PT Portugal
on the closing date, plus an additional earn-out amount of €500 million in the event
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that the consolidated revenues of PT Portugal and its subsidiaries (as of the closing date) for any single year between the year ending
December 31, 2015 and the year ending December 31, 2019 is equal to or exceeds €2,750 million.
In connection with the closing, Altice Portugal disbursed €5,789 million, of which €869 million was utilized by PT Portugal to
prepay outstanding indebtedness in that amount, and €4,920 million were paid to our company in cash. As of December 31, 2015, we
had used R$8,682 million of the net cash proceeds of the PT Portugal Disposition for the prepayment of indebtedness of our
company, and as of the date of this annual report have used an additional R$5,350 million of these net cash proceeds for the
prepayment and repayment of indebtedness of our company. We expect to use the remainder of these net cash proceeds for the
repayment of indebtedness of our company.
In anticipation of the PT Portugal Disposition, PT Portugal transferred PTIF, its wholly-owned finance subsidiary, to Oi. As a
result of the completion of the PT Portugal Disposition, the indebtedness of PTIF, which had previously been classified as liabilities
associated with assets held for sale in our consolidated financial statements, was reclassified as indebtedness of our company. In
addition, in connection with the PT Portugal Disposition, PTIF assumed all obligations under PT Portugal’s outstanding 6.25% Notes
due 2016.
In addition, PT Portugal transferred to Oi all of the outstanding share capital of PT Participações which holds:
•
•
our 75% interest in Africatel, which holds our interests in telecommunications companies in Africa, including
telecommunications companies in Angola, Cape Verde, Namibia, and São Tomé and Principe; and
our interests in TPT, which provides telecommunications, multimedia and IT services in Timor Leste.
Proposed Disposition of Africatel
On September 16, 2014, our board of directors authorized our management to take the necessary measures to market our shares
in Africatel. As a result, as of December 31, 2014 and 2015, we recorded the assets and liabilities of Africatel as held-for sale,
although we do not record Africatel as discontinued operations in our income statement due to the immateriality of the effects of
Africatel on our results of operations. Due to the many risks involved in the ownership of these interests, particularly our interest in
Unitel, we cannot predict when the sale of these assets may be completed.
Financial Presentation and Accounting Policies
Presentation of Financial Statements
We have prepared our consolidated financial statements as of December 31, 2015 and 2014 and for the years ended
December 31, 2015, 2014 and 2013 in accordance with U.S. GAAP. Based on our operating cash flows and the impact such operating
cash flows have had on our liquidity, in combination with the level of our indebtedness and the potential impact if we cannot satisfy
certain financial covenants under our current debt instruments in 2016, our independent registered public accounting firm has
included an emphasis paragraph related to the substantial doubt with respect to our ability to continue as a going concern in their
report on our consolidated financial statements for the year ended December 31, 2015. However, our financial statements have been
prepared assuming we will continue to operate as a going concern, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business.
Business Segments and Presentation of Segment Financial Data
As a result of our acquisition of PT Portugal, we consolidated the results of PT Portugal and its subsidiaries into our financial
statements as from May 5, 2014 until our disposition of PT Portugal on June 2, 2015. Following our acquisition of PT Portugal, we
implemented a new organizational structure that we believe reflects our business activities and corresponds to our principal services.
We have identified only one operating segment that corresponds to the telecommunications business in Brazil.
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The Telecommunications in Brazil segment includes our services in Brazil, Africa and Asia, including operations that were
reported as part of our Fixed-Line and Data Transmission Services, Mobile Services and Other Services segments in prior periods.
Prior to our acquisition of PT Portugal, we accounted for our operations under three segments: Fixed-Line and Data Transmission
Services, Mobile Services, and Other Services. As a result of our implementation of our new organizational structure, our three
previously existing segments have been combined into our Telecommunications in Brazil segment.
Within our Telecommunications in Brazil segment, our management assesses revenue generation based on customer
segmentation into the following categories:
•
•
•
Residential Services, focused on the sale of fixed telephony services, including voice services, broadband, and Pay-TV;
Personal Mobility, focused on the sale of mobile telephony services to post-paid and pre-paid customers that include voice
services and data communication services; and
SME and Corporate, which includes corporate solutions offered to our small, medium-sized, and large corporate
customers, including voice services and corporate data solutions.
In addition to the Telecommunications in Brazil segment, we conduct other businesses that individually or in aggregate do not
meet any of the quantitative indicators that would require their disclosure as reportable business segments. These businesses include
primarily the following companies: Mobile Telecommunications Limited in Namibia, Companhia Santomense de Telecomunicações,
Listas Telefónicas de Moçambique, ELTA – Empresa de Listas Telefónicas de Angola, and Timor Telecom, which provide fixed and
mobile telecommunications services and publish telephone directories, and which have been consolidated since May 2014.
We evaluate and manage business segment performance based on information prepared in accordance with Brazilian GAAP,
and, accordingly, the segment data included in this “Management’s Discussion and Analysis of Financial Condition and Results of
Operations of Oi” section is presented under Brazilian GAAP.
Critical Accounting Policies and Estimates
Our critical accounting policies and estimates described in note 2(c) to our consolidated financial statements. In preparing our
consolidated financial statements in conformity with U.S. GAAP, we relied on estimates and assumptions derived from historical
experience and various other factors, including expected future events, that we deemed reasonable and relevant. Critical accounting
policies are those that are important to the portrayal of our consolidated financial position and results of operations and require
management’s subjective and complex judgments, estimates and assumptions. The application of these critical accounting policies
often requires judgments made by management regarding the effects of matters that are inherently uncertain with respect to our
results of operations and the carrying value of our assets and liabilities. Our results of operations and financial position may differ
from those set forth in our consolidated financial statements, if our actual experience differs from management’s assumptions and
estimates. In order to provide an understanding of our critical accounting policies, including some of the variables and assumptions
underlying the estimates, and the sensitivity of those assumptions and estimates to different parameters and conditions, we set forth
below a discussion of our critical accounting policies relating to:
•
•
•
•
•
revenue recognition and trade receivables;
provision for doubtful accounts;
depreciation of property, plant and equipment;
impairment of long-lived assets;
provisions;
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•
•
•
fair value of derivative financial instruments and other financial instruments;
deferred income taxes and social contribution; and
employee benefits.
Revenue Recognition and Trade Receivables
Our revenues correspond primarily to the amount of the payments received or receivable from sales of services in the regular
course of our activities and our subsidiaries’ activities.
Service revenue is recognized when services are provided. Local and long distance calls are charged based on time measurement
according to the legislation in effect. The services charged based on monthly fixed amounts are calculated and recorded on a straight-
line basis. Prepaid services are recognized as unearned revenues and recognized in revenue as these services are used by customers.
Revenue from sales of handsets and accessories is recognized when these items are delivered and accepted by the customers.
Discounts on services provided and sales of cell phones and accessories are taken into consideration in the recognition of the related
revenue. Revenues involving transactions with multiple elements are identified in relation to each one of their components, and the
recognition criteria are applied on an individual basis. Revenue is not recognized when there is significant uncertainty as to its
realization.
Our revenue is a material component of our results of operations. Management’s determination of price, collectability and the
rights to receive certain revenues for the use of our network are based on judgments regarding the nature of the fee charged for
services rendered, the price for certain services delivered and the collectability of those revenues. Should changes in conditions cause
management to conclude that these criteria are not met for certain transactions, the amount of accounts receivable could be adversely
affected. In addition, for certain categories of revenue we rely upon revenue recognition measurement guidelines set by ANATEL.
We consider revenue recognition to be a critical accounting policy, because of the uncertainties caused by different factors such
as the complex information technology required, high volume of transactions, fraud and piracy, accounting regulations,
management’s determination of collectability and uncertainties regarding our right to receive certain revenues (mainly revenues for
use of our network). Significant changes in these factors could cause us to fail to recognize revenues or to recognize revenues that we
may not be able to realize in the future, despite our internal controls and procedures. We have not identified any significant need to
change our revenue recognition policy.
Provision for Doubtful Accounts
Our provision for doubtful accounts is established in order to recognize probable losses on accounts receivable and takes into
account limitations we impose to restrict the provision of services to customers with past-due accounts and actions we take to collect
delinquent accounts. For additional information regarding our provision for doubtful accounts, see note 8 to our consolidated
financial statements.
We have entered into agreements with certain customers to collect past-due accounts receivable, including agreements allowing
customers to settle their delinquent accounts in installments. The amounts that we actually fail to collect in respect of these accounts
may differ from the amount of the allowance established, and additional allowances may be required.
Depreciation of Property, Plant and Equipment
We depreciate property, plant and equipment using the straight-line method at rates we judge compatible with the useful lives of
the underlying assets. The depreciation rates of our most significant assets are presented in note 14 to our consolidated financial
statements. The useful lives of assets in certain categories may vary based on
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whether they are used primarily to provide fixed-line or mobile services. We review the estimated useful lives of the assets taking into
consideration technical obsolescence and a valuation by outside experts.
Given the complex nature of our property, plant and equipment, the estimates of useful lives require considerable judgment and
are inherently uncertain, due to rapidly changing technology and industry practices, which could cause early obsolescence of our
property, plant and equipment. If we materially change our assumptions of useful lives and if external market conditions require us to
determine the possible obsolescence of our property, plant and equipment, our depreciation expense, obsolescence write-off and
consequently net book value of our property, plant and equipment could be materially different.
Impairment of Long-Lived Assets
Long-lived assets, such as property, plant, and equipment, and purchased intangible assets subject to amortization, are reviewed
for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If
circumstances require a long-lived asset or asset group be tested for possible impairment, we first compare the undiscounted cash
flows expected to be generated by that asset or asset group to its carrying amount. If the carrying amount of the long-lived asset or
asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying amount
exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted
market values and third-party independent appraisals, as deemed necessary.
We have not recorded any impairment of our long-lived assets during the three years ended December 31, 2015.
Provisions
Liabilities for loss contingencies arising from claims, assessment, litigation, fines and penalties are recorded when it is probable
that the liability has been incurred and the amount can be reasonably estimated, based on the opinion of management and its in-house
and outside legal counsel. The amounts are recognized based on the cost of the expected outcome of ongoing lawsuits.
We classify our risk of loss in legal proceedings as remote, possible or probable. Provisions recorded in our consolidated
financial statements in connection with these proceedings reflect reasonably estimated losses at the relevant date as determined by our
management after consultation with our general counsel and the outside legal counsel. As discussed in note 20 to our consolidated
financial statements, we record as a liability our estimate of the costs of resolution of such claims, when we consider our losses
probable. We continually evaluate the provisions based on changes in relevant facts, circumstances and events, such as judicial
decisions, that may impact the estimates, which could have a material impact on our results of operations and shareholders’ equity.
While management believes that the current provision is adequate, it is possible that our assumptions used to estimate the provision
and, therefore, our estimates of loss in respect of any given contingency will change in the future based on changes in the relevant
situation. This may therefore result in changes in future provisioning for legal claims. For more information regarding material
pending claims against our company, see “Item 8. Financial Information—Legal Proceedings” and note 20 to our consolidated
financial statements.
Fair Value of Derivative Financial Instruments and Other Financial Instruments
We recognize derivative financial instruments at fair value based on future cash flow estimates associated with each instrument
contracted. The financial assets available for sale related to our investment in Unitel have been valued at fair value according to the
operating assets used as basis in the valuation related to the Oi capital increase. Our estimates of future cash flows may not
necessarily be indicative of the amounts that could be obtained in the current market. The use of different assumptions to measure the
fair value could have a material effect on the amounts obtained and not necessarily be indicative of the cash amounts that we would
receive or pay to settle such transactions.
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Income taxes in Brazil are calculated and paid on a legal entity basis, and there are no consolidated tax returns. Accordingly, we
only recognize deferred tax assets, related to tax loss carryforwards and temporary differences, if it is likely that they will be realized
on a legal entity basis.
We recognize and settle taxes on income based on the results of operations determined in accordance with the Brazilian
Corporation Law, taking into consideration the provisions of Brazilian tax law, which are materially different from the amounts
calculated for U.S. GAAP purposes. Under U.S. GAAP, we recognize deferred tax assets and liabilities based on the differences
between the carrying amounts and the taxable bases of the assets and liabilities.
We regularly test deferred tax assets for impairment and recognize a provision for impairment losses when it is probable that
these assets may not be realized, based on the history of taxable income, the projection of future taxable income, and the time
estimated for the reversal of existing temporary differences. These projections require the use of estimates and assumptions. In order
to project future taxable income, we need to estimate future taxable revenues and deductible expenses, which are subject to a variety
of external and internal factors, such as economic trends, industry trends and interest rates, changes in business strategies, and
changes in the type of services and products sold by our company. The use of different estimates and assumptions could result in the
recognition of a provision for impairment losses for the entire or a significant portion of the deferred tax assets.
Employee Benefits
We record liabilities for employee benefits based on actuarial valuations which are calculated based on assumptions and
estimates regarding discount rates, investment returns, inflation rates for future periods, mortality indices and projected employment
levels relating to pension fund benefit liabilities. The accuracy of these assumptions and estimates will determine whether we have
created sufficient reserves for the costs of accumulated pensions and healthcare plans, and the amount we are required to disburse
each year to fund pension benefits. These assumptions and estimates are subject to significant fluctuations due to different external
and internal factors, such as economic trends, social indicators, our capacity to create new jobs and our ability to retain our
employees. All of these assumptions are reviewed at the end of each reporting period. If these assumptions and estimates are not
accurate, we may be required to revise our reserves for pension benefits, which could materially impact our results of operations.
Principal Factors Affecting Our Financial Condition and Results of Operations
Effects of Our Declining Liquidity
As of December 31, 2015, our consolidated cash and cash equivalents and short-term cash investments amounted to R$16,700
million. We expect to use our cash and cash equivalents and short-term cash investments, and financing for which we have
commitments under facilities from CDB and BNB, to fund our operations, investments, debt service obligations and working capital
requirements during the period in which our operating cash flows are insufficient to fund these cash requirements.
On March 9, 2016, we announced that we had retained PJT Partners as our financial advisor to assist us in evaluating financial
and strategic alternatives to optimize our liquidity and debt profile. On April 25, 2016, we entered into a customary non-disclosure
agreement with Moelis & Company, who acts as advisor for a diverse ad hoc group of holders of the bonds issued by Oi and its
subsidiaries, as an initial step towards discussions of a potential restructuring of its indebtedness.
Our financial statements for the year ended December 31, 2015 have been prepared assuming that we will continue as a going
concern, based on our cash flow projections. Our projections depend on factors such as attainment of traffic volume targets, customer
base, launching of bundled products attractive to customers, service sales prices, foreign exchange fluctuation and the success of the
efforts to identify and implement financial and strategic alternatives to optimize the liquidity and debt profile.
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Should one or more of the assumptions underlying our cash flow projections and other forecasts or the outcome of the efforts to
identify and implement financial and strategic alternatives to optimize our liquidity and debt profile not be met, our cash and cash
equivalents and short-term cash investments, together with our committed financing, may not be sufficient to meet our contractual
obligations and commitments during 2016. If we are unable to successfully restructure our debt on terms satisfactory to our company,
we may not be able to execute our business plan or meet our obligations. If we become unable to meet our obligations, we may seek
the protection of the courts through a judicially supervised reorganization (recuperação judicial) proceeding in Brazil.
Effects of Investment in and Disposal of Portuguese Business of PT Portugal
On May 5, 2014, we concluded the Oi capital increase in which we issued (1) 121,674,063 of our common shares and
280,483,641 of our preferred shares for an aggregate amount of R$8,250 million in cash, and (2) 104,580,393 of our common shares
and 172,025,273 of our preferred shares to Pharol in exchange for the contribution by Pharol to our company of all of the shares of its
subsidiary PT Portugal. PT Portugal provides a broad range of telecommunications services in Portugal and owned significant
interests in telecommunications companies in Angola, Cape Verde, Namibia, and São Tomé and Principe in Africa and Timor-Leste
in Asia.
On June 2, 2015, we sold all of the share capital of PT Portugal to Altice Portugal for a purchase price equal to the enterprise
value of PT Portugal of €6,900 million, subject to adjustments based on the financial debt, cash and working capital of PT Portugal
on the closing date, plus an additional earn-out amount of €500 million in the event that the consolidated revenues of PT Portugal and
its subsidiaries (as of the closing date) for any single year between the year ending December 31, 2015 and the year ending
December 31, 2019 is equal to or exceeds €2,750 million.
In connection with the closing, Altice Portugal disbursed €5,789 million, of which €869 million was utilized by PT Portugal to
prepay outstanding indebtedness in that amount, and €4,920 million were paid to our company in cash. As of December 31, 2015, we
had used R$8,682 million of the net cash proceeds of the PT Portugal Disposition for the prepayment of indebtedness of our
company, and as of the date of this annual report have used an additional R$5,350 million of these net cash proceeds for the
prepayment and repayment of indebtedness of our company. We expect to use the remainder of these net cash proceeds for the
repayment of indebtedness of our company.
In anticipation of the PT Portugal Disposition, PT Portugal transferred Portugal Telecom International Finance B.V., or PTIF, its
wholly-owned finance subsidiary, to Oi. As a result of the completion of the PT Portugal Disposition, the indebtedness of PTIF,
which had previously been classified as liabilities associated with assets held for sale in our consolidated financial statements, was
reclassified as indebtedness of our company. In addition, in connection with the PT Portugal Disposition, PTIF assumed all
obligations under PT Portugal’s outstanding 6.25% Notes due 2016.
In addition, PT Portugal transferred to Oi all of the outstanding share capital of PT Participações, SGPS, S.A., or PT
Participações, which holds:
•
•
our 75% interest in Africatel Holding B.V., or Africatel, which holds our interests in telecommunications companies in
Africa, including telecommunications companies in Angola, Cape Verde, Namibia, and São Tomé and Principe; and
our interests in TPT, which provides telecommunications, multimedia and IT services in Timor Leste.
We have accounted for the acquisition of all of the shares of PT Portugal by our company in exchange for our common shares
and preferred shares in the Oi capital increase under the purchase method of accounting as a result of which we have recorded the
assets and liabilities of PT Portugal on our balance sheet based on the fair value of the identifiable assets acquired and liabilities
assumed. We have prepared a purchase price allocation under which we adjusted the carrying values of certain of the assets and
liabilities of PT Portugal.
The following table sets forth the adjustments to market value made in the context of the allocation of the fair values of
identifiable assets and liabilities of PT Portugal.
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List of residential segment customers
List of personal mobile segment customers
List of corporate segment customers
Mobile licenses of the operations in Portugal
Adjustments of intangible assets to market value
Property, plant and equipment of operations in Portugal
Adjustments to market value before taxes
Effects of taxation
Total adjustments to market value net of taxes
Carrying
Value
R$
40
94
37
1,037
R$1,208
Adjustments
to market
value
(in millions of reais)
R$
738
1,642
665
103
3,147
608
3,755
(1,012)
R$ 2,743
Fair Value
R$ 778
1,736
701
1,140
R$ 4,355
The following table shows the total acquisition price for, and the goodwill arising on, the acquisition of PT Portugal.
Equity instruments issued
Fair value of the stake previously held by our company in Portugal
Telecom
Non-controlling interests
Less: fair value of assets acquired and liabilities assumed
Goodwill determined on May 5, 2014
(in millions of
reais)
R$
5,710
571
1,478
(2,816)
R$ 10,575
As a result of our decision to sell PT Portugal, the revenue and expenses of PT Portugal are presented in our income statement
as discontinued operations. In addition, as a result of our decision to sell PT Portugal and its subsidiary Africatel, the assets and
liabilities related to PT Portugal and Africatel were classified in our balance sheet as assets held for sale and liabilities of assets held
for sale, respectively.
We recorded a loss from discontinued operations for 2014 of R$4,415 million, consisting of a loss from discontinued operations
of R$250 million and an allowance for impairment loss at fair value of the PT Portugal investment and divesture-related expenses of
R$4,164 million.
We recorded net operating revenue of discontinued operations of R$5,082 million for the period from our acquisition of PT
Portugal on May 5, 2014 through December 31, 2014. Our profit on discontinued operations before financial expenses and taxes was
R$390 million, or 7.7% of net operating revenue of discontinued operations. Financial expenses of our discontinued operations were
R$694 million and we recorded an income tax and social contribution benefit on our discontinued operations was R$54 million. As a
result, the loss for our discontinued operations for the year ended December 31, 2014 was R$250 million, or 4.9% of net operating
revenue of discontinued operations.
In connection with the reclassification of the assets and liabilities related to PT Portugal and Africatel, we recorded an
impairment loss as part of our loss from discontinued operations for 2014 on the investment in PT Portugal, in the amount of R$4,164
million resulting from the recognition of this asset at its fair value less expenses to sell. The sale price used to determine the
impairment loss allowance corresponds to the unadjusted purchase price of R$22,267 million (€6,900 million) and liabilities on
retirement and other benefits assumed by PT Portugal, amounting to R$3,872 million (€1,200 million).
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We recorded loss from discontinued operations for 2015 of R$867 million, consisting of comprehensive income transferred to
our income statement of R$226 million, principally consisting of the cumulative foreign exchange differences related to PT Portugal,
and a loss on the sale of PT Portugal and divestiture related expenses of R$625 million.
Our R$625 million loss in connection with the sale of PT Portugal consisted of (1) the derecognized investment cost that
includes goodwill arising on the business combination between our company and PT Portugal and selling expenses totaling R$1,308
million, and (2) the R$683 million revenue related to cash proceeds received directly by our company.
Effects of Investment in Rio Forte Commercial Paper and PT Exchange
In preparing the purchase price allocation with respect to our acquisition of PT Portugal, we recognized the write-off of all
commercial paper of Rio Forte owned by PT Portugal and PTIF on the date of acquisition and recorded as other assets a right to
compensation receivable of R$2,763 million from Pharol, reflecting the face value of this commercial paper.
On July 15 and 17, 2014, Rio Forte defaulted on the commercial paper held by PTIF and PT Portugal. On September 8, 2014,
we, TmarPart, Pharol and our subsidiaries PT Portugal and PTIF, entered into the PT Exchange Agreement and the PT Option
Agreement. On March 24, 2015, PT Portugal assigned its rights under the PT Exchange Agreement and the PT Option Agreement to
PTIF. On March 27, 2015, PT Portugal assigned all of its rights and obligations under the Rio Forte commercial paper that it owned
to PTIF. On March 30, 2015, the transactions contemplated by the PT Exchange Agreement were completed through the transfer of
Rio Forte commercial paper in the aggregate amount of €897 million to Pharol in exchange for 47,434,872 of our common shares and
94,869,744 of our preferred shares.
As of December 31, 2014, we had the right to compensation from Pharol related to its subscription in the Oi capital increase in
the amount of R$2,895 million (equivalent to €897 million) and had an obligation to acquire 47,434,872 of our common shares and
94,869,744 of our preferred shares from Pharol in exchange for this amount under the PT Exchange Agreement, subject to approval
by our shareholders at a meeting scheduled for March 26, 2015. Considering that this asset and liability were for the same amount and
could be settled with the same entity and at the same time, we stated them on our balance sheet as of December 31, 2014 on a net
basis.
Under the PT Exchange Agreement, on March 30, 2015 we complete the share exchange under which Pharol delivered
47,434,872 of our common shares and 94,869,744 of our preferred shares to PTIF and we delivered Rio Forte securities to Pharol in
the total principal amount of R$3,163 million (€897 million).
Rate of Growth of Brazil’s Gross Domestic Product and Demand for Telecommunications Services
As a Brazilian company with a substantial portion of our operations in Brazil, we are affected by economic conditions in Brazil.
Brazilian GDP declined by an estimated 3.8% in 2015, grew by 0.1% in 2014, and grew by 2.3% in 2013. While we believe that
growth in Brazil’s GDP stimulates demand for telecommunications services, we believe that demand for telecommunications services
is relatively inelastic in periods of economic stagnation and that the effect on our revenues of low growth or a recession in Brazil
would not be material under foreseeable scenarios. However, a substantial and prolonged deterioration of economic conditions in
Brazil could have a material adverse effect on the number of subscribers to our services and the volume of usage of our services by
our subscribers and, as a result, our net operating revenue.
Based on information available from ANATEL, the number of fixed lines in service in Brazil increased from 39.8 million as of
December 31, 2005 to 43.6 million as of December 31, 2015, the latest date for which such information has been made available by
ANATEL, and the number of mobile subscribers in Brazil increased from 86.2 million as of December 31, 2005 to 257.8 million as
of December 31, 2015. Although the demand for
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telecommunications services has increased substantially during the past ten years, the tastes and preferences of Brazilian consumers
of these services have shifted.
During the three-year period ended December 31, 2015, the number of mobile subscribers in Brazil has declined at an average
rate of 4.3% per year, while the number of fixed lines in service in Brazil during the three-year period ended December 31, 2015 has
declined at an average rate of 6.3% per year. As the incumbent provider of fixed-line services and a provider of mobile services in our
service areas, we are both a principal target and a beneficiary of this trend. During the three-year period ended December 31, 2015,
the number of our mobile subscribers has decreased at an average rate of 1% per year from 49.2 million at December 31, 2012 to
48 million at December 31, 2015, while the number of our fixed lines in service has declined by an average rate of 6% per year from
18.5 million at December 31, 2012 to 14.9 million at December 31, 2015.
Demand for Our Telecommunications Services
Demand for Our Residential Services
Because the number of our customers terminating their residential services has exceeded new activations between December 31,
2012 and December 31, 2015, the number of our fixed lines in service declined by 19.1%, or 3.5 million, during this period,
according to ANATEL. As part of the Transformation Plan, we are focusing on offering more and higher-value added services to new
and existing customers by combining upselling and cross selling initiatives, thereby increasing the ARPU of our Residential Services
business. We believe that through our sales of bundles consisting of more than one service, we improve customer profitability and
enhance loyalty, while also increasing ARPU and minimizing churn rates. Primarily as a result of these initiatives, the ARPU of our
residential services grew by 5.8% to R$79.6 during 2015 from R$75.2 during 2014. We believe that our renewed focus on the sale of
bundled services is the principal reason for the increase in the percentage of our customers that subscribe to more than one of our
residential services from 61.6% as of December 31, 2014 to 63.3% as of December 31, 2015.
We are required under ANATEL regulations and our concession contracts to offer a basic service plan to our residential
customers that permits 200 minutes of usage of our fixed-line network to make local calls. We also offer alternative residential plans
that include significantly larger numbers of minutes and charge higher monthly fees for these plans. Over the past three years, the
percentage of our customers selecting these alternative plans has grown significantly. Subscribers to our alternative residential plans,
including our bundled service plans, represented 86.4% of our residential customers as of December 31, 2015 as compared to 82% of
our residential customers as of December 31, 2012. We believe that our alternative residential plans contribute to a net increase in our
residential services revenue as many subscribers of our alternative residential plans do not use their full monthly allocations of local
minutes.
We have sought to combat the general trend in the Brazilian telecommunications industry of substitution of mobile services in
place of local fixed-line services by offering a variety of bundled plans that include mobile services, broadband services and Oi TV
subscriptions to our fixed-line customers. As a result of these service offerings, the monthly disconnections of our fixed lines in
service have declined. As of December 31, 2015:
•
•
•
11.7% of our residential customers subscribed for bundled service packages, which accounted for 28.6% of our post-paid
mobile subscribers as each fixed-line subscriber may include multiple mobile devices in a bundled plan, a decrease of
0.6% from the 29.2% of subscribers as of December 31, 2014;
51.0% of our residential customers subscribed for broadband services (whether separately or as part of a bundled service
plan), an improvement of 3.0% from the 48.0% of subscribers as of December 31, 2014; and
11.7% of our residential customers subscribed for Pay TV services (whether separately or as part of a bundled service
plan), an improvement of 0.3% from the 11.4% of subscribers as of December 31, 2014.
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The substantial increase in the number of mobile service users in Brazil has also negatively impacted the use of our public
telephones. As the incumbent local fixed-line service provider in Region I and Region II, we are required under ANATEL regulations
and our concession contracts to meet specified targets with respect to the availability of public telephones throughout our concession
area. However, as a larger portion of the population of Region I and Region II uses mobile handsets to make calls when not in
proximity to a fixed-line telephone, revenue from the use of our public telephones declined by 85.7% from 2012 to 2015.
Demand for Our Personal Mobility Services
Our customer base for mobility services (including customers in our Personal Mobility Services and SME and Corporate
Services) has declined from 49.2 million at December 31, 2012 to 48.1 million at December 31, 2015, according to ANATEL. We
believe that the primary reason for the decline in our Personal Mobility customer base is the reduction in the total number of mobile
accesses in Brazil, especially in the second half of 2015. We believe this market shift reflects the trend to consolidate mobile use into
a single SIM card, following the launch of new all-net plans and the structural market migration from voice to data in response to the
offering of more robust data packages. Additionally, in the second half of 2015, operators in the Brazilian telecommunication sector
(including our company) implemented a more intensive policy of disconnecting inactive users (access clean up). As a result, operators
reduced regulated costs associated with the maintenance of active accesses for devices that do not generate revenue.
The market for mobile services is extremely competitive in each of the regions that we serve. As a result, (1) we incur selling
expenses in connection with marketing and sales efforts designed to retain existing mobile customers and attract new mobile
customers, and (2) from time to time the discounts that we offer in connection with our promotional activities lead to charges against
our gross operating revenue from mobile services. In addition, competitive pressures have in the past required us to introduce service
plans under which the monthly and per-minute rates that we charge our mobile customers are lowered, reducing our personal mobility
ARPU. During 2015, the average monthly churn rate of our Personal Mobility Services business was 12.4% per month.
Our new service offerings have had strong performances in the first months following their releases in late 2015. As of
December 31, 2015, Oi Livre has acquired 6.2 million customers, corresponding to 15.9% of our total pre-paid base. We have also
been increasing our market share in the pre-paid segment, with a market share of 21.3% as of December 31, 2015, a 1.7% increase
compared to December 31, 2014.
We expect our overall mobile services business to continue to grow in terms of its market share, traffic volumes and revenues
from value-added services. However, due to market saturation, the current macroeconomic situation and the trend in SIM card
consolidation, we expect future growth in our mobile services business to occur at lower rates than we have historically achieved.
Demand for Our SME and Corporate Services
The number of our customers for SME and Corporate Services has declined from 8.9 million as of December 31, 2012 to
7.2 million as of December 31, 2015. We believe that the primary reason for the decline in our SME and Corporate Services customer
base is the declining macroeconomic conditions in Brazil, which has caused many of our SME customers to cease operations. Our
corporate customers, while better able to survive the current economic instability, often respond by reducing their economic activity
and their spending for telecommunications products and services. In addition, provided that our SME and corporate customers also
purchase the core fixed-line and mobile services offered to our Residential and Personal Mobility Services customers, demand for our
SME and Corporate Services is subject to some of the same conditions that affect our Residential and Personal Mobility Services,
including reductions in interconnection tariffs, which have led to more robust mobile package offerings and driven the traffic
migration trend of fixed-to-mobile substitution.
Effects of Expansion of Mobile Data Transmission Services
We have authorizations and radio frequency licenses necessary for us to provide 2G, 3G and 4G services throughout Brazil.
During 2015, 2014 and 2013, Oi Mobile undertook extensive capital expenditure projects to
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install the network equipment necessary to expand our offerings of these services, investing R$1,151 million, R$1,923 million and
R$2,241 million, respectively, which has increased in our depreciation expenses. We financed the purchase and installation of our
network equipment through loans and vendor financing.
In 2015, our mobile data transmission services, consisting of 2G, 3G and 4G services to mobile handsets and mini-modems,
captured approximately 2,857 net disconnections (calculated based on the number of subscribers at the end of a period less the
number of subscribers at the beginning of that period). We increased the number of municipalities in which we offered 4G services to
133, covering 51.4% of the urban population of Brazil, as of December 31, 2015 from 45 municipalities, covering 30.6% of the
population of Brazil, as of December 31, 2014, and we increased the number of municipalities in which we offered 3G services to
1,288, covering 78.8% of the urban population of Brazil, as of December 31, 2015 from 1,011 as of December 31, 2014. We expect
that these services will generate significant additions to our mobile customer base and lead to long-term increases in our revenues and
operating income before financial income (expenses) and taxes.
The aggregate cost of our 3G authorizations and radio frequency licenses and our 2G authorizations and radio frequency
licenses in Region III was R$3,129 million; we are obligated to pay the remaining balance of R$919 million to ANATEL in
installments through 2019. The cost of our 4G authorizations and radio frequency licenses was R$368 million, which has been paid in
full.
Under our 3G radio frequency licenses, we are required to meet certain service expansion obligations that will require capital
expenditures through 2016. Under our 4G radio frequency licenses, we are required to meet certain service expansion obligations that
will require capital expenditures through 2019. If we are unable to fund these capital expenditures through our operating cash flows,
or incur additional indebtedness or vendor financing obligations to make these capital expenditures, we may be required to default on
our obligations under these licenses, which could result in requirements to provide completion guarantees and administrative
proceedings by the respective regulatory bodies, which could result in fines.
Effects of Divestment of Non-Core Assets
Beginning in 2012, we entered into various transactions to monetize non-essential assets and acquire the services related to these
assets at more favorable financial terms, with an aim to reduce future capital expenditures and maintenance expenses.
In August 2013, we completed the assignment of the right to use 4,226 fixed-line communications towers that formed part of
our infrastructure for commercial operations by companies whose core operations consist of providing transmission tower and
radiofrequency management and maintenance services. Upon the completion of these assignments, we received proceeds of
approximately R$1,087 million. We have entered into agreements to lease the communications towers from the assignees for 20-year
terms (renewable for another 20 years), effective upon completion of the assignments.
In November 2013, we completed the assignment of the right to use 2,113 fixed-line communications towers that formed part of
our infrastructure for commercial operations by companies whose core operations consist of providing transmission tower and
radiofrequency management and maintenance services. Upon the completion of these assignments, we received proceeds of
approximately R$687 million. We have entered into agreements to lease the communications towers from the assignees for 20-year
terms (renewable for another 20 years), effective upon completion of the assignments.
In December 2013, we and our subsidiary BrTI sold all of our equity interests in GlobeNet (other than Brasil Telecom de
Venezuela S.A.) to BTG Pactual YS Empreendimentos e Participações. On January 17, 2014, the sale was concluded for an aggregate
amount of R$1,779 million (based on the U.S. dollar-real exchange rate on January 15, 2014), resulting in a gain of approximately
R$1,497 million after deducting the book value of the assets and related costs of approximately R$1,497 million. GlobeNet’s
principal assets consist of 22,500 kilometers of fiber optic submarine cables, composed of two rings of protected submarine cables,
linking connection points between the United States, Bermuda, Colombia and Brazil. As part of this transaction, GlobeNet will
supply guaranteed submarine cable capacity to us and our subsidiaries at a fixed price for a term of 13 years.
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In March 2014, we sold all of our equity interests in Caryopoceae, our wholly-owned subsidiary, to SBA Torres Brasil, Ltda. for
R$1,525 million. Caryopoceae owned 2,007 mobile telecommunications towers and rooftop antennae used in our mobile services
business. Contemporaneously with the sale of this subsidiary, we entered into an operating lease with a 15-year term (renewable for
another five years) with Caryopoceae permitting us to continue to use space on these communications towers for our mobile services
business.
In December 2014, we sold all of our equity interests in Tupã Torres, our wholly-owned subsidiary, to SBA Torres Brasil, Ltda.
for R$1,172 million. Tupã Torres owned 1,641 mobile telecommunications towers and rooftop antennae used in our mobile services
business. Contemporaneously with the sale of Tupã Torres, we entered into an operating lease with a 15-year term (renewable for
another five years) with Tupã Torres permitting us to continue to use space on these communications towers for our mobile services
business.
As a result of these transactions, we have received cash related to these transactions and recorded gains on disposals of these
assets of R$2,399 million during 2014 and R$1,497 million during 2013. As a result of these transactions, the amount of property and
equipment that we record has been reduced, and consequently we will no longer record depreciation and amortization expenses
relating to these assets, nor will we be required to maintain these assets. As a result of our entering lease and other agreements to
continue to use these assets in the provision of our services, our expenses and commitments relating to operating leases have
increased.
Effects of Investments in Africatel
At the time of our acquisition of PT Portugal, PT Portugal held indirectly 75% of the outstanding share capital of Africatel
which held 25% of the outstanding share capital of Unitel. Our management considers this a non-controlling stake in Unitel which
does not grant our company significant influence over the financial, operating and strategic policies of Unitel since we do not elect
enough members of the board of directors of Unitel to allow us to be involved in the decision-making process of these policies,
including decisions on dividend and other distributions, material business relations, appointment of officers or managers, or the
provision of key technical information. Accordingly, upon the acquisition of PT Portugal, we recognized this investment as an
available-for-sale financial asset recognized at fair value. The fair value of the investment in Unitel of R$4,089 million was
determined based on the valuation report prepared by Banco Santander on the valuation of Pharol’s operating assets that was used as
the basis for the valuation of PT Portugal as part of the Oi capital increase using a series of estimates and assumptions, including the
cash flows projections for a four-year period, the choice of a growth rate to extrapolate the cash flows projections, and definition of
appropriate discount rates.
As a result of our decision to sell Africatel, the assets and liabilities related to Africatel, including its investment in Unitel and
the accounts receivable relating to declared and unpaid dividends of Unitel, were classified in our balance sheet as assets held for sale
and liabilities of assets held for sale, respectively.
As of December 31, 2015, as a result of our updating the main assumptions and material estimates used in the fair value
measurement of our investment in Unitel, taking into consideration in this assessment possible impacts of actual events related to the
investment, notably the lawsuits filed against Unitel and its shareholders in 2015, we determined a fair value of the investment in
Unitel of R$3,436 million and recognized a loss of R$408 million.
Effects of Adjustments to Our Regulated Rates
Telecommunications services rates are subject to comprehensive regulation by ANATEL. Our rates for local fixed-line services,
domestic long-distance services, mobile services, interconnection to our fixed-line network, and EILD and SLD services are subject
to regulation by ANATEL.
In July 2014, ANATEL approved rules under which interconnection rates charged by our company for the use of our fixed-line
and mobile networks would be reduced over a period of years until they were set at rates based on a long-run incremental cost
methodology. As a result, the mobile interconnection rates for Regions I, II and III declined by 25% each in February 2014, 33.3%
each in February 2015 and 40.0%, 35.2% and 27.6%, respectively, in February 2016, with additional cuts approved through 2019. In
addition, ANATEL approved cuts for most of our fixed interconnection rates ranging from 9.1% and 20.0 in February 2016, with
additional cuts approved through 2019. In addition, ANATEL has reduced the substantially reduced our VC Rates during 2013 and
2015, as described
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under the caption “Item 4. Information on the Company—Operations in Brazil—Rates.” These rate reductions have been a primary
reason for the decline in our mobile interconnection revenue to R$889 million during 2015 from R$1,399 million during 2014 and
R$2,147 million during 2013, and the decline in our fixed-line interconnection revenue to R$316 million during 2015 from R$354
million during 2014 and R$388 million during 2013. However, these rate reductions have also led to a substantial reduction of our
interconnection costs, which have declined to R$1,809 million during 2015 from R$2,690 million during 2014 and R$3,966 million
during 2013. As a result of the substantial reductions in our interconnection costs, and in keeping with our strategy of simplifying our
portfolios to enhance the customer experience, in 2015 we launched several fixed-line and mobile plans that allow all-net calls for a
flat fee.
We are required to obtain ANATEL approval prior to offering new alternative fixed-line or mobile plans. The rates established
or approved by ANATEL for our services act as caps on the prices that we charge for these services, and we are permitted to offer
these services at a discount from the rates approved by ANATEL. After ANATEL establishes or approves rate caps for these services,
these rate caps are subject to annual adjustment based on the rate of inflation, as measured by the IST. Rate caps for local fixed-line
plans are adjusted by inflation, as measured by the IST, less an amount that serves as a proxy for productivity gains achieved by our
company and the local fixed-line services industry as a whole.
Effects of Claims by ANATEL that Our Company Has Not Fully Complied with Our Quality of Service and Other Obligations
As a fixed-line service provider, we must comply with the provisions of the General Plan on Quality Goals. As a public regime
service provider, we must comply with the network expansion and modernization obligations under the General Plan on Universal
Service Goals and our concession agreements. Our personal mobile services authorizations set forth certain network expansion
obligations and targets and impose obligations on us to meet quality of service standards. In addition, we must comply with
regulations of general applicability promulgated by ANATEL, which generally relate to quality of service measures.
If we fail to meet quality goals established by ANATEL under the General Plan on Quality Goals, fail to meet the network
expansion and modernization targets established by ANATEL under the General Plan on Universal Service Goals and our concession
agreements, fail to comply with our obligations under our personal mobile services authorizations or fail to comply with our
obligations under other ANATEL regulations, we may be subject to warnings, fines, intervention by ANATEL, temporary
suspensions of service or cancellation of our concessions and authorizations.
On an almost weekly basis, we receive inquiries from ANATEL requiring information from us on our compliance with the
various service obligations imposed on us by our concession agreements. If we are unable to respond satisfactorily to those inquiries
or comply with our service obligations under our concession agreements, ANATEL may commence administrative proceedings in
connection with such noncompliance. We have received numerous notices of commencement of administrative proceedings from
ANATEL, mostly due to our inability to achieve certain targets established in the General Plan on Quality Goals and the General Plan
on Universal Service Goals.
At the time that ANATEL notifies us it believes that we have failed to comply with our obligations, we evaluate the claim and,
based on our assessment of the probability of loss relating to that claim, may establish a provision. We vigorously contest a
substantial number of the assessments made against us. As of December 31, 2015, the total estimated contingency in connection with
all pending administrative proceedings brought by ANATEL against us in which we deemed the risk of loss as probable totaled
R$1,149 million, including fines which we are contesting through judicial proceedings, and we had recorded an aggregate provision
related to these proceedings in the same amount. In the event that we are unsuccessful in obtaining final approval of the inclusion of
the R$5 billion of fines and claims we have proposed to be included in the TAC program, we could be required to constitute an
additional provision of the portion of these fines and claims for which we have not previously established a provision.
In December 2013, ANATEL approved Resolution No. 629/2013 under which a TAC was adopted permitting
telecommunications concessionaires to request that their obligations to pay fines to ANATEL for non-compliance with certain service
requirements be satisfied through capital expenditure investments in their networks. Under this
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regulation, Oi is currently negotiating several TACs with ANATEL related to fines in an aggregate amount of approximately R$5
billion, which can be classified into four categories of non-compliance: (1) universalization and quality, (2) systemic interruptions
and external network, (3) consumer rights and general obligations, and (4) fiscalization.
On January 5, 2016, ANATEL published a decision defining the priority projects in case of TACs executed by any operator and
ANATEL. ANATEL will accept projects related to: (1) transport infrastructure based on fiber to the municipal capital; (2) transport
infrastructure through high capacity digital radio to the municipal capital; (3) deployment of mobile personal service to provide 3G
technology in cities that currently do not have such service; (4) deployment of mobile personal service to provide 4G technology in
cities with more than 30,000 inhabitants that currently lack such service; and (5) copper network shortening through FTTC
technology in order to provide broadband service. ANATEL also published the factor of regional inequalities to stimulate the
implementation of these projects in less developed areas.
If we execute a TAC with ANATEL, then we will be subject to the terms and conditions set forth in the TAC, including any
penalties for non-compliance provided therein (in lieu of those set forth in the regulations) for the life of the TAC. We will be
required to comply with the regulatory requirements only upon the expiration of the relevant TAC.
During 2015, we recorded provisions related to administrative proceedings brought by ANATEL in the amount of R$44.6
million. Our provisions related to administrative proceedings brought by ANATEL generally have been sufficient to pay all amounts
that we were ultimately required to pay with respect to claims brought by ANATEL.
Effects of Inflation
After several years of relatively modest inflation in Brazil, inflation rates increased substantially during 2015 to annual rates of
10.7% as measured by the IGP-DI and the IBGE. Because substantially all of our cost of services and operating expenses are incurred
in reais in Brazil, this increase in inflation has the effect of increasing our operating expenses and reducing our margins. Although we
have taken significant measures to control and reduce operating expenses during 2015, the benefits of these measures have been
weakened as a result of the countervailing impact of Brazilian inflation. Although our regulated rates are subject to annual adjustment
based on the rate of inflation as measured by the IST, the majority of our revenue is generated from services delivered at rates that are
not regulated or that are provided at a discount to the regulated rates as a result of competitive pressures in the market. As a result, we
may not be able to pass our increased operating costs and expenses resulting from inflationary pressures through to our customers as
incurred in the form of higher tariffs for our services.
A significant portion of our real-denominated debt bears interest at the TJLP or the CDI rate, which are partially adjusted for
inflation, and the ICPA rate, an inflation index, and, as a result, inflation results in increases in our interest expenses and debt service
obligations.
Effects of Fluctuations in Exchange Rates between the Real and the U.S. Dollar and the Euro
Substantially all of our cost of services and operating expenses in Brazil are incurred in reais. As a result, the appreciation or
depreciation of the real against the U.S. dollar does not have a material effect on our operating margins. However, the costs of a
substantial portion of the network equipment that we purchase for our capital expenditure projects are denominated in U.S. dollars or
are U.S. dollar-linked. This network equipment is recorded on our balance sheet at its cost in reais based on the applicable exchange
rate on the date the transfer of ownership, risks and rewards related to the purchased equipment occurs. As a result, depreciation of
the real against the U.S. dollar results in this network equipment being more costly in reais and leads to increased depreciation
expenses. Conversely, appreciation of the real against the U.S. dollar results in this network equipment being less costly in reais and
leads to reduced depreciation expenses.
Our consolidated indebtedness denominated in U.S. dollars and euros represented 38.2% and 40.3%, respectively, of our
consolidated outstanding indebtedness at December 31, 2015. As a result, when the real appreciates against the U.S. dollar or the
euro:
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•
•
•
the interest costs on our indebtedness denominated in U.S. dollars or euros declines in reais, which positively affects our
results of operations in reais;
the amount of our indebtedness denominated in U.S. dollars or euros declines in reais, and our total liabilities and debt
service obligations in reais decline; and
our net interest expenses tend to decline as a result of foreign exchange gains that we record.
A depreciation of the real against the U.S. dollar has the converse effects.
In order to mitigate the effects of foreign exchange variations, we have historically maintained a hedging policy under which our
exposure to foreign exchange variations is subject to limits set by our board of directors. Under this policy, we typically entered into
derivative transactions to swap the foreign exchange rate variation for variations of the CDI. At December 31, 2015, we had entered
into hedging transactions in respect of 99.5% of our consolidated indebtedness affected by exchange rate variations. The purpose of
these hedging transactions is to seek to “match” the currency of our debt with that of our revenues to mitigate foreign exchange risk.
During 2016, in connection with our consideration of potential plans to restructure our indebtedness, we have not rolled over our non-
deliverable forwards and have selectively settled several of our long-term currency swaps. As a result, our exposure to foreign
currency fluctuations has increased substantially.
Effect of Level of Indebtedness and Interest Rates
At December 31, 2015, our total outstanding indebtedness on a consolidated basis was R$59,857 million. The level of our
indebtedness results in significant interest expenses that are reflected in our income statement. Financial expenses of our continuing
operations consist of interest expense, exchange variations of U.S. dollar- and other foreign currency-denominated debt, foreign
exchange losses or gains, and other items as set forth in note 6 to our consolidated financial statements. In 2015, we recorded
financial expenses of our continuing operations of R$11,903 million on a consolidated basis, of which R$4,050 million consisted
primarily of interest expenses on loans and debentures payable to third parties and R$10,908 million consisted of losses from
monetary correction and exchange differences on third-party loans and financings. Part of the financial expenses of our continuing
operations were offset by income from derivative transactions of R$5,797 million and by exchange rate gains related to cash
maintained offshore to provide a natural hedge of R$3,350 million. During 2015, we hedged our foreign currency denominated debt
for which we did not have corresponding foreign currency cash deposits against exchange rate fluctuations; as a result, the cost of
such indebtedness was linked to fluctuations in the CDI rate rather than the exchange rate. During 2016, in connection with our
consideration of potential plans to restructure our indebtedness, we have not rolled over our non-deliverable forwards and have
selectively settled several of our long-term currency swaps. As a result, our exposure to foreign currency fluctuations has increased
substantially.
The interest rates that we pay depend on a variety of factors, including prevailing Brazilian and international interest rates and
risk assessments of our company, our industry and the Brazilian economy made by potential lenders to our company, potential
purchasers of our debt securities and the rating agencies that assess our company and its debt securities.
Standard & Poor’s, Moody’s and Fitch maintain ratings of our company and our debt securities. Currently, Standard & Poor’s,
Moody’s and Fitch maintain ratings of our company on a local and a global basis. On a global basis, Standard & Poor’s maintains a
foreign currency rating for our company of “CCC-,” Moody’s maintains a foreign currency rating for our company of “Caa1,” and
Fitch maintains a foreign currency rating for our company of “CCC.” Any decision by these agencies to downgrade the ratings of our
company or of our debt securities in the future would likely result in increased interest and other financial expenses relating to our
borrowings and debt securities and the inclusion of financial covenants in the instruments governing new indebtedness, and could
significantly reduce our ability to obtain such financing on satisfactory terms or in amounts required by us.
Our export credit facility guaranteed by EKN contained a requirement that we prepay all outstanding amounts in the event that
our credit rating was downgraded below Ba2 by Moody’s or BB by Fitch. As a result of the actions
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by these rating agencies, we were required to prepay the outstanding principal amount under this export credit agreement of R$202
million in April 2016.
Seasonality
Our primary business operations do not have material seasonal operations, other than our sales of handsets and accessories in
our Personal Mobility business which tends to increase during the fourth quarter of each year as compared to the other three fiscal
quarters related to significant increases of volume during the year-end holiday shopping season.
Recent Developments
Exclusivity Agreement with LetterOne
In October 2015, we entered into an exclusivity agreement with LetterOne with respect to the negotiation of a potential
transaction for the specific purpose of allowing a consolidation in the Brazilian telecommunications industry involving a potential
business combination with TIM. As part of the potential transaction, LetterOne proposed to make a capital contribution of up to
US$4.0 billion in our company, contingent on the completion of the consolidation transaction. On February 25, 2016, we were
notified by LetterOne that it had been informed by TIM that the latter was no longer interested in proceeding with the negotiations of
a business combination with our company and that without TIM’s involvement, LetterOne could not proceed with transaction as
previously planned.
Engagement of PJT Partners
On March 9, 2016, we announced that we had retained PJT Partners as our financial advisor to assist us in evaluating financial
and strategic alternatives to optimize our liquidity and debt profile. On April 25, 2016, we entered into a customary non-disclosure
agreement with Moelis & Company, who acts as advisor for a diverse ad hoc group of holders of the bonds issued by Oi and its
subsidiaries, as an initial step towards discussions of a potential restructuring of its indebtedness.
Notice of Default under PTIF Bonds
Under the Trust Deed governing the PTIF Bonds, we were required to file audited financial statements of PTIF as of and for the
year ended December 31, 2014 with the Dutch Chamber of Commerce no later than January 31, 2016. On April 29, 2016, the PTIF
Trustee delivered a written notice to PTIF and Oi noting that the failure of PTIF to provide the 2014 audited financial statements
constituted a potential event of default under the PTIF Bonds and requesting the delivery of those financial statements. PTIF is
continuing to work with its auditor to complete the preparation of its 2014 audited financial statements as soon as possible.
The PTIF Trustee has notified PTIF that if PTIF fails to deliver the financial statements on or prior to May 29, 2016 and the
PTIF Trustee determines that this failure is materially prejudicial to the interests of the holders of the PTIF Bonds, the PTIF Trustee
could declare that the PTIF Bonds are immediately due and repayable. Under the terms of the PTIF Bonds, the PTIF Trustee is not
obliged to exercise its discretion to declare any PTIF Bonds immediately due and repayable or to take any other action to enforce the
rights of the holders of the PTIF Bonds unless it shall have been indemnified to its satisfaction and specifically directed or requested
to do so by a requisite percentage of the holders of the PTIF Bonds in accordance with the terms and conditions of the PTIF Bonds.
Results of Operations
The following discussion of our results of operations is based on our consolidated financial statements prepared in accordance
with US GAAP. In the following discussion, references to increases or decreases in any period are made by comparison with the
corresponding prior period, except as the context otherwise indicates.
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Year Ended December 31, 2015 Compared with Year Ended December 31, 2014
The following table sets forth the components of our consolidated income statement, as well as the percentage change from the
prior year, for the years ended December 31, 2015 and 2014.
2015
Year ended December 31,
2014
(in millions of reais, except percentages)
% Change
Net operating revenue
Cost of sales and services
Gross profit
Operating income (expenses)
Selling expenses
General and administrative expenses
Other operating income (expenses), net
Operating income (loss) before financial income
(expenses) and taxes
Financial income
Financial expenses
Financial expenses, net
Income (loss) before taxes
Income tax and social contribution
Net income (loss) from continuing operations
Net income (loss) from discontinued operations
Net income (loss)
R$ 27,354
(16,250)
11,104
R$ 28,247
(16,257)
11,990
(3.2)
—
(7.4)
(4,720)
(3,912)
(1,259)
(5,566)
(3,835)
2,024
1,213
5,365
(11,903)
(6,538)
(5,325)
(3,380)
(8,705)
(867)
R$ (9,572)
4,613
1,345
(5,894)
(4,549)
64
(758)
(694)
(4,086)
R$ (4,780)
(15.2)
2.0
(162.2)
(73.7)
298.9
102.0
43.7
n.m.
345.7
n.m.
(78.8)
100.2
n.m. Not meaningful.
Net Operating Revenue
The following table sets forth the components of our net operating revenue, as well as the percentage change from the prior
year, for the years ended December 31, 2015 and 2014.
2015
Year ended December 31,
2014
(in millions of reais, except percentages)
% Change
Telecommunications in Brazil Segment:
Residential
Personal mobility
SME/Corporate
Other services
Other operations (1)
Net operating revenue
R$ 9,779
8,431
7,974
257
26,441
913
R$27,354
R$ 9,995
9,011
8,312
295
27,613
634
R$28,247
(2.2)
(6.4)
(4.1)
(12.9)
(4.2)
44.0
(3.2)
(1) Other operations includes the net operating revenue of Africatel from the date of our acquisition of PT Portugal on May 5, 2014
through December 31, 2015.
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Net operating revenue of our Telecommunications in Brazil segment declined by 3.2% during 2015, principally due to (1) a
6.4% decline in net operating revenue from personal mobility services, (2) a 4.1% decline in net operating revenue from
SME/Corporate services, and (3) a 2.2% decline in net operating revenue from residential services. The effects of these declines on
our net income were partially offset by 44.0% increase in net operating revenue from our other operations in Africa and Asia.
Net Operating Revenue from Residential Customer Services
Net operating revenue from residential customer services represented 35.7% of our net operating revenue for the year ended
December 31, 2015. Residential customer services includes fixed telephony services, including voice services, data communication
services (broadband), and Pay-TV. Net operating revenue from residential services declined by 2.2%, primarily due to (1) the 8.6%
decline in the average number of residential fixed-line customers; and (2) the decline in fixed-mobile tariffs. These effects were
partially offset by the 6.4% increase in the average monthly net residential revenue per user (calculated based on the total revenue for
the year divided by the monthly average customer base for the year divided by 12) to R$78.8 in 2015 from R$74.0 in 2014, primarily
due to the increase in broadband and Pay-TV revenues as well as initiatives to improve profitability of the customer base such as
selling bundled services and higher value offers.
Net Operating Revenue from Residential Fixed-Line Services. Net operating revenue from residential fixed-line services
declined by 9.9%, primarily due to:
•
a 9.7% decline in net operating revenue from local fixed-line services, principally as a result of a 8.6% decline in the
average number of residential fixed lines in service to 10.0 million during 2015 from 11.0 million during 2014, as a result
of the general trend in the Brazilian telecommunications industry to substitute mobile services in place of local fixed-line
services; and
•
a 9.5% decline in net operating revenue from long-distance, primarily as a result of (1) the effects of the 8.6% decline in
the number of residential fixed-line customers, and (2) the increase in the proportion of fixed-line customers that subscribe
to alternative plans, which include long-distance fixed line minutes as part of the monthly subscription fee.
Net Operating Revenue from Broadband Services. Net operating revenue from residential broadband services increased by
4.5%, primarily as a result of a 7.6% increase in the average net operating revenue per subscriber, the effects of which were partially
offset by a 2.9% decline in the average number of our residential ADSL subscribers to 5.1 million during 2015 from 5.2 million
during 2014. As of December 31, 2015, our ADSL subscribers represented 39.4% of our total residential subscribers as compared to
30.1% as of December 31, 2014.
Net Operating Revenue from Pay-TV Services. Net operating revenue from residential Pay-TV services increased by 38.9%,
primarily as a result of a 48.2% increase in the average net operating revenue per subscriber. The average number of our residential
Pay-TV subscribers remained stable at 1.2 million during 2015 and 2014.
Net Operating Revenue from Personal Mobility Services
Net operating revenue from personal mobility services represented 30.8% of our net operating revenue for the year ended
December 31, 2015. Personal mobility services include sales of mobile telephony services to post-paid and pre-paid customers that
include voice services and data communication services. Net operating revenue from personal mobility services declined by 6.4%,
primarily due to (1) a 5.4% decline in the average number of our personal mobility customers, (2) the reduction in VU-M
interconnection tariffs, and (3) decline in handsets revenue due to our strategy to outsource handsets sales in order to increase
logistical efficiency and improve the supply of handsets in our sales channels. These effects were partially offset by an increase in
data revenue, as a result of better mix acquisition, increased penetration of smartphones and the launch of our recent offerings.
Net Operating Revenue from Mobile Telephony Services. Net operating revenue from mobile telephony services increased by
5.3%, primarily due to an increase in data revenue, primarily due to the success of commercial and operational initiatives to improve
the profitability of our customer base focused on increasing sales of our mobile services, such as data
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services and value added services to smartphones, that are available to our post-paid and pre-paid subscribers. The effects of this
increase was partially offset by a 5.4% decline in the number of our mobile customers to 45.9 million during 2015 from 48.5 million
during 2014, primarily as a result of the strict client disconnection policy that we have introduced, particularly for our pre-paid
customers, to control costs and improve the profitability of our business.
Net Operating Revenue from Interconnection to Our Mobile Network. Mobile interconnection revenue declined by 36.5% in
2015, primarily as a result of the reduction in VU-M interconnection tariffs in February 2015.
Net Operating Revenue from Sales of Handsets and Accessories. Net operating revenue from sales of handsets and accessories
declined by 53.4% as a result of our strategy to outsource handsets sales in order to increase logistical efficiency and improve the
supply of handsets in our sales channels.
Net Operating Revenue from SME and Corporate Services
Net operating revenue from SME and corporate services represented 29.2% of our net operating revenue for the year ended
December 31, 2015. SME and corporate services include corporate solutions offered to our small, medium-sized, and large corporate
customers, including voice services and corporate data solutions. Net operating revenue from SME and corporate services, which
were temporarily increased during 2014 as a result of a contract that we had entered into with FIFA in connection with the 2014 FIFA
World Cup, declined by 4.1%, primarily as a result of (1) the decrease in fixed-mobile and mobile interconnection tariffs, and (2) an
8.5% decline in the number of SME and corporate customers to 7.2 million during 2015 from 7.9 million during 2014 principally due
to the effects of the worsening recession in Brazil. These effects were partially offset by the increase in revenues from IT and data
corporate services.
Gross Profit
As a result of the 3.2% decline in net operating revenue in 2015 our consolidated gross profit declined by 7.3% to R$11,104 in
2015 from R$11,990 million in 2014. As a percentage of net operating revenue, gross profit declined to 40.6% in 2015 from 42.4% in
2014.
Operating Expenses
Under the Brazilian Corporation Law, we are required to segregate cost of sales and services from operating expenses in the
preparation of our income statement. However, in evaluating and managing our business, we prepare reports in which we review the
elements included in cost of sales and services and operating expenses classified by nature, as presented in note 5 of our financial
statements. We believe that this classification improves our ability to understand results and trends in our business and that financial
analysts and other investors who review our performance rely on this classification in performing their own analysis. Therefore, we
have presented the discussion below of our operating expenses based on the classification of operating expenses presented in note 5
of our financial statements.
The following table sets forth the components of our operating expenses, as well as the percentage change from the prior year,
for the years ended December 31, 2015 and 2014.
2015
Year Ended December 31,
2014
(in millions of reais, except percentages)
% Change
Third-party services
Depreciation and amortization
Rental and insurance
Personnel
Interconnection
Network maintenance services
R$6,317
6,195
3,600
2,719
1,809
1,902
R$6,259
5,767
3,120
2,829
2,690
1,923
1.0%
7.4
15.4
(3.9)
(32.8)
(1.1)
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2015
Year Ended December 31,
2014
(in millions of reais, except percentages)
% Change
Taxes and other income (expenses)
Contingencies
Impairment losses
Costs of handsets and accessories
Advertising and publicity
Allowance for doubtful accounts
Other operating income (expenses), net
Total cost of sales and services
n.m. Not meaningful.
1,013
862
591
284
406
721
(278)
R$26,141
1,460
779
—
730
674
649
(3,246)
R$23,634
(30.6)
10.5
n.m.
(61.0)
(39.8)
11.0
(91.4)
10.6
Operating expenses increased by 10.6% in 2015, principally due to:
•
•
•
•
•
•
•
a 91.4%, or R$2,968 million, decline in other operating income, net;
R$591 million, increase in impairment losses;
a 7.4%, or R$428 million, increase in depreciation and amortization costs;
a 15.4%, or R$480 million, increase in rental and insurance costs;
a 10.5%, or R$ 83 million, increase in contingencies;
a 11.0%, or R$ 72 million, increase in allowance for doubtful accounts; and
a 1.0%, or R$ 58 million, increase in third-party services.
The effects of these factors were partially offset by the declines in expenses below:
•
•
•
•
•
•
a 32.8%, or R$881 million, decline in interconnection costs;
a 30.6%, or R$447 million, decline in taxes and other expenses;
a 61.0%, or R$446 million, decline in costs of handsets and accessories
a 39.8%, or R$268 million, decline in advertising and publicity expenses; and
a 3.9%, or R$110 million, decline in personal expenses; and
a 1.1%, or R$21 million, decline in network maintenance services.
Third-Party Services
Third-party service costs increased by 1.0% in 2015, primarily as a result of inflationary adjustments required by many of our
contracts, increased expenses for Pay-TV content and an increase in energy costs. The effects of these factors were partially offset by
lower costs for consulting and advisory services, gains from the renegotiation of many of our contracts for third-party services and a
reduction in sales commission expenses as a result of our efforts to optimize our sales channels through the increased use of our own
channels.
114
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Depreciation and Amortization
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Depreciation and amortization costs increased by 7.4% in 2015, primarily as a result of the growth of our data and mobile
network due to our strategy of modernization of the core network focusing on transmission and transport infrastructure, which has
increased the amount of depreciable property, plant and equipment and amortizable license.
Rental and Insurance
Rental and insurance costs increased by 15.4% in 2015, primarily as a result of (1) an increase in rental costs relating to our
network infrastructure as a result of our sale of non-strategic assets, principally mobile towers that we sold in December 2014, (2) an
increase in reais of certain rental expenses denominated in U.S. dollars as a result of the depreciation of real against U.S. dollar
during 2015, particularly expenses relating to our agreements with GlobeNet and our lease of capacity on the SES-6 satellite, and
(3) annual contractual adjustments under our rental agreements.
Personnel
Personnel expenses (including employee benefits and social charges and employee and management profit sharing) declined by
3.9% in 2015, primarily as a result of a reduction in the number of our employees during the first half of 2015. The effects of this
reduction in headcount was partially offset by (1) an increase in the number of our employees in October 2015 as a result of our
acquisition of a portion of Telemont’s network service operations in the State of Rio de Janeiro which performs plant maintenance
operations for our company, and (2) increases in the compensation of some of our employees as a result of the renegotiation of some
of our collective bargaining agreements at the end of 2015.
Impairment Losses
Expenses on impairment losses refers a R$591 million loss related to (1) R$501 million related to goodwill and trademarks for
the operations in Brazil due to a significant change in the macroeconomic conditions in Brazil, and (2) R$89 million related to loss on
goodwill assets related to our operations in Africa.
Interconnection
Interconnection costs declined by 32.8%, primarily as a result of the 33% decline in VU-M interconnection tariffs that was
mandated for February 2015 and the decline in off-net mobile voice traffic.
Network Maintenance Services
Network maintenance services costs declined by 1.1% in 2015, primarily as a result of our acquisition of a portion of
Telemont’s network service operations in the State of Rio de Janeiro which performs plant maintenance operations for our company,
as a result of which we no longer incur costs to third parties for these services. The effects of these savings were partially offset by
annual contractual adjustments under our agreements with network maintenance service providers.
Taxes and Other Expenses
Taxes and other expenses declined by 30.6% in 2015 primarily due to a decrease in other tax expenses, due to a decrease in
other revenues and a decrease in expenses for fines.
Contingencies
Provisions increased by 10.5% in 2015, primarily as a result of an increase in small consumer claims against our company.
115
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Costs of handsets and accessories declined by 61.0% in 2015, primarily as a result of our strategy to outsource handsets sales in
order to increase logistical efficiency and improve the supply of handsets in our sales channels.
Advertising and Publicity
Advertising and publicity expenses, which were temporarily increased during 2014 as a result of costs of advertising campaigns
related to our sponsorship of the 2014 FIFA World Cup, declined by 39.8% in 2015, primarily as a result of our focus on more
selective sales in 2015, which led to a reduction in our advertising and publicity efforts.
Allowance for Doubtful Accounts
Allowance for doubtful accounts increased by 11.0% in 2015, primarily as a result of the increase in customer delinquencies due
to the worsening recession in Brazil. During the year ended December 31, 2015, allowance for doubtful accounts represented 2.7% of
our net operating revenue compared to 2.3% in 2014.
Other Operating Income, Net
Other operating income, net declined by 91.4% to R$278 million in 2015 from R$3,246 million in 2014. The principal
components of other operating income, net in 2015 were (1) a R$326 million reversal of a civil contingency arising from the revision
of the methodology we use to calculate civil contingencies, and (2) R$48 million in costs relating to terminations of employees during
2015.
The principal components of other operating income, net in 2014 were:
•
•
•
a R$2,399 million gain, net of transaction expenses, relating to the sale of Caryopoceae and Tupã Torres which owned an
aggregate of 3,648 mobile communications towers used in our mobile services business;
a R$355 million reversal of allowance arising from our review of the methodology used to calculate allowances for losses
on corporate processes; and
a R$476 million reversal of the allowance relating to the Brazilian government’s tax refinancing program as a result of our
settlement of a portion of our obligations for principal, interest and fines utilizing tax loss carryforwards.
Operating Income (Loss) before Financial Income (Expenses) and Taxes
As a result of the foregoing, our consolidated operating income before financial income (expenses) and taxes was R$1,213
million compared to our consolidated operating income before financial income (expenses) and taxes of R$4,613 million in 2014. As
a percentage of net operating revenue, operating income before financial income (expenses) and taxes was 4.4% during 2015
compared to 16.3% in 2014.
Financial Expenses, Net
Financial Income
Financial income increased by 298.9% to R$5,365 million in 2015 from R$1,345 million in 2014, primarily due to the increase
of exchange rate gains on foreign investments to R$3,350 million in 2015 from R$32 million in 2014, principally as a result of (1) an
increase in our balances invested in cash maintained offshore as a result of our sale of PT Portugal, (2) the 22.8% depreciation of the
real against the euro during the second half of 2015.
Financial Expenses
116
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Financial expenses increased by 102.0% to R$11,903 million in 2015 from R$5,894 in 2014, primarily due to:
•
an increase in inflation adjustment and exchange differences on third party borrowing to R$10,908 million in 2015 from
R$1,465 million during 2014, primarily as a result of (1) the classification of the financial results of PTIF in our financial
expenses rather than as a part of our discontinued operations following the conclusion of the sale of PT Portugal in June
2015, and (2) the 47.0% depreciation of the real against the U.S. dollar and the 31.7% depreciation of the real against the
Euro during 2015 compared to the 13.4% depreciation of the real against the U.S. dollar and the stability of the real
against the Euro during 2014; and
•
a 38.1% increase in interest on loans payable to third parties and debentures to R$4,050 million during 2015 from R$2,933
million during 2014, primarily as a result of our classification of the financial results of PTIF in our financial expenses
rather than as a part of our discontinued operations following the conclusion of the sale of PT Portugal in June 2015.
The effects of these factors were partially offset by an increase in gains on derivatives transactions to R$5,797 million during 2015
from R$427 million during 2014, primarily as a result of the 47.0% depreciation of the real against the U.S. dollar and the 31.7%
depreciation of the real against the Euro during 2015 compared to the 13.4% depreciation of the real against the U.S. dollar and the
stability of the real against the Euro during 2014.
Income Tax and Social Contribution
The composite corporate statutory income tax and social contribution rate was 34% in each of 2015 and 2014. We recorded an
income tax and social contribution expense of R$3,379 million during 2015 compared to an income tax and social contribution
expense of R$758 million during 2014. The effective tax rate applicable to our loss before taxes was 63.5% during 2015 and the
effective tax rate applicable to our income before taxes was 1,179.5% during 2014. The table below sets forth a reconciliation of the
composite corporate statutory income tax and social contribution rate to our effective tax rate for each of the periods presented.
Composite corporate statutory income tax and social contribution
rate
Tax effects of valuation allowance
Tax effects of differentiated tax rates
Tax effects of permanent additions
Tax effects of permanent exclusions
Tax effect of REFIS permanent additions
Tax incentives (SUDENE)
Tax amnesty program
Tax effects of other
Effective rate
Year Ended December 31,
2015
2014
34.0%
(89.3)
(2.0)
(5.1)
2.1
—
0.1
(3.1)
(0.3)
(63.5)%
34.0%
(9.1)
37.0
1,071.3
(585.3)
689.7
(56.4)
—
(1.8)
1,179.5%
The effective tax rate applicable to our loss before taxes was (63.5)% in 2015, primarily as a result of the tax effects of valuation
allowance, which resulted in a decline in our tax assets by R$4,755 million, that were recognized for the companies that, as at
December 31, 2015, do not expect to generate sufficient future taxable profits against which these tax assets could be offset, which
reduced the effective tax rate applicable to our loss before taxes by 89.3% (effectively increasing our tax expense).
117
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Our effective tax rate was 1,179.5% in 2014, primarily as a result of (1) the tax effect of permanent additions related to the
write-off of R$266 million of tax credits related to potential loss on the shares of Pharol held by Telemar, which increased our
effective tax rate by 1,071.3%, and (2) the tax effect of REFIS permanent additions related to the settlement of principal, fines and
interest in amount of R$443 million payable to the Brazilian government’s tax refinancing program through the use of tax loss
carryforwards as permitted by Article 2 of Law 12996/2014 and Article 33 of Law 13043/2014, which increased our effective tax rate
by 689.7%. The effect of these factors was partially offset by the tax effect of REFIS permanent exclusion related to the settlement of
principal, fines and interest in amount of R$219 million payable to the Brazilian government’s tax refinancing program through the
use of tax loss carryforwards, which reduced our effective tax rate by 585.3%.
Net Loss from Continuing Operations
Our net loss from continuing operations was R$8,705 million in 2015 compared to R$694 million in 2014. As a percentage of
net operating revenue, net loss from continuing operations was 31.8% in 2015 compared to 2.5% in 2014.
Net Loss from Discontinued Operations
Net loss from discontinued operations in 2015 of R$867 million consisted of a R$226 million loss related to the cumulative
foreign exchange differences recognized in other comprehensive income, transferred from equity to net income from discontinued
operations for the year due to the sale of PT Portugal and expenses of R$625 million of expenses related to the derecognized
investment cost that includes goodwill arising on the business combination of our company with PT Portugal less selling expenses
and cash received directly our company.
Net loss from discontinued operations in 2014 of R$4,086 million consisted of (1) the allowance for loss in the amount of
R$3,836 million on the investment of PT Portugal resulting from the recognition of assets of PT Portugal at fair value, less selling
expenses, and (2) loss from discontinued operations of PT Portugal in the amount of R$250 million. The sales price used to determine
the allowance for loss corresponds to purchase price under the PTP Share Purchase Agreement of R$22,267 million (€6,900 million)
and liabilities on retirement and other benefits assumed by PT Portugal, amounting to R$3,872 million (€1,200 million).
Net Income
As a result of the foregoing, our consolidated net loss increased by 100.2% to R$9,572 million during 2015 from R$4,780
million during 2014. As a percentage of net operating revenue, our net loss was 35.0% during 2015 and 16.9% during 2014.
Year Ended December 31, 2014 Compared with Year Ended December 31, 2013
The following table sets forth the components of our consolidated income statement, as well as the percentage change from the
prior year, for the years ended December 31, 2014 and 2013.
2014
Year ended December 31,
2013
(in millions of reais, except percentages)
% Change
Net operating revenue
Cost of sales and services
Gross profit
Operating income (expenses)
Selling expenses
General and administrative expenses
Other operating income (expenses), net
Operating income before financial income (expenses) and
taxes
118
R$ 28,247
(16,257)
11,990
R$ 28,422
(16,467)
11,955
(5,566)
(3,835)
2,024
(5,532)
(3,683)
1,243
4,613
3,983
(0.6)
(1.3)
0.3
0.6
4.1
62.8
15.8
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2014
Year ended December 31,
2013
(in millions of reais, except percentages)
% Change
Financial income
Financial expenses
Financial expenses, net
Income before taxes
Income tax and social contribution
Net income (loss) from continuing operations
Net loss from discontinued operations
Net income (loss)
1,345
(5,894)
(4,549)
64
(758)
(694)
(4,086)
R$(4,780)
1,375
(4,677)
(3,302)
681
(77)
604
—
604
R$
(2.2)
26.0
37.8
(90.6)
889.8
(214.8)
n.m.
(890.9)
Net Operating Revenue
The following table sets forth the components of our net operating revenue, as well as the percentage change from the prior
year, for the years ended December 31, 2014 and 2013.
2014
Year ended December 31,
2013
(in millions of reais, except percentages)
% Change
Residential
Personal mobility
SME/Corporate
Other services and businesses (1)
Net operating revenue
R$ 9,995
9,011
8,312
929
R$28,247
R$10,303
9,290
8,455
374
R$28,422
(3.0)
(3.0)
(1.7)
148.4
(0.6)
(1) Other services and businesses includes the net operating revenue of Africatel from the date of our acquisition of PT Portugal on
May 5, 2014 through December 31, 2014.
Net operating revenue declined by 0.6% during 2014, principally due to (1) a 3.0% decline in net operating revenue from
residential services, (2) a 3.0% decline in net operating revenue from personal mobility services, and (3) a 1.7% decline in net
operating revenue from SME/Corporate services. These effects were partially offset by 148.4% increase in net operating revenue
from other services and businesses primarily as a result of our consolidation of the results of Africatel as from May 5, 2014, which
generated net operating revenue of R$635 million.
Net Operating Revenue from Residential Customer Services
Net operating revenue from residential customer services represented 35.4% of our net operating revenue for the year ended
December 31, 2014. Net operating revenue from residential services declined by 3.0%, primarily due to (1) the 6.7% decline in the
average number of residential fixed-line customers; and (2) the decline in fixed-mobile tariffs. These effects were partially offset by
the 5.1% increase in the average monthly net residential revenue per user (calculated based on the total revenue for the year divided
by the monthly average customer base for the year divided by 12) to R$74.0 in 2014 from R$70.4 in 2013, primarily due to the
increase in broadband and Pay-TV revenues.
Net Operating Revenue from Residential Fixed-Line Services. Net operating revenue from residential fixed-line services
declined by 6.1%, primarily due to:
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•
a 4.9% decline in net operating revenue from local fixed-line services, principally as a result of a 6.7% decline in the
average number of residential fixed lines in service to 11.0 million during 2014 from 11.8 million during 2013, as a result
of the general trend in the Brazilian telecommunications industry to substitute mobile services in place of local fixed-line
services; and
•
a 14.7% decline in net operating revenue from long-distance, primarily as a result of (1) aggressive discounting campaigns
undertaken by our competitors, (2) the effects of the 6.7% decline in the number of residential fixed-line customers, and
(3) the increase in the proportion of fixed line customers that subscribe to alternative plans, which include long-distance
fixed line minutes as part of the monthly subscription fee.
Net Operating Revenue from Broadband Services. Net operating revenue from residential broadband services increased by
3.2%, primarily as a result of a 3.2% increase in the average net operating revenue per subscriber. The average number of our
residential ADSL subscribers remained stable at 5.2 million in 2014 and 2013. As of December 31, 2014, our ADSL customer base
represented 37.2% of our total fixed lines in service as compared to 33.9% as of December 31, 2013.
Net Operating Revenue from Pay-TV Services. Net operating revenue from residential Pay-TV services increased by 11.3%,
primarily as a result of the increase in the number of our residential Pay-TV subscribers to 1.2 million during 2014 from 0.9 million
during 2013.
Net Operating Revenue from Personal Mobility Services
Net operating revenue from personal mobility services represented 31.9% of our net operating revenue for the year ended
December 31, 2014. Net operating revenue from personal mobility services declined by 3.0%, primarily as a result of the reduction in
VU-M interconnection tariffs. This effect was partially offset by an increase in pre-paid recharge revenues, mobile data revenue and
sales of handsets.
Net Operating Revenue from Mobile Telephony Services. Net operating revenue from mobile telephony services increased by
3.0%, primarily due to (1) a 0.7% increase in the number of our pre-paid mobile customers to 41.3 million during 2014 from
41.1 million during 2013, primarily as a result of an increase in pre-paid recharge revenue and mobile data revenue primarily as a
result of our launches of new promotions that include bonus minutes, packages of data services and credits for use for our text
messaging services, and (2) 6.4% increase in the number of our post-paid mobile customers to 7.1 million during 2014 from
approximately 6.7 million during 2013, primarily as a result of the success of commercial and operational initiatives focused on
increasing sales of our premium services, such as data services and value added services, that are available to subscribers of our plans.
These effects were partially offset by a 5.9% decline in the average monthly net mobile revenue per user to R$18.7 in 2014 from
R$20.4 in 2013.
Net Operating Revenue from Interconnection to Our Mobile Network. Mobile interconnection revenue declined by 34.8% in
2014, primarily as a result of the reduction in VU-M interconnection tariffs in February 2014.
Net Operating Revenue from Sales of Handsets and Accessories. Net operating revenue from sales of handsets and accessories
increased by 50.7% as a result of our strategy of selling premium mobile devices, such as smart phones, as part of our efforts to
acquire new high value customers and retain existing ones.
Net Operating Revenue from SME and Corporate Services
Net operating revenue from SME and corporate services represented 29.4% of our net operating revenue for the year ended
December 31, 2014. Net operating revenue from SME and corporate services declined by 1.7%, primarily as a result of (1) the
decrease in fixed-mobile and mobile interconnection tariffs, and (2) a 4.0% decline in the number of SME and corporate customers to
7.9 million during 2014 from 8.2 million during 2013. These effects were partially offset by the increase in revenues from IT and data
corporate services.
Net Operating Revenue from SME Services. Net operating revenue from SME services increased by 1.0%, primarily as a result
of an increased demand for these services.
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Net Operating Revenue from Corporate Services. Net operating revenue from corporate services declined by 2.9%, primarily as
a result of (1) the decrease in fixed-mobile and mobile interconnection tariffs, and (2) the 4.0% decline in the average number of our
corporate customers.
Gross Profit
As a result of the 0.6% decline in net operating revenue in 2014, coupled with a decline in cost of sales and services of 1.3% in
2014, our consolidated gross profit increased by 0.3% to R$11,990 million in 2014 from R$11,955 million in 2013. As a percentage
of net operating revenue, gross profit increased to 42.4% in 2014 from 42.1% in 2013.
Operating Expenses
The following table sets forth the components of our operating expenses, as well as the percentage change from the prior year,
for the years ended December 31, 2014 and 2013.
2014
Year Ended December 31,
2013
(in millions of reais, except percentages)
% Change
Third-party services
Depreciation and amortization
Rental and insurance
Personnel
Interconnection
Network maintenance services
Taxes and other income (expenses)
Contingencies
Costs of handsets and accessories
Advertising and publicity
Allowance for doubtful accounts
Other operating income (expenses), net
Total cost of sales and services
R$ 6,259
5,767
3,120
2,829
2,690
1,923
1,460
779
730
674
649
(3,246)
R$23,634
R$ 6,120
5,692
2,120
2,534
3,966
2,328
1,398
657
515
557
923
(2,370)
R$24,440
2.3
1.3
47.2
11.6
(32.2)
(17.4)
4.4
18.6
41.7
21.2
(29.6)
37.0
(3.3)
Operating expenses declined by 3.3% in 2014, principally due to:
•
•
•
•
a 32.2%, or R$1,276 million, decline in interconnection costs;
a 37.0%, or R$876 million, increase in other operating income, net;
a 17.4%, or R$405 million, decline in network maintenance services costs; and
a 29.6%, or R$273 million, decline in the allowance for doubtful accounts.
The effects of these factors were partially offset by the increases in expenses below:
•
•
•
•
•
•
•
•
a 47.2%, or R$1,000 million, increase in rental and insurance costs;
an 11.6%, or R$295 million, increase in personnel expenses;
a 41.7%, or R$215 million, increase in costs of handsets and accessories;
a 2.3%, or R$142 million, increase in third-party service costs;
an 18.6%, or R$122 million, increase in contingencies;
a 21.2%, or R$118 million, increase in advertising and publicity expenses;
a 1.3%, or R$75 million, increase in depreciation and amortization costs; and
a 4.4%, or R$62 million, increase in taxes and other expenses.
Third-Party Services
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Third-party service costs increased by 2.3% in 2014, primarily as a result of the increase in expenses on Pay-TV content and the
implementation of IT projects for the 2014 FIFA World Cup. The effects of these expenditures were partially offset by a decline in
expenses on consulting services and lower call center costs as a result of more efficient sales processes.
Depreciation and Amortization
Depreciation and amortization costs increased by 1.3% in 2014, primarily as a result of the growth of our 4G network, which
has increased the amount of our amortizable license costs and depreciable property, plant and equipment.
Rental and Insurance
Rental and insurance costs increased by 47.2% in 2014, primarily as a result of (1) an increase in rental costs relating to our
network infrastructure as a result of our sale of non-strategic assets, including GlobeNet, fixed-line communications towers and
mobile communications towers, (2) an increase in rental expenses relating to our leasing of capacity on the SES-6 satellite in order to
provide our own head-end DTH services within Brazil, and (3) annual contractual adjustments under our other rental agreements.
Personnel
Personnel expenses (including employee benefits and social charges and employee and management profit sharing) increased by
11.6% in 2014, primarily as a result of an increase in the number of our employees as a result of our internalizing a portion of our
plant maintenance operations in 2013, and increases in the compensation of some of our employees as a result of the renegotiation of
some of our collective bargaining agreements at the end of 2013.
Interconnection
Interconnection costs declined by 32.2%, primarily as a result of the 25% decline in VU-M interconnection tariffs that was
mandated for February 2014 and the decline in off-net mobile voice traffic, which reflects the success of our offers that incentivize
on-net traffic.
Network Maintenance Services
Network maintenance services costs declined by 17.4% in 2014, primarily as a result of (1) our internalizing a portion of our
plant maintenance operations in 2013; and (2) actions taken to support our commitment to enhance efficiency and productivity and
procedures that we adopted to reduce costs.
Taxes and Other Expenses
Taxes and other expenses increased by 4.4% in 2014, primarily as a result of a R$60 million increase in PIS and COFINS taxes
recorded on the increased distributions of interest on shareholders equity received from some of our subsidiaries.
Contingencies
Contingencies increased by 18.6% in 2014, primarily as a result of a R$116 million increase in labor provisions in 2014,
compared to a R$154 million reversal of labor provisions in 2013, principally due to our revision of the methodology used to
calculate the provisions for losses in labor lawsuits. These effects were partially offset by a decline in provision for civil claims to
R$340 million in 2014 from R$528 million in 2013, primarily due to revision in 2014 of the methodology we use to calculate the
provisions for losses in civil lawsuits (principally, lawsuits involving the financial participation agreements), including statistical
techniques as a result of the greater experience that we have accumulated in this matter.
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Costs of Handsets and Accessories
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Costs of handsets and accessories increased by 41.7% in 2014, primarily as a result of the increase in sale of smartphones as part
of our strategic initiative to increase our mobile data communications revenue.
Advertising and Publicity
Advertising and publicity expenses increased by 21.2% in 2014, primarily as a result of increased costs of advertising
campaigns related to our Oi TV service, and costs of advertising campaigns related to our sponsorship of the 2014 FIFA World Cup.
Allowance for Doubtful Accounts
Allowance for doubtful accounts declined by 29.6% in 2014, primarily as a result of the improvement of our credit policy as
part of measures we adopted to lower our churn rate and improve the quality of our customer base. During the year ended
December 31, 2014, allowance for doubtful accounts represented 2.3% of our net operating revenue compared to 3.2% in 2013.
Other Operating Income (Expenses), Net
Other operating income (expenses), net increased by 37.0% to R$3,246 million in 2014 from R$2,370 million in 2013. The
principal components of other operating income (expenses), net in 2014 were:
•
•
•
a R$2,399 million gain, net of transaction expenses, relating to the sale of Caryopoceae and Tupã Torres which owned an
aggregate of 3,648 mobile communications towers used in our mobile services business;
a R$355 million reversal of allowance arising from our review of the methodology used to calculate allowances for losses
on corporate processes; and
a R$476 million reversal of the allowance relating to the Brazilian government’s tax refinancing program as a result of our
settlement of a portion of our obligations for principal, interest and fines utilizing tax loss carryforwards.
The principal components of other operating income (expenses), net in 2013 were:
•
•
•
•
a R$1,497 million gain, net of transaction expenses, relating to the sale of GlobeNet;
a R$330 million reversal of accrued profit sharing;
a R$201 million reversal of allowance arising from our review of the methodology used to calculate provisions for losses
on labor claims; and
a R$173 million gain, net of transaction expenses, related to the sale of a property.
Operating Income before Financial Income (Expenses) and Taxes
As a result of the foregoing, our consolidated operating income before financial income (expenses) and taxes increased by 7.3%
to R$5,675 million in 2014 from R$5,287 million in 2013. As a percentage of net operating revenue, operating income before
financial income (expenses) and taxes increased to 20.1% in 2014 from 18.6% in 2013.
123
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Financial Expenses, Net
Financial Income
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Financial income declined by 2.2% to R$1,345 million in 2014 from R$1,375 million in 2013, primarily due to:
•
•
•
a 36.2% decline in other financial income to R$162 million in 2014 from R$254 million in 2013;
a 59.0% decline in dividends received to R$32 million in 2014 from R$78 million in 2013; and
a 53.4% decline in exchange rate gains on foreign investments to R$32 million during 2014 from R$70 million during
2013, primarily as a result of a decrease in our balances invested in foreign currencies and the 13.4% depreciation of the
real against the U.S. dollar during 2014 compared to the 14.6% depreciation of the real against the U.S. dollar during
2013.
The effects of these factors was partially offset by (1) a 27.3% increase in income from short-term investments to R$355 million
during 2014 from R$279 million during 2013, primarily as a result of an increase in the average amount of our short-term
investments, and (2) a 9.8% increase in interest and inflation adjustments on other assets to R$762 million during 2014 from R$695
million during 2013, primarily as a result of an increase in average amount of our other assets.
Financial Expenses
Financial expenses increased by 26.0% to R$5,893 in 2014 from R$4,677 million in 2013, primarily due to:
•
•
•
•
a 63.1% decline in gains on derivatives transactions to R$427 million during 2014 from R$1,159 million during 2013,
primarily as a result of the 13.4% depreciation of the real against the U.S. dollar and the stability of the real against the
Euro during 2014 compared to the 14.6% depreciation of the real against the U.S. dollar and the 19.7% depreciation of the
real against the Euro during 2013;
a 19.6% increase in interest on loans payable to third parties and interest on debentures to R$2,933 million during 2014
from R$2,452 million during 2013, primarily as a result of an increase in the average amount of our loans payable to third
parties and debentures;
a 26.6% increase in interest and inflation adjustments on other liabilities to R$814 million during 2014 from R$643 million
during 2013, primarily as a result of an increase in average amount of our other liabilities; and
a 99.9% increase in withholding income tax on financial transactions and charges R$386 million during 2014 from R$193
million during 2013, primarily as a result of our incurrence of these expenses in connection with the Oi capital increase.
The effects of these factors were partially offset by a 27.2% decline in inflation adjustment and exchange differences on third party
borrowing to R$1,465 million during 2014 from R$2,013 million during 2013, primarily as a result of the 13.4% depreciation of the
real against the U.S. dollar and the stability of the real against the Euro during 2014 compared to the 14.6% depreciation of the real
against the U.S. dollar and the 19.7% depreciation of the real against the Euro during 2013.
Income Tax and Social Contribution
The composite corporate statutory income tax and social contribution rate was 34% in each of 2014 and 2013. Income tax and
social contribution expense increased by 889.8% to R$758 million in 2014 from R$77 million in 2013. Our effective tax rate was
1,179.5% in 2014 and 11.2% in 2013. The table below sets forth a reconciliation of the composite corporate statutory income tax and
social contribution rate to our effective tax rate for each of the periods presented.
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Composite corporate statutory income tax and social contribution
rate
Tax effects of valuation allowance
Tax effects of differentiated tax rates
Tax effects of permanent additions
Tax effects of permanent exclusions
Tax effect of REFIS permanent additions
Tax incentives (SUDENE)
Tax amnesty program
Tax effects of other
Effective rate
Year Ended December 31,
2014
2013
34.0%
(9.1)
37.0
1,071.3
(585.3)
689.7
(56.4)
—
(1.8)
1,179.5%
34.0%
10.1
1.9
11.2
(41.2)
—
(4.6)
—
(0.1)
11.2
Our effective tax rate was 1,179.5% in 2014, primarily as a result of (1) the tax effect of permanent additions related to the
write-off of R$266 million of tax credits related to potential loss on the shares of Pharol held by Telemar, which increased our
effective tax rate by 1,071.3%, and (2) the tax effect of REFIS permanent additions related to the settlement of principal, fines and
interest in amount of R$443 million payable to the Brazilian government’s tax refinancing program through the use of tax loss
carryforwards as permitted by Article 2 of Law 12996/2014 and Article 33 of Law 13043/2014, which increased our effective tax rate
by 689.7%. The effect of these factors was partially offset by the tax effect of REFIS permanent exclusion related to the settlement of
principal, fines and interest in amount of R$219 million payable to the Brazilian government’s tax refinancing program through the
use of tax loss carryforwards, which reduced our effective tax rate.
Our effective tax rate was 11.2% in 2013, primarily as a result of the tax effect of permanent exclusions, primarily as a result of
prescribed dividends and other permanent exclusions, which decreased our effective tax rate by 41.2%. The effect of these factors
was partially offset by (1) the tax effect of permanent additions, primarily as a result of non-deductible fines, tax incentives and
sponsorships, which increased our effective tax rate by 11.2%, and (2) the tax effect of valuation allowance, which resulted in a
decline in our tax assets by R$69 million and increased our effective tax rate by 10.1%.
Net Income (Loss) from Continuing Operations
Our net loss from continuing operations was R$695 million in 2014 compared to net income from continuing operations of
R$604 million in 2013. As a percentage of net operating revenue, net loss from continuing operations was 2.5% in 2014 compared to
net loss from continuing operations of 2.1% in 2013.
Net Loss from Discontinued Operations
Net loss from discontinued operations in 2014 of R$4,086 million consisted of (1) the allowance for loss in the amount of
R$3,836 million on the investment of PT Portugal resulting from the recognition of assets of PT Portugal at fair value, less selling
expenses, and (2) loss from discontinued operations of PT Portugal in the amount of R$250 million.
Net Income
As a result of the foregoing, we recorded a consolidated net loss of R$4,780 million during 2014 compared to consolidated net
income of income R$604 million during 2013. As a percentage of net operating revenue, our net loss was 16.9% during 2014
compared to net income of 2.1% in 2013
Liquidity and Capital Resources
Our principal cash requirements consist of the following:
•
working capital requirements;
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•
•
•
servicing of our indebtedness;
capital expenditures related to investments in operations, expansion of our networks and enhancements of the technical
capabilities and capacity of our networks; and
dividends on our shares, including in the form of interest attributable to shareholders’ equity.
Unless our board of directors deems it inconsistent with our financial position, payment of dividends is mandatory under our by-laws
and, consequently, may give rise to significant cash requirements in future periods.
Our principal sources of liquidity have traditionally consisted of the following:
•
•
•
•
cash flows from operating activities;
short-term and long-term loans;
sales of debt securities in domestic and international capital markets; and
during 2012, 2013 and 2014, sales of non-core assets.
During 2015, our operations generated negative cash flows of R$1,054 million. As a result, we financed investing activities,
debt service and working capital from our cash and cash equivalents and short-term cash investments. As of December 31, 2015, our
consolidated cash and cash equivalents and short-term cash investments amounted to R$16,700 million. As of December 31, 2015,
we had working capital of R$12,609 million, which includes net assets and liabilities held for sale of R$6,941 million.
Our financial statements for the year ended December 31, 2015 have been prepared assuming that we will continue as a going
concern, based on our cash flow projections. Our projections depend on factors such as attainment of traffic volume targets, customer
base, launching of bundled products attractive to customers, service sales prices, foreign exchange fluctuation and the success of the
efforts to identify and implement financial and strategic alternatives to optimize the liquidity and debt profile.
Should one or more of the assumptions underlying our cash flow projections and other forecasts or the outcome of the efforts to
identify and implement financial and strategic alternatives to optimize our liquidity and debt profile not be met, our working capital
may not be sufficient for our requirements during 2016.
Cash Flow
Cash Flows from Operating Activities
Our primary source of operating funds has historically been cash flow generated from our operations. However, during 2015,
our operations generated negative cash flows of R$1,054 million. As a result, cash flows provided by our operating activities were not
sufficient for our cash requirements related to operations. Historically, we have financed our investments in property, plant and
equipment through the use of bank loans, vendor financing, capital markets and other forms of financing. During 2015, we financed
investing activities, debt service and working capital from our cash and cash equivalents and short-term cash investments.
Net cash used by operating activities was R$1,054 million during 2015, after giving effect to net cash provided by discontinued
operations of R$485 million. Net cash provided by operating activities was R$5,531 million during 2014, including cash flow from
discontinued operations of R$1,878 million, and R$7,035 million during 2013.
The R$6,584 million deterioration of our operating cash flows during 2015 was primarily as a result of:
•
a R$4,792 million increase in net loss to R$9,572 million during 2015 from R$4,780 million during 2014;
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•
•
•
•
the effects of a R$5,371 million increase in non-cash gains from financial derivative transactions to R$5,796 million during
2015 from R$425 million during 2014 as a result of the decline in the value of the real against the U.S. dollar and the Euro
during 2015, particularly during the second half of 2015;
the effects of a 78.8%, or R$3,219 million, decline in net income of discontinued operations, net of tax, to R$867 million
during 2015 from R$4,086 million during 2014, as described under the caption “—Results of Operations—Year Ended
December 31, 2015 Compared with Year Ended December 31, 2014—Net Income (Loss) from Discontinued Operations”;
the effects of a 74.2% decline in operating cash flows generated by discontinued operations to R$485 million during 2015
from R$1,878 during 2014, primarily as a result of our recording PT Portugal as discontinued operations for eight months
during 2015 compared to five months during 2014; and
the effects of a R$1,100 decline in cash flows related to investments in held-for-trading short-term investments, net of
redemptions, to a net outflow of R$832 million during 2015 from a net inflow of R$268 million during 2014.
These factors reducing our operating cash flows were partially offset by:
•
•
the effects of a 391.4%, or R$5,131 million increase in non-cash gains from interest loss on financial instruments to
R$6,443 million during 2015 from R$1,311 million during 2014; and
the effects of a R$2,462 million increase in non-cash deferred income tax expenses to R$2,598 million during 2015 from
R$136 million during 2014.
Operating cash flow declined by 21.4%, or R$1,505 million, to R$5,531 million during 2014 from R$7,035 million during 2013,
primarily as a result of:
•
•
•
our net loss of R$4,780 million during 2014, compared to our net income of R$604 million during 2013;
the effects of a R$1,705 decrease in cash flows related to investments in held-for-trading short-term investments, net of
redemptions, to a net inflow of R$268 million during 2014 from a net inflow of R$1,973 million during 2013; and
the effects of a R$1,613 million change in cash flows from accounts receivable to a net increase of R$1,057 million during
2014 from a net decline of R$556 million during 2013.
These factors reducing our operating cash flows were partially offset by:
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•
•
•
the effects of a our recording net income of discontinued operations, net of tax, of R$4,086 million during 2014 as a result
of our classification of PT Portugal as discontinued operations;
the effects of a our recording operating cash flows generated by discontinued operations of R$1,878 million during 2014 as
a result of our classification of PT Portugal as discontinued operations; and
the effects of a 78.5%, or R$1,215 million, decline in non-cash gains classified as “other” to R$332 million during 2014
from R$1,547 million during 2013.
Cash Flows Used in Investing Activities
Investing activities provided net cash of R$12,543 million during 2015, giving effect to net cash used by discontinued
operations of R$195 million, and used net cash of R$4,303 million during 2014, including cash used by discontinued operations of
R$2,813 million, and R$6,770 million during 2013.
During 2015, investing activities of our continuing operations which provided cash primarily consisted of our sale of PT
Portugal which generated cash of R$17,218 million. During 2015, investing activities of our continuing operations for which we used
cash primarily consisted of (1) investments of R$3,681 million in purchases of property, plant and equipment and intangible assets,
primarily related to the expansion of our data communications network and the implementation of projects to meet ANATEL’s
regulatory requirements, and (2) net judicial deposits (consisting of deposits less redemptions) of R$1,006 million, primarily related
to provisions for labor, taxes and civil contingencies.
During 2014, investing activities of our continuing operations for which we used cash primarily consisted of (1) investments of
R$5,370 million in purchases of property, plant and equipment and intangible assets, primarily related to the expansion of our data
communications network, the acquisition of our 4G authorization and the implementation of projects to meet ANATEL’s regulatory
requirements, and (2) net judicial deposits (consisting of deposits less redemptions) of R$938 million, primarily related to provisions
for labor, taxes and civil contingencies. During 2014, investing activities generated cash flows of (1) R$4,454 million from the sale of
permanent assets, primarily consisting of the net proceeds of our sales of GlobeNet, Caryopoceae, and Tupã Torres, and (2) R$357
million from the acquisition of PT Portugal, net of cash and cash equivalents of assets classified as held-for sale.
During 2013, investing activities for which we used cash primarily consisted of (1) investments of R$5,976 million in purchases
of property, plant and equipment and intangible assets, primarily related to the expansion of our data communications network, the
acquisition of our 4G authorization and the implementation of projects to meet ANATEL’s regulatory requirements, and (2) net
judicial deposits (consisting of deposits less redemptions) of R$735 million, primarily related to provisions for labor, taxes and civil
contingencies.
Cash Flows from Financing Activities
Financing activities used net cash of R$2,357 million during 2015, including cash used by discontinued operations of R$492
million, used net cash of R$1,175 million during 2014, including cash used by discontinued operations of R$5,533 million, and
R$2,299 million during 2013.
During 2015, our principal sources of borrowed funds consisted of (1) the issuance of €600 million aggregate principal amount
of 5.625% Senior Notes due 2021, (2) US$700 million aggregate principal amount borrowed under a US$1,000 million revolving
credit facility that Oi entered into with a syndicate financials institution during 2011, (3) US$600 million aggregate principal amount
under an export credit facility that Telemar entered into with China Development Bank during 2015, (4) US$141 million aggregate
principal amount borrowed under a US$397 million export credit facility agreement that Oi entered into during 2014 that is
guaranteed by Finnvera plc, the Finnish Export Credit Agency, or FINNVERA, (5) US$43 million aggregate principal amount
borrowed under a US$257 million export credit facility agreement that Oi entered into during 2013 that is insured by the Office
National Du Ducroire/Nationale Delcrederedienst, the Belgian national export credit agency, or ONDD, and (6) US$33 million
aggregate principal amount borrowed under a US$600 million export credit facility that Telemar entered into with China
Development Bank, or CDB, during 2015.
During 2015, we used cash to (1) repay R$8,604 million principal amount of our outstanding loans and financings and
derivatives, (2) to make installment payments relating to our permits and concessions in the
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aggregate amount of R$349 million, and (3) to make installment payments under the tax refinancing plan in the aggregate amount of
R$93 million.
During 2014, our principal sources of borrowed funds consisted of (1) R$1,300 million aggregate principal amount under a
revolving credit facility that we entered into with a syndicate financials institution during December 2012, (2) R$836 million
aggregate principal amount borrowed under a credit facility with the Brazilian National Development Bank (Banco Nacional de
Desenvolvimento Econômico e Social), or BNDES that we entered into in December 2012, (3) US$104 million aggregate principal
amount under an export credit facility that Telemar entered into with Export Development Canada, or EDC, during July 2012, and
(4) US$98 million aggregate principal amount under an export credit facility that Oi entered into during March 2013. In addition, we
generated cash (net of issue premium and related costs) of R$7,827 million through our sale of common shares and preferred shares
for cash in the Oi capital increase.
During 2014, in addition to the R$5,533 million used by discontinued operations, we used cash to (1) repay R$5,054 million
principal amount of our outstanding loans and financings and derivatives, (2) to make installment payments under the tax refinancing
plan in the aggregate amount of R$870 million, and (3) to make installment payments relating to our permits and concessions in the
aggregate amount of R$205 million.
During 2013, our principal sources of borrowed funds consisted of (1) R$1,500 million aggregate principal amount of non-
convertible debentures issued in March 2013, (2) R$873.5 million aggregate principal amount borrowed under a R$5.4 billion credit
facility with BNDES that we entered into in December 2012, (3) US$96 million aggregate principal amount borrowed under an
export credit facility that Telemar entered into with EDC in July 2012, and (4) US$37 million aggregate principal amount borrowed
under an export credit facility that Telemar entered into in July 2011.
During 2013, we used cash to (1) repay R$3,568 million principal amount of our outstanding loans and financings and
derivatives, (2) to make installment payments relating to our permits and concessions in the aggregate amount of R$711 million,
(3) to pay dividends and interest on shareholders’ equity in the aggregate amount of R$1,280 million, and (4) to make installment
payments under the tax refinancing plan in the aggregate amount of R$174 million.
Projected Sources and Uses of Cash
We anticipate that we will be required to spend approximately R$19,725 million to meet our short-term contractual obligations
and commitments during 2016, and an additional approximately R$30,672 million to meet our long-term contractual obligations and
commitments in 2017 and 2018.
As of December 31, 2015, our consolidated cash and cash equivalents and short-term cash investments amounted to R$16,700
million. We expect to use our cash and cash equivalents and short-term cash investments, and financing for which we have
commitments under facilities from CDB and Banco do Nordeste do Brasil S/A, or BNB, to fund our operations, investments, debt
service obligations and working capital requirements during the period in which our operating cash flows are insufficient to fund
these cash requirements.
On March 9, 2016, we announced that we had retained PJT Partners as our financial advisor to assist us in evaluating financial
and strategic alternatives to optimize our liquidity and debt profile. On April 25, 2016, we entered into a customary non-disclosure
agreement with Moelis & Company, who acts as advisor for a diverse ad hoc group of holders of the bonds issued by Oi and its
subsidiaries, as an initial step towards discussions of a potential restructuring of its indebtedness.
Our financial statements for the year ended December 31, 2015 have been prepared assuming that we will continue as a going
concern, based on our cash flow projections. Our projections depend on factors such as attainment of traffic volume targets, customer
base, launching of bundled products attractive to customers, service sales prices, foreign exchange fluctuation and the success of the
efforts to identify and implement financial and strategic alternatives to optimize the liquidity and debt profile.
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Should one or more of the assumptions underlying our cash flow projections and other forecasts or the outcome of the efforts to
identify and implement financial and strategic alternatives to optimize our liquidity and debt profile not be met, our cash and cash
equivalents and short-term cash investments, together with our committed financing, may not be sufficient to meet our contractual
obligations and commitments during 2016.
We have a commitment from CDB to provide us with financing in the future under a credit facility described under “—
Indebtedness.” In addition, we have an undrawn credit facility with BNB as described below. We pay commitment fees to these
financial institutions in connection with their commitments.
In December 2014, Oi Mobile entered into a credit agreement with BNB, under which BNB agreed to disburse a loan in the
aggregate principal amount of up to R$370 million. The proceeds of this loan agreement may be used to fund equipment purchase and
expenditures on our fixed-line and mobile telecommunication infrastructure in the Brazilian states of the northeastern region. Loans
under this agreement bear interest at a rate of 7.06% per annum over the principal amount of BRL 37 million and 8.24% per annum
over the principal amount of BRL 333 million. Interest on each of these loans is payable quarterly in the first two years and monthly
thereafter until the final maturity of the debt. The outstanding principal amount of these loans is payable in 72 successive monthly
installments commencing in January, 2017. As of December 31, 2015, we had not borrowed any amounts under this facility.
Contractual Commitments
The following table summarizes our significant contractual obligations and commitments as of December 31, 2015:
Less than
One Year
One to
Three Years
Payments Due by Period
Three to
Five Years
(in millions of reais)
More than
Five Years
Total
Continuing operations:
Loans and financings (1)
Debentures (2)
Unconditional purchase obligations (3)
Concession fees (4)
Usage rights (5)
Pension plan contributions (6)
R$15,282 R$ 24,998 R$16,894 R$ 6,243 R$63,417
5,809
2,578
2,379
919
1,443
R$19,725 R$ 30,672 R$17,891 R$ 8,257 R$76,545
—
—
1,437
—
577
4,170
758
306
7
433
1,622
1,477
288
912
144
17
343
348
—
289
(1)
(2)
Includes (1) estimated future payments of interest on our loans and financings, calculated based on interest rates and foreign
exchange rates applicable at December 31, 2015 and assuming that all amortization payments and payments at maturity on our
loans and financings will be made on their scheduled payment dates, and (2) estimated future cash flows on our derivative
obligations, calculated based on interest rates and foreign exchange rates applicable as of December 31, 2015 and assuming that
all payments on our derivative obligations will be made on their scheduled payment dates.
Includes estimated future payments of interest on our debentures, calculated based on interest rates applicable as of
December 31, 2015 and assuming that all amortization payments and payments at maturity on our debentures will be made on
their scheduled payment dates.
(3) Consists of (1) obligations in connection with a business process outsourcing agreement, and (2) purchase obligations for
network equipment pursuant to binding obligations which include all significant terms, including fixed or minimum quantities to
be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction.
(4) Consists of estimated bi-annual fees due to ANATEL under our concession agreements expiring in 2025. These estimated
amounts are calculated based on our results for the year ended December 31, 2015.
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(5) Consists of payments due to ANATEL for radio frequency licenses. Includes accrued and unpaid interest as of December 31,
2015.
(6) Consists of expected contributions to amortize the actuarial deficit of the BrTPREV plan.
We are also subject to contingencies with respect to tax, civil, labor and other claims and have made provisions for accrued
liability for legal proceedings related to certain tax, civil, labor and other claims of R$4,434 million as of December 31, 2015. See
“Item 8. Financial Information—Legal Proceedings” and note 21 to our consolidated financial statements.
Indebtedness
On a consolidated basis, our Euro-denominated indebtedness as of December 31, 2015 was R$24,222 million, our U.S. dollar-
denominated indebtedness was R$22,714 million, and our real-denominated indebtedness was R$12,922 million. As of December 31,
2015, our Euro-denominated indebtedness bore interest at an average rate of 5.2% per annum, our U.S. dollar-denominated
indebtedness bore interest at an average rate of 5.1% per annum, and our real-denominated indebtedness bore interest at an average
rate of 13.3% per annum. As of December 31, 2015, 33.4% of our debt bore interest at floating rates, including the effect of swap
operations.
Short-Term Indebtedness
Our short-term debt, consisting of the current portion of long-term borrowings and financings, was R$11,927 million as of
December 31, 2015. Under our financing policy, we generally do not incur short-term indebtedness, as we believe that our cash flows
from operations generally will be sufficient to service our current liabilities.
Long-Term Indebtedness
Our principal sources of long-term debt are:
•
•
•
•
•
•
fixed-rate notes issued in the international market;
credit facilities with international export credit agencies;
unsecured lines of credit obtained from Brazilian and international financial institutions;
credit facilities with BNDES;
debentures issued in the Brazilian market; and
real estate securitization transactions.
Some of our debt instruments require that Oi or Telemar comply with financial covenants, annually, semi-annually or quarterly,
the most restrictive of which require Oi to maintain a consolidated debt to consolidated EBITDA, determined based on our financial
statements prepared in accordance with Brazilian GAAP, for the prior 12-month period less than or equal to 4.0 to 1.0 at the end of
each fiscal quarter until maturity. Under each of these debt instruments, the creditor has the right to accelerate the debt if, at the end
of any applicable period we are not in compliance with the defined financial covenants ratios.
In anticipation of the completion of the PT Portugal Disposition, we executed temporary modifications of each of our debt
instruments that contains such financial maintenance covenants (other than our debt instruments with BNDES), pursuant to which the
consolidated debt to consolidated EBITDA ratio that Oi was required to maintain was increased to 6.0 to 1.0 for each of the fiscal
quarters of 2015.
Our debt facilities with BNDES contained a number of financial covenants (including ratios with respect to shareholders equity
to total assets and consolidated debt to EBITDA) that were measured on a semi-annual basis on June 30 and December 31. Under
these debt facilities, noncompliance with two or more of these covenants in one
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semi-annual period would automatically trigger the right of BNDES to retain proceeds (in an amount equivalent to three times our
next amortization payment under each debt facility with BNDES) from receivables otherwise payable to us in reserve accounts
pledged for the benefit of BNDES until such time as the breach is cured.
On June 30, 2015, we were not in compliance with the covenants in each of our debt facilities with BNDES that require Oi to
maintain a shareholder’s equity to EBITDA ratio of at least 0.25 to 1 and a consolidated debt to EBITDA ratio of less than 4.0 to 1.
As a result, BNDES, had the right to retain proceeds from receivables in reserve accounts pledged for the benefit of BNDES, as
described above. In November, 2015, we and BNDES amended the terms of each of our debt facilities with BNDES. As a result of
these amendments, (1) the consolidated debt to consolidated EBITDA ratio that Oi was required to maintain was increased to 6.0 to
1.0 for the December 31, 2015 measurement date, (2) the measurement period under each of these debt facilities was reduced to
quarterly periods, and (3) BNDES has the right to accelerate the debt under each of these debt facilities, at the end of any applicable
period, we are not in compliance with two or more of the financial covenants contained in these debt facilities.
Prior to December 31, 2015, we executed temporary modifications of each of our debt instruments that contains covenants
requiring Oi to maintain specified levels of consolidated debt to consolidated EBITDA (other than the debt instruments governing
Oi’s 5th and 9th issuances of debentures), pursuant to which Oi was required to maintain a consolidated net debt to consolidated
EBITDA ratio of no more than 6.0 to 1.0 as of December 31, 2015. Most of these waivers and amendments continue to require Oi
was required to maintain a consolidated net debt to consolidated EBITDA ratio of no more than 6.0 to 1.0 for each of the fiscal
quarters of 2016. Upon the expiration of these waivers and under the terms of these amendments, the consolidated debt to EBITDA
ratio that Oi is required to maintain under each of these debt instruments will be reduced to their pre-existing levels, the most
restrictive of which will require that Oi maintain a consolidated debt to EBITDA ratio of less than 4.0 to 1.0. We have repaid the
principal amount outstanding under Oi’s 5th and 9th issuances of debentures in the aggregate amount of R$23 million.
Under the amendments to our revolving credit facility, we agreed to additional conditions applicable to further extensions of
credit under this facility. All amounts outstanding under this facility were repaid at maturity in January 2016 and we have terminated
this facility.
We were in compliance with each of the financial covenants applicable the debt instruments to which Oi and its subsidiaries are
a party as of December 31, 2015 (other than the debt instruments governing Oi’s 5th and 9th issuances of debentures). We are seeking
waivers from those creditors for which these waivers and amendments do not cover all measurement periods to and including the
periods ending on December 31, 2016. We cannot provide investors with any assurance that these waivers will be obtained. In the
event that we are unable to obtain waivers of the anticipated breaches of these covenants in these debt instruments, or identify and
implement financial and strategic alternatives to optimize our liquidity and debt profile, we may be unable to meet our obligations
under these debt instruments in the event that the creditors under these debt instruments seek to enforce their available remedies.
Under the Trust Deed governing the PTIF Bonds, we were required to file audited financial statements of PTIF as of and for the
year ended December 31, 2014 with the Dutch Chamber of Commerce no later than January 31, 2016. On April 29, 2016, the PTIF
Trustee delivered a written notice to PTIF and Oi noting that the failure of PTIF to provide the 2014 audited financial statements
constituted a potential event of default under the PTIF Bonds and requesting the delivery of those financial statements. PTIF is
continuing to work with its auditor to complete the preparation of its 2014 audited financial statements as soon as possible.
The PTIF Trustee has notified PTIF that if PTIF fails to deliver the financial statements on or prior to May 29, 2016 and the
PTIF Trustee determines that this failure is materially prejudicial to the interests of the holders of the PTIF Bonds, the PTIF Trustee
could declare that the PTIF Bonds are immediately due and repayable. Under the terms of the PTIF Bonds, the PTIF Trustee is not
obliged to exercise its discretion to declare any PTIF Bonds immediately due and repayable or to take any other action to enforce the
rights of the holders of the PTIF Bonds unless it shall have been indemnified to its satisfaction and specifically directed or requested
to do so by a requisite percentage of the holders of the PTIF Bonds in accordance with the terms and conditions of the PTIF Bonds.
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The instruments governing a substantial portion of our indebtedness contain cross-acceleration clauses and the occurrence of an
event of default under one of these instruments, could trigger an event of default under other indebtedness or enable the creditors
under other indebtedness to accelerate that indebtedness or those obligations. Were a substantial amount of our outstanding
indebtedness to be accelerated, we may not have sufficient funds to repay such debt when due.
As of December 31, 2015, all of our debt instruments with BNDES were secured by pledges of certain of our accounts
receivable.
The following discussion briefly describes certain of our significant financing transactions.
Fixed-Rate Notes
As of December 31, 2015, we had 14 series of fixed-rate debt securities that were issued in the international market. All of these
securities pay interest semi-annually or annually in arrears.
The following table sets forth our outstanding fixed-rate debt securities as of December 31, 2015, the outstanding principal
amount of these securities and their maturity dates.
Security
PTIF 5.625% Notes due 2016(1)
PTIF 6.25% Notes due 2016(1)
Oi 9.75% senior notes due 2016(2)
PTIF 4.375% Notes due 2017(1)
PTIF 5.242% Notes due 2017(1)
Oi 5.125% senior notes due 2017(3)
PTIF 5.875% Notes due 2018(1)
Oi 9.500% senior notes due 2019(3)
PTIF 5.00% Notes due 2019(1)
PTIF 4.625% Notes due 2020(1) IF
Oi 5.500% senior notes due 2020(3)
Oi Brasil Holdings Coöperatief U.A. 5.625%
senior notes due 2021(1)
Oi Brasil Holdings Coöperatief U.A. 5.75%
senior notes due 2022(1)
PTIF 4.5% Notes due 2025(1) IF
Outstanding Principal
Amount
(in millions)
Final Maturity
February 2016
July 2016
September 2016
March 2017
November 2017
December 2017
April 2018
April 2019
November 2019
May 2020
October 2020
532
232
1,055
384
250
578
750
138
750
1,000
1,787
600
June 2021
1,432
500
February 2022
June 2025
€
€
R$
€
€
€
€
US$
€
€
US$
€
US$
€
(1) These notes are fully and unconditionally guaranteed by Oi S.A.
(2) These notes are denominated in reais and payments of principal and interest under these notes are payable in U.S. dollars at
prevailing exchange rates at the time of payment.
(3) These notes are fully and unconditionally guaranteed by Telemar Norte Leste S.A.
Export Credit Agency Credit Facilities
As of December 31, 2015, we had entered into 13 export credit facility agreements under which we have borrowed funds to
make equipment purchases related our fixed-line and mobile telecommunications infrastructure. The lender under some of these
export credit facility agreements are the export credit agencies. Under the remainder of these export credit facility agreements, the
export credit agencies have guaranteed or insured our obligations to the lenders, which are international financial institutions. Interest
these export credit facility agreements is payable semi-annually in arrears and principal amortizes in equal semi-annual installments
through maturity.
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The following table sets forth our outstanding export credit facility agreements as of December 31, 2015, the export credit
agency, the borrower under the facility, the outstanding principal amount, the interest rate, the number of remaining amortization
payments and the final maturity dates.
Export Credit Agency
Borrower
Interest Rate
Number of
Remaining
Amortization
Payments
Final Maturity
Outstanding
Principal
Amount
(in US$
millions)
China Development Bank (2009)(1)
China Development Bank (2009)
China Development Bank (2015)(2)
China Development Bank (2015)(5)
FINNVERA (2008)
FINNVERA (2009)
FINNVERA (2011)
FINNVERA (2014):
Tranche A
Tranche B
ONDD (2010):
Tranche A
Tranche B
ONDD (2013):
Tranche A
Tranche B
Export Development Canada (2012)
EKN (2011): (7)
Tranche A
Tranche B
Nordic Development Bank (2008)
US$
Telemar
Telemar
Telemar(3)
Telemar(3)
Telemar(3)
Telemar(3)
Telemar
27 LIBOR plus 2.50%
53 LIBOR plus 2.50%
600 LIBOR plus 1.90%
33 LIBOR plus 2.00%
106 LIBOR plus 1.07%
235 LIBOR plus 1.70%
129 LIBOR plus 0.90%
Oi
Oi
123 LIBOR plus 1.00%
0 LIBOR plus 1.00%
Telemar
Telemar
Oi
Oi
Telemar
Telemar
Telemar
Telemar
36 LIBOR plus 1.40%
84 LIBOR plus 1.40%
81 LIBOR plus 1.50%
40 LIBOR plus 1.50%
2.25%
153
2.21%
22
40
2.21%
35 LIBOR plus 1.18%
February 2016
October 2016
1
2
5(4) December 2020
14(6)
June 2025
December 2018
6
August 2019
8
February 2021
11
14
16
8
10
13
15
13
7
9
6
November 2022
November 2023
August 2019
August 2020
March 2023
March 2024
May 2022
June 2021
February 2020
February 2021
July 2018
(1) All amounts outstanding under this facility were paid at maturity in February 2016.
(2) The proceeds of this credit facility were required to be used to pay up to 70% of the existing financial indebtedness due and
payable by Oi or Telemar since January 1, 2015 and through December 2016.
(3) The obligations under this credit export facility agreement are fully and unconditionally guaranteed by Oi S.A.
(4) The outstanding principal amount of these loans is payable in four unequal semi-annual installments commencing in April 2019
with a final payment upon maturity in December 2020.
(5) An additional US$568 million is available for disbursement under this facility.
(6) The outstanding principal amount of these loans is payable in 13 unequal semi-annual installments commencing in April 2019
with a final payment upon maturity in June 2025.
(7) All amounts outstanding under this facility were paid in April 2016 pursuant to a requirement that we prepay all outstanding
amounts in the event that our credit rating was downgraded below Ba2 by Moody’s or BB by Fitch.
Unsecured Lines of Credit
In May 2008, Telemar entered into an unsecured line of credit with a Brazilian financial institution in the aggregate amount of
R$4,300 million to finance the acquisition of control of Oi. The loans under this line of credit originally bore interest at the rate of the
CDI rate plus 1.30% per annum, payable semi-annually in arrears in May and November of each year, commencing in May 2010. As
a result of the renegotiation of the terms and conditions of these loans in May 2011, these loans bear interest at the rate of the CDI
rate plus 1.00% per annum from May 2011 to May 2014 and at the rate of CDI rate plus 1.83% per annum from May 2014 to May
2018. The principal of these loans is payable in seven equal annual installments, commencing in May 2010. As of December 31,
2015, the outstanding principal amount under this line of credit was R$2,304 million.
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In November 2011, Oi, Oi Mobile, Telemar and TNL PCS entered together into a revolving credit facility with a syndicate of
international institutions. As a result of the merger of TNL PCS with and into Oi Mobile in February 2014, Oi Mobile assumed all of
TNL PCS’s rights and obligations under this credit facility. Under this facility, up to US$1 billion aggregate principal amount will be
available for disbursement to the borrowers during the five-year term of this facility. As of December 31, 2015, the outstanding
principal amount under this revolving credit facility was US$700 million. As of the date of this annual report, all amounts outstanding
under this revolving credit facility have been repaid and this facility has been terminated.
Credit Facilities with BNDES
We and our subsidiaries have entered into a variety of credit facilities with BNDES. The proceeds of these credit facilities have
been used for a variety of purposes, including funding our investment plans, funding the expansion of our telecommunications plant
(voice, data and video), and making operational improvements to meet the targets established in the General Plan on Universal
Service Goals and the General Plan on Quality Goals in effect at the time of these loans.
The following table sets forth selected information with respect to our BNDES credit facilities as of December 31, 2015.
Facility
Oi Mobile 2009 credit facility(1):
Floating-rate loans
Fixed-rate loans
2012 credit facility:
Oi A loans
Oi B loans
Oi C loans
Telemar A loans
Telemar B loans
Telemar D loans
Telemar E loans
Oi Mobile A loans(4)
Oi Mobile B loans(4)
Oi Mobile C loans(4)
Outstanding
Principal
Amount
(in millions
of reais)
Interest Rate
Amortization
Schedule
Final Maturity
71
16
TJLP plus 3.95%
4.50%
Monthly(2)
Monthly(2)
December 2018
December 2018
360
49
157
678
109
71
6
398
96
29
TJLP plus 4.08%
2.50%
2.50%
TJLP plus 4.08%
2.50%
TJLP plus 2.18%
TJLP
TJLP plus 4.08%
2.50%
2.50%
Monthly(3)
Monthly(3)
Monthly(3)
Monthly(3)
Monthly(3)
Monthly(3)
Monthly(3)
Monthly(3)
Monthly(3)
Monthly(3)
July 2021
January 2021
January 2021
July 2021
January 2021
January 2021
January 2021
July 2021
January 2021
January 2021
(1) Represents four separate facilities. On September 30, 2013, the obligations of Telemar under its 2009 Credit Facility and the
obligations of Oi under its 2009 Credit Facility were assumed by TNL PCS, in each case with the consent of BNDES. As a
result of the merger of TNL PCS with and into Oi Mobile in February 2014, Oi Mobile assumed TNL PCS’s obligations under
this credit facility and the obligations of TNL PCS under its 2009 Credit Facility.
(2) Amortization on this facility commenced in January 2012.
(3) Amortization on this facility commenced in August 2015.
(4) As a result of the merger of TL PCS with and into Oi Mobile in February 2014, Oi Mobile assumed TNL PCS’s obligations
under this credit facility.
Debentures
We have issued several series of debentures in the Brazilian market. All of these securities pay interest annually or semi-
annually in arrears. The table below sets forth our outstanding debentures as of December 31, 2015, the outstanding principal amount
of these securities, the applicable interest rates, and their maturity dates.
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Security
Oi 9th issuance; 1st series (1)
Oi 8th issuance
Oi 10th issuance
Oi 9th issuance; 2nd series (1)
Oi 5th issuance; 2nd series (1)
Telemar 2nd issuance
Outstanding Principal
Amount
(in millions of reais)
Interest Rate
Final Maturity
R$
10
2,350
1,500
43
6
31
CDI plus 0.94%
CDI plus 1.15%
CDI plus 0.75%
IPCA plus 6.20%
IPCA plus 7.98%
IPCA plus 0.50%
March 2017
December 2018(2)
March 2019
March 2020(3)
April 2020
July 2021
(1) All outstanding amounts under these debentures were prepaid in April 2016.
(2) The outstanding principal amount of these debentures is payable in three equal annual installments in December 2016, 2017 and
2018.
(2) The outstanding principal amount of these debentures is payable in two equal annual installments in March 2019 and 2020.
Real Estate Securitization Transaction
In August 2010, Telemar transferred 162 real estate properties to our wholly-owned subsidiary Copart 4 Participações S.A., or
Copart 4, and Oi transferred 101 real estate properties to Copart 5 Participações S.A., or Copart 5, our wholly-owned subsidiary.
Telemar entered into lease contracts with terms of up to 12 years for the continued use of all of the properties transferred to Copart 4
and Oi entered into lease contracts with terms of up to 12 years for the continued use of all of the properties transferred to Copart 5.
Copart 4 and Copart 5 assigned the receivables representing all payments under these leases to Brazilian Securities Companhia
de Securitização, which issued Real Estate Receivables Certificates (Certificados de Recebíveis Imobiliários), or CRIs, backed by
these receivables. The CRIs were purchased by Brazilian financial institutions.
We received net proceeds from the assignment of lease receivables in the total aggregate amount of R$1,585 million on a
consolidated basis, and recorded our obligations to make the assigned payments as short- and long-term debt in our consolidated
financial statements. The aggregate net effective interest rate on this transaction is 102% of the CDI rate. The proceeds raised in this
transaction were used to repay short-term debt. In June 2012, each of Copart 4 and Copart 5 partially redeemed the CRIs that they had
issued for an aggregate amount of R$393 million. As of December 31, 2015, the aggregate liability under these leases was R$952
million.
Capital Expenditures
During 2015 we followed the strategy included in the Transformation Plan of modernizing our core network, with a focus on
infrastructure improvements and enhancing our customers’ experience, by making strategic investment decisions that allow us to do
more with less. As a result, we expanded our fiber optic backbone, which enhanced our data traffic capabilities for fixed and mobile
networks, to keep up with the growing demand, In addition, our performance on ANATEL’s network quality metrics improved.
Our efforts to lower our capital expenditures in 2015 include: (1) renegotiating contracts with our suppliers; (2) increasing our
involvement in fixed network sharing, including RAN sharing on our 4G network; and (3) structural projects that increase the
efficiency of services to both fixed and mobile broadband customers (i.e. faster downloads, higher quality HD video channels, and
improved voice and video calls) and reduce infrastructure costs.
Our capital expenditures on property, plant and equipment and intangible assets of our continuing operations were R$3,681
million in 2015, R$5,382 million in 2014 and R$6,614 million in 2013. Our capital expenditures on property, plant and equipment
and intangible assets of our discontinued operations were R$911 million in 2014. The following table sets forth our capital
expenditure payments on plant expansion and modernization of our continuing operations for the periods indicated.
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Data transmission equipment
Installation services and devices
Mobile network and systems
Voice transmission
Information technology services
Telecommunication services infrastructure
Buildings, improvements and furniture
Submarine cables
Network management system equipment
Backbone transmission
Internet services equipment
Other
Total capital expenditures
2015
Year Ended December 31,
2014
(in millions of reais)
2013
R$1,201
358
528
605
380
444
73
—
72
293
2
208
4,164
R$1,207
878
877
663
454
281
166
—
113
159
3
478
5,279
R$1,699
625
1,120
886
370
405
289
23
227
69
6
531
6,250
Our principal capital expenditures relate to a variety of projects designed to expand and upgrade our data transmission networks,
our mobile services networks, our voice transmission networks, our information technology equipment and our telecommunications
services infrastructure.
Data Transmission Equipment Programs
In our access networks, we have been engaged in a program of deploying FTTH technology to support our “triple play” and
“quadruple play” services, using a GPON network engineered to support satellite video transport services, IP TV and RF overlay
video services, internet with speeds up to up to 200 Mbps, and VoIP services.
We have acquired and installed data communications equipment to convert elements of our networks that used ATM protocol
over legacy copper wire and SDH protocols to MPLS protocol over optical fiber, which supports IP and permits the creation of VPNs
through our MetroEthernet networks. We also deployed an optical switching layer based on optical transport network technology in
order to provide more efficient use of our DWDM capacity, fast restorations, and IP routers traffic offloading.
In 2015 Oi began implementing a new broadband data communications network architecture, which we refer to as the Single
Edge project. This architecture enables Oi to offer access network services such as mobile, broadband, IPTV, and B2B in a single
platform, which eliminates the need for individual management of each type of access network, expedites the resolution of networks
problems and minimizes maintenance and operation costs.
In 2015, we transformed our IP backbone to expand its capacity and speed to operate 10/100 Gbps line rate interfaces on our
new OTN/DWDM network over 30,000 km of fiber-optic cable. The OTN/DWDM network is designed to protect against
interruptions in service caused by external events and accidents. Since January 2014, Our OTN/DWDM network has experienced an
average annual growth of traffic, especially in data traffic, of more than 40% per year.
In addition to expanding our IP backbone capacity, we are continuing to simplify our transport network architecture through the
adoption of the single edge concept, which means using one single router to join our commercial, mobile and residential functions
that would otherwise require many specialized routers. We believe that this network simplification will reduce both capital and
operational expenditures.
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We are implementing wireless local loop technology in areas not supported by our fixed-line network to provide service to our
customers through our 2G network.
We have undertaken a project to upgrade a portion of our mobile networks to enable us to increase the capacity of our mobile
network. Since December 2007, when we acquired our authorizations to provide 3G services, we have engaged in a program of
developing our 3G network. We are deploying new radio base stations and transceivers to improve our 3G coverage and quality in
areas we already serve, reducing the level of signal congestion in these areas, and to expand our 3G service to municipalities in
Regions I, II and III where we currently do not provide 3G service. We are continuing to upgrade portions of our 3G mobile network
to support greater data rates through the HSPA+ standard.
In 2014, we extended our service area to include 118 new municipalities with 3G technology. We also activated HSPA+ in
3,302 sites in 2014, which allowed our customers to transfer data at higher speeds. We currently provide 3G services to 1,290
municipalities. We have increased the capacity of our 3G network in order to support the growing demand for mobile data services.
We expect to perform capacity expansions in 37% of our existing 3G sites during 2016 to increase the speed of our 3G connection.
Furthermore, in order to improve the experience of our data service users, we began granting our 2G users access to our 3G network
by migrating the user’s data plan from 2G to 3G and upgrading their devices to be 3G compatible.
4G Network
In June 2012, we acquired the authorizations and radio frequency licenses necessary for us to commence the offering of 4G
services throughout Brazil. We intend to offer 4G services throughout Brasil using LTE network technology and have begun
deploying our 4G network. As part of this project, we have upgraded our existing mobile core to the LTE Evolved Packet Core, using
an Evolved NodeB base station under a Radio Access Network that we will share with other Brazilian mobile services operators.
In 2013, we commenced offering 4G services in the 12 cities where the FIFA World Cup was held, pursuant to the 2013 RAN
Sharing Agreement. For a discussion of RAN sharing, see “Item 4: Information on the Company—Network and Facilities—
Infrastructure Sharing Agreements—4G Network.” In addition, we extended LTE services in 2015 to cities with over 200,000
inhabitants, including 88 new municipalities, as a result of obligations imposed by ANATEL.
Voice Transmission Network Programs
We are engaged in a program of investing in new equipment for our switching station to support next-generation networks to
support offerings of new value-added services to our fixed-line customers. We believe that our investment in next-generation
networks will:
•
•
•
assist us in meeting the increased demand for long distance traffic, both domestic and international, through the use of
VoIP;
permit us to offer differentiated services, such voice over broadband; and
significantly promote fixed-to-mobile convergence.
As part of this program, we are concluding the deployment of an IP Multimedia Subsystem, or IMS, core that will facilitate our
convergent voice, broadband and IP TV offerings. The IMS core not only will provide control for the VoIP resource but also
integrated access control and authentication for all three services, significantly improving automation and speed for customer
provisioning.
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We are also undertaking a program of removing and replacing smaller switching stations and integrating these operations with
other switching stations to promote efficiency in our operations.
We monitor the anticipated demands of new residential developments and the service demand growth of existing residential
areas to ensure that we make adequate network equipment available to service the demands of these areas.
Information Technology Services Programs
We are investing in the expansion of supply of our cloud computing services in data centers, particularly in the State of São
Paulo, in order to support the growing demand from our corporate customers. Our cloud computing services enable us to provide our
customers with integrated telecommunications and information technology solutions.
Telecommunications Services Infrastructure Programs
We are investing in several structural projects in order to improve and modernize our business support systems, or BSS, and
operational support systems, or OSS, and consolidate duplicative systems resulting from integrating previously acquired companies,
thereby optimizing our capital and operational expenditure investments. Based on the Telemanagement Forum frameworks and best
practices, our main projects are unified customer relationship management; network provisioning services; order management;
consolidation of network inventory; network planning, project and construction; network fault management; performance
management; customer experience management; API management and digital self-care, among others.
One of the primary projects connected to the OSS is related to assurance and quality. In March 2013, we began investing in a
transition from a network centric monitoring system to a customer focused approach and thereby our network operations will migrate
from network operations centers to service operations centers which will provide more efficient and customer-based support. We
expect to complete this project in January 2017.
Another of our projects is to improve fulfillment by speeding up service creation and provisioning, reduce costly human
intervention and increase overall customer quality of experience through automation of fulfillment processes. Our goal is to evolve as
close as possible to a zero-touch provisioning process, without user intervention. This project began in March 2012 and is expected to
be completed in December 2016.
We are investing in the expansion of our transport networks in an effort to ensure that our networks continue to have the
capacity to serve our customers and to support our plans to expand our services. In 2015, we activated the first chain in Brazil of
entirely 100 Gbps interfaces along our OTN/DWDM network of over 30,000 km of fiber optic cables connecting 12 Brazilian capitals
(Rio de Janeiro, São Paulo, Belo Horizonte, Vitoria, Porto Alegre, Florianópolis, Curitiba, Salvador, Fortaleza, Recife, Teresina and
Brasilia). This structural transformation is intended to increase the quality and data transmission capacity of our network as well as
protect against interruptions in service caused by external events and accidents.
We are also investing in projects to improve our networks by increasing the redundancy of our wire and fiber optic cable routes
and establishing network mesh routes. We also perform preventive maintenance on sections of our network that have unusually high
failure rates, and have a program to replace network elements in these sections.
We are investing in the standardization of our facilities to deter fraud and improve the quality of our services, including the
replacement of some of our public telephones.
Off-Balance Sheet Arrangements
We do not currently have any transactions involving off-balance sheet arrangements.
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ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
Our board of directors (conselho de administração) and our board of executive officers (diretoria) are responsible for operating
our business.
Board of Directors
Our board of directors is a decision-making body responsible for, among other things, determining policies and guidelines for
our business and our wholly-owned subsidiaries and controlled companies. Our board of directors also supervises our board of
executive officers and monitors its implementation of the policies and guidelines that are established from time to time by the board
of directors. Under the Brazilian Corporation Law, our board of directors is also responsible for hiring independent accountants.
Our by-laws provide for a board of directors of up to 11 members and an equal number of alternate members. As of the date of
this annual report, our board of directors is composed of 10 members and nine alternate members. During periods of absence or
temporary unavailability of a regular member of our board of directors, the corresponding alternate member substitutes for the absent
or unavailable regular member.
The members of our board of directors are elected at general meetings of shareholders for two-year terms and are eligible for
reelection. The terms of all current members expire at our annual shareholders’ meeting that approves the financial statements for the
year ended December 31, 2017. Members of our board of directors are subject to removal at any time with or without cause at a
general meeting of shareholders. Our by-laws do not contain any citizenship or residency requirements for members of our board of
directors. Our board of directors is presided over by the chairman of the board of directors, and, in his absence, on an interim basis,
by his designated alternate. The chairman of our board of directors is elected by the general meeting of shareholders that elects the
directors. Our by-laws provide that the chairman of our board of directors may not serve as our chief executive officer.
Our board of directors ordinarily meets once every month and extraordinarily when a meeting is called by the chairman or any
two other members of our board of directors. Decisions of our board of directors require a quorum of a majority of the directors and
are taken by a majority vote of those directors present.
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The following table sets forth certain information with respect to the current members of our board of directors and their
alternates.
Name
José Mauro Mettrau Carneiro da Cunha
Fernando Marques dos Santos
Luiz Antonio do Souto Gonçalves
Joaquim Dias de Castro
Rafael Luís Mora Funes
João do Passo Vicente Ribeiro
João Manuel Pisco de Castro
Pedro Guimarães e Melo de Oliveira Guterres
Luís Maria Viana Palha da Silva
Maria do Rosário Amado Pinto Correia
André Cardoso de Menezes Navarro
Nuno Rocha dos Santos de Almeida e Vasconcellos
Thomas Cornelius Azevedo Reichenheim
Sérgio Bernstein
Robin Anne Bienenstock
Marcos Grodetzky
Marten Pieters
Pedro Zañartu Gubert Morais Leitão
Ricardo Malavazi Martins
Position
Member Since
Age
Chairman February 2009 66
Alternate May 2012
63
Director September 2015 59
Alternate September 2015 37
51
Director October 2014
Alternate September 2015 67
Director February 2016 50
Alternate February 2016 44
Director September 2015 59
Alternate February 2016 61
Director September 2015 52
Alternate September 2015 51
Director September 2015 68
79
Alternate April 2014
Director September 2015 47
Alternate September 2015 59
Director September 2015 62
Alternate September 2015 50
Director September 2015 51
We summarize below the business experience, areas of expertise and principal outside business interests of our current directors
and their alternates.
Directors
José Mauro Mettrau Carneiro da Cunha. Mr. Cunha has served as our chairman since February 2009. From January 2013 until
June 2013, Mr. Cunha served as our interim chief executive officer, during which time he resigned as chairman and member of our
board of directors. He resumed his position as our chairman and a member of our board of directors in June 2013. Mr. Cunha has also
served as chairman of the board of directors of Dommo Empreendimentos Imobiliários since 2007. He previously served as chairman
of the board of directors of (i) TNL from April 1999 until March 2003 and from April 2007 until February 2012, where he also served
as an alternate director in 2006; (ii) Telemar Norte Leste S.A. from April 2007 until April 2012, where he served as a member of the
board of directors from April 1999 until May 2012; (iii) TNL PCS from April 2007 until April 2012; (iv) Tele Norte Celular
Participações S.A. from April 2008 until February 2012; and (v) Coari Participações S.A. from May 2007 until February 2012. In
addition, Mr. Cunha was a director of TmarPart from April 2008 until September 2015. He has also served on the board of directors
of Santo Antonio Energia S.A. since April 2008 and Pharol since May 2015. He was a member of the board of directors of Vale S.A.
from April 2010 until April 2015. Mr. Cunha was an executive officer of Lupatech S.A. from April 2006 to April 2012, where he
served as a member of the board of directors from April 2006 to April 2012. He has also held several executive positions at BNDES,
and was a member of its board of executive officers from 1991 to 2002. He was the vice president of strategic planning of Braskem
S.A. from February 2003 to October 2005, and business consultant from November 2005 to February 2007. Mr. Cunha was a member
of the board of directors of Log-In Logistica Intermodal from April 2007 to March 2011, Braskem S.A. from July 2007 to April 2010,
Banco do Estado do Espírito Santo S.A. (Banestes) from April 2008 to April 2009, Light Serviços de Eletricidade S.A. from
December 1997 to July 2000, Aracruz Celulose S.A. from June 1997 to July 2002, FUNTTEL from December 2000 to January 2002,
FUNCEX- Fundação Centro de Estudos do Comércio Exterior from June 1997 to January 2002, and Politeno Indústria e Comércio
S.A. from April 2003 to April 2004. Mr. Cunha holds a bachelor’s degree in mechanical engineering from Universidade Católica de
Petrópolis in Rio de Janeiro and a master’s degree in industrial and transportation projects from Instituto
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Alberto Luiz Coimbra de Pós-Graduação (COPPE) at Universidade Federal do Rio de Janeiro. He attended the Executive Program in
Management at the Anderson School at the University of California in Los Angeles.
Luiz Antonio do Souto Gonçalves. Mr. Gonçalves has been serving on our board of directors since September 2015. He is
currently the superintendent of the Venture Capital area of BNDES Participações S.A. (BNDESPAR), responsible for the investment,
monitoring, and divestiture in closely-held companies of the BNDESPAR portfolio and Equity Investment Funds since 2011.
Mr. Gonçalves started his career at BNDES in 1982 as engineer of the Priority Area, where he also served as planning manager of
BNDESPAR, head of the Urban Mobility Department, head of the Planning Department of BNDES, and superintendent of the capital
markets area of BNDESPAR. He also worked as head of the Claims Department of Banco Bradesco between 1980 and 1982.
Mr. Gonçalves holds a bachelor’s degree in mechanical engineering from UERJ in Rio de Janeiro (1980), an Executive MBA from
COPPEAD/UFRJ in Rio de Janeiro (1980), a master’s degree in production engineering from COPPE/UFRJ in Rio de Janeiro (2001),
and Ph.D. in production engineering from COPPE/UFRJ (2003 to 2004).
Rafael Luís Mora Funes. Mr. Funes has served as a member of our board of directors since October 2014 and has served as the
coordinator of the Engineering, Technology and Networks Committee since September 2015. Mr. Funes is currently a member of the
board of directors of Pharol, chairman of the board of directors of Webspectator Corp., and member of the Advisory Board of ISCTE
Business School. Mr. Funes holds a bachelor’s degree in economy and business management from Malaga University.
João Manuel Pisco de Castro. Mr. Castro has served as a member of our board of directors since February 2016 and previously
was an alternate member of our board of directors since September 2015. Mr. Castro serves as vice president of Grupo Visabeira
SGPS S.A., Visabeira Imobiliária SGPS S.A., Visabeira Indústria SGPS S.A., Visabeira Participações Financeiras SGPS S.A., and
Vista Alegre Atlantis SGPS S.A. He serves as the CEO of Visabeira Global SGPS S.A., Visagreen SGPS S.A., and Real Life
Tecnologia de Informação S.A. and is the manager of the following companies: Ambitermo Engenharia e Equipamentos Térmicos
S.A., Gevisar SGPS S.A., Granbeira Sociedade de Exploração e Comércio de Granitos, Granbeira II Rochas Ornamentais S.A.,
Visacasa S.A., Constructel (Belgium), Constructel Sweden AB, and Constructel (Russia). In addition, Mr. Castro has served as a
member of the board of directors of Grupo Visabeira SGPS S.A. from 2002 to 2007, president of the Instituto de Gestão Financeira e
de Infra-Estrutiuras da Justiça I.P. from 2007 to 2009 and as manager of the following companies: Visabeira Telecomunicações e
Construção SGPS S.A. from 2002 to 2006, Visabeira Serviços SGPS S.A. from 2003 to 2005, Ifervisa S.A. from 2005 to 2007, Viatel
S.A. from 2005 to 2007, Visacasa S.A. from 2003 to 2005, Figueira Paranova S.A. from 2005 to 2006 and Beiragás S.A. from 2000
to 2003. He also served as: manager of Visabeira Ltda. from 2004 to 2007, management advisor of Grupo Visabeira from 1995 to
2000, CEO of Grupo Visabeira in Azores from 1993 to 1995, regional officer of Grupo Visabeira in Lisbon from 1989 to 1993, head
of department of Centro e Exploração de Carcavelos dos TLP from 1985 to 1989, specialist in production management of TLP from
1983 to 1985, professor at Escola Salesiana do Estoril from 1981 to 1983 and managing partner and professor of Externato das
Neves, Viana do Castelo from 1977 to 1981. Mr. Castro holds a bachelor’s degree in electrical engineering, with a specialization in
telecommunications and electronics, from Instituto Superior Técnico and an MBA from Faculdade de Economia da Universidade de
Lisboa.
Luís Maria Viana Palha da Silva. Mr. Silva has served as a member of our board of directors since September 2015 and
currently serves as chairman of the board of directors and CEO of Pharol. Mr. Silva served as vice-chairman of the board of directors
and executive committee of GALP Energia, SGPS, SA from 2102 to 2015. He was a member of the board of directors and audit
committee of NYSE Euronext from 2012 to 2013. Mr. Silva worked at Jerónimo Martins, SGPS, S.A. as CFO from 2001 to 2004,
and as CEO from 2004 to 2010. In 2011, he worked at Jerónimo Martins, SGPS, S.A. as non-executive member of the board of
directors and chairman of the corporate responsibility committee. He served as CFO of CIMPOR - Cimentos de Portugal from 1995
to 2001 and as State Secretary of Commerce of Portugal from 1992 to 1995, responsible for foreign economic relations, trade and
investment, and supervision of domestic trade, food security, and antitrust enforcement. Mr. Silva served as CFO at COVINA,
Companhia Vidreira Nacional, from 1987 to 1992. Mr. Silva holds a bachelor’s degree in economics from Instituto Superior de
Economia (1978) and in business administration from Universidade Católica Portuguesa (1981). He attended the Advanced
Management Program at University of Pennsylvania - Wharton School of Economics (2005).
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André Cardoso de Menezes Navarro. Mr. Navarro has served as a member of our board of directors since September 2015. He
also serves as general director of Millennium Investment Bank where he is responsible for the investment division, and as a member
of the board of directors of Interoceanico where he is responsible for monitoring the company’s investment portfolio management. He
acted as chairman of the Banco Privado Atlantico Europa from 2008 to 2014, as CEO of Société Generale Corporate and Investment
Bank from 2002 to 2008, and as shareholder and managing director of Fundamentis Investimentos from 2000 to 2002. Between 1998
and 2002, he worked as managing director of the International Division of Banco Espírito Santo and, between 1992 and 1998, as
managing director of the Corporate and the Investment Divisions of the same bank. He worked in the Investment Area of the
Companhia Nacional de Mineração (Brazil) from 1986 to 1990, and as credit analyst of the Chase Banco Lar (Brazil) from 1986 to
1988. He graduated with a law degree from the State University of Rio de Janeiro in 1986, received a graduate degree in Finance
from the Fundação Getúlio Vargas (“FGV”) in 1988, an MBA from the American Graduate School of International Business -
Thunderbird, in 1992, and attended the Executive Program in Leadership at the Harvard Business School in 2014.
Thomas Cornelius Azevedo Reichenheim. Mr. Reichenheim has served as a member of our board of directors since September
2015. He has been the CEO of Carisma Comercial Ltda., a foreign trade company, since 2002, and a member of the board of directors
of Jereissati Telecom S.A. since 2010. He served as market relations officer and member of the management of Grupo Jereissati from
1984 to 2015. He served as member of the board of directors of Didier & Levy Associados, a brokerage firm, from 1998 to 2014.
Mr. Reichenheim served as: (i) commercial officer, insurance officer, and investment officer of Banco Auxiliar from 1977 to 1983;
(ii) foreign exchange manager, commercial manager, and assistant officer of Banco Real from 1972 to 1977; and (iii) trainee of the
marketing area of Banco Unibanco from 1969 to 1971. Mr. Reichenheim holds a bachelor’s degree in business administration from
EAESP - FGV/SP (1972) and law from FMU (1972). He holds graduate degrees in business administration and finance from EAESP
FGV/SP.
Robin Anne Bienenstock. Ms. Bienenstock has served as a member of our board of directors since September 2015.
Ms. Bienenstock, a telecom expert, is a partner of Gladwyne Partners, an investment fund. Previously, she was the senior analyst
covering Latin American and European Telecoms at Sanford C Bernstein for seven years. Ms. Bienenstock was an associate principal
at McKinsey & Co. She started her career working for Bunting Warburg as an investment banking analyst and also worked for the
European Union Administration of Mostar in Bosnia, managing a revolving loan fund for small and medium companies.
Ms. Bienenstock holds a bachelor’s degree from Oxford University in politics, philosophy and economics, a master’s degree from
SDA Bocconi in international economics and management.
Marten Pieters. Mr. Pieters has served as a member of our board of directors since September 2015. He served as managing
director and chief executive officer of Vodafone India Ltd. (before that Vodafone Essar Ltd) in India from April 2009 until April
2015. Mr. Pieters has served as vice chairman and chairman of Cellular Operators Association of India between August 2012 and July
2015. Mr. Pieters served as chief executive officer of MSI, which became Celtel International B.V., from 2003 until 2007, during
which period the company with mobile operations in 14 African countries was acquired by MTC Kuwait. Between 1989 and 2003, he
worked at KPN, the Dutch incumbent operator, where he has served as member of the executive management board of KPN Telecom
since 2000 as the person responsible for the Business Solutions division of KPN and for its investments in emerging markets.
Mr. Pieters also served as executive vice president of the international operations division of KPN, covering Eastern and Central
Europe, Asia, and the United States. In 1989, he started working at KPN as secretary of the board of directors. He also served as
commercial officer and general manager of a telecommunications district. Since 1995, Mr. Pieters has been serving in KPN as vice
president of the international operations division, and was responsible for the affiliates of KPN. Since 1998, he has been serving as
executive vice president for KPN International. He was a member of the (supervisory) boards of a number of operators, including
Cesky Telecom in Czech Republic, Eircom plc in Ireland, Utel and UMC in the Ukraine, Pannon GSM in Hungary, Euroweb,
KPNQwest and Xantic, a joint venture between Telstra and KPN. Mr. Pieters served as non-executive officer of Millicom
International Cellular SA between May 2008 and February 2009. Before beginning his career in the telecommunications industry,
Mr. Pieters worked for 11 years (from 1979 until 1989) at the Royal Smilde Foods as chief financial and strategic planning officer
and CEO of certain subsidiaries in the Netherlands. Mr. Pieters currently is a member of the board of directors of Vodafone India,
INDUS Towers and Vodacom in South Africa. He is actively involved in charities and serves as chairman of the supervisory board of
the Investment Fund for Health in Africa. He also serves as officer of Social Investor Foundation for Africa. Mr. Pieters holds a law
degree
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from University of Groningen, Netherlands, and a graduate degree in economics from the University of Groningen, Netherlands.
Ricardo Malavazi Martins. Mr. Martins has served as a member of our board of directors since September 2015. He has been a
member of the board of directors of Jereissati Participações S.A., a company that holds equity interest in other companies, since
March 2011 and a member of the board of directors of Pharol since May 2015. He is currently an associate of TPYX Assessoria
Empresarial and has been serving as member of the Corporate Governance Committee of the American Chamber of São Paulo since
2003. Mr. Martins served as chief financial and investments officer of PETROS for 6 years and as officer and consultant of Stratus
Investimentos (a private equity management firm) for 3 years. He was a member of the board of directors of the following companies:
Trisul S.A.; Fras-Le S.A.; Iguatemi Empresa de Shopping Centers S.A.; CPFL; and Coteminas S.A. He was a member of the fiscal
council of Brasil Telecom, Brasil Telecom Participações S.A., Telemar Participações S.A., and Tele Norte Leste Participações S.A.
Mr. Martins was a member of the advisory board of ABVCAP (Associação Brasileira de Venture Capital e Private Equity) and of the
investment committee of ABRAPP. He started his executive career as an economist focused on treasury transactions of banks
(responsible for the economic areas of BCN and Bradesco) between 1990 and 2003, when he served as vice-president of the
Economy Commission (Comissão de Economia) of FEBRABAN. Mr. Martins holds a bachelor’s degree in economics from
UNICAMP, where he also attended courses in the master’s program, and attended courses for the MBA program in management at
IBMEC-RJ.
Alternate Directors
Fernando Marques dos Santos. Mr. Santos has served as an alternate member of our board of directors since September 2015.
He served as a member of our board of directors from May 2012 until September 2015. Since 2012, he has been an executive officer
of BNDES, where he is responsible for the human resources, AGIR Project and information technology and processes departments.
Prior to being named an executive officer, he served in the office of the president and vice-president of BNDES. Mr. Santos has
worked at BNDES since 1983, having served as superintendent of the credit department from 1994 to 2003, manager of the credit
department (compliance) from 1989 to 1994 and manager of the projects department from 1983 to 1989. He holds a degree in
mechanical engineering from Universidade do Estado do Rio de Janeiro – UERJ.
Joaquim Dias de Castro. Mr. Castro has served as an alternate member of our board of directors since September 2015. He has
been manager of the Capital Markets department of the BNDES since 2008 and worked in the Credit department of the BNDES from
2004 until 2008. Mr. Castro has been a member of the fiscal council of AES Eletropaulo since April 2011 and a member of the fiscal
council of JBS SA since April 2013. He served as a member of the fiscal council of AES Tiete from April 2011 to April 2013 and as
a member of the board of directors of Rede Energia S.A. from April 2010 to April 2012. He also served as a member of the board of
directors of Renova S.A. from April 2013 to April 2014, a member of the board of directors of Light S.A. from April 2010 to April
2012, board of directors of Tele Norte Leste Participações S.A., Telemar Participações S.A. from June 2015 to September 2015, and
CTX Participações S.A. from 2010 to 2012. Mr. Castro holds a bachelor’s degree in economics from Universidade Federal do Rio
Grande do Sul and a master’s degree in economics from Escola de Pós Graduação em Economia da Fundação Getúlio Vargas - RJ.
João do Passo Vicente Ribeiro. Mr. Ribeiro has served as an alternate member of our board of directors since September 2015.
He has been as manager of Pharol SGPS, S.A. since May 2015 and served as CEO of AMP-Sociedade Gestora de Fundos de
Investimento Mobiliário from 2014 to 2015. He was appointed coordinator of the Work Group on Financial Mechanisms and
Instruments to Support Tourism of the Tourism Office in Portugal in 2012. Mr. Ribeiro served as manager of SLN SGPS, S.A. from
2008 to 2009, manager of Banco Português de Negócios in 2008, president and founder of Quadrantis - Sociedade de Capital de
Risco from 2007 until 2008, CEO of PME Investimentos from 2004 to 2007, CEO of APFIN-Associação Portuguesa das Sociedades
Gestoras de Património e Fundos de Pensões from 2002 to 2003, manager of AF Investimento - Sociedade Gestora de Património e
Fundos de Investimento do Grupo BCP from 2002 to 2003, general officer of BCP-Banco Comercial Português and Banco Português
do Atlântico in the private banking, large companies, and retail banking areas from 1986 to 2002 and officer in Paris and London for
the branches of Banco Português do Atlântico from 1980 to 1986 and of the Instituto de Crédito de Angola from 1974 to 1975.
Mr. Ribeiro holds a bachelor’s degree in finance from Instituto Superior de Economia da Universidade de Lisboa and an MBA degree
from INSEAD in Fontainebleau, France.
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Pedro Guimarães e Melo de Oliveira Guterres. Mr. Guterres has been a member of our board of directors since February 2016
and previously served in this capacity from October 2014 to September 2015. Mr. Guterres has served as a regular member of the
board of directors of Pharol Brasil Ltda. since 2015. Mr. Guterres was an officer of Telemar Participações S.A. from 2011 to 2015, a
member of the board of directors of Bratel Brasil from 2011 to 2015, a member of the board of directors of Medi Telecom from 2008
to 2009 and director of planning and control of Portugal Telecom SGPS, S.A. (currently Pharol) from 2009 to 2010. Previously,
Mr. Guterres held the positions of director of corporate finance of Portugal Telecom, SGPS, S.A. from 2008 to 2010, director of
planning and control of PT Comunicações S.A. from 2007 to 2008, director of planning and control of PT Multimédia from 2003 to
2007 and director of business development of Portugal Telecom, SGPS, S.A. from 2000 to 2003. Before joining the Portugal
Telecom Group, Mr. Guterres worked at Merrill Lynch Investment Banking from 1997 to 2000. Mr. Guterres holds a degree in
economics from the Universidade Nova de Lisboa.
Maria do Rosário Amado Pinto Correia. Mrs. Pinto Correia has served as an alternate member of our board of directors since
February 2016. She has served as a member of the board of directors of Pharol since 2015, chairman of Ferreira Marques & Irmão
since 2012, and CEO of Topázio since 2012. Previously, Mrs. Pinto Correia held the positions of advisor to the Board of PT
International Investments in 2007, chairman and legal representative of CTTC-Archway/Beijing from 2005 until 2007, member of the
board of directors of PT Asia from 2005 until 2007, responsible for business development in Asia and Brasil for CLSBE Executive
Education from 2012 until 2015, supervisor of Directel (Yellow Pages) Cosmos and Telesat (technical support for MCTV) activities
from 2005 until 2007, CEO of Macau Cable TV from 2005 until 2007, director of client satisfaction and service quality at PT-SGPS
in 2004, director of knowledge management and communication at PT Comunicações in 2003, head of office of OGILVYONE
Portugal from 1994 until 2002), publisher of the Portugal edition of the Marie Claire magazine from 1992 until 1994), account
director at McCann Direct and director of client service at McCann-Erickson Lisbon from 1987 until 1992, product manager &
director of the Direct Mail Office at CTT – Correios de Portugal from 1981 until 1987. Mrs. Pinto Correia holds a bachelor’s degree
in economics from the Católica Lisbon School of Business and Economics, a master’s degree in business by Nova School of Business
and an MBA by Wharton School.
Nuno Rocha dos Santos de Almeida e Vasconcellos. Mr. Vasconcellos has served as an alternate member of our board of
directors since September 2015. He is currently the chairman of the board of directors of the following companies: Rocha dos Santos
Holding SGPS S.A., Ongoing Strategy Investments SGPS S.A., Ongoing TMT, Ongoing Media, Ongoing Energy, Económica SGPS,
RS Holding SGPS, Insight Strategic Investments SGPS S.A., Ongoing Comunicações e Participações S.A., and Heidrick & Struggles.
Mr. Vasconcellos was first elected as an executive officer of Pharol in 2006 and was reelected in 2012 and 2015. He served as the
chairman of the board of directors of Rocksun S.A. from 2008 to 2012, member of the general council of ISCTE from 2009 to 2011,
member of the board of executive officers of Automóvel Clube de Portugal from 2007 to 2011, managing partner of the consulting
area of Heidrick & Struggles in Portugal from 1995 to 2006 and officer of Andersen Consulting (current Accenture) from 1987 to
1995. Mr. Vasconcellos holds a bachelor’s degree in business administration from Curry College in Boston.
Sérgio Bernstein. Mr. Bernstein has served as an alternate member of our board of directors since April 2014. Mr. Bernstein is a
member of the board of directors of Iguatemi Empresa de Shopping Centers S.A., a holding company that invests in other companies.
He began his career as a trainee in the finance department of General Electric do Brasil in 1961, where he eventually served as
director controller for six years and vice-president of finance for four years. He also served as vice-president of finance of Grupo
Jereissati from 1990 until 2007, chairman of the fiscal council of TNL from May 2009 until February 2012 and member of the fiscal
council of Coari from September 2009 until February 2012. Mr. Bernstein holds a bachelor’s degree in civil engineering from Escola
Nacional de Engenharia do Rio de Janeiro.
Marcos Grodetzky. Mr. Grodetzky has served as an alternate member of our board of directors since September 2015). He
currently is an independent member of the board of directors of Smiles S.A., Centro de Cultura Judaica and Eneva S.A., and the CFO
of União Israelita Brasileira do Bem Estar Social - UNIBES, a philanthropic nonprofit organization, senior advisor to Banco UBS,
and a founding member of Mediator Assessoria Empresarial Ltda. Until October 2013, Mr. Grodetzky served as CEO of DGB S.A., a
logistics holding company of Grupo Abril S.A. and parent company of the following companies: Dinap - Dist. Nacional de
Publicações, Magazine Express Comercial Imp e Exp de Revistas, Entrega Fácil Logística Integrada, FC Comercial e Distribuidora,
Treelog S.A. - Logística e Distribuição, DGB Logística e Distribuição Geográfica, and TEX Courier (Total Express). In addition, he
served as
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finance and investor relations vice-president of Telemar/Oi, Aracruz Celulose/Fibria, and Cielo S.A from 2002 until 2010. He holds a
bachelor’s degree in economics from Universidade Federal do Rio de Janeiro and attended the Senior Management Program at
INSEAD/FDC.
Pedro Zañartu Gubert Morais Leitão. Mr. Leitão has served as an alternate member of our board of directors since September
2015. He has been the chairman of the board of directors of Prio Energy SGPS since May 2015, where he also served as chairman of
the executive committee. He served as chairman of the board of directors of ONI SGPS from 2012 to 2013, administrator of UnyLeya
Brasil and UnyLeya Portugal from 2010 to 2011. Mr. Leitão currently holds non-executive roles, including at MoteDAlma SGPS
since 2009, Villas Boas ACE, S.A. since 2012, and FikOnline Ltda. since 2003. Ha previously held other non-executive roles,
including at Quifel Natural Resources, S.A. from 2007 to 2012 and MegaFin S.A. from 2009 to 2012. Mr. Leitão holds a bachelor’s
degree in business administration from Universidade Católica Portuguesa and a master’s degree in business administration from
Kellogg Graduate School of Management at Northwestern University.
Executive Officers
Our board of executive officers is our executive management body. Our executive officers are our legal representatives and are
responsible for our internal organization and day-to-day operations and the implementation of the general policies and guidelines
established from time to time by our board of directors.
Our by-laws require that the board of executive officers consist of between three and six members, including a chief executive
officer, a chief financial officer, investor relations officer and chief legal officer. Our by-laws provide that our chief executive officer
may not serve as chairman of our board of directors. Each officer is responsible for business areas that our board of directors assigns
to them. The members of our board of executive officers, other than our chief executive officer and our chief financial officer, have
no formal titles (other than the title of executive officer or “Diretor”).
The members of our board of executive officers are elected by our board of directors for two-year terms and are eligible for
reelection. The current term of all of our executive officers ends on the date of our first board of directors’ meeting following our
annual shareholders’ meeting in 2016. Our board of directors may remove any executive officer from office at any time with or
without cause. According to the Brazilian Corporation Law, executive officers must be residents of Brazil but need not be
shareholders of our company. Our board of executive officers holds meetings when called by our chief executive officer or any two
other members of our board of executive officers.
The following table sets forth certain information with respect to the current members of our board of executive officers.
Name
Bayard De Paoli Gontijo
Flavio Nicolay Guimarães
Eurico De Jesus Teles Neto
Jason Santos Inácio
Marco Norci Schroeder
Position
Date Elected/
Appointed
Age
Chief Executive Officer
January 2015 43
Chief Financial Officer and Investor
Relations Officer
Chief Legal Officer
Executive Officer
Executive Officer
April 2015 40
May 2016
58
January 2014 41
April 2015 51
Summarized below is information regarding the business experience, areas of expertise and principal outside business interests
of our current executive officers.
Bayard De Paoli Gontijo. Mr. Gontijo has served as our chief executive officer since January 2015 and our chief financial
officer and investor relations officer since June 2013. Mr. Gontijo served as our interim chief executive officer between October 2014
and January 2015, and has served as one of our executive officers since
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April 2012. Mr. Gontijo started working at Oi as Treasury Manager in 2003. Mr. Gontijo has over 23 years’ experience in the
financial market and, since 1993, works with large companies and banks such as Banco Bamerindus do Brasil S.A, HSBC Bank
Brasil S.A., and NET Serviços de Comunicações S.A. Mr. Gontijo holds a degree in business administration and an MBA from
Coppead / UFRJ.
Flavio Nicolay Guimarães. Mr. Guimarães has served as our chief financial officer and investor relations officer since April
2015. Previously, he served as our treasury director from May 2010 to April 2015, regional corporate treasurer at Noble Brasil S.A.
from 2008 to 2010 and treasury manager at Brookfield Brasil form 2006 to 2008. Mr. Guimarães has also served as a trader at CSN -
Companhia Siderúrgica Nacional from 2003 to 2006 and Ford Motor Company Brasil from 2000 to 2003. He holds a bachelor’s
degree in foreign trade from Faculdades Associadas de São Paulo and a specialization in the executive development program from
The Wharton School, University of Pennsylvania.
Eurico de Jesus Teles Neto. Mr. Teles has served as our chief legal officer since May 2016, having previously served as one of
our executive officers from April 2012 until May 2016. He was a member of our board of directors from 2009 to 2011 and an
alternate member of our board of directors until April 2012. He previously served as member of the board of directors of Coari from
2009 until February 2012 and has been a member of the board of directors of Telemar from 2009 until its termination in 2012. He
was the legal officer of TNL from April 2007 through February 2012 and the legal manager of Telemar from April 2005 until April
2007. He previously served as manager of the securities division at Telecomunicações de Bahia S.A., where he went on to hold the
position of legal consultant in 1990. Mr. Teles holds a bachelor’s degree in economic sciences and law from Universidade Católica de
Salvador and holds a master’s degree in Employment Law from Universidade Estácio de Sá.
Marco Norci Schroeder. Mr. Schroeder has served as one of our executive officers since April 2015. He has also served as the
financial officer of our international operations since July 2014 and was elected as vice president and chief financial officer of PT
Portugal in August 2014. Previously, Mr. Schroeder has served as chief financial officer and investor relations officer of Contax
Participações from 2011 to 2013, a member of the board of directors of Fundação Sistel from 2009 to 2012, officer of the controlling
area of Telemar Norte Leste S.A. from 2002 to 2011, chief financial officer of Televisão Gaucha S.A. from 1991 to 1997, chief
financial officer of Televisão Cidade S.A. from 1999 to 2001 and officer of the controlling area of Net Controller from 1998 to 1999.
He chairs the fiscal council of FATL. Mr. Schroeder holds a bachelor’s degree in economics from Federal University of Rio Grande
do Sul and a specialization in the general management program at Harvard Business School.
Fiscal Council
The Brazilian Corporation Law requires us to establish a permanent or non-permanent fiscal council (conselho fiscal). Our by-
laws provide for a permanent fiscal council composed of between three and five members and their respective alternate members. The
fiscal council is a separate corporate body independent of our board of directors, our board of executive officers and our independent
accountants. The primary responsibility of the fiscal council is to review our management’s activities and our financial statements and
to report their findings to our shareholders.
The members of our fiscal council are elected by our shareholders at the annual shareholders’ meeting for one-year terms and
are eligible for reelection. The terms of the members of our fiscal council expire at the annual shareholders’ meeting in 2017. Under
the Brazilian Corporation Law, the fiscal council may not contain members
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who are members of our board of directors or our board of executive officers, spouses or relatives of any member of our board of
directors or our board of executive officers, or our employees. To be eligible to serve on our fiscal council, a person must be a
resident of Brazil and either be a university graduate or have been a company officer or fiscal council member of another Brazilian
company for at least three years prior to election to our fiscal council. Holders of preferred shares without voting rights and non-
controlling common shareholders that together hold at least 10.0% of our voting share capital are each entitled to elect one member
and his or her respective alternate to the fiscal council.
The following table sets forth certain information with respect to the current members of our fiscal council and their alternates.
Name
Allan Kardec de Melo Ferreira
Piero Carbone
José Cláudio Rego Aranha
Álvaro Bandeira
Pedro Wagner Pereira Coelho
Wiliam da Cruz Leal
Manuel Jeremias Leite Caldas(1)
Marissa Rose Vegele Renaud
(1) Elected by the preferred shareholders.
Position Member Since Age
Chairman February 2009 69
Alternate April 2016 60
Member April 2016 68
Alternate April 2016 65
Member April 2016 67
Alternate April 2016 59
Member March 2013 60
Alternate April 2016 26
We summarize below the business experience, areas of expertise and principal outside business interests of the current members
of our fiscal council and their alternates.
Fiscal Council Members
Allan Kardec de Melo Ferreira. Mr. Ferreira has served as chairman of our fiscal council since February 2009. He has also
served as an alternate member of the fiscal council of TmarPart since April 2006 and a member of the fiscal council of TNL from
April 2002 through February 2012. From 1971 to 1993, he was an in-house counsel with Construtora Andrade Gutierrez. His current
activities include management consultancy services to a number of companies in the civil, commercial and tax areas, participation in
corporate restructuring processes (mergers, spin-offs, disposals, sale of assets) of the telecommunications companies of the Andrade
Gutierrez Group and in several bidding processes conducted by the Minas Gerais Roads Department (Departamento de Estrada de
Rodagem de Minas Gerais), the Belo Horizonte Traffic Department (Empresa de Transporte e Trânsito de Belo Horizonte), the
Ministry of Communications and ANATEL. He holds a degree in law from Pontifícia Universidade Católica de Minas Gerais, in
addition to having participated in several extension courses in foreign trade, in particular export services, at Fundação Centro de
Comércio Exterior, FDC, Foreign Trade Ministry, and Construtora Andrade Gutierrez.
José Cláudio Rego Aranha. Mr. Aranha has served as a member of our fiscal council since April 2016. He served as a member
of the independent committee of Brazil Telecom July 2011 until August 2011, a member of the independent committee of Açúcar
Guarani April 10 until July 2010 and a member of the independent committee for JBS October 2009 until January 2010. Previously,
he was a director of Banco Nossa Caixa Capital Markets from September 2009 until December 2009, investment analyst, manager
and head of department of BNDESPAR from 1979 until 2008, advisor to the Board Finance and Infrastructure and Superintendent of
Fixed Income Area of BNDES from 1983 until 2002, project analyst at PETROQUISA from 1976 until 1979, planning engineer at
Promom ENGINEERING from 1974 until 1976, project analyst at Natron Engineering in 1973, engineer at Caterpillar Brazil
Services from 1972 until 1973 and project analyst at Tecnometal from 1971 until 1972. Mr. Aranha holds a bachelor’s degree in
industrial mechanical engineering from the School of Engineering Fluminense Federal University, a graduate degree in industrial
management from the Research Institute for Management Science in Delft, Holland and an executive MBA in business administration
from COPEAD.
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Pedro Wagner Pereira Coelho. Mr. Coelho has served as a member of our fiscal council since April 2016. He also serves as
chairman of the fiscal council of Magnesita S.A since April 2008, as member of the fiscal council of Parnaiba Natural Gas S.A since
October 2015 and as member of the supervisory board of Estacio Participações S.A since April 2012. Mr. Coelho was also a partner
of Carpe Diem - Consulting, Business Planning and Consulting Ltda. from 2011 until 2016. He worked as controller at Investment
Bank Garantia S.A from May 1982 until July 1997 at and as an auditor at Pricewaterhouse Coopers Independent Auditors from
October 1978 to April 1981. Previously, he was chairman of the fiscal council of Lojas Americanas S.A, Tele Norte Leste
Participações SA, Telemar Participações S.A, TAM S.A and Enersul - Energy of South Mato Grosso. Mr. Coelho holds a bachelor’s
degree in business administration from the University Society Augusto Motta - SUAM and in accounting from SOMLEI.
Manuel Jeremias Leite Caldas. Mr. Caldas has served as a member of our fiscal council since March 2013. He has been a
consultant at Alto Capital Gestão de Recursos since 2007 and a partner at Argucia Capital Gestão de Recursos Ltda. since 2012. In
addition, he served as manager of the technical department of Banco PEBB S.A. from 1996 to 2006, research manager at Banco
Gulfinvest S.A. from 1994 to 1995, manager of the economics department at Banco Nacional S.A. from 1991 to 1994, financial
analyst at Banco Bozano Simonsen S.A. from 1990 to 1991, engineer at Light Serviços de Eletricidade S.A. from 1981 to 1990 and
engineer at Promon in 1981. Mr. Caldas has served as a member of the board of directors of Eletropaulo Metropolitana Eletricidade
de São Paulo S.A. since April 2012, an alternate member of the board of directors of Contax Holdings since 2012 and São Carlos
Empreendimentos e Participações S.A. from 2011 to 2013, member of the board of directors of Forjas Taurus from 20013 until 2015;
a member of the fiscal council of Centrais Elétricas Brasileiras S.A. – Eletrobras since 2012 until 2015. He also served as a member
of the fiscal council of Companhia Energética do Rio Grande do Norte (Cosern) from 2009 to 2011, , member of the fiscal council of
Oi from 2013 until 2015, member of the fiscal council of Cesp since 2013 until 2016, member of the fiscal council of Eneva since
2015 until 2016 an member of the fiscal council of Tegma logistica from 2013 to 2014. Mr. Caldas holds a bachelor’s degree in
business management from UERJ, a degree in electrical engineering from Instituto Militar de Engenharia – IME and a master’s
degree and PhD in economics from EPGE - Fundação Getúlio Vargas.
Alternate Fiscal Council Members
Piero Carbone. Mr. Carbone has served as an alternate member of our fiscal council since April 2016. He also currently serves
as a member of the supervisory board of the following companies: Ciapam Cia. Agropastoril Mucuri since 2015, Gado e Cana de
Açúcar Fontes Agropecuária S.A. since 2015, Gado e Cana de Açúcar Itaguay Imobiliária e Participações S.A. since 2015, Condor
S.A. since 2014, Industry of non-lethal weapons Risk Office S.A. since 2014 and Cultura Inglesa S.A. since 2011. Previously, he
worked in accounting at Telemar and Oi from May 1999 to June 2011 and as an audit trainee at PricewaterhouseCoopers from 1978
to 1998. Mr. Carbone holds a bachelor’s degree in accounting from the University Santa Ursula, an MBA in business management
from Fundação Dom Cabral and a degree in executive education at the University Estacio de Sá.
Álvaro Bandeira. Mr. Bandeira has served as an alternate member of our fiscal council since April 2016. He has also served as
chief economist of Brokerage Modalmais since 2015, the year he joined the institution. Mr. Bandeira also served as chief economist
of Orama from 2011 until 2015 and held various positions at Ágora Corretora from April 2001 to December 2010. He was president
of the Brazilian Futures Exchange (BBF), president of regional chapters of APIMEC for five administrations, Director of BVRJ and
BM&F, as well as former full member of the Supervisory Board of Souza Cruz. Mr. Bandeira has spoken in several conferences
related to the capital markets and personal finance and has developed lectures at universities and companies on related issues. He
regularly contributes to publications regarding economics, and on financial education websites including Dinheirama and Infomoney.
Mr. Bandeira holds a bachelor’s degree in economics from UFRJ and a graduate degree in administration from Coppe-RUFRJ.
Wiliam da Cruz Leal. Mr. Leal has served as an alternate member of our fiscal council since April 2016. He has served as
managing partner of Cruz Leal Gestão Empresarial Ltda. since 2011 and has been a board member certified by IBGC - Brazilian
Institute of Corporate Governance since 2009. He worked at Tele Norte Leste Participações S.A. from 2000 to 2009, serving as
executive manager of corporate governance, internal controls, budget and special projects and systems audit. Previously, he served as
served as executive manager of changes and
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as an information technology consultant at Banco do Brasil S.A. from 1975 until 2000. Mr. Leal holds a bachelor’s degree in
mechanical engineering from Fundação de Ensino Superior de Itaúna, Minas Gerais.
Marissa Rose Vegele Renaud. Ms. Renaud has served as an alternate member of our fiscal council since April 2016. She has
served as partner of Agruciacapital Gestão de Recursos Ltda. since May 2015. Previously, she served as a financial analyst of
Agruciacapital Gestão de Recursos Ltda. from November 2012 until April 2015, as operations and processing assistant of Prosper SA
Corretora de Valores e Cambio from March 2012 until November 2012 and as intern from August 2010 until March 2012.
Ms. Renaud holds a bachelor’s degree in economics from Universidade Candido Mendes.
Compensation
According to our by-laws, our shareholders are responsible for establishing the aggregate compensation we pay to the members
of our board of directors, board of executive officers and members of our fiscal council. Our shareholders determine this
compensation at the annual shareholders’ meeting. Once aggregate compensation is established, our board of directors is responsible
for distributing such aggregate compensation individually to the members of our board of directors and our board of executive
officers in compliance with our by-laws.
The aggregate compensation paid by us to all members of our board of directors, board of executive officers and our fiscal
council for services in all capacities was R$25.6 million in 2015. This amount includes pension, retirement or similar benefits for our
officers and directors. On April 28, 2016, our shareholders (acting in the annual general meeting) established the following
compensation for the year 2016:
•
•
•
board of directors (including aggregate directors): an aggregate limit of R$9.2 million;
board of executive officers: an aggregate limit of R$29.4 million; and
fiscal council: an aggregate limit of R$1.0 million.
We compensate our alternate directors on a monthly basis, and compensation is not contingent upon attendance at the meetings
of the board of directors. We compensate alternate members of our fiscal council for each meeting of our fiscal council that they
attend.
Our executive officers receive the same benefits generally provided to our employees, such as medical (including dental)
assistance, private pension plan and meal vouchers. Like our employees, our executive officers also receive an annual bonus equal to
one-month’s salary (known as the “thirteenth” (monthly) salary in Brazil), an additional one-third of one-month’s salary for vacation,
and contributions of 8.0% of their salary into a defined contribution pension fund known as the Guarantee Fund for Time of Service
(Fundo de Garantia por Tempo de Serviço). Members of our board of directors and fiscal council are not entitled to these benefits.
Members of our board of directors, board of executive officers and fiscal council are not parties to contracts providing for
benefits upon the termination of employment other than, in the case of executive officers, the benefits described above.
Long-Term Incentive Program
On March 13, 2015, our board of directors approved a long-term incentive plan for certain executives of the company. The
purpose of the long-term incentive plan is to encourage integration, align the interests of management with that of shareholders and
retain our strategic executives in the medium- and long-term. The long-term incentive plan program will run from 2015 until 2017.
Compensation under the long-term incentive plan, calculated based on our share price, will be made in 2018. As of December 31,
2015, we had recorded provisions in the amount of R$210 million with respect to our obligations under the long-term incentive plan.
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Our People, Designation and Compensation Committee, or the Compensation Committee, organized in September 2015 to
supersede the Remuneration and Human Resources Committee, is an advisory committee to our board of directors. It meets every
three months but may hold additional meeting if necessary. According to its internal regulations, the Compensation Committee is
responsible for:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
reviewing, recommending and monitoring strategies for developing and managing the talents and human capital of the
Company and its subsidiaries;
preparing and periodically reviewing, in merely indicative terms, the selection criteria and summary of qualifications,
knowledge and professional experience as a proper profile for performing functions as a member of an administrative body
of the Company and its subsidiaries;
giving opinions on the profiles of candidates for member of our board of directors, officer and members of the Company
advisory committees, in the processes of presenting candidates by the board of directors and designation or substitution by
the board of directors, considering that the hiring of officers that report to the chief executive officer must be informed in
advance to this Compensation Committee;
taking part in discussions regarding major changes to the organizational structure of the Company and its subsidiaries (first
and second levels below the chief executive officer);
monitoring the succession program for the principal executives of the Company and its subsidiaries, recommending actions
at the first management level and establishing directives for the succession program for other levels of the Company and its
subsidiaries;
giving opinions on the appointment process to management of important subsidiaries;
analyzing, recommending and monitoring special programs, such as voluntary termination and early retirement, among
others;
evaluating the strategy for developing and training third parties;
analyzing and recommending to the board of directors the policy for compensating members of bodies and employees of
the Company and its subsidiaries, including fixed and variable remuneration, any type of incentive, benefits programs and
stock options;
analyzing and recommending to the board of directors parameters for the bonus program for the Company and its
subsidiaries;
analyzing and recommending to the board of directors compensation policies and practices for members of the board of
directors itself, the advisory committees and the audit board, subject to the provisions of Art. 162, §3, of Law 6.404/76 and
subsequent changes;
recommending defining goals for the Company and its subsidiaries and metrics and scale of variable annual compensation
and for each term, especially, as a function of compliance with strategy, risk profile, plans and budget;
reviewing compliance of annual performance based on the defined goals;
reviewing and recommending a system of evaluation of performance, including its timing and methods;
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•
•
•
preparing the annual evaluation of performance of the members of the board of directors and officers in relation to the
goals approved by the board of directors, reviewing the evaluations of the high executives of the Company and its
subsidiaries and submitting the evaluation to the board of directors;
recommending to the board of directors distribution of individual compensation by the members of the board of directors
and officers; and
recommending strategy to the board of directors regarding pension plans of the Company and its subsidiaries, particularly
regarding extraordinary contributions to complementary retirement funds.
The Compensation Committee must be composed of five to seven members appointed by the board of directors, from among its
members following deliberation specifically for this purpose, at the first meeting of the board of directors that takes place after the
end of the members’ terms, with no hierarchy among the members, one of whom will be the coordinator. The current members of the
Compensation Committee include members of our board of directors (Luís Palha, Thomas Reichenheim, Luiz Antonio Souto, Rafael
Mora and Marten Pieters) and one alternate member of our board of directors (Jorge Cardoso). All of the members of the
Compensation Committee have been elected to terms that expire at our annual general shareholders’ meeting to be held in April 2018.
Share Ownership
As of May 13, 2016, the number of our common and preferred shares held by the members of our board of directors and board
of executive officers, supervisory or management bodies, including outstanding stock options, do not exceed 1% of either class of our
outstanding shares.
Employees
As of December 31, 2015, we had a total of 45,125 employees. All of our employees are employed on a full-time basis, divided
into the following functions: network operations, sales and marketing, information technology, call center operations, support areas
and authorized agents.
The table below sets forth a breakdown of our employees by main category of activity and geographic location as of the dates
indicated:
Number of employees by category of activity:
Employees of Continuing Operations:
Plant operation, maintenance, expansion and modernization
Sales and marketing
Call center operations
Support areas
Authorized agents
Employees of continuing operations
Employees of available for sale operations
Employees of discontinued operations
Total
Number of employees by geographic location:
Employees of Continuing Operations:
Brazil:
Rio de Janeiro
Goiás
Paraná
Mato Gross do Sul
São Paulo
Minas Gerais
Rio Grande do Sul
Bahia
Federal District
152
Year Ended December 31,
2015
2014
2013
18,623
5,480
15,168
4,599
163
44,033
1,092
—
45,125
16,082
5,167
17,544
3,649
354
42,796
—
12,290
55,086
13,943
5,572
18,831
3,939
286
42,571
—
—
42,571
20,125
7,605
3,802
3,147
1,581
1,723
737
1,171
603
14,356
8,838
4,322
3,739
1,854
1,831
1,195
1,265
741
13,285
9,865
4,527
4,005
1,954
1,953
957
893
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Santa Catarina
Pernambuco
Ceará
Pará
Mato Grosso
Maranhão
Amazonas
Espírito Santo
Paraiba
Piauí
Rondônia
Rio Grande do Norte
Sergipe
Alagoas
Tocantins
Amapá
Acre
Roraima
United States, Bermuda, Venezuela and Colombia
Total employees of continuing operations
Employees of Available for Sale Operations:
Portugal
Namibia
São Tomé and Principe
Timor Leste
Total employees of available for sale operations
Employees of Discontinued Operations:
Portugal
Namibia
Cape Verde Islands
São Tomé and Principe
Timor Leste
Total employees of discontinued operations
Total
Year Ended December 31,
2015
514
495
518
342
219
216
146
174
168
118
106
140
110
86
67
41
45
34
—
44,033
2014
646
802
588
470
272
304
246
215
175
138
134
159
178
105
79
54
50
40
—
42,796
2013
652
601
560
416
275
259
236
223
161
146
143
136
125
89
79
61
50
44
77
42,571
7
540
97
448
1,092
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
45,125
10,701
503
512
95
479
12,290
55,086
—
—
—
—
—
—
42,571
We negotiate separate collective bargaining agreements with the local unions in each of the Brazilian states for our company and
each of our subsidiaries operating in such states. New collective bargaining agreements with these unions are negotiated every year.
We maintain good relations with each of the unions representing our employees. As of December 31, 2015, approximately 15% of the
employees of our company were members of state labor unions associated either with the National Federation of Telecommunications
Workers (Federação Nacional dos Trabalhadores em Telecomunicações), or Fenattel, or with the Interstate Federation of
Telecommunications Workers (Federação Interestadual dos Trabalhadores em Telecomunicações), or Fittel. We have never
experienced a strike that had a material effect on our operations.
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Employee Benefits
Pension Benefit Plans
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Sistel is a not-for-profit private pension fund created by Telebrás in November 1977 to supplement the benefits provided by the
federal government to employees of the former Telebrás System. The following are pension plans managed by Sistel.
PBS-A Plan
Since the privatization of Telebrás, the Sistel Benefits Plan (Plano de Benefícios da Sistel – Assistidos), or PBS-A plan, a
defined benefit plan, has been sponsored by the fixed-line telecommunications companies that resulted from the privatization of
Telebrás, including our company and TNL. The PBS-A plan is self-funded and has been closed to new members since January 2000.
Contributions to the PBS-A plan are contingent on the determination of an accumulated deficit and we are jointly and severally liable,
along with other fixed-line telecommunications companies, for 100% of any insufficiency in payments owed to members of the PBS-
A plan. As of December 31, 2015, the PBS-A plan had a surplus of R$2,636.2 million. We were not required to make contributions to
the PBS-A plan in 2015, 2014 or 2013.
PBS-TNCP Plan
Since the privatization of Telebrás, our subsidiary Tele Norte Celular Participações S.A., or TNCP, has sponsored the Sistel
Benefits Plan – TNCP (Plano de Benefícios da Sistel – TNCP), or PBS-TNCP plan. The PBS-TNCP plan has been closed to new
members since April 2004. Contributions to the PBS-TNCP plan are contingent on the determination of an accumulated deficit. As a
result of the corporate reorganization and TNL’s earlier acquisition of control of TNCP, we are liable for 100% of any insufficiency
in payments owed to members of the PBS-TNCP plan. As of December 31, 2015, the PBS-TNCP plan had a surplus of R$25.4
million. We made contributions to the PBS-TNCP plan of less than R$1 million in each of 2015, 2014 and 2013.
CELPREV Plan
In March 2004, Amazônia Celular S.A., or Amazônia, a subsidiary of TNCP, began sponsoring the CelPrev Amazônia, or
CELPREV, plan, a defined contribution plan managed by Sistel. The CELPREV plan was offered to employees of Amazônia who did
not participate in the PBS-TNCP plan, as well as to its new employees. Participants in the PBS-TNCP plan were encouraged to
migrate to the CELPREV plan. Approximately 27.3% of Amazônia’s active employees that were participants in the PBS-TNCP plan
migrated to the CELPREV plan. As of December 31, 2015, the CELPREV plan had a surplus of R$2.4 million. We made
contributions to the CELPREV plan of less than R$1 million in each of 2015, 2014 and 2013.
PAMA Plan and PCE Plan
Since the privatization of Telebrás, the Medical Assistance Plan to the Retired (Plano de Assistência Médica ao Aposentado), or
PAMA, a health-care plan managed by Sistel, has been sponsored by the fixed-line telecommunications companies that resulted from
the privatization of Telebrás, including our company. The PAMA plan has been closed to new members since February 2000, other
than new beneficiaries of current members and employees that are covered by the PBS-A plan who have not yet elected to join the
PAMA plan. In December 2003, we and the other telecommunications companies that resulted from the privatization of Telebrás
began sponsoring the PCE –Special Coverage Plan, or the PCE plan, a health-care plan managed by Sistel. The PCE plan is open to
employees that are covered by the PAMA plan. From February to July 2004, December 2005 to April 2006, June to September
2008, July 2009 to February 2010, March to November 2010, February 2011 to March 2012 and March 2012 until today, we offered
incentives to our employees to migrate from the PAMA plan to the PCE plan.
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In October 2015, in compliance with a court order, Sistel transferred the R$3,042 million surplus in the PBS-A plan to the
PAMA plan to ensure the solvency of the PAMA plan. Of the total amount transferred, R$2,127 million is related to the plans
sponsored by the company, apportioned proportionally to the obligations of the defined benefit plan.
As of December 31, 2015, the PAMA plan had a surplus of R$1,154 million. We were not required to make contributions to the
plan in 2015, 2014 or 2013.
Fundação Atlântico de Seguridade Social
FATL is a not-for-profit, independent private pension fund that manages pension plans for the employees of its plans’ sponsors.
TCSPREV Plan
In December 1999, we and the other companies that participate in the plans managed by Sistel agreed to withdraw the active
participants in these plans and each company agreed to establish its own separate new plan for these participants. In February 2000,
we began sponsoring the TCSPREV Plan, a private defined contribution pension plan and settled benefit plan offered to our
employees that participated in the PBS-A plan and new employees who were employed by our company after the privatization of the
Telebrás System. Approximately 80% of our active employees that were participants in the PBS-A plan migrated to the TSCPREV
plan. In March 2005, Fundação 14 de Previdência Privada, or Fundação 14, a private not-for-profit pension fund created by Brasil
Telecom Holding in 2004 to manage the TSCPREV plan, began managing the TSCPREV plan. In January 2010, FATL began
managing the TSCPREV plan.
The TCSPREV plan offers three categories of benefits to its members: (1) risk benefits, which are funded according to the
defined benefit method; (2) programmable benefits, which are funded according to the defined contribution method; and
(3) proportional paid benefits, applicable to those employees who migrated to a defined contribution method with their rights reserved
as contributors to the defined benefit system. This plan was closed to new participants in March 2003; however, we resumed offering
programmable benefits under this plan to new employees beginning in March 2005. We are liable for any deficits incurred by the
TCSPREV plan according to the existing proportion of the contributions we make to this plan. As of December 31, 2015, the
TCSPREV plan had a surplus of R$1,061.4 million. We were not required to make contributions to the TCSPREV plan in 2015, 2014
or 2013.
BrTPREV Plan
In 2000, as a result of our acquisition of CRT, we assumed liability for retirement benefits to CRT’s employees by means of the
creation of the Fundador/Alternativo plan, a defined benefit plan, which is managed by Fundação BrTPREV, a private not-for-profit
pension fund created by CRT in 1971 to manage the CRT plans. This plan has been closed to new members since October 2002.
In October 2002, we began sponsoring the BrTPREV plan, a private defined contribution pension plan and settled benefit plan
offered to our employees that participated in the Fundador/Alternativo plan and new employees of our company. Approximately 96%
of our active employees that were participants in the Fundador/Alternativo plan migrated to the BrTPREV plan. This plan was offered
to our new employees from March 2003 to February 2005, when it was closed to new participants. In March 2005, Fundação
BrTPREV began managing these plans. In January 2010, FATL began managing the Fundador/Alternativo plan and the BrTPREV
plan. In July 2012, the Fundador/Alternativo plan was merged into the BrTPREV plan, and participants and beneficiaries of the
Fundador/Alternativo plan automatically became members of the BrTPREV plan.
The BrTPREV plan offers three categories of benefits to its members: (1) risk benefits, which are funded according to the
defined benefit method; (2) programmable benefits, which are funded according to the defined contribution method; (3) proportional
paid benefits, applicable to those employees who migrated to a defined contribution method with their rights reserved as contributors
to the defined benefit system. We are liable for any
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deficits incurred by the BrTPREV plan according to the existing proportion of the contributions we make to this plan. As of
December 31, 2015, the BrTPREV plan had a deficit of R$541 million, which is being amortized through 2019. Since February 2003,
we have been making additional monthly contributions to the Fundador/Alternativo plan and the BrTPREV plan to reduce these
deficits. During 2015, 2014 and 2013, we contributed R$139 million, R$123 million and R$117 million, respectively, to the
BrTPREV plan and the Fundador/Alternativo plan to reduce these deficits.
BrTPREV Plan ended the year 2015 with a deficit of R$87 million, however, holds a significant portfolio of government
securities (NTN-B) marked the maturity, ensured profitability higher than the actuarial target of the Plan. This position also
recognized by Resolution 16/2014 CNPC brings a slightly lower result than recorded deficit. The net result of long position and the
deficit is still a negative R$27 million, but close to only about 1.1% of total Mathematical Reserves Plan.
PBS Telemar Plan
In September 2000, Telemar began sponsoring the PBS-Telemar plan, a private defined benefit plan offered to Telemar’s
employees. In February 2005, FATL began managing the PBS Telemar plan. As a result of the corporate reorganization, we have
assumed Telemar’s obligations under the PBS-Telemar plan.
The PBS-Telemar plan has the same characteristics as the PBS-A plan. The PBS-Telemar plan was closed to new participants in
September 2000. We are responsible for any deficits incurred by the PBS-Telemar plan according to the existing proportion of the
contributions we make to this plan and those made by participants. As of December 31, 2015, the PBS-Telemar plan had a surplus of
R$33.5 million. We made contributions to the plan of less than R$1 million in 2015, 2014 and 2013.
TelemarPrev Plan
In September 2000, Telemar began sponsoring the TelemarPrev plan, a private defined contribution pension plan and settled
benefit plan offered to Telemar’s employees that participated in the PBS-Telemar plan and new employees who were employed by
Telemar after the privatization of the Telebrás System. Approximately 96% of Telemar’s active employees that were participants in
the PBS-Telemar plan migrated to the TelemarPrev plan. In February 2005, FATL began managing the TelemarPrev plan. As a result
of the corporate reorganization, we have assumed Telemar’s obligations under the TelemarPrev plan.
The TelemarPrev plan offers two categories of benefits to its members: (1) risk benefits, which are funded according to the
defined benefit method; and (2) programmable benefits, which are funded according to the defined contribution method. We are
liable for any deficits incurred by the TelemarPrev plan according to the proportion of the contributions we make to this plan. As of
December 31, 2015, the TelemarPrev plan had a surplus of R$482.9 million. We made contributions to the plan of less than R$1
million in 2015, 2014 and 2013.
The TelemarPrev Plan ended the year 2015 with a deficit of R$94 million; however, because this plan holds a significant
portfolio of government securities that are marked to maturity, assuring a return higher than the actuarial target of this plan. This
position is higher than the deficit recorded, with a positive net result of R$74 million, recognized by Resolution National Council of
Supplementary Pension (CNPC) No 16/2014.
PAMEC-BrT Plan
We also provide health care benefits for some retirees and pensioners that are members of the TCSPREV plan under the
PAMEC-BrT plan, a defined benefit plan. The contributions for the PAMEC-BrT plan were fully paid in July 1998 through a single
payment. In November 2007, the assets and liabilities of PAMEC-BrT were transferred from Fundação 14 to us, and we began
managing the plan. As a result of the transfer, we do not recognize assets to cover current expenses and we fully recognize the
actuarial obligations as liabilities. As of December 31, 2015, the PAMEC-BrT plan had a deficit of R$2.6 million. We made
contributions to the PAMEC-BrT plan of less than R$1 million in each of 2015, 2014 and 2013.
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For more information on our pension benefit plans, see note 22 to our consolidated financial statements.
Medical, Dental and Employee Assistance Benefits
We provide our employees with medical and dental assistance, pharmacy and prescription drug assistance, group life insurance
and meal, food and transportation assistance. We and our employees cover the costs of these benefits on a shared basis. In 2015, we
contributed R$125.3 million to the medical and dental assistance plans, R$7.2 million to the occupational medicine plans, R$142.7
million for the Worker’s Food Program (Programa de Alimentação do Trabalhador), or PAT, and R$22.2 million to the other
benefits programs.
Profit Sharing Plans
Our collective bargaining agreements with several labor unions require us to pay bonuses to employees who reach certain
operational targets. As of December 31, 2015, we had provisioned R$210.0 million to be distributed in bonuses with respect to 2015.
We also have implemented a profit sharing plan as an incentive for employees to pursue our goals and to align employees’
interests with those of our shareholders. Profit sharing occurs if economic value-added targets and other targets defined annually by
our board of directors are achieved.
Education and Training
We contribute to the professional qualification of our employees by offering training for the development of organizational and
technical skills. In 2015, we offered approximately 332,200 hours of training, and we invested approximately R$23 million in the
qualification and training of our employees.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
Major Shareholders
Oi has two outstanding classes of share capital: common shares and preferred shares with no par value. Generally, only Oi’s
common shares have voting rights. Oi’s preferred shares have voting rights only in exceptional circumstances.
As of May 13, 2016, we had issued 668,033,661 common shares and 157,727,241 preferred shares, including 148,282,003
common shares and 1,811,755 preferred shares held in treasury.
As of May 13, 2016, we had approximately 1.1 million shareholders, including 65 U.S. resident holders of our common shares
and approximately 83 U.S. resident holders of our preferred shares (including The Bank of New York Mellon, as depositary under
our American Depositary Receipt, or ADR, facilities). As of May 13, 2016, there were 99,329,988 common shares (including
common shares represented by ADSs) and 76,478,434 preferred shares (including preferred shares represented by ADSs) held by
U.S. resident holders.
The following table sets forth information concerning the ownership of our common shares and preferred shares as of May 13,
2016, by each person whom we know to be the owner of more than 5% of our outstanding common shares, and by all of our directors
and executive officers as a group. Except for the shareholders listed below, we are not aware of any other of our shareholders holding
more than 5% of any class of our share capital. Our principal shareholders have the same voting rights with respect to each class of
our shares that they own as other holders of shares of that class.
Under our by-laws, any shareholder or group of shareholders, representing the same interest or bound by a voting agreement,
that hold or may hold in the future, alone or jointly, interest in the company representing more than 15% of our voting capital shall
have its voting rights limited to 15% of the shares with voting rights, subject to certain exceptions. See “Item 10. Additional
Information—Description of Our Company’s By-laws—Limitation on Voting Rights.” Pharol and its wholly owned subsidiary Bratel
B.V. jointly hold more than 15% of our voting
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capital stock, but, due to the limitation set forth in our by-laws, their vote is limited to 15% of our voting capital stock.
Name
Pharol(1)
Ontario Teacher’s Pension Plan Board
BNDESPar
Blackrock
All directors, fiscal council members, their alternates and
executive officers as a group (34 persons)
Common Shares
Preferred Shares
Total
Number of
Shares
%
Number of
Shares
%
Number of
Shares
%
318,481,594 48.66
39,366,866 6.01
38,254,636 5.84
— — 318,481,594 39.30
— — 39,366,866 4.86
— — 38,254,636 4.72
7,888,717 0.97
— — 7,888,717 5.06
10,257
*
4,029
*
14,286
*
(1) Represents 71,067,957 common shares held directly by Pharol, 112,594,247 common shares held directly by Pharol’s wholly-
owned subsidiary Bratel B.V., and 134,819,390 common shares which Pharol has the option to acquire from PTIF.
less than 1%
*
Changes in Share Ownership
On August 21, 2013, TmarPart issued 252,729,128 common shares to its shareholders in exchange for an aggregate amount of
R$100 million in cash and preferred shares of our company. In connection with this transaction, Bratel Brasil contributed 300,236 of
our preferred shares to TmarPart, AG Telecom contributed 481,492 of our preferred shares to TmarPart, LF Tel contributed 481,492
of our preferred shares to TmarPart, BNDESPar contributed 324,652 of our preferred shares to TmarPart, and PREVI contributed
241,121 of our preferred shares to TmarPart.
In May 2014, we completed the Oi capital increase in which we issued:
•
•
121,674,063 of our common shares and 280,483,641 of our preferred shares for an aggregate of R$8,250 million; and
104,580,393 of our common shares and 172,025,273 of our preferred shares to Pharol in exchange for the contribution by
Pharol to us of all of the outstanding shares of PT Portugal.
As a result of the Oi capital increase:
•
•
•
Pharol acquired direct ownership of 32.8% of our outstanding share capital, including 37.7% of our outstanding voting
share capital, in addition to the indirect interests in our company that it owned prior to the Oi capital increase;
Caravelas Fundo de Investimentos em Ações, an investment vehicle managed through Banco BTG Pactual S.A., or
Caravelas, acquired 6.3% of our outstanding share capital, including 6.2% of our outstanding voting share capital; and
TmarPart’s direct and indirect proportional share ownership of Oi was reduced to 4.4% of our outstanding share capital,
including 12.6% of our outstanding voting share capital.
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txpg159
Prior to the Oi capital increase, Pharol’s then wholly-owned subsidies PTIF and PT Portugal subscribed to an aggregate of
€897 million principal amount of commercial paper of Rio Forte that matured in July 2014. As a result of our acquisition of PT Portugal
as part of the Oi capital increase, we became the creditor under this commercial paper.
On July 15 and 17, 2014, Rio Forte defaulted on the commercial paper held by PTIF and PT Portugal. On September 8, 2014, we,
TmarPart, Pharol and our subsidiaries PT Portugal and PTIF, entered into the PT Exchange Agreement and the PT Option Agreement.
On the same date, we, Pharol and TmarPart executed a terms of commitment agreement, which we refer to as the Terms of Commitment
Agreement. For more information regarding the PT Option Agreement and the Terms of Commitment Agreement, see “—PT Option
Agreement” and “—Terms of Commitment Agreement.”
On March 24, 2015, PT Portugal assigned its rights under the PT Exchange Agreement and the PT Option Agreement to PTIF. On
March 27, 2015, PT Portugal assigned all of its rights and obligations under the Rio Forte commercial paper that it owned to PTIF.
Under the PT Exchange Agreement, on March 30, 2015, we transferred the defaulted Rio Forte commercial paper to Pharol and
Pharol delivered to us an aggregate of 47,434,872 of our common shares and 94,869,744 of our preferred shares, representing 16.9% of
our outstanding share capital, including 17.1% of our outstanding voting capital prior to giving effect to the PT Exchange. Under
Brazilian law, these shares are deemed to be held in treasury.
Corporate Ownership Simplification
On September 1, 2015, TmarPart merged with and into our company. Immediately prior to this merger:
•
•
•
•
•
•
AG Telecom merged with and into PASA;
LF Tel merged with and into EDSP;
PASA and EDSP merged with and into Bratel Brasil;
Valverde merged with and into TmarPart;
Venus RJ Participações S.A., Sayed RJ Participações S.A. and PTB2 S.A. merged with and into Bratel Brasil; and
Bratel Brasil merged with and into TmarPart.
As a result of these transactions, as of September 1, 2015, the ownership structure of our common shares and preferred shares was as set
forth in the chart below. The percentages in bold and italics represent the percentage of the outstanding common shares owned by each
shareholder, and the percentages not in bold and italics represent the percentage of the total outstanding share capital owned by each
shareholder.
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On October 8, 2015, we completed a voluntary share exchange under which we had offered (1) the holders of our preferred
shares (including preferred shares represented by the Preferred ADSs), the opportunity to convert their preferred shares into our
common shares at a ratio of 0.9211 common shares for each preferred share, plus cash in lieu of any fractional share, and (2) the
holders of the Preferred ADSs the opportunity to exchange their Preferred ADSs for Common ADSs at a ratio of 0.9211 Common
ADSs for each Preferred ADS, plus cash in lieu of any fractional Common ADS. Holders of 314,250,655 of our preferred shares were
tendered for conversion or exchange of the related ADSs. Each of Pharol and Caravelas participated in the voluntary share exchange
and surrendered all of its preferred shares for conversion. As a result of the voluntary share exchange, 314,250,655 of our outstanding
preferred shares were cancelled and in exchange we issued 289,456,278 of our common shares.
Decrease of Caravelas shareholding interest
In March 2016, we received a letter from BTG Pactual Asset Management S.A. DTVM, or BTG Pactual AM informing us that
Caravelas had reduced its shareholding interests in our company from 7.52% to approximately 3.54% of our common stock, as a
result of the partial redemption and subsequent transfer of assets to the former quotaholder of Caravelas. Therefore, the funds
managed of BTG Pactual AM reduced its aggregate shareholding interests from 7.54% to less than 5% of our common shares and no
longer holds a material shareholding interest in our company.
PT Option Agreement
Under the PT Option Agreement, PTIF granted to Pharol an option to acquire 47,434,872 of our common shares and 94,869,744
of our preferred shares. Pharol is entitled to exercise the PT Option in whole or in part, at any time prior to March 31, 2021. The
number of shares subject to the PT Option will be reduced on each March 31 such that:
•
•
•
•
•
90% of the shares originally subject to the option will be available between March 31, 2016 and March 31, 2017;
72% will be available between March 31, 2017 and March 31, 2018;
54% will be available between March 31, 2018 and March 31, 2019;
36% will be available between March 31, 2019 and March 31, 2020; and
18% will be available between March 31, 2020 and March 31, 2021,
in each case, less the number of shares with respect to the PT Option has been previously exercised. As of May 13, 2016, Pharol has
not exercised the PT Option with respect to any of our shares and, as a result, the option over 4,743,487 of our common shares and
9,486,974 of our preferred shares has lapsed. The exercise prices under the PT Option are be R$20.104 per common share and
R$18.529 per preferred share, in each case as adjusted by the CDI rate plus 1.5% per annum, calculated pro rata temporis, from
March 31, 2015 to the date of the effective payment of the exercise price.
We are not required to maintain the shares subject to the PT Option in treasury. In the event that, at the time of exercise of the
PT Option, PTIF and/or any of our other subsidiaries do not hold, in treasury, the number of shares with respect to which Pharol
exercises the PT Option, the PT Option may be financially settled through payment by
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PTIF of the amount corresponding to the difference between the market price of the shares and the exercise price corresponding to
these shares.
We may terminate the PT Option if (1) the by-laws of Pharol are amended to remove or amend the provision of those by-laws
that limits the voting right to 10% of all votes corresponding to the capital stock of Pharol, except if this removal or amendment is
required by law or by order of a competent governmental authority; (2) Pharol directly or indirectly engages in activities that compete
with the activities of our company or our subsidiaries in the countries in which we or they operate; or (3) Pharol violates certain
obligations under the PT Option Agreement.
Prior to the earlier of the expiration or full exercise of the PT Option, Pharol may not purchase shares of our company, directly
or indirectly, in any manner other than by exercising the PT Option. If the PT Option is exercised, Pharol will undertake its best
efforts to integrate the shareholder bases of Pharol and Oi in the shortest time possible.
Pharol may not directly or indirectly transfer or assign the PT Option, in whole or in part, nor grant any rights under the PT
Option, including any security interest in the PT Option or the shares underlying the PT Option, without the consent of our company.
If Pharol issues, directly or indirectly, any derivative instrument that is backed by or references our shares, it shall immediately use all
proceeds derived directly or indirectly from such derivative instrument to acquire shares pursuant to the exercise of the PT Option.
On March 31, 2015, we, Pharol and PTIF entered into an amendment to the PT Option Agreement. Under this amendment,
(1) Pharol will be permitted to assign the PT Option to a third party provided that such assignment involves at least one-quarter of our
shares subject to the PT Option, and (2) Pharol has granted our company a right of first refusal exercisable prior to any such
assignment. This amendment does not affect the agreement of Pharol not to grant any rights under the PT Option, including any
security interest in the PT Option or the shares underlying the PT Option, without the consent of our company, or the requirement that
Pharol use all proceeds derived directly or indirectly from the issuance of any derivative instrument that is backed by or references
our shares to acquire shares pursuant to the exercise of the PT Option.
The effectiveness of the amendment to the PT Option Agreement is subject to (1) the authorization of the amended terms by the
CVM, and (2) the approval of the amendment to the PT Option Agreement by a general meeting of our shareholders at which both
our common and preferred shareholders will be entitled to vote. The CVM has not authorized the amended terms; however, in
December 2015, the board of directors of the CVM declined to authorize the amended terms.
Terms of Commitment Agreement
On March 31, 2015, we and Pharol entered into an amendment to the Terms of Commitment Agreement. The Terms of
Commitment Agreement, as amended, will remain in effect until the integration of the shareholder bases of Oi and Pharol pursuant to
a legally permissible structure, which we refer to as the Integration Transaction, has been fully completed, including in respect of any
shares of our company that may be acquired by Pharol during the term of the PT Option.
Under the Terms of Commitment Agreement, we and Pharol each agreed:
•
to use our respective best efforts and to take all reasonable measures to also implement the listing of our shares (or
securities backed by our shares or our successor in case of a corporate reorganization) on the regulated market of Euronext
Lisbon concurrently with the migration of our company to the Novo Mercado segment of the BM&FBOVESPA, which we
refer to as the migration, provided that in the event that it is not possible for any reason beyond the control of the parties
for these listings to occur prior to or concurrently with the approval of the migration, they will use their best efforts and to
take all reasonable measures to implement these listings as soon as possible following the migration.
•
to perform all acts, provide any required information, prepare all necessary documentation and to present and duly file all
necessary filings before all appropriate governmental bodies and authorities so as to
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implement the listing on the regulated market of Euronext Lisbon and Integration Transaction as soon as possible.
•
to undertake to perform all necessary acts to implement the Integration Transaction relating to all shares of our company
held by Pharol as of March 31, 2015 or that Pharol shall come to hold for so long as the Terms of Commitment Agreement
is in force, including, but not limited to:
•
•
preparing and filing any prospectuses, including for admission to trading, registration statements or other documents
with the CVM, the CMVM, Euronext Lisbon and the SEC by Pharol and/or our company (or our successor in case
of a corporate reorganization), as the case may be, including the preparation of audited and unaudited financial
statements required by the rules of such government authorities, and
engaging independent auditors, independent financial institutions or other experts to prepare financial statements,
valuation reports and/or other necessary reports or documents and to use best efforts to cause such experts to
consent to the inclusion their reports or other documents in the prospectuses, registration statements or other
documents to be filed with CVM, CMVM, Euronext Lisbon and the SEC.
In addition, under the Terms of Commitment Agreement we agreed to attend any general meetings of the shareholders of Pharol
convened for the purposes of deliberating on the acts and authorizations required for the Integration Transaction, whether through a
reduction of the share capital of Pharol, pursuant to the alternative structure under analysis described in the Information Statement
issued by Pharol, dated August 13, 2014, or through another legally permissible alternative structure, and to vote in favor of approval
of the approval of these acts and authorizations, to the extent our legitimate interests are preserved.
The obligations assumed by our company and Pharol described above apply equally in the event the Integration Transaction
continues in respect of any of our shares that Pharol may receive upon exercise of the PT Option.
Related Party Transactions
The following summarizes the material transactions that we have engaged in with our principal shareholders and their affiliates
since January 1, 2015.
Under the Brazilian Corporation Law, each of our directors, their alternates and our executive officers cannot vote on any matter
in which they have a conflict of interest and such transactions can only be approved on reasonable and fair terms and conditions that
are no more favorable than the terms and conditions prevailing in the market or offered by third parties. However, if one of our
directors is absent from a meeting of our board of directors, that director’s alternate may vote even if that director has a conflict of
interest, unless the alternate director shares that conflict of interest or has another conflict of interest.
PT Exchange and Related Agreements
On March 30, 2015, under the PT Exchange Agreement, we transferred the defaulted Rio Forte commercial paper to Pharol and
Pharol delivered to us an aggregate of 47,434,872 of our common shares and 94,869,744 of our preferred shares, representing 16.9%
of our outstanding share capital, including 17.1% of our outstanding voting capital prior to giving effect to the PT Exchange.
Under the PT Option Agreement, PTIF has granted to Pharol an option to acquire 47,434,872 of our common shares and
94,869,744 of our preferred shares at exercise prices of R$20.104 per common share and R$18.529 per preferred share, in each case
as adjusted by the CDI rate plus 1.5% per annum, calculated pro rata temporis, from March 31, 2015 to the date of the effective
payment of the exercise price. For more information regarding the PT Option Agreement, see “—Major Shareholders—PT Option
Agreement.”
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Under the Terms of Commitment Agreement, we have made numerous commitments relating to the listing of our shares on the
regulated market of Euronext Lisbon and the implementation of the Integration Transaction. For more information regarding the
Terms of Commitment Agreement, see “—Major Shareholders—Terms of Commitment Agreement.”
Corporate Ownership Simplification
On September 1, 2015, TmarPart merged with and into our company. In the merger of TmarPart with and into Oi, the net assets
of TmarPart, in the amount of R$122.4 million were merged into the shareholders’ equity of Oi and as a result of the merger,
TmarPart ceased to exist. The merger of TmarPart with and into Oi also resulted in the transfer to the shareholders’ equity of Oi of
goodwill derived from the acquisition of equity interest recorded by Bratel Brasil, AG Telecom, LF Tel, and TmarPart, in accordance
with applicable Brazilian law. In the merger of TmarPart with and into Oi, shareholders of TmarPart received the same number of
shares of Oi as were held by TmarPart immediately prior to the merger of TmarPart with and into Oi in proportion to their holdings in
TmarPart. No withdrawal rights for the holders of shares of Oi were available in connection with the merger of TmarPart with and
into Oi.
Voluntary Share Exchange
On October 8, 2015, we completed a voluntary share exchange under which we had offered (1) the holders of our preferred
shares (including preferred shares represented by the Preferred ADSs), the opportunity to convert their preferred shares into our
common shares at a ratio of 0.9211 common shares for each preferred share, plus cash in lieu of any fractional share, and (2) the
holders of the Preferred ADSs the opportunity to exchange their Preferred ADSs for Common ADSs at a ratio of 0.9211 Common
ADSs for each Preferred ADS, plus cash in lieu of any fractional Common ADS. Holders of 314,250,655 of our outstanding preferred
shares tendered their shares for conversion or exchange of the related ADSs. As a result of the voluntary share exchange, 314,250,655
of our outstanding preferred shares were cancelled and in exchange we issued 289,456,278 of our common shares. Pharol and
Caravelas participated in the voluntary share exchange: Pharol surrendered 77,155,529 preferred shares for conversion and received
71,067,957 common shares, and Caravelas surrendered 35,917,151 preferred shares for conversion and received 33,083,287 common
shares.
BNDES Facilities
For a description of our credit facilities with BNDES, see “Item 5. Operating and Financial Review and Prospects—
Indebtedness and Financing Strategy—Long-Term Indebtedness.” For other information about these agreements, see note 17 to our
consolidated financial statements.
Transactions with AIX
Companhia AIX de Participações S.A., in which we own 50% of the outstanding share capital, renders services to us relating to
the rental of ducts for transmission of traffic originated outside our local network in Region I of Brazil. In 2015, our total consolidated
expenses for services rendered by AIX amounted to R$21 million.
Transactions with Contax
On November 30, 2004, Telemar and TNL PCS entered into a call center services agreement with Contax S.A., or Contax, a call
center business owned principally by some of the controlling shareholders of TmarPart, under which Contax renders call center
services to TNL PCS on a fully outsourced basis. Telemar and TNL PCS agreed to pay an estimated amount of R$550 million per
year, subject to adjustment based on services actually rendered at the request of Telemar and TNL PCS. As a result of the merger of
TNL PCS with and into Oi Mobile in February 2014, Oi Mobile assumed all of TNL PCS’s rights and obligations under this
agreement. As a result of the corporate ownership simplification, as of September 1, 2015 Contax is no longer a related party of our
company. Contax currently provides a variety of services to Telemar and Oi Mobile, including customer services for our fixed-line
business, outbound telemarketing to attract additional mobile customers, customer support for pre-paid and post-paid mobile
telephone users, technical support for ADSL subscribers and debt collection services. During the period
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ended September 1, 2015 (the period of 2015 during which Contax was a related party), our total consolidated expenses for services
rendered by Contax amounted to R$1,004 million.
Transactions with Hispamar
We own 19% of the capital stock of Hispamar. We lease transponders on the Amazonas 3 satellite from Hispamar, which we
use to provide voice and data services. In 2015, our total consolidated expenses under the lease agreements amounted to R$207
million.
ITEM 8. FINANCIAL INFORMATION
Consolidated Statements and Other Financial Information
Reference is made to Item 19 for a list of all financial statements filed as part of this annual report.
Legal Proceedings
General
We are a party to certain legal proceedings arising in the normal course of business, including civil, administrative, tax, social
security, labor, government and arbitration proceedings. We classify our risk of loss in legal proceedings as “remote,” “possible” or
“probable,” and we only record provisions for reasonably estimable probable losses, as determined by our management. As of
December 31, 2015, the total estimated amount in controversy for those proceedings in respect of which the risk of loss was deemed
probable or possible totaled approximately R$30,501 million, and we had established provisions of R$4,435 million relating to these
proceedings. Our provisions for legal contingencies are subject to monthly monetary adjustments. For a detailed description of our
provisions for contingencies, see note 21 to our consolidated financial statements.
In certain instances, we are required to make judicial deposits or post financial guarantees with the applicable judicial bodies. As
of December 31, 2015, we had made judicial deposits in the aggregate amount of R$14,377 million and obtained financial guarantees
from third parties in the aggregate amount of R$14,013 million. During 2015, we paid fees in the aggregate amount of R$246 million
to the financial institutions from which we had obtained these guarantees, and as of December 31, 2015, we had pledged 1,811,755 of
our preferred shares, representing 1.15% of our outstanding share capital, as security for one of these financial guarantees.
Tax Proceedings Relating to Oi S.A. and Our Brazilian Operations
As of December 31, 2015, the total estimated contingency in connection with tax proceedings against us in respect of which the
risk of loss was deemed probable or possible totaled R$24,540 million and we had recorded provisions of R$492 million relating to
these proceedings.
The Brazilian corporate tax system is complex, and we are currently involved in tax proceedings regarding, and have filed
claims to avoid payment of, certain taxes that we believe are unconstitutional. These tax contingencies, which relate primarily to
value-added tax, service tax and taxes on revenue, are described in detail in note 21 to our consolidated financial statements. We
record provisions for probable losses in connection with these claims based on an analysis of potential results, assuming a
combination of litigation and settlement strategies. We currently do not believe that the proceedings that we consider as probable
losses, if decided against us, will have a material adverse effect on our financial position. It is possible, however, that our future
results of operations could be materially affected by changes in our assumptions and the effectiveness of our strategies with respect to
these proceedings.
Value-Added State Taxes (ICMS)
Under the regulations governing the ICMS, in effect in all Brazilian states, telecommunications companies must pay ICMS on
every transaction involving the sale of telecommunications services they provide. We may record
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ICMS credits for each of our purchases of operational assets. The ICMS regulations allow us to apply the credits we have recorded
for the purchase of operational assets to reduce the ICMS amounts we must pay when we sell our services.
We have received various tax assessments challenging the amount of tax credits that we recorded to offset the ICMS amounts
we owed. Most of the tax assessments are based on two main issues: (1) whether ICMS is due on those services subject to the Local
Service Tax (Imposto Sobre Serviços de Qualquer Natureza), or ISS; and (2) whether some of the assets we have purchased are
related to the telecommunications services provided, and, therefore, eligible for an ICMS tax credit. A small part of the assessments
that are considered to have a probable risk of loss are related to: (1) whether certain revenues are subject to ICMS tax or ISS tax;
(2) offset and usage of tax credits on the purchase of goods and other materials, including those necessary to maintain the network;
and (3) assessments related to non-compliance with certain ancillary (non-monetary) obligations.
As of December 31, 2015, we deemed the risk of loss as possible with respect to approximately R$10,144 million of these
assessments and had not recorded any provisions in respect of these assessments. As of that date, we had recorded provisions in the
amount of R$308 million for those assessments in respect of which we deemed the risk of loss as probable.
Local Service Tax (ISS)
We have received various tax assessments claiming that we owe ISS taxes on supplementary services. We have challenged these
assessments on the basis that ISS taxes should not be applied to supplementary services (such as, among others things, equipment
leasing and technical and administrative services) provided by telecommunications service providers, because these services do not
clearly fit into the definition of “telecommunications services.”
As of December 31, 2015, we deemed the risk of loss as possible with respect to approximately R$2,908 million of these
assessments and had not recorded any provisions in respect of these assessments. As of that date, we had recorded provisions in the
amount of R$71 million for those assessments in respect of which we deemed the risk of loss as probable.
FUST and FUNTTEL
The FUST is a fund that was established to promote the expansion of telecommunications services to non-commercially viable
users. The FUNTTEL was established to finance telecommunications technology research. We are required to make contributions to
the FUST and the FUNTTEL. Due to a change by ANATEL in the basis for calculation of our contributions to the FUST and the
FUNTTEL, we made provisions for additional contributions to the FUST and TNL made provisions for additional contributions to
the FUST and the FUNTTEL. With respect to the calculation of the contribution to the FUST, the Brazilian Association of Fixed-
Line Companies (Associação Brasileira das Empresas de Telefonia Fixa) of which we are members, filed a lawsuit to request a
review of the applicable legislation.
As of December 31, 2015, we deemed the risk of loss as possible with respect to approximately R$3,161 million of these
assessments and had not recorded any provisions in respect of these assessments.
Contributions to the INSS
Pursuant to Brazilian social security legislation, companies must pay contributions to the National Social Security Institute
(Instituto Nacional do Seguro Social), or INSS, based on their payroll. In the case of outsourced services, the contracting parties
must, in certain circumstances, withhold the social contribution due from the third-party service providers and pay the retained
amounts to the INSS. In other cases, the parties are jointly and severally liable for contributions to the INSS. Assessments have been
filed against us primarily relating to claims regarding joint and several liability and claims regarding the percentage to be used to
calculate workers’ compensation benefits and other amounts subject to social security tax.
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As of December 31, 2015, we deemed the risk of loss as possible with respect to approximately R$1,029 million of these
assessments. As of that date, we had recorded provisions of R$29 million for those assessments in respect of which we deemed the
risk of loss as probable.
PIS and COFINS
In 2006, the Brazilian federal tax authorities filed a claim in the amount of R$1,026 million related to the basis for the
calculation of PIS/COFINS. In 2007, TNL obtained a partially favorable decision in a lower court that reduced the amount of this
claim to R$585 million. Both TNL and the Brazilian federal tax authorities filed appeals, with respect to which decisions are pending.
As of December 31, 2015, we deemed the risk of loss as possible with respect to approximately R$3,290 million of these assessments
and had not recorded any provisions in respect of this claim.
ILL
TNL used credits from the Tax on Net Profit (Imposto sobre Lucro Líquido), or ILL, to offset certain other taxes based on
decisions rendered by the Brazilian Federal Supreme Court in cases brought by other taxpayers that have held this tax
unconstitutional. No final administrative or judicial ruling has been rendered setting forth the criteria by which to calculate the
amounts permitted to be offset. As of December 31, 2015, we had recorded provisions in the amount of R$7 million for those
assessments in respect of which we deem the risk of loss as probable.
Other Tax Claims
There are various federal taxes that have been assessed against us, largely relating to (1) assessments of taxes against our
company that we do not believe are due and which we are contesting, and (2) our use of tax credits to offset certain federal taxes,
which the federal tax authorities are contesting.
As of December 31, 2015, we deemed the risk of loss as possible with respect to approximately R$3,515 million of these
assessments. As of that date, we had recorded provisions in the amount of R$77 million for those assessments in respect of which we
deemed the risk of loss as probable.
Civil Claims Relating to Oi S.A. and Our Brazilian Operations
As of December 31, 2015, the total estimated contingency in connection with civil claims against us, including ANATEL
proceedings, in respect of which the risk of loss was deemed probable or possible, totaled R$4,331 million and we had recorded
provisions of R$3,093 million relating to these proceedings.
Administrative Proceedings
Almost every week, we receive notifications from ANATEL requesting information about our compliance with the various
services obligations imposed on our company by virtue of our concession agreements. When we are not able to comply with these
requests or with our concession obligations, ANATEL may initiate administrative proceedings to impose sanctions on us. We have
received various notifications, mainly for not meeting certain goals or obligations set out in the General Plan on Universal Service
Goals or the General Plan on Quality Goals, such as responding to complaints relating to billing errors, requests for service repairs on
a timely basis and requests from locations with collective or individual access.
As of December 31, 2015, we deemed the risk of loss as possible with respect to approximately R$144 million of these claims
and had not recorded any provisions in respect of these claims. As of that date, we had recorded provisions in the amount of R$1,149
million, including fines which we are contesting through judicial proceedings, for those claims in respect of which we deemed the
risk of loss as probable. In the event that we are unsuccessful in obtaining final approval of the inclusion of the R$5 billion of fines
and claims we have proposed to be included in the TAC program, we could be required to constitute an additional provision of the
portion of these fines and claims for which we have not previously established a provision.
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As a condition to ANATEL’s approval of the Portugal Telecom Alliance, ANATEL required that Telemar and Oi pay all
pending administrative fines, amounting to approximately R$218 million, regardless of the procedural posture of the proceedings
which Telemar and Oi had instituted to contest these fines. Telemar and Oi deemed the risk of loss as possible and had not recorded
any provisions in respect of these claims. Telemar and Oi sought and have been granted injunctive relief which has permitted them to
make judicial deposits of these amounts while preserving its rights to contest these fines. ANATEL has appealed these injunctions,
which appeals remain pending.
Brazilian Antitrust Proceedings
We are subject to administrative proceedings and preliminary investigations conducted by the Brazilian antitrust authorities with
respect to potential violations of the Brazilian antitrust law. Such investigations may result in penalties, including fines. To date, no
fines or penalties have been levied against us. We deemed the risk of loss as possible that we will be fined in one or more of such
proceedings and have not recorded any provisions for those claims.
Financial Interest Agreement (CRT and Community Telephone Program)
As successor to CRT, which we acquired in July 2000, we are subject to various civil claims. The claims, filed in 1998 and
1999, allege: (1) error in the sale of CRT’s share capital; (2) the illegality of bidding procedure No. 04/98; (3) errors in the calculation
of the number of shares offered; (4) procedural nonconformities in the shareholders’ meeting that approved the sale of shares of CRT;
and (5) errors in the valuation of the shares of CRT.
We are also a defendant in several claims filed by users of telephone lines in the State of Rio Grande do Sul. Prior to our
acquisition of control of CRT in July 2000, CRT entered into financial interest agreements with its fixed-line subscribers. Under these
financial interest agreements, customers subscribing to CRT’s fixed-line service had the right to subscribe to a number of CRT
shares. The number of shares to be issued to such subscribers was determined based on a formula that divided the cost of the fixed-
line subscription by the book value of CRT’s shares.
Beginning in June 1997, certain of CRT’s fixed-line subscribers began to file suits in which they claimed that the calculation
used by CRT to arrive at the number of shares to be issued pursuant to the financial interest agreements was incorrect and resulted in
the claimants receiving too few shares.
In addition, as successor to Telecomunicações do Mato Grosso do Sul S.A. – Telems, Telecomunicações de Goiás S.A. –
Telegoiás and Telecomunicações do Mato Grosso S.A. – Telemat, which were operating companies that Brasil Telecom Holding
acquired in the privatization of Telebrás and which were subsequently merged into our company, we are subject to various civil
claims in connection with telephone programs (Community Telephone Programs) established in the States of Mato Grosso do Sul,
Goiás and Mato Grosso.
In 2009, two court decisions significantly changed the assumptions underlying our estimate of the potential losses relating to
these suits.
On March 30, 2009, the Superior Court of Justice ruled that for suits that had yet to be adjudicated, the number of shares to be
issued must be calculated using CRT’s balance sheet at the end of the month in which the shares were issued. However, for those
lawsuits that have already been adjudicated, the number of shares to be issued must be calculated according to the most recent judicial
decision, which, in most of the cases, used the balance sheet at the end of the year prior to the date on which the shares were issued.
On May 28, 2009, a member of the Brazilian Supreme Court published a decision ruling that the financial interest agreements
are not subject to a statute of limitations, which resulted in a change in the likelihood of an unfavorable outcome in these pending
cases to probable.
As of December 31, 2015, we had recorded provisions in the amount of R$1,112 million for those claims in respect of which we
deemed the risk of loss as probable.
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We are a defendant in 66 civil class actions filed by the Attorney General of the National Treasury jointly with certain consumer
agencies demanding the re-opening of customer service centers. The lower courts have rendered decisions in all of these proceedings,
some of which have been unfavorable to us. All of these proceedings are currently under appeal. As of December 31, 2015, we had
recorded provisions in the amount of R$12 million for those claims in respect of which we deemed the risk of loss as probable.
Customer Service
We are a defendant in a civil class action lawsuit filed by the Federal Prosecutor’s Office (Ministério Público Federal) seeking
recovery for alleged collective moral damages caused by TNL’s alleged non-compliance with the Customer Service (Serviço de
Atendimento ao Consumidor –SAC) regulations established by the Ministry of Justice (Ministério da Justiça). TNL presented its
defense and asked for a change of venue to federal court in Rio de Janeiro, where we are headquartered. Other defendants have been
named and await service of process. The amount involved in this action is R$300 million. As a result of the corporate reorganization,
we have succeeded to TNL’s position as a defendant in this action. As of December 31, 2015, we deemed the risk of loss as possible
with respect to these lawsuits and had not made any provisions with respect to this action since it was awaiting the court’s initial
decision.
Special Civil Court Proceedings
We are party to proceedings in special civil courts relating to customer claims in connection with our basic subscription
services. The value of any individual claim does not exceed 40 minimum wages. As of December 31, 2015, we had recorded
provisions in the amount of R$362 million for these claims in respect of which we deemed the risk of loss as probable.
Other Claims
We are defendants in various claims involving contract termination, indemnification of former suppliers and contractors, review
of contractual conditions due to economic stabilization plans and breach of contract. As of December 31, 2015, we had recorded
provisions in the amount of R$471 million in respect of these claims.
Labor Claims Relating to Oi S.A. and Our Brazilian Operations
We are a party to a large number of labor claims arising out of the ordinary course of our businesses. We do not believe any of
these claims, individually or in the aggregate would have a material effect on our business, financial condition or results of operations
if such claims are decided against us. These proceedings generally involve claims for: (1) risk premium payments sought by
employees working in dangerous conditions; (2) wage parity claims seeking equal pay among employees who do the same kind of
work, within a given period of time, and have the same productivity and technical performance; (3) indemnification payments for,
among other things, work accidents, occupational injuries, employment stability, child care allowances and achievement of
productivity standards set forth in our collective bargaining agreements; (4) overtime wages; and (5) joint liability allegations by
employees of third-party service providers.
As of December 31, 2015, the total estimated contingency in connection with labor claims against us in respect of which the risk
of loss was deemed probable or possible totaled R$1,629 million and we had recorded provisions of R$849 million relating to these
proceedings.
Legal Proceedings Relating to Our Interest in Africatel
On September 16, 2014, Africatel GmbH received a letter from Samba Luxco in which Samba Luxco claimed that Oi’s
acquisition of PT Portugal was deemed a change of control of Pharol under the Africatel shareholders’ agreement, and that this
change of control entitled Samba Luxco to exercise a put right under the Africatel shareholders’ agreement at the fair market equity
value of Samba Luxco’s Africatel shares. In the letter, Samba
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Luxco purported to exercise the alleged put right and thereby require Africatel GmbH to acquire its shares in Africatel.
On November 12, 2014, the International Court of Arbitration of the International Chamber of Commerce notified Africatel
GmbH that Samba Luxco had commenced arbitral proceedings against Africatel GmbH to enforce its purported put right or, in the
alternative, certain ancillary rights and claims. Africatel GmbH presented its answer to Samba Luxco’s request for arbitration on
December 15, 2014. The arbitral tribunal was constituted on March 12, 2015 and held a first management conference in London on
May 8, 2015.
On July 22, 2015, Samba Luxco submitted its Statement of Claim, and on October 9, 2015, Pharol and Africatel GmbH
submitted their Statement of Defence. On January 25, 2016, Samba Luxco submitted its Reply and, on March 14, 2016, Pharol and
Africatel GmbH submitted their Rejoinder.
The proceedings have been bifurcated, with the merits hearing currently scheduled to take place during November 2016. Dates
for a quantum hearing (if necessary) have been reserved in March 2017.
Legal Proceedings Relating to Our Interest in Unitel
On October 13, 2015, PT Ventures initiated an arbitration proceeding against the other shareholders of Unitel as a result of the
violation by those shareholders of a variety of provisions of the Unitel shareholders’ agreement, including the provisions entitling PT
Ventures to nominate the majority of the members of the board of directors of Unitel and its chief executive officer. Vidatel presented
its answer to PT Ventures’ request for arbitration on January 8, 2016. The arbitral tribunal was constituted on April 14, 2016 and the
proceedings are ongoing.
On March 14, 2016, the other shareholders of Unitel initiated an arbitration proceeding against PT Ventures, claiming that
Pharol’s sale of a minority interest in Africatel to our company did not comply with the Unitel shareholders’ agreement. PT Ventures
disputes this interpretation of the relevant provisions of the Unitel shareholders’ agreement, and we believe that the relevant
provisions of the Unitel shareholders’ agreement apply only to a transfer of Unitel shares by PT Ventures itself. PT Ventures is
seeking to consolidate this arbitration proceeding with the separate arbitration proceeding brought by PT Ventures against the other
shareholders of Unitel. We intend to continue to vigorously defend these proceedings.
Non-Provisioned Contingencies
We are defendants in various proceedings with no legal precedent involving network expansion plans, compensation for moral
and material damages, collections and bidding proceedings, among others, for which we deem the risk of loss as possible and have
not recorded any provisions. As of December 31, 2015, we deemed the risk of loss as possible with respect to R$26,066 billion of
these proceedings. This amount is based on total value of the damages being sought by the plaintiffs. Typically, we believe the value
of individual claims to be beyond the merits of the case in question.
Dividends and Dividend Policy
Payment of Dividends
Our dividend distribution policy has historically included the distribution of periodic dividends, based on annual balance sheets
approved by our board of directors. The payment of dividends is currently subject only to the provisions of the Brazilian Corporate
Law and our by-laws, which provide that the dividends will be paid annually in the minimum amount of 25% of adjusted net income.
Our distribution policy may be implemented through the distribution of dividends, payment of interest on capital, share grants or
redemption, capital reduction or other forms that enable the distribution of funds to shareholders. Payment of intermediate or interim
dividends will also be permitted, subject to market conditions, our then-prevailing financial condition and other factors deemed
relevant by our board of directors.
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When we declare dividends, we are generally required to pay them within 60 days of declaring them unless the shareholders’
resolution establishes another payment date. In any event, if we declare dividends, we must pay them by the end of the fiscal year for
which they are declared. Under Article 9 of Law No. 9,249/95 and our by-laws, we also may pay interest attributable to shareholders’
equity as an alternative form of dividends upon approval of our board of directors. For a more detailed description of interest
attributable to shareholders’ equity, see “—Payment of Dividends and Interest Attributable to Shareholders’ Equity—Interest
Attributable to Shareholders’ Equity.”
The following table sets forth the dividends and/or interest attributable to shareholders’ equity paid to holders of our common
shares and preferred shares since January 1, 2011 in reais and in U.S. dollars translated from reais at the commercial market selling
rate in effect as of the payment date.
Nominal Reais per US$ equivalent per
Year
2011
2012
2013
Payment Date
May 9, 2011(1)
August 27, 2012 (2)
March 28, 2013 (3)
April 1, 2013 (4)
October 11, 2013 (5)
Preferred
Common
Shares
Common
Shares
Shares
7.352 7.352 4.539
6.097 6.097 3.004
5.107 5.107 2.536
0.991 0.991 0.491
3.049 3.049 1.397
Preferred
Shares
4.539
3.004
2.536
0.491
1.397
(1) Represents interest attributable to shareholders’ equity of R$4.360 (US$2.692) per common and preferred share, plus dividends
of R$2.992 (US$1.847) per common and preferred share.
(2) Represents dividends of R$3.095 (US$1,525) per common and preferred share, plus payment for the redemption of class B and
class C preferred shares issued as a bonus and distributed to shareholders of our common and preferred shares in the total
amount of R$3.002 (US$1.479) per common and preferred share.
(3) Represents dividends of R$5.107(US$2.536) per common and preferred share.
(4) Represents payment for the redemption of class B and class C preferred shares issued as a bonus and distributed to shareholders
of common and preferred shares of the Company in the total amount of R$0.991(US$0.491) per common and preferred share.
(5) Represents dividends of R$3.049 (US$1.397) per common and preferred share.
The following discussion summarizes the principal provisions of the Brazilian Corporation Law and our by-laws relating to the
distribution of dividends, including interest attributable to shareholders’ equity.
Calculation of Adjusted Net Profit
At each annual shareholders’ meeting, our board of directors is required to recommend how to allocate our net profit for the
preceding fiscal year, which recommendation our board of executive officers initially submits to our board of directors for approval.
This allocation is subject to approval by our common shareholders. The Brazilian Corporation Law defines “net profit” for any fiscal
year as our net income after income taxes for that fiscal year, net of any accumulated losses from prior fiscal years and any amounts
allocated to employees’ participation in our net profit in that fiscal year. Under the Brazilian Corporation Law, our adjusted net profit
available for distribution are equal to our net profit in any fiscal year, reduced by amounts allocated to our legal reserve and other
applicable reserves, and increased by any reversals of reserves that we constituted in prior years.
Our calculation of net profit and allocations to reserves for any fiscal year are determined on the basis of financial statements
prepared in accordance with Brazilian GAAP.
Reserve Accounts
As required by the Brazilian Corporation Law and as provided for in our by-laws, we maintain a legal reserve. In addition, we
are permitted by the Brazilian Corporation Law to establish the following discretionary reserves:
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•
•
•
•
•
a contingency reserve for an anticipated loss that is deemed probable in future years. Any amount so allocated in a
previous year must be reversed in the fiscal year in which the loss had been anticipated if the loss does not occur as
projected or charged off in the event that the anticipated loss occurs;
a reserve for investment projects, in an amount based on a capital expenditure budget previously approved by our
shareholders;
a special goodwill reserve for the merger, which represents the net amount of the counterpart of the premium amount
recorded in the asset, pursuant to provisions of CVM Instruction No. 319/1999;
an unrealized income reserve described under “—Mandatory Distributions” below; and
a tax incentive investment reserve, included in our capital reserve accounts, in the amount of the reduction in our income
tax obligations due to government tax incentive programs.
Allocations to each of these reserves (other than the legal reserve) are subject to approval by our common shareholders voting at
our annual shareholders’ meeting.
The Brazilian Corporation Law provides that the legal reserve and the tax incentive investment reserve may be credited to
shareholders’ equity or used to absorb losses, but these reserves are unavailable for the payment of distributions in subsequent years.
The amounts allocated to the other reserves may be credited to shareholders’ equity and used for the payment of distributions in
subsequent years.
Legal Reserve Account
Under the Brazilian Corporation Law and our by-laws, we must allocate 5% of our net profit for each fiscal year to our legal
reserve until the aggregate amount of our legal reserve equals 20% of our paid-in capital. However, we are not required to make any
allocations to our legal reserve in a fiscal year in which our legal reserve, when added to our other reserves, exceeds 30% of our
shareholders’ equity. At December 31, 2015, we used this reserve to offset losses.
Capital Reserve Accounts
Under the Brazilian Corporation Law, we are also permitted to record a capital reserve that may be used only (1) to absorb
losses which exceed retained earnings and income reserves as defined in the Brazilian Corporation Law, (2) to redeem or repurchase
share capital and/or participation certificates, (3) to increase our capital, or (4) if specified in our by-laws (which currently do not so
specify), to pay preferred share dividends. Amounts allocated to our capital reserves are unavailable for the payment of distributions
and are not taken into consideration for purposes of determining the mandatory distributable amount. At December 31, 2015, we had
a balance of R$18,745 million in our capital reserve account
Dividend Preference of Preferred Shares
As permitted by the Brazilian Corporation Law, our by-laws specify that 25% of our adjusted net income for each fiscal year
must be distributed to shareholders as dividends or interest attributable to shareholders’ equity. We refer to this amount as the
mandatory distributable amount. Distributions of dividends in any year are made:
•
•
first, to the holders of preferred shares, up to the greater non-cumulative amount of: (1) 6.0% per year of the amount
resulting from our share capital divided by the number of our total issued shares, or (2) 3.0% per year of the book value of
our shareholders’ equity divided by the number of our total issued shares, or the Minimum Preferred Dividend;
then, to the holders of common shares, until the amount distributed in respect of each common share is equal to the amount
distributed in respect of each preferred share; and
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•
thereafter, to the common and preferred shareholders on a pro rata basis.
If the Minimum Preferred Dividend is not paid for a period of three years, holders of preferred shares shall be entitled to full
voting rights.
Mandatory Distributions
The mandatory distributable amount of dividends and interest attributable to shareholders’ equity is recognized as a provision at
the year-end. Any proposed dividends above the mandatory distributable amount are only recognized when declared.
Under the Brazilian Corporation Law, the amount by which the mandatory distributable amount exceeds the “realized” portion
of net income for any particular year may be allocated to the unrealized income reserve, and the mandatory distribution may be
limited to the “realized” portion of net income. The “realized” portion of net income is the amount by which our net income exceeds
the sum of (1) our net positive results, if any, from the equity method of accounting for earnings and losses of our subsidiaries and
certain associated companies, and (2) the profits, gains or income obtained on transactions maturing after the end of the following
fiscal year. As amounts allocated to the unrealized income reserve are realized in subsequent years, such amounts must be added to
the dividend payment relating to the year of realization.
According to our by-laws, by proposal of our executive officers and board of directors, a portion corresponding to up to 75% of
our adjusted net income, must be used to form an equity replenishment reserve, in order to replenish our capital and equity position to
be used for investments and debt reduction. The remaining balance will be allocated as approved by the shareholders. The balance of
the equity replenishment reserve, plus the balances of the other profit reserves, minus the realizable profit reserves and reserves for
contingencies, may not exceed 100% of the capital stock and, upon reaching the 100% threshold, the shareholders may decide to use
excess funds to increase capital stock or to distribute dividends.
The Brazilian Corporation Law permits us to suspend the mandatory distribution in respect of common shares and preferred
shares if our board of directors reports to our annual shareholders’ meeting that the distribution would be incompatible with our
financial condition at that time. Our fiscal council must approve any suspension of the mandatory distribution. In addition, our
management must report the reasons of any suspension of the mandatory distribution to the CVM. We must allocate net profit not
distributed by our company as a result of a suspension to a special reserve and, if not absorbed by subsequent losses, we must
distribute these amounts as soon as our financial condition permits. In case our profits reserves, as defined in the Brazilian
Corporation Law, exceed our share capital, the excess must be credited to shareholders’ equity or used for the payment of
distributions.
Payment of Dividends and Interest Attributable to Shareholders’ Equity
We may pay the mandatory distributable amount as dividends or as interest attributable to shareholders’ equity, which is similar
to a dividend but is deductible in calculating our income tax obligations.
Because our shares are issued in book-entry form, dividends with respect to any share are automatically credited to the account
holding such share. Shareholders who are not residents of Brazil must register with the Brazilian Central Bank in order for dividends,
sales proceeds or other amounts with respect to their shares to be eligible to be remitted outside of Brazil.
The common and preferred shares underlying our ADSs are held in Brazil by the depositary, which has registered with the
Brazilian Central Bank as the registered owner of our common and preferred shares. Payments of cash dividends and distributions, if
any, will be made in Brazilian currency to the depositary. The depositary will then convert such proceeds into dollars and will cause
such dollars to be distributed to holders of our ADSs. As with other types of remittances from Brazil, the Brazilian government may
impose temporary restrictions on remittances to foreign investors of the proceeds of their investments in Brazil, as it did for
approximately six months in 1989 and early 1999, and on the conversion of Brazilian currency into foreign currencies, which could
hinder or prevent the
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depositary from converting dividends into U.S. dollars and remitting these U.S. dollars abroad. See “Item 3. Key Information—Risk
Factors—Risks Relating to Our Preferred Shares and the ADSs.”
See “Item 10. Additional Information— Taxation—Brazilian Tax Considerations” for information regarding Brazilian tax
implications of dividends and interest attributable to shareholders’ equity.
Dividends
Our by-laws require that we hold an annual shareholders’ meeting which, pursuant to Brazilian Corporation Law, must be held
by April 30 of each year. At our annual shareholders’ meeting, our common shareholders may vote to declare an annual dividend.
Our payment of annual dividends is based on our audited financial statements prepared for our preceding fiscal year.
Any holder of record of shares at the time that a dividend is declared is entitled to receive dividends. Under the Brazilian
Corporation Law, we are generally required to pay dividends within 60 days after declaring them, unless the shareholders’ resolution
establishes another payment date, which, in any case, must occur prior to the end of the fiscal year in which the dividend is declared.
Our board of directors may declare interim dividends based on the accrued profits recorded or the realized profits in our annual
or semi-annual financial statements. In addition, we may pay dividends from net income based on our unaudited quarterly financial
statements. We may set off any payment of interim dividends against the amount of the mandatory distributable amount for the year
in which the interim dividends were paid.
Under the current Brazilian tax law, dividends paid to persons who are not Brazilian residents, including holders of ADSs, will
not be subject to Brazilian withholding tax, except for dividends declared based on profits generated prior to December 31, 1995,
which may be subject to Brazilian withholding income tax at varying tax rates. See “Item 10. Additional Information— Taxation—
Brazilian Tax Considerations.”
Interest Attributable to Shareholders’ Equity
Brazilian companies, including our company, are permitted to pay interest attributable to shareholders’ equity as an alternative
form of payment of dividends to our shareholders. These payments may be deducted when calculating Brazilian income tax and
social contribution tax. The interest rate applied to these distributions generally cannot exceed the TJLP for the applicable period. The
amount of interest paid that we can deduct for tax purposes cannot exceed the greater of:
•
•
50% of our net income (after the deduction of the provision for social contribution tax and before the deduction of the
provision for corporate income tax) before taking into account any such distribution for the period for which the payment
is made; and
50% of the sum of our retained earnings and income reserves.
Any payment of interest attributable to shareholders’ equity to holders of our common shares or preferred shares or our ADSs,
whether or not they are Brazilian residents, is subject to Brazilian withholding tax at the rate of 15%, except that a 25% withholding
tax rate applies if the recipient is a resident of a “tax haven” jurisdiction for this purpose. The definition of “tax haven” jurisdiction
for this purpose includes countries and locations (a) that do not impose income tax, (b) that impose income tax at a rate of 20% or
less, or (c) where local laws do not allow access to information related to shareholding composition, ownership of investments, or the
identity of the beneficial owner of earnings that are attributed to non-residents. On November 28, 2014, the Brazilian Revenue
Service issued Rule No. 488, which reduces the threshold income tax rate for determining a “tax favorable jurisdiction” from 20% to
17%. See “Item 10. Additional Information—Taxation—Brazilian Tax Considerations” below for a discussion of the definition of
“tax haven” jurisdiction being broadened by an interpretation of Law No. 11,727. Under our by-laws, we may include the amount
distributed as interest attributable to shareholders’ equity, net of any withholding tax, as part of the mandatory distributable amount.
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There are ongoing discussions in Congress regarding possible changes to the tax treatment of interest on shareholders’ equity.
There can be no assurance that the current tax treatment will continue to be available in the future.
Prescription of Payments
Our shareholders have three years to claim dividend distributions made with respect to their shares, as from the date that we
distribute the dividends to our shareholders, after which any unclaimed dividend distributions legally revert to us. We are not required
to adjust the amount of any distributions for inflation that occurs during the period from the date of declaration to the payment date.
Significant Changes
Other than as disclosed in this annual report, no significant change has occurred since the date of the audited consolidated
financial statements included in this annual report.
ITEM 9.
THE OFFER AND LISTING
Markets for Our Equity Securities
The principal trading market for our common shares and preferred shares is the BM&FBOVESPA, where they are traded under
the symbols “OIBR3” and “OIBR4,” respectively. Our common shares and preferred shares began trading on the BM&FBOVESPA
on July 10, 1992. On November 16, 2001, our Preferred ADSs began trading on the NYSE under the symbol “BTM.” On
November 17, 2009, our Common ADSs began trading on the NYSE under the symbol “BTMC.” On April 9, 2012, the trading
symbols for our Preferred ADSs and Common ADSs on the NYSE were changed to “OIBR” and “OIBR.C,” respectively.
We have registered our Common ADSs and Preferred ADSs with the SEC pursuant to the Exchange Act. On December 31,
2015, there were 21,168,498 Common ADSs, representing 21,168,498 common shares, or 20.36% of our outstanding common
shares, and 43,376,418 Preferred ADSs outstanding, representing 43,376,418 preferred shares, or 27.82% of our outstanding
preferred shares.
Price History of Our Common Shares, Preferred Shares and the ADSs
The tables below set forth the high and low closing sales prices and the approximate average daily trading volume for our
common shares and preferred shares on the BM&FBOVESPA and the high and low closing sales prices and the approximate average
daily trading volume for the Common ADSs and the Preferred ADSs on the NYSE for the periods indicated.
2011
2012
2013
2014
2015
2014
First Quarter
Second Quarter
BM&FBOVESPA
Reais per Preferred Share(1)(2)
U.S. dollars per Preferred ADS(1)(3)
NYSE
Closing Price per
Preferred Share
Low
High
(in reais)
167.70 101.50
127.30 75.20
91.70 33.40
8.61
44.20
1.30
8.43
Average Daily
Trading Volume
(thousands of
shares)
Closing Price per
Preferred ADS
High Low
(in U.S. dollars)
Average Daily
Trading Volume
(thousands of
Preferred ADSs)
81.9 104.10 54.40
70.00 36.70
437.1
44.20 14.60
1,009.0
18.80 3.17
3,692.3
3.15 0.34
4,608.5
72.3
234.3
389.7
1,263.4
2,327.2
44.20 31.20
33.00 18.30
1,107
4,584
18.80 13.30
14.70 8.00
712.9
1,559.1
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BM&FBOVESPA
Reais per Preferred Share(1)(2)
U.S. dollars per Preferred ADS(1)(3)
NYSE
Third Quarter
Fourth Quarter
2015
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2016
First Quarter
Most Recent Six Months
November 2015
December 2015
January 2016
February 2016
March 2016
April 2016
May 2016(3)
Closing Price per
Preferred Share
Low
High
(in reais)
18.10 11.90
8.61
16.70
Average Daily
Trading Volume
(thousands of
shares)
Closing Price per
Preferred ADS
High
Low
Average Daily
Trading Volume
(thousands of
Preferred ADSs)
5,309
3,679
(in U.S. dollars)
8.00 5.20
6.70 3.17
8.43
7.07
5.66
3.67
4.96
5.56
2.47
1.30
4,933.0
3,118.6
3,598.0
6,871.0
3.15 1.54
2.24 1.82
1.81 0.62
0.95 0.34
1.89
1.15
3,258.9
0.45 0.26
402.9
2.21
2.09
1.84
1.89
1.45
1.15
1.07
1.76
1.30
1.42
1.21
1.15
0.92
1.02
3,902.0
4,816.3
2,943.1
2,861.1
3,875.3
3,443.6
1,860.2
0.63 0.46
0.51 0.34
0.43 0.35
0.45 0.26
0.34 0.29
0.33 0.26
0.31 0.26
629.2
581.8
349.9
375.0
475.0
273.6
92.0
1,639.2
1,038.0
3,854.3
2,634.9
1,920.6
975.3
(1) Adjusted to reflect the reverse split of all of our issued preferred shares into one preferred share for each 10 issued preferred
shares that became effective on December 22, 2014.
(2) Adjusted to reflect change of ratio from three preferred shares per Preferred ADS to one preferred share per Preferred ADS
effective as of August 15, 2012.
(3) Through May 13, 2016.
Source: Economática Ltda./ Bloomberg
BM&FBOVESPA
Reais per Common Share(1)
NYSE
U.S. dollars per Common ADS(1)
2011
2012
2013
2014
2015
2014
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2015
First Quarter
Closing Price per
Common Share
Low
High
(in reais)
184.50 112.50
142.00 87.10
101.70 35.40
9.15
48.80
2.06
9.12
Average Daily
Trading Volume
(thousands of
shares)
7.0
58.2
169.7
467.8
1,060.8
Closing Price per
Common ADS
Low
High
(in U.S. dollars)
582.5 292.5
392.0 201.5
251.5 75.0
101.5 16.6
2.5
16.4
Average Daily
Trading Volume
(thousands of
Common ADSs)
48.80 32.00
32.70 19.50
19.60 12.40
9.15
17.40
137.7
637.4
646.0
441.5
101.50 70.00
78.50 42.00
43.25 27.38
35.23 16.55
9.12
5.14
753.2
16.35 8.15
175
0.3
2.0
1.9
36.3
57.7
1.2
68.5
45.7
27.7
54.9
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Second Quarter
Third Quarter
Fourth Quarter
2016
First Quarter
Most Recent Six Months
November 2015
December 2015
January 2016
February 2016
March 2016
April 2016
May 2016(2)
BM&FBOVESPA
Reais per Common Share(1)
NYSE
U.S. dollars per Common ADS(1)
Closing Price per
Common Share
Low
High
(in reais)
7.05 5.58
5.76 2.47
3.86 2.06
Average Daily
Trading Volume
(thousands of
shares)
Closing Price per
Common ADS
High
Low
Average Daily
Trading Volume
(thousands of
Common ADSs)
789.8
856.0
1,867.7
(in U.S. dollars)
11.25 8.80
9.15 3.05
5.35 2.50
43.8
37.3
94.1
2.55 1.05
3,587.2
3.55 1.40
182.3
3.79 2.89
2.78 2.06
2.55 2.08
2,.55 1.26
1.32 1.05
1.06 0.81
0.85 0.80
1,286.3
1,883.7
1,218.9
3,025.3
6,117.8
6,093.2
3,824
5.35 4.00
4.10 2.50
3.55 2.65
3.36 1.50
1.70 1.40
1.45 1.06
1.24 1.11
85.7
77.8
55.8
176.2
296.9
77.9
49.9
(1) Adjusted to reflect the reverse split of all of our issued common shares into one common share for each 10 issued common
shares that became effective on December 22, 2014 and change in the ratio applicable to our Common ADSs as a result of
which each Common ADS which formerly represented one common share has represented five common shares since
February 1, 2016.
(2) Through May 13, 2016.
Source: Economática Ltda./ Bloomberg
On May 13, 2016, the closing sales price of:
•
•
•
•
our common shares on the BM&FBOVESPA was R$0.81 per common share;
our Common ADSs on the NYSE was US$1.12 per Common ADS;
our preferred shares on the BM&FBOVESPA was R$1.02 per preferred share; and
our Preferred ADSs on the NYSE was US$0.26 per Preferred ADS.
Regulation of Brazilian Securities Markets
The Brazilian securities markets are regulated by the CVM, which has regulatory authority over the stock exchanges and the
securities markets generally, the National Monetary Council and the Brazilian Central Bank, which has, among other powers,
licensing authority over brokerage firms and which regulates foreign investment and foreign exchange transactions. The Brazilian
securities markets are governed by (1) Law No. 6,385, as amended and supplemented, which is the principal law governing the
Brazilian securities markets, (2) the Brazilian Corporation Law, and (3) the regulations issued by the CVM, the National Monetary
Council and the Brazilian Central Bank.
These laws and regulations provide for, among other things, disclosure requirements applicable to issuers of publicly traded
securities, restrictions on insider trading (including criminal sanctions under the Brazilian Penal Code) and price manipulation,
protection of minority shareholders and disclosure of transactions in a company’s
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securities by its insiders, including directors, officers and major shareholders. They also provide for the licensing and oversight of
brokerage firms and the governance of Brazilian stock exchanges.
However, the Brazilian securities markets are not as highly regulated or supervised as U.S. securities markets or securities
markets in some other jurisdictions. In addition, rules and policies against self-dealing or for preserving shareholder interests may be
less well-defined and enforced in Brazil than in the United States, which may put holders of our preferred shares and the ADSs at a
disadvantage. Finally, corporate disclosures also may be less complete than for public companies in the United States and certain
other jurisdictions.
Under the Brazilian Corporation Law, a company is either publicly held (companhia aberta), as we are, or privately held
(companhia fechada). All publicly held companies are registered with the CVM and are subject to reporting and regulatory
requirements. A company registered with CVM may have its securities traded either on the BM&FBOVESPA or in the Brazilian
over-the-counter market. Shares of companies, such as our company, that are listed on the BM&FBOVESPA may not simultaneously
trade on the Brazilian over-the-counter market. The shares of a publicly held company may also be traded privately, subject to certain
limitations.
The Brazilian over-the-counter market consists of direct trades between individuals in which a financial institution registered
with the CVM serves as intermediary. No special application, other than registration with the CVM, is necessary for securities of a
public company to be traded in this market. The CVM requires that it be given notice of all trades carried out in the Brazilian over-
the-counter market by the respective intermediaries.
Disclosure Requirements
Law No. 6,385 requires that a publicly traded company, such as our company, submit to the CVM and the BM&FBOVESPA
certain periodic information, including annual and quarterly reports prepared by management and independent auditors. Law
No. 6,385 also requires us to file with the CVM our shareholders’ agreements, notices of shareholders’ meetings and copies of the
minutes of these meetings.
CVM Instruction No. 358, which became effective in April 2002, revised and consolidated the requirements regarding the
disclosure and use of information related to material facts and acts of publicly traded companies, including the disclosure of
information in the trading and acquisition of securities issued by publicly traded companies.
CVM Instruction No. 358 includes provisions that:
•
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 meeting of shareholders and of management of the company, or any
other facts related to the company’s business (whether occurring within the company or otherwise 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 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 investor relations officer, controlling shareholders, other officers or directors, members of the fiscal council and
other advisory boards to disclose material facts;
require simultaneous disclosure of material facts to all markets in which the company’s securities are admitted for trading;
require the acquirer of a controlling stake in a company to publish material facts, including its intentions as to whether or
not to de-list the company’s shares, within one year;
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•
•
establish rules regarding disclosure requirements in the acquisition and disposal of a material shareholding stake; and
prohibit trading on the basis of material non-public information.
Brazilian regulations also require that any person or group of persons representing the same interest that has directly or
indirectly acquired an interest corresponding to 5% of a type or class of shares of a publicly traded company must provide such
publicly traded company with information on such acquisition and its purpose, and such company must transmit this information to
the CVM. If this acquisition causes a change in the control of the company or in the administrative structure of the company, or if this
acquisition triggers the obligation to make a public offering in accordance with CVM Instruction No. 361, as amended, then the
acquirer must disclose this information to the applicable stock exchanges and the appropriate Brazilian newspapers. Such obligation
is also triggered whenever the equity interest directly or indirectly held by such person or group of persons representing the same
interest increases or decreases to 5%, or any 5% multiple thereof, of a type or class of shares.
Integrated Disclosure
CVM Instruction No. 480, which the CVM issued in December 2009:
•
created two different categories of securities issuers in accordance with the securities that those issuers are authorized to
issue in the Brazilian regulated markets and established different disclosure requirements for each category. A category A
issuer is authorized to issue any and all securities and is subject to more stringent disclosure requirements. A category B
issuer is authorized to issue any and all securities, other than shares, share certificates and other securities issued by the
issuer of such shares or shares certificates or by a company of its group that grants to its holders the right to acquire such
shares or shares certificates.
•
•
•
created the current CVM form for annual reports (Formulário de Referência). The Formulário de Referência requires
extensive disclosures in several areas, including, among others, management’s discussion and analysis of the financial
statements, management compensation and risk controls and derivative policies.
introduced a requirement that an issuer publish an offering note with respect to a public securities offering with
information on the public securities offering to supplement the Formulário de Referência.
classified as Well-Known Seasoned Issuers (Emissor de Grande Exposição ao Mercado) companies (1) that have had
securities traded in the BM&FBOVESPA for at least three years, (2) that are in compliance with the CVM rules on current
and periodic reporting obligations in the previous 12 months, and (3) which have shares traded in the market with a market
value equal or greater than R$5 billion. The CVM is expected to issue regulations regarding which public securities
offerings by Well-Known Seasoned Issuers that will permit these issuers to register public securities offerings through an
expedited procedure.
Recommendations Regarding Business Combination Transactions Between Affiliated Companies
In September 2008, the CVM issued CVM Practice Bulletin No. 35/08 (Parecer de Orientação No. 35/08) recommending that
where a controlling company and its subsidiaries or affiliated companies engage in a business combination transaction, certain
additional procedures be followed to protect the non-controlling shareholders. The release constitutes guidance for Brazilian
companies engaging in business combination transactions, and does not mandate that any procedure be followed. The release
recommends that the constituent companies implement one of the following procedures in connection with a business combination
transaction:
•
establish an independent advisory committee to protect the interests of the non-controlling shareholders and to negotiate
the terms and conditions for such business combination transaction; or
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•
condition the of approval of the business combination transaction upon the affirmative vote of a majority of the non-
controlling shareholders of the controlled company, including the minority holders of the voting and the non-voting shares
of the controlled company.
Proxy Solicitation Rules
CVM Instruction No. 481, which the CVM issued in December 2009, sets forth (1) the procedures relating to the public
solicitation of proxies for the exercise of voting rights at shareholders’ meetings of publicly held companies, and (2) disclosure
requirements to be followed by publicly held companies before such shareholders meetings.
CVM Instruction No. 481 provides that:
•
•
•
shareholders that own 0.5% or more of a company’s share capital may nominate members of the board of directors and the
fiscal council in a public solicitation of proxies conducted by the company’s management, and that shareholders will be
entitled to vote with respect to these nominations;
companies that accept digital proxies sent through the internet must allow shareholders who hold 0.5% or more of the
company’s share capital to make a public solicitation of proxies through the company’s digital proxy system; and
publicly held companies that do not accept digital proxies sent through the internet must pay part of the costs of the public
solicitation of proxies made by shareholders that own 0.5% or more of the company’s share capital.
CVM Instruction No. 481 also specifies the information and documents that must be made available to shareholders following
the date of the publication of the first call notice for the shareholders’ meeting. The information and documents that must be provided
varies according to the agenda of the shareholders’ meeting. This information must be available through the CVM’s website before
the shareholders’ meeting, must be prepared in accordance with the requirements of Instruction No. 481, and, if the information and
documents relate to the annual shareholders’ meeting, must include management’s discussion and analysis of the financial statements,
personal data and history of the nominees for election to the company’s board of directors and/or fiscal council, and a proposal for the
compensation of the company’s management.
In 2015, CVM Instruction No. 481 was amended to provide the procedures relating to the exercise of distance voting by the
shareholders at the shareholders’ meetings. The distance voting procedure is currently at the discretion of Brazilian publicly held
companies and has not yet adopted by us. Such procedure will become mandatory (i) in January 2017, for publicly-held companies
with at least one type or class of shares integrating IBrX-100 and IBOVESPA indexes; and (ii) in January 2018, for the other
publicly-held companies with shares traded in the stock market.
Trading on the BM&FBOVESPA
Overview of the BM&FBOVESPA
In 2000, the São Paulo Stock Exchange (Bolsa de Valores de São Paulo S.A. – BVSP), or the BOVESPA, was reorganized
through the execution of memoranda of understanding by the Brazilian stock exchanges. Following this reorganization, the
BOVESPA was a non-profit entity owned by its member brokerage firms and trading on the BOVESPA was limited to these member
brokerage firms and a limited number of authorized nonmembers. Under the memoranda, all securities are now traded only on the
BOVESPA, with the exception of electronically traded public debt securities and privatization auctions, which are traded on the Rio
de Janeiro Stock Exchange.
In August 2007, the BOVESPA underwent a corporate restructuring that resulted in the creation of BOVESPA Holding S.A., a
public corporation, whose wholly-owned subsidiaries were (1) the BOVESPA, which is responsible for the operations of the stock
exchange and the organized over-the-counter markets, and (2) the Brazilian
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Settlement and Custodial Company (Companhia Brasileira de Liquidação e Custódia), or CBLC, which is responsible for settlement,
clearing and depositary services. In the corporate restructuring, all holders of membership certificates of the BOVESPA and of shares
of CBLC became shareholders of BOVESPA Holding S.A. As a result of the corporate restructuring, access to the trading and other
services rendered by the BOVESPA is not conditioned on stock ownership in BOVESPA Holding S.A.
In May 2008, the BOVESPA merged with the Commodities and Futures Exchange (Bolsa de Mercadorias & Futuros) to form
the BM&FBOVESPA. In November 2008, the CBLC merged with the BM&FBOVESPA. As a result, the BM&FBOVESPA now
performs its own settlement, clearing and depositary services.
Trading and Settlement
Trading of equity securities on the BM&FBOVESPA is conducted through an electronic trading system called Megabolsa every
business day from 10:00 a.m. to 5:30 p.m., São Paulo time. Trading of equity securities on the BM&FBOVESPA is also conducted
after market between 6:00 p.m. and 7:30 p.m., São Paulo time, in an after-market system connected to both traditional brokerage
firms and brokerage firms operating on the internet. This after-market trading is subject to regulatory limits on price volatility of
securities and on the volume of shares traded by investors operating on the internet.
Since March 2003, market making activities have been allowed on the BM&FBOVESPA. On July 23, 2012, we announced the
engagement of Brasil Plural Corretora de Câmbio, Títulos e Valores Mobiliários S.A. (formerly known as Flow Corretora de Câmbio,
Títulos e Valores Mobiliários S.A.) as market maker of our common shares and preferred shares on the BM&FBOVESPA. Trading in
securities listed on the BM&FBOVESPA may be effected off the exchange in the unorganized over-the-counter market under certain
circumstances, although such trading is very limited.
The trading of securities of a company on the BM&FBOVESPA may be suspended at the request of a company in anticipation
of the announcement of a material event. A requesting company must also suspend trading of its securities on international stock
exchanges on which its securities are traded. The CVM and the BM&FBOVESPA have discretionary authority to suspend trading in
shares of a particular issuer, based on or due to a belief that, among other reasons, a company has provided inadequate information
regarding a material event or has provided inadequate responses to inquiries by the CVM or the BM&FBOVESPA.
In order to reduce volatility, the BM&FBOVESPA has adopted a “circuit breaker” mechanism under which trading sessions
may be suspended for a period of 30 minutes or one hour whenever the Ibovespa index falls 10% or 15%, respectively, compared to
the closing of the previous trading session.
Settlement of transactions on the BM&FBOVESPA is effected three business days after the trade date, without adjustment of
the purchase price for inflation. Delivery of and payment for shares is made through the facilities of the clearing and settlement
chamber of the BM&FBOVESPA. The seller is ordinarily required to deliver shares to the clearing and settlement chamber of the
BM&FBOVESPA on the second business day following the trade date.
Market Size
Although the Brazilian equity market is Latin America’s largest in terms of market capitalization, it is smaller, more volatile and
less liquid than the major U.S. and European securities markets. Moreover, the BM&FBOVESPA is significantly less liquid than the
NYSE or other major exchanges in the world.
As of December 31, 2015, the aggregate market capitalization of all companies listed on the BM&FBOVESPA was equivalent
to approximately R$1.9 trillion (US$490 billion) and the 10 largest companies listed on the BM&FBOVESPA represented
approximately 51% of the total market capitalization of all listed companies. By comparison, as of December 31, 2015, the aggregate
market capitalization of the companies (including U.S. and non-U.S. companies) listed on the NYSE was approximately US$17.8
trillion. The average daily trading volume of the BM&FBOVESPA and the NYSE for 2015 was approximately R$6.8 billion (US$2.1
billion) and US$64.0 billion, respectively.
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Although any of the outstanding shares of a listed company may trade on the BM&FBOVESPA, in most cases fewer than half
of the listed shares are actually available for trading by the public, the remainder being held by small groups of controlling persons,
one principal shareholder or governmental entities that rarely trade their shares. For this reason, data showing the total market
capitalization of the BM&FBOVESPA tends to overstate the liquidity of the Brazilian equity market. The relative volatility and
illiquidity of the Brazilian equity markets may substantially limit your ability to sell our common shares or preferred shares at the
time and price you desire and, as a result, could negatively impact the market price of these securities.
Regulation of Foreign Investments
Trading on the BM&FBOVESPA by a holder not deemed to be domiciled in Brazil for Brazilian tax and regulatory purposes, or
a non-Brazilian holder, is subject to certain limitations under Brazilian foreign investment regulations. With limited exceptions, non-
Brazilian holders may trade on the BM&FBOVESPA only in accordance with the requirements of Annex I of Resolution No. 4,373
of the National Monetary Council. Annex I of Resolution No. 4,373 requires that securities held by non-Brazilian holders be
registered, maintained in the custody of, or maintained in deposit accounts with, financial institutions that are authorized by the
Brazilian Central Bank and the CVM, as applicable. Subject to limited exceptions provided in the CVM regulation or previous CVM
authorization, Annex I of Resolution No. 4,373 requires non-Brazilian holders (1) to restrict their securities trading to transactions on
the BM&FBOVESPA or qualified over-the-counter markets; and (2) to not transfer the ownership of investments made under Annex
I of Resolution No. 4,373 through private transactions. See “Item 10. Additional Information—Exchange Controls—Resolution
No. 4,373” for further information about Resolution No. 4,373, and “Item 10. Additional Information—Taxation—Brazilian Tax
Considerations—Taxation of Gains” for a description of certain tax benefits extended to non-Brazilian holders who qualify under
Resolution No. 4,373.
BM&FBOVESPA Corporate Governance Standards
In December 2000, the BM&FBOVESPA introduced three special listing segments:
•
•
•
Level 1 of Differentiated Corporate Governance Practices;
Level 2 of Differentiated Corporate Governance Practices; and
The Novo Mercado (New Market).
These special listing segments were designed for the trading of shares issued by companies that voluntarily undertake to abide
by corporate governance practices and disclosure requirements in addition to those already required by Brazilian law. The inclusion
of a company in any of the special listing segments requires adherence to a series of corporate governance rules. These rules were
designed to increase shareholders’ rights and enhance the quality of information provided to shareholders.
Our shares joined Level 1 of Differentiated Corporate Governance Practices on December 14, 2012. As a Level 1 company, we
must, among other things:
•
•
•
•
•
ensure that shares representing 25% of our total share capital are effectively available for trading;
adopt offering procedures that favor widespread ownership of shares whenever we make a public offering;
comply with minimum quarterly disclosure standards, including issuing consolidated financial information, a cash flow
statement, and special audit revisions on a quarterly basis;
follow stricter disclosure policies with respect to contracts with related parties, material contracts and transactions
involving our securities made by our controlling shareholders, if any, directors or executive officers;
make a schedule of corporate events available to our shareholders; and
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hold public meetings with analysts and investors at least annually.
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Pursuant to the regulations of the BM&FBOVESPA, the members of our board of directors and board of executive officers are
personally liable for our compliance with the rules and regulations of the BM&FBOVESPA’s Level 1 Listing Segment.
ITEM 10. ADDITIONAL INFORMATION
Description of Our Company’s By-laws
The following is a summary of the material provisions of our by-laws and of the Brazilian Corporation Law. In Brazil, a
company’s by-laws (estatuto social) are the principal governing document of a corporation (sociedade anônima).
General
Our registered name is Oi S.A., and our registered office is located in the City of Rio de Janeiro, State of Rio de Janeiro, Brazil.
Our registration number with the Board of Trade of the State of Rio de Janeiro is No. 33.3.0029520-8. We have been duly registered
with the CVM under No. 11312 since March 27, 1980. Our headquarters are located in City of Rio de Janeiro, State of Rio de Janeiro,
Brazil. Our company has a perpetual existence.
As of December 31, 2015 and May 13, 2016, we had outstanding share capital of R$21,438,374,154.00, comprised of
825,760,902 total shares, consisting of 668,033,661 issued common shares and 157,727,241 issued preferred shares, including
148,282,003 common shares and 1,811,755 preferred shares held in treasury. All of our outstanding share capital is fully paid. All of
our shares are without par value. Under the Brazilian Corporation Law, the aggregate number of our non-voting and limited voting
preferred shares may not exceed two-thirds of our total outstanding share capital. In addition, our board of directors may increase our
share capital to a number of common shares equivalent to R$34,038,701,741.49, provided that no preferred shares are issued by the
Company in public or private subscriptions.
Corporate Purposes
Under Article 2 of our by-laws, our corporate purposes are:
•
•
•
•
•
•
•
•
to offer telecommunications services and all activities required or useful for the operation of these services, in conformity
with our concessions, authorizations and permits;
to participate in the capital of other companies;
to organize wholly-owned subsidiaries for the performance of activities that are consistent with our corporate purposes and
recommended to be decentralized;
to import, or promote the importation of, goods and services that are necessary to the performance of activities consistent
with our corporate purposes;
to provide technical assistance services to other telecommunications companies engaged in activities of common interest;
to perform study and research activities aimed at the development of the telecommunications sector;
to enter into contracts and agreements with other telecommunications companies or other persons or entities to assure the
operations of our services, with no loss of its attributions and responsibilities; and
to perform other activities related to the above corporate purposes.
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Under our by-laws, any matters subject to the approval of our board of directors can be approved only by a majority of votes of
the members of our board of directors. Under our by-laws, our board of directors may only deliberate if a majority of its members are
present at a duly convened meeting.
Election of Directors
The members of our board of directors are elected at general meetings of shareholders for concurrent two-year terms. The tenure
of the members of the board of directors and board of executive officers will be conditioned on such members signing a Term of
Consent (Termo de Anuência dos Administradores) in accordance with the Level 1 Corporate Governance Listing Segment of the
BM&FBOVESPA and complying with applicable legal requirements.
Qualification of Directors
There is no minimum share ownership or residency requirement to qualify for membership on our board of directors. Our by-
laws do not require the members of our board of directors to be residents of Brazil. The Brazilian Corporation Law requires each of
our executive officers to be residents of Brazil. The tenure of the members of the board of directors will be conditioned to the
appointment of a representative who resides in Brazil, with powers to receive service of process in proceedings initiated against such
member based on the corporate legislation, by means of a power-of-attorney with a validity term of at least three years after the end
of the term of office.
Fiduciary Duties and Conflicts of Interest
All members of our board of directors and their alternates owe fiduciary duties to us and all of our shareholders.
Under the Brazilian Corporation Law, if one of our directors or his or her respective alternate or one of our executive officers
has a conflict of interest with our company in connection with any proposed transaction, such director, alternate director or executive
officer may not vote in any decision of our board of directors or of our board of executive officers, as the case may be, regarding such
transaction and must disclose the nature and extent of his conflicting interest for inclusion in the minutes of the applicable meeting.
However, if one of our directors is absent from a meeting of our board of directors, that director’s alternate may vote even if that
director has a conflict of interest, unless the alternate director shares that conflict of interest or has another conflict of interest.
Any transaction in which one of our directors (including the alternate members) or executive officers may have an interest,
including any financings, can only be approved on reasonable and fair terms and conditions that are no more favorable than the terms
and conditions prevailing in the market or offered by third parties. If any such transaction does not meet this requirement, then the
Brazilian Corporation Law provides that the transaction may be nullified and the interested director or executive officer must return
to us any benefits or other advantages that he obtained from, or as result of, such transaction. Under the Brazilian Corporation Law
and upon the request of a shareholder who owns at least 5.0% of our total share capital, our directors and executive officers must
reveal to our shareholders at an ordinary meeting of our shareholders certain transactions and circumstances that may give rise to a
conflict of interest. In addition, our company or shareholders who own 5.0% or more of our share capital may bring an action for civil
liability against directors and executive officers for any losses caused to us as a result of a conflict of interest.
Compensation
Under our by-laws, our common shareholders approve the aggregate compensation payable to our board of directors, board of
executive officers and members of our fiscal council. Subject to this approval, our board of directors establishes the compensation of
its members and of our executive officers. See “Item 6. Directors, Senior Management and Employees—Compensation.”
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Neither the Brazilian Corporation Law nor our by-laws establish any mandatory retirement age for our directors or executive
officers.
Share Capital
Under the Brazilian Corporation Law, the number of our issued and outstanding non-voting shares or shares with limited voting
rights, such as our preferred shares, may not exceed two-thirds of our total outstanding share capital.
Each of our common shares entitles its holder to one vote at our annual and extraordinary shareholders’ meetings. Holders of
our common shares are not entitled to any preference in respect of our dividends or other distributions or otherwise in case of our
liquidation.
Our preferred shares are non-voting, except in limited circumstances, and do not have priority over our common shares in the
case of our liquidation. See “—Voting Rights” for information regarding the voting rights of our preferred shares and “Item 8.
Financial Information—Dividends and Dividend Policy—Calculation of Adjusted Net Profit” and “—Dividend Preference of
Preferred Shares” for information regarding the distribution preferences of our preferred shares.
Shareholders’ Meetings
Under the Brazilian Corporation Law, we must hold an annual shareholders’ meeting by April 30 of each year in order to:
•
•
approve or reject the financial statements approved by our board of directors and board of executive officers, including any
recommendation by our board of directors for the allocation of net profit and distribution of dividends; and
elect members of our board of directors (upon expiration of their two-year terms) and members of our fiscal council.
In addition to the annual shareholders’ meetings, holders of our common shares have the power to determine any matters related
to changes in our corporate purposes and to pass any resolutions they deem necessary to protect and enhance our development
whenever our interests so require, by means of extraordinary shareholders’ meetings.
We convene our shareholders’ meetings, including our annual shareholders’ meeting, by publishing a notice in the national
edition of Valor Econômico, a Brazilian newspaper, and in the Official Gazette of the state of Rio de Janeiro (Diário Oficial do
Estado do Rio de Janeiro). Under the rules of the CVM, on the first call of any meeting, the notice must be published no fewer than
three times, beginning at least 30 calendar days prior to the scheduled meeting date. The notice must contain the meeting’s place,
date, time, agenda and, in the case of a proposed amendment to our by-laws, a description of the subject matter of the proposed
amendment.
Our board of directors may convene a shareholders’ meeting. Under the Brazilian Corporation Law, shareholders’ meetings also
may be convened by our shareholders as follows:
•
•
by any of our shareholders if, under certain circumstances set forth in the Brazilian Corporation Law, our directors do not
convene a shareholders’ meeting required by law within 60 days;
by shareholders holding at least 5% of our total share capital if, after a period of eight days, our directors fail to call a
shareholders’ meeting that has been requested by such shareholders; and
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by shareholders holding at least 5% of either our total voting share capital or our total non-voting share capital, if after a
period of eight days, our directors fail to call a shareholders’ meeting for the purpose of appointing a fiscal council that has
been requested by such shareholders.
In addition, our fiscal council may convene a shareholders’ meeting if our board of directors does not convene an annual
shareholders’ meeting within 30 days or at any other time to consider any urgent and serious matters.
Each shareholders’ meeting shall be convened by the chairman of the board of directors. In case of absence or impediment of
the chairman of the board of directors, the meeting shall be convened by any director chosen at the meeting; and if all other directors
are absent or impeded, the shareholders present at the meeting shall be responsible for choosing the chairman and the secretary of the
board of directors.
In order for a valid action to be taken at a shareholders’ meeting, shareholders representing at least 25% of our issued and
outstanding voting share capital must be present on first call. However, shareholders representing at least two-thirds of our issued and
outstanding voting share capital must be present on first call at a shareholders’ meeting called to amend our by-laws. If a quorum is
not present, our board of directors may issue a second call by publishing a notice as described above at least eight calendar days prior
to the scheduled meeting. Except as otherwise provided by law, the quorum requirements do not apply to a meeting held on the
second call, and the shareholders’ meetings may be convened with the presence of shareholders representing any number of shares
(subject to the voting requirements for certain matters described below). A shareholder without a right to vote may attend a
shareholders’ meeting and take part in the discussion of matters submitted for consideration.
Voting Rights
Under the Brazilian Corporation Law and our by-laws, each of our common shares entitles its holder to one vote at our
shareholders’ meetings. Our preferred shares generally do not confer voting rights, except in limited circumstances described below.
We may not restrain or deny any voting rights without the consent of the majority of the shares affected. Whenever the shares of any
class of share capital are entitled to vote, each share is entitled to one vote.
In accordance with article 72 of our by-laws, any shareholder of our company or group of shareholders representing a common
interest or bound by a voting agreement that holds a stake of more than 15% of the number of shares into which the voting capital
stock of Company is divided will have their voting rights limited to 15% of the number of shares of our company in which the voting
capital stock is divided. Currently, such limitation is being applied to the votes corresponding to the shares held by Bratel B.V. and
Pharol, which taken together, exceed the 15% threshold of our voting capital.
Voting Rights of Common Shares
Except as otherwise provided by law, resolutions of a shareholders’ meeting are passed by a simple majority vote of the holders
of our common shares present or represented at the meeting, without taking abstentions into account. Under the Brazilian Corporation
Law, the approval of shareholders representing at least half of our outstanding voting shares is required for the types of action
described below:
•
•
•
•
reducing the mandatory dividend set forth in our by-laws;
changing our corporate purpose;
merging our company with another company, or consolidating our company, subject to the conditions set forth in the
Brazilian Corporation Law;
transferring all of our shares to another company, known as an “incorporação de ações” under the Brazilian Corporation
Law;
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•
•
•
•
participating in a centralized group of companies (grupo de sociedades) as defined under the Brazilian Corporation Law
and subject to the conditions set forth in the Brazilian Corporation Law;
dissolving or liquidating our company or canceling any ongoing liquidation of our company;
creating any founders’ shares (partes beneficiárias) entitling the holders thereof to participate in the profits of our
company; and
spinning-off of all or any part of our company.
Decisions on the transformation of our company into another form of company require the unanimous approval of our
shareholders, including the holders of our preferred shares.
Our company is required to give effect to shareholders’ agreements that contain provisions regarding the purchase or sale of our
shares, preemptive rights to acquire our shares, the exercise of the right to vote our shares or the power to control our company, if
these agreements are filed with our headquarters in Rio de Janeiro. Brazilian Corporation Law obligates the president of any
shareholder or board of directors meeting to disregard any vote taken by any of the parties to any shareholders’ agreement that has
been duly filed with our company that violates the provisions of any such agreement. In the event that a shareholder that is party to a
shareholders’ agreement (or a director appointed by such shareholder) is absent from any shareholders’ or board of directors’ meeting
or abstains from voting, the other party or parties to that shareholders’ agreement have the right to vote the shares of the absent or
abstaining shareholder (or on behalf of the absent director) in compliance with that shareholders’ agreement. Currently, no
shareholders’ agreement affecting our shares has been filed with our headquarters in Rio de Janeiro.
Under the Brazilian Corporation Law, neither our by-laws nor actions taken at a shareholders’ meeting may deprive any of our
shareholders of certain specific rights, including:
•
•
•
•
•
the right to participate in the distribution of our profits;
the right to participate in any remaining residual assets in the event of our liquidation;
the right to supervise the management of our corporate business as specified in the Brazilian Corporation Law;
the right to preemptive rights in the event of an issuance of our shares, debentures convertible into our shares or
subscription bonuses, other than as provided in the Brazilian Corporation Law; and
the right to withdraw from our company under the circumstances specified in the Brazilian Corporation Law.
Voting Rights of Minority Shareholders
Shareholders holding shares representing not less than 5% of our voting shares have the right to request that we adopt a
cumulative voting procedure for the election of the members of our board of directors. This procedure must be requested by the
required number of shareholders at least 48 hours prior to a shareholders’ meeting.
Under the Brazilian Corporation Law, shareholders that are not controlling shareholders, but that together hold either:
•
•
preferred shares representing at least 10% of our total share capital; or
common shares representing at least 15% of our voting capital,
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have the right to appoint one member and an alternate to our board of directors at our annual shareholders’ meeting. If no group of
our common or preferred shareholders meets the thresholds described above, shareholders holding preferred shares or common shares
representing at least 10% of our total share capital are entitled to combine their holdings to appoint one member and an alternate to
our board of directors. In the event that minority holders of common shares and/or holders of non-voting preferred shares elect a
director and the cumulative voting procedures described above are also used, our controlling shareholders, if any, always retain the
right to elect at least one member more than the number of members elected by the other shareholders, regardless of the total number
of members of our board of directors. The shareholders seeking to exercise these minority rights must prove that they have held their
shares for not less than three months preceding the shareholders’ meeting at which the director will be appointed.
Under our by-laws, holders of preferred shares may appoint, by separate voting, one board member and one alternate.
In accordance with the Brazilian Corporation Law, the holders of our preferred shares are entitled to elect one member and an
alternate to our fiscal council in a separate election. Minority shareholders have the same right as long as they jointly represent 10%
or more of the voting shares. The other shareholders with the right to vote may elect the remaining members and alternates, who, in
any event, must number more than the directors and alternates elected by the holders of the preferred shares and the minority
shareholders.
Voting Rights of Preferred Shares
Holders of our preferred shares are not entitled to vote on any matter, except:
•
•
•
•
with respect to the election of a member of our board of directors by preferred shareholders holding at least 10% of our
total share capital in a separate meeting as described above;
with respect to the election of a member and alternate member of our fiscal council in a separate meeting as described
above;
with respect to the approval of the contracting of foreign entities related to the controlling shareholders of our company, if
any, to render management services, including technical assistance, in which decisions preferred shares will have the right
to vote separately from the common shares;
with respect to decisions relating to the employment of foreign entities linked to the controlling shareholders of our
company, if any, to provide management services, including technical assistance, if the remuneration for such services will
exceed 0.2% of our consolidated annual sales for fixed switched telephone service, network service transport
telecommunications and the mobile highway telephone service, after deductions of tax and contributions; and
•
in the limited circumstances described below.
The Brazilian Corporation Law and our by-laws provide that our preferred shares will acquire unrestricted voting rights after the
third consecutive fiscal year that we fail to pay the minimum dividends or fixed dividends to which our preferred shares are entitled.
This voting right will continue until the past due minimum dividend for any year in that three consecutive-year period is paid in full.
Our preferred shareholders will also obtain unrestricted voting rights if we enter into a liquidation process.
Limitation on Voting Rights
Under our by-laws, any shareholder or group of shareholders, representing the same interest or bound by a voting agreement,
that hold or may hold in the future, alone or jointly, interest in the company representing more than 15% of our voting capital shall
have its voting rights limited to 15% of the shares with voting rights.
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The limitation above shall be deemed void and without effect in case (1) of capital increase or corporate reorganization that
cause a dilution superior to 50% of the corporate capital; (2) of public tender offer, in which the offering shareholder or a group of
shareholders, bound by voting agreement, acquire more than 50% of the shares of the corporate capital; or (3) no shareholder or
group of shareholders hold, alone or jointly, interests representing more than 15% of our voting capital.
Any declaration of vote that overcomes the limits of the by-laws shall not be computed in the shareholders’ meeting.
Liquidation
We may be liquidated in accordance with the provisions of Brazilian law. In the event of our extrajudicial liquidation, a
shareholders’ meeting will determine the manner of our liquidation, appoint our liquidator and our fiscal council that will function
during the liquidation period.
Upon our liquidation, our preferred shares do not have a liquidation preference over our common shares in respect of the
distribution of our net assets, but shall be entitled to unrestricted voting rights. In the event of our liquidation, the assets available for
distribution to our shareholders would be distributed to our shareholders in an amount equal to their pro rata share of our legal
capital. If the assets to be so distributed are insufficient to fully compensate our all of our shareholders for their legal capital, each of
our shareholders would receive a pro rata amount (based on their pro rata share of our legal capital) of any assets available for
distribution.
Preemptive Rights
Under the Brazilian Corporation Law, each of our shareholders has a general preemptive right to subscribe for our shares or
securities convertible into our shares in any capital increase, in proportion to the number of our shares held by such shareholder.
Under our by-laws, our board of directors or our shareholders, as the case may be, may decide not to extend preemptive rights to
our shareholders with respect to any issuance of our shares, debentures convertible into our shares or warrants made in connection
with a public exchange made to acquire control of another company or in connection with a public offering or sale through a stock
exchange. The preemptive rights are transferable and must be exercised within a period of at least 30 days following the publication
of notice of the issuance of shares or securities convertible into our shares. Holders of our ADSs may not be able to exercise the
preemptive rights relating to our shares underlying their ADSs unless a registration statement under the Securities Act is effective
with respect to those rights or an exemption from the registration requirements of the Securities Act is available. We are not obligated
to file a registration statement with respect to the shares relating to these preemptive rights or to take any other action to make
preemptive rights available to holders of our ADSs, and we may not file any such registration statement.
Redemption, Amortization, Tender Offers and Rights of Withdrawal
Our by-laws or our shareholders at a shareholders’ meeting may authorize us to use our profits or reserves to redeem or amortize
our shares in accordance with conditions and procedures established for such redemption or amortization. The Brazilian Corporation
Law defines “redemption” (resgate de ações) as the payment of the value of the shares in order to permanently remove such shares
from circulation, with or without a corresponding reduction of our share capital. The Brazilian Corporation Law defines
“amortization” (amortização) as the distribution to the shareholders, without a corresponding capital reduction, of amounts that they
would otherwise receive if we were liquidated. If an amortization distribution has been paid prior to our liquidation, then upon our
liquidation, the shareholders who did not receive an amortization distribution will have a preference equal to the amount of the
amortization distribution in the distribution of our capital.
The Brazilian Corporation Law authorizes our shareholders to approve in a shareholders’ meeting the redemption of our shares
not held by our controlling shareholders, if any, if after a tender offer effected for the purpose of delisting us as a publicly held
company, our controlling shareholders, if any, increase their participation
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in our total share capital to more than 95%. The redemption price in such case would be the same price paid for our shares in any
such tender offer.
The Brazilian Corporation Law and our by-laws also require the acquirer of control (in case of a change of control) or the
controller (in case of delisting or a substantial reduction in liquidity of our shares) to make a tender offer for the acquisition of the
shares held by minority shareholders under certain circumstances described below under “—Mandatory Tender Offers.” The
shareholder can also withdraw its capital from our company under certain circumstances described below under “—Rights of
Withdrawal.”
Mandatory Tender Offers
The Brazilian Corporation Law requires that if our common shares are delisted from the BM&FBOVESPA or there is a
substantial reduction in liquidity of our common shares, as defined by the CVM, in each case as a result of purchases by our
controlling shareholders, our controlling shareholders must effect a tender offer for acquisition of our remaining common shares at a
purchase price equal to the fair value of our common shares taking into account the total number of our outstanding common shares.
If our controlling shareholders enter into a transaction which results in a change of control of our company, the controlling
shareholders must include in the documentation of the transaction an obligation to effect a public offer for the purchase of all our
common shares for the same price per share paid to the controlling shareholders. The tender offer must be submitted to the CVM
within 30 days from the date of execution of the documents that provide for the change of control.
Rights of Withdrawal
The Brazilian Corporation Law provides that, in certain limited circumstances, a dissenting shareholder may withdraw its equity
interest from our company and be reimbursed by us for the value of our common or preferred shares that it then holds.
This right of withdrawal may be exercised by the dissenting or non-voting holders (including any holder of preferred shares) in
the event that the holders of a majority of all outstanding common shares authorize:
•
•
•
•
•
a reduction of the mandatory dividend set forth in our by-laws;
our participation in a centralized group of companies;
a change in our corporate purpose;
spinning-off of all or any part of our company, if such spin-off implies (1) a change in our business purpose (except if the
spun-off assets revert to a company whose main purpose is the same as ours), (2) a reduction of the mandatory dividend set
forth in our by-laws, or (3) our participation in a centralized group of companies; or
in one of the following transactions in which the shares held by such holders do not meet liquidity and dispersion
thresholds under the Brazilian Corporation Law:
•
•
•
the merger of our company with another company, or the consolidation of our company, in a transaction in which
our company is not the surviving entity;
the transfer of all of our outstanding shares to another company in an incorporação de ações transaction;
the transfer of all of the outstanding shares of another company to us in an incorporação de ações transaction; or
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•
the acquisition of control of another company at a price that exceeds certain limits set forth in the Brazilian
Corporation Law.
Dissenting or non-voting shareholders are also entitled to withdraw in the event that the entity resulting from a merger or spin-
off does not have its shares listed in an exchange or traded in the secondary market within 120 days from the shareholders’ meeting
that approved the relevant merger or spin-off.
Notwithstanding the above, in the event that we are consolidated or merged with another company, become part of a centralized
group of companies, or acquire the control of another company for a price in excess of certain limits imposed by the Brazilian
Corporation Law, holders of any type or class of our shares or the shares of the resulting entity that have minimal market liquidity and
are dispersed among a sufficient number of shareholders will not have the right to withdraw. For this purpose, shares that are part of
the IBOVESPA index are considered liquid, and sufficient dispersion will exist if the controlling shareholder, the parent company or
other companies under its control hold less than half of the total number of outstanding shares of that type or class. In case of a spin-
off, the right of withdrawal will only exist if (1) there is a change in the corporate purpose, (2) there is a reduction in the mandatory
dividend, or (3) the spin-off results in our participation in a centralized group of companies.
Only shareholders who own shares on the date of publication of the first notice convening the relevant shareholders’ meeting or
the material fact notice concerning the relevant transaction is published, whichever is earlier, will be entitled to withdrawal rights.
Shareholders will only be entitled to exercise withdrawal rights with respect to the shares held by them from such date until the date
withdrawal rights are exercised.
The redemption of shares arising out of the exercise of any withdrawal rights would be made at the book value of the shares,
determined on the basis of our most recent audited balance sheet approved by our shareholders. If the shareholders’ meeting
approving the action that gave rise to withdrawal rights occurred more than 60 days after the date of the most recent approved audited
balance sheet, a shareholder may demand that its shares be valued on the basis of a balance sheet prepared specifically for this
purpose.
The right of withdrawal lapses 30 days after the date of publication of the minutes of the shareholders’ meeting that approved
the action that gave rise to withdrawal rights, except when the resolution is approved pending confirmation by the holders of our
preferred shares (such confirmation to be given at an extraordinary meeting of such preferred shareholders to be held within one
year). In this event, the 30-day period for dissenting shareholders begins at the date of publication of the minutes of the extraordinary
meeting of such preferred shareholders. Our shareholders may reconsider any resolution giving rise to withdrawal rights within 10
days after the expiration of the exercise period of withdrawal rights if our management believes that the withdrawal of shares of
dissenting shareholders would jeopardize our financial stability.
Liability of Our Shareholders for Further Capital Calls
Neither Brazilian law nor our by-laws require any capital calls. Our shareholders’ liability for capital calls is limited to the
payment of the issue price of any shares subscribed or acquired.
Inspection of Corporate Records
Shareholders that own 5% or more of our outstanding share capital have the right to inspect our corporate records, including
shareholders’ lists, corporate minutes, financial records and other documents of our company, if (1) we or any of our officers or
directors have committed any act contrary to Brazilian law or our by-laws, or (2) there are grounds to suspect that there are material
irregularities in our company. However, in either case, the shareholder that desires to inspect our corporate records must obtain a
court order authorizing the inspection.
Disclosures of Share Ownership
Brazilian regulations require that (1) each of our direct or indirect controlling shareholders, if any, and (2) any person or group
of persons representing a person that has directly or indirectly acquired or sold an interest that would result in an increase or decrease
corresponding to 5%, or any 5% multiple thereof, of the total number of our
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shares of any type or class to disclose its or their share ownership or divestment to us, and we are responsible for transmitting such
information to the CVM and the market. In addition, if a share acquisition results in, or is made with the intention of, change of
control or company’s management structure, as well as acquisitions that cause the obligation of performing a tender offer, the persons
acquiring such number of shares are required to publish a statement containing certain required information about such acquisition.
Our controlling shareholders, if any, members of our board of directors, board of executive officers, fiscal council and members
of other bodies created pursuant to our by-laws with technical or consulting functions must file a statement of any change in their
holdings of our shares with the CVM and the Brazilian stock exchanges on which our securities are traded. We also must disclose any
trading of our shares by us or our controlled or related companies.
Form and Transfer
Our preferred shares and common shares are in book-entry form, registered in the name of each shareholder or its nominee. The
transfer of our shares is governed by Article 35 of the Brazilian Corporation Law, which provides that a transfer of shares is effected
by our transfer agent, Banco do Brasil S.A., by an entry made by the transfer agent in its books, upon presentation of valid written
share transfer instructions to us by a transferor or its representative. When preferred shares or common shares are acquired or sold on
a Brazilian stock exchange, the transfer is effected on the records of our transfer agent by a representative of a brokerage firm or the
stock exchange’s clearing system. The transfer agent also performs all the services of safe-keeping of our shares. Provided that the
provisions of Resolution No. 4,373 are observed, transfers of our shares by a non-Brazilian investor are made in the same manner and
are executed on the investor’s behalf by the investor’s local agent. If the original investment was registered with the Brazilian Central
Bank pursuant to foreign investment regulations, the non-Brazilian investor is also required to amend, if necessary, through its local
agent, the electronic certificate of registration to reflect the new ownership.
The BM&FBOVESPA operates a central clearing system, the CSD. A holder of our shares may choose, at its discretion, to
participate in this system, and all shares that such shareholder elects to be put into the clearing system are deposited in custody with
the CSD (through a Brazilian institution that is duly authorized to operate by the Brazilian Central Bank and maintains a clearing
account with the CSD). Shares subject to the custody of the CSD are noted as such in our registry of shareholders. Each participating
shareholder will, in turn, be registered in the register of the CSD and will be treated in the same manner as shareholders registered in
our books.
Material Contracts
We have not entered into any material contracts, other than those described in this annual report or entered into in the ordinary
course of business.
Exchange Controls
There are no restrictions on ownership or voting of our capital stock by individuals or legal entities domiciled outside Brazil.
However, the right to convert dividend payments, payments of interest on shareholders’ equity and proceeds from the sale of our
share capital into foreign currency and to remit such amounts outside Brazil is subject to exchange control restrictions under foreign
investment legislation and foreign exchange regulations, which generally require, among other things, the registration of the relevant
investment with the Brazilian Central Bank and/or the CVM, as the case may be.
Investments in our common shares or preferred shares by (1) a holder not deemed to be domiciled in Brazil for Brazilian tax
purposes (including a non-Brazilian holder) who is registered with the CVM under Annex I of Resolution No. 4,373, or (2) the
depositary, are eligible for registration with the Brazilian Central Bank. This registration (the amount so registered is referred to as
registered capital) allows the remittance outside Brazil of foreign currency, converted at the commercial market rate, acquired with
the proceeds of distributions on, and amounts realized through, dispositions of our common shares or preferred shares.
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The registered capital per newly issued common share or preferred share purchased in the form of an ADS, or purchased in
Brazil under Annex I of Resolution No. 4,373 and deposited with the depositary in exchange for an ADS, will be equal to its purchase
price and to the market value of the corresponding shares on the date of the deposit, respectively.
The registered capital under Annex I of Resolution No. 4,373 per common share or preferred share withdrawn upon cancellation
of a corresponding ADS will be the U.S. dollar equivalent of the market value of the common or preferred share, as the case may be,
on the BM&FBOVESPA on the day of withdrawal. Such cancellation is also subject to the execution of simultaneous foreign
exchange agreements without the actual inflow and outflow of funds to and from Brazil, or the Symbolic FX Agreements. The U.S.
dollar equivalent will be determined upon the execution of the Symbolic FX Agreement.
Foreign Direct Investment and Portfolio Investment
Investors (individuals, legal entities, mutual funds and other collective investment entities) domiciled, residing or headquartered
outside Brazil may register their investments in our shares as foreign portfolio investments under Annex I of Resolution No. 4,373
(described below) or as foreign direct investments under Law No. 4,131 (described below). Registration under Annex I of Resolution
No. 4,373 or Law No. 4,131 generally enables the conversion of dividends, other distributions and sales proceeds received in
connection with registered investments into foreign currency and the remittance of such amounts outside Brazil. Registration under
Annex I of Resolution No. 4,373 affords favorable tax treatment to non-Brazilian portfolio investors who are not resident in a
favorable tax jurisdiction, which is defined by Brazilian tax legislation as any country or location that: (1) does not tax income, or
taxes income at a rate lower than 20% (or 17% in the case of countries or regimes abiding by the international policy for tax
transparency); or (2) does not disclose or imposes restrictions on the disclosure of certain information concerning the shareholding
composition of a legal entity, its ownership or the effective beneficiary of income attributable to the foreigners. See “—Taxation—
Brazilian Tax Considerations.”
Annex I of Resolution No. 4,373
All investments made by a non-Brazilian investor under Annex I of Resolution No. 4,373 are subject to an electronic
registration with the Brazilian Central Bank. This registration permits the conversion of dividend payments, payments of interest on
shareholders’ equity and proceeds from the sale of our share capital into foreign currency and the remission of such amounts outside
Brazil.
Under Annex I of Resolution No. 4,373, non-Brazilian investors registered with the CVM may invest in almost all financial
assets and engage in almost all transactions available to Brazilian investors in the Brazilian financial and capital markets without
obtaining a separate Brazilian Central Bank registration for each transaction, provided that certain requirements are fulfilled. Under
Annex I of Resolution No. 4,373, the definition of a non-Brazilian investor includes individuals, legal entities, mutual funds and other
collective investment entities domiciled or headquartered outside Brazil.
Pursuant to Annex I of Resolution No. 4,373, non-Brazilian investors must:
•
•
•
•
•
•
appoint at least one representative in Brazil with powers to take action relating to its investments, which must be a
financial institution duly authorized by the Brazilian Central Bank;
appoint an authorized custodian in Brazil for its investments, which must be an institution duly authorized by the CVM;
complete the appropriate foreign investor registration forms;
appoint a tax representative in Brazil;
through its representative, register as a non-Brazilian investor with the CVM;
through its representative, register its investments with the Brazilian Central Bank; and
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•
obtain a taxpayer identification number from the Brazilian federal tax authorities.
The securities and other financial assets held by a non-Brazilian investor pursuant to Annex I of Resolution No. 4,373 must be
registered or maintained in deposit accounts or under the custody of an entity duly licensed by the Brazilian Central Bank or the
CVM, as applicable, or be registered in registration, clearing and custody systems authorized by the Brazilian Central Bank or by the
CVM, as applicable. Subject to limited exceptions provided in the CVM regulation or previous CVM authorization, the trading of
securities held under Annex I of Resolution No. 4,373 is restricted to transactions carried out on stock exchanges or through
organized over-the-counter markets licensed by the CVM.
The offshore transfer or assignment of the securities or other financial assets held by non-Brazilian investors pursuant to Annex
I of Resolution No. 4,373 are prohibited, except for transfers (1) resulting from consolidation, spin-off, merger or merger of shares or
occurring upon the death of an investor by operation of law or will; or (2) resulting from a corporate reorganization effected abroad,
as long as the final beneficiaries and the amount of the assets remain the same.
Law 4,131
To obtain a certificate of foreign capital registration from the Brazilian Central Bank under Law No. 4,131, a foreign direct
investor must:
•
•
•
•
register as a foreign direct investor with the Brazilian Central Bank;
obtain a taxpayer identification number from the Brazilian tax authorities;
appoint a tax representative in Brazil; and
appoint a representative in Brazil for service of process in respect of suits based on the Brazilian Corporation Law.
Foreign direct investors under Law No. 4,131 may sell their shares in either private or open market transactions, but these
investors will generally be subject to less favorable tax treatment on gains with respect to our common or preferred shares. See “—
Taxation—Brazilian Tax Considerations.”
ADS - Annex II of Resolution No. 4,373
Annex II of Resolution No. 4,373 of the National Monetary Council provides for the issuance of depositary receipts in foreign
markets in respect of shares of Brazilian issuers. The Common and Preferred ADS program was approved by the Brazilian Central
Bank and the CVM prior to the issuance of the Common and Preferred ADSs.
In the event that a holder of Common or Preferred ADSs exchanges those Common or Preferred ADSs for the underlying
common shares or preferred shares, respectively, the holder must:
•
•
convert its investment in those shares into a foreign portfolio investment under Annex I of Resolution No. 4,373, subject to
the execution of Symbolic FX Agreements; or
convert its investment in those shares into a direct foreign investment under Law No. 4,131, subject to the execution of
Symbolic FX Agreements.
The custodian is authorized to update the electronic registration of the Common and Preferred ADS Depositary to reflect conversions
of Common and Preferred ADSs into foreign portfolio investments under Resolution No. 4,373.
If a holder of Common or Preferred ADSs elects to convert its Common and Preferred ADSs, as the case may be, into a foreign
portfolio investment under Annex I of Resolution No. 4,373 or into a foreign direct investment under Law No. 4,131, the conversion
will be effected before the Brazilian Central Bank by the custodian after receipt of an electronic request from the depositary with
details of the transaction.
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If a holder of ADSs wishes to convert its investment in our shares into either a foreign portfolio investment under Annex I of
Resolution No. 4,373 or a foreign direct investment under Law No. 4,131, it should begin the process of obtaining its own foreign
investor registration with the Brazilian Central Bank or with the CVM, as the case may be, in advance of exchanging the Common or
Preferred ADSs for the underlying common or preferred shares, respectively. A non-Brazilian holder of common or preferred shares
may experience delays in obtaining a foreign investor registration, which may delay remittances outside Brazil, which may in turn
adversely affect the amount, in U.S. dollars, received by the non-Brazilian holder.
Unless the holder has registered its investment with the Brazilian Central Bank, the holder may not be able to convert the
proceeds from the disposition of, or distributions with respect to, such preferred shares (or the common shares into which such holder
converts such preferred shares) into foreign currency or remit those proceeds outside Brazil. In addition, if the non-Brazilian investor
resides in a “tax haven” jurisdiction or is not an investor registered under Annex I of Resolution No. 4,373, the investor will be
subject to less favorable tax treatment than a holder of ADSs. See “—Taxation—Brazilian Tax Considerations.”
Taxation
The following discussion contains a description of the material Brazilian and U.S. federal income tax consequences of the
acquisition, ownership and disposition of our common shares, preferred shares or ADSs. The following discussion does not purport to
be a comprehensive description of all the tax considerations that may be relevant to a decision to purchase, hold or dispose of our
common shares, preferred shares or ADSs. This discussion is based upon the tax laws of Brazil and the United States and regulations
under these tax laws as currently in effect, which are subject to change.
Although there is at present no income tax treaty between Brazil and the United States, the tax authorities of the two countries
have had discussions that may culminate in such a treaty. No assurance can be given, however, as to whether or when a treaty will
enter into force or how it will affect the U.S. holders of our common shares, preferred shares or ADSs.
Prospective purchasers of our common shares, preferred shares or ADSs should consult their own tax advisors as to the tax
consequences of the acquisition, ownership and disposition of our common shares, preferred shares or ADSs in their particular
circumstances.
Brazilian Tax Considerations
The following discussion contains a description of the material Brazilian tax consequences, subject to the limitations set forth
herein, of the acquisition, ownership and disposition of our common shares, preferred shares or ADSs by a non-Brazilian holder. This
discussion is based on the tax laws of Brazil and regulations thereunder in effect on the date hereof, which are subject to change
(possibly with retroactive effect). This discussion does not specifically address all of the Brazilian tax considerations that may be
applicable to any particular non-Brazilian holder. Therefore, each non-Brazilian holder should consult its own tax advisor about the
Brazilian tax consequences of an investment in our common shares, preferred shares or ADSs.
Individuals domiciled in Brazil and Brazilian companies are taxed in Brazil on the basis of their worldwide income which
includes earnings of Brazilian companies’ foreign subsidiaries, branches and affiliates. The earnings of branches of foreign
companies and non-Brazilian residents, or nonresidents, in general are taxed in Brazil only on income derived from Brazilian sources.
Dividends
Dividends paid by a Brazilian corporation, such as Oi, including stock dividends and other dividends paid to a non-Brazilian
holder of our common shares, preferred shares or ADSs, are currently not subject to income tax withholding in Brazil to the extent
that such amounts are related to profits generated after January 1, 1996. Dividends paid from profits generated before January 1, 1996
may be subject to Brazilian income tax withholding at
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varying rates, according to the tax legislation applicable to each corresponding year. See “—New Tax Regime Created by Law
No. 12,973” for further information regarding dividends based on the 2014 calendar-year profits.
Interest on Shareholders’ Equity
Law No. 9,249, dated December 26, 1995, as amended, allows a Brazilian corporation, such as Oi, to make distributions to
shareholders of interest on shareholders’ equity, and treat those payments as a deductible expense for purposes of calculating
Brazilian corporate income tax, and, since 1998, social contribution on net profit as well, as long as the limits described below are
observed. These distributions may be paid in cash. For tax purposes, the deductible amount of this interest is limited to the daily pro
rata variation of the TJLP, as determined by the Brazilian Central Bank from time to time, and the amount of the deduction may not
exceed the greater of:
•
•
50% of net income (after the deduction of social contribution on net profit but before taking into account the provision for
corporate income tax and the amounts attributable to shareholders as interest on shareholders’ equity) for the period in
respect of which the payment is made; and
50% of the sum of retained profits and income reserves as of the date of the beginning of the period in respect of which the
payment is made.
Payment of interest on shareholders’ equity to a non-Brazilian holder is subject to income tax withholding at the rate of 15%, or
25% if the non-Brazilian holder is domiciled in a country or location that is considered to be a “tax haven jurisdiction” for this
purpose. For this purpose, the definition of “tax haven” encompasses countries and locations (1) that do not impose income tax,
(2) that impose income tax at a rate of 20% or less, or (3) where local laws do not allow access to information related to shareholding
composition, ownership of investments, or the identity of the beneficial owners of earnings that are attributed to non-residents.
On November 28, 2014, the Brazilian Revenue Service issued Rule No. 488, which reduces the threshold income tax rate for
determining a “tax favorable jurisdiction” from 20% to 17%. Please refer to “—Discussion on Definition of ‘Tax Haven’
Jurisdictions” below for a discussion that the definition of “tax haven” jurisdiction may be broadened by an interpretation of Law
No. 11,727. These payments of interest on shareholders’ equity may be included, at their net value, as part of any mandatory
dividend. To the extent payment of interest on net equity is so included, Oi is required to distribute to shareholders an additional
amount to ensure that the net amount received by them, after payment of the applicable income tax withholding, is at least equal to
the mandatory dividend.
Payments of interest on shareholders’ equity are decided by Oi’s shareholders, at its annual shareholders meeting, on the basis
of recommendations of its board of directors. No assurance can be given that our board of directors will not recommend that future
distributions of profits should be made by means of interest on shareholders’ equity instead of by means of dividends.
There are ongoing discussions in Congress regarding possible changes to the tax treatment of interest on shareholders’ equity.
There can be no assurance that the current tax treatment will continue to be available in the future.
Taxation of Gains
Under Law No. 10,833, enacted on December 29, 2003, the gain on the disposition or sale of assets located in Brazil by a non-
Brazilian holder, whether to another non-Brazilian resident or to a Brazilian resident, may be subject to income capital gain taxes in
Brazil.
With respect to the disposition of our common shares or preferred shares, as they are assets located in Brazil, the non-Brazilian
holder should be subject to income tax on the gains assessed, following the rules described below, regardless of whether the
transactions are conducted in Brazil or with a Brazilian resident.
With respect to our ADSs, although the matter is not entirely clear, arguably the gains realized by a non-Brazilian holder upon
the disposition of ADSs to another non-Brazilian resident will not be taxed in Brazil, on the
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basis that ADSs are not “assets located in Brazil” for the purposes of Law No. 10,833. We cannot assure you, however, that the
Brazilian tax authorities or the Brazilian courts will agree with this interpretation. As a result, gains on a disposition of ADSs by a
non-Brazilian holder to a Brazilian resident, or even to a non-Brazilian resident, in the event that courts determine that ADSs would
constitute assets located in Brazil, may be subject to income tax in Brazil according to the rules applicable to our common shares and
preferred shares, described above.
As a general rule, gains realized as a result of a disposition of our common shares, preferred shares or ADSs are the positive
difference between the amount realized on the transaction and the acquisition cost of our common shares, preferred shares or ADSs.
Under Brazilian law, however, income tax rules on such gains can vary depending on the domicile of the non-Brazilian holder,
the type of registration of the investment by the non-Brazilian holder with the Brazilian Central Bank and how the disposition is
carried out, as described below.
Gains realized on a disposition of shares carried out on a Brazilian stock exchange (which includes the organized over-the-
counter market) are:
•
•
exempt from income tax when realized by a non-Brazilian holder that (1) has registered its investment in Brazil with the
Brazilian Central Bank under the rules of Resolution No. 4,373, dated September 14, 2014, which replaced Resolution
2,689 dated January 26, 2000 (“4,373 Holder”), and (2) is not a resident in a country or location which is defined as a “tax
haven” jurisdiction for this purposes (as described below); or
subject to income tax at a rate of up to 25% in any other case, including a case of gains assessed by a non-Brazilian holder
that is not a 4,373 Holder, and is a resident of a country or location defined as a “tax haven” jurisdiction for this purpose
(as described below). In these cases, a withholding income tax of 0.005% of the sale value will be applicable and can be
later offset with the eventual income tax due on the capital gain. This 0.005% withholding income tax is not levied on day
trade transactions.
Any other gains assessed on a disposition of our common shares or preferred shares that is not carried out on a Brazilian stock
exchange are subject to income tax at the rate of 15%, or 25% in the case of a non-Brazilian holder which resides in a “tax haven”
jurisdiction according to the definition applicable to this situation. In the case that these gains are related to transactions conducted on
the Brazilian non-organized over-the-counter market with intermediation, income tax withholding of 0.005% will also be applicable
and can be offset against the eventual income tax due on the capital gain. This 0.005% income tax withholding is not levied in day
trade transactions.
In the case of 4,373 Holders, a country or location should only be defined as a “tax haven” jurisdiction when it (1) does not tax
income, or (2) taxes income at a rate of 20% or less. In the case of gains realized by non-Brazilian holders other than 4,373 Holders, a
country or location should be defined as a “tax haven” jurisdiction when it (a) does not tax income, (b) taxes income at a rate of 20%
or less, or (c) where local laws do not allow access to information related to shareholding composition, ownership of investments, or
the identity of the beneficial owners of earnings that are attributed to non-residents. See “—Discussion on Definition of ‘Tax Haven’
Jurisdictions” for more information on this maximum rate of 20% and its reduction to 17%.
In the case of redemption of securities or capital reduction by a Brazilian corporation, such as Oi, the positive difference
between the amount effectively received by the non-Brazilian holder and the corresponding acquisition cost is treated, for tax
purposes, as capital gain derived from sale or exchange of shares not carried out on a Brazilian stock exchange market, and is
therefore subject to income tax at the rate of 15% or 25%, as the case may be.
The deposit of our common or preferred shares in exchange for ADSs will be subject to Brazilian income tax if the acquisition
cost of the shares is lower than (1) the average price per share on a Brazilian stock exchange on which the greatest number of such
shares were sold on the day of deposit, or (2) if no shares were sold on that day, the average price on the Brazilian stock exchange on
which the greatest number of shares were sold in the 15 trading sessions immediately preceding such deposit. In such case, the
difference between the acquisition cost and the average price of the shares calculated as above will be considered to be a capital gain
subject to income tax withholding at the rate of 15% or 25%, as the case may be. In some circumstances, there may be arguments to
claim
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that this taxation is not applicable in the case of a non-Brazilian holder that is a 4,373 Holder and is not a resident in a “tax haven”
jurisdiction for this purpose. The availability of these arguments to any specific holder of our common shares or preferred shares will
depend on the circumstances of such holder. Prospective holders of our common shares or preferred shares should consult their own
tax advisors as to the tax consequences of the deposit of our common shares or preferred shares in exchange for ADSs.
Any exercise of preemptive rights relating to our common shares, preferred shares or ADSs will not be subject to Brazilian
taxation. Any gain on the sale or assignment of preemptive rights relating to our common shares or preferred shares, including the
sale or assignment carried out by the depositary, on behalf of non-Brazilian holders of ADSs, will be subject to Brazilian income
taxation according to the same rules applicable to the sale or disposition of our common shares or preferred shares.
As a non-Brazilian holder of ADSs, you may cancel your TmarPart ADSs and exchange them for TmarPart shares. Income tax
will not be levied on such exchange, as long as the appropriate rules are complied with in connection with the registration of the
investment with the Central Bank, and as long as ADSs are not deemed to be “assets located in Brazil.”
Any gain earned by a non-Brazilian holder on the exercise of appraisal rights (which consists of a disposition of Oi shares, in
exchange for a cash payment by Oi) will be subject to Brazilian income taxation according to the same rules applicable to the sale or
disposition of shares of TmarPart.
Any exercise of preemptive rights relating to the subscription of new TmarPart shares or ADSs, upon a capital increase of
TmarPart, will not be subject to Brazilian taxation. Any gain on the sale or assignment of preemptive rights relating to shares of
TmarPart, including the sale or assignment carried out by the TmarPart Depositary, on behalf of non-Brazilian holders of ADSs, will
be subject to Brazilian income taxation according to the same rules applicable to the sale or disposition of shares of TmarPart. The
current preferential tax treatment for 4,373 Holders, as described above, may be extinguished in the future.
On March 16, 2016, Provisional Measure No. 692 was converted into Law 13,259/16 and increased tax rates on capital gains
earned by Brazilian individuals and certain legal entities. The new rates should apply as from 2017 as follows: (i) 15% on the capital
gain not exceeding R$5,000,000; (ii) 17.5% on the capital gain amount between R$5,000,000 and R$10,000,000; (iii) 20% on the
capital gain amount between R$10,000,000 and R$30,000,000; and (iv) 22.5% on the capital gain which exceeds R$30,000,000. The
new rates should also apply to non-Brazilian holders depending on their type of investment, jurisdiction and the sale transaction,
subject to confirmation on a case by case basis.
Discussion on Definition of “Tax Haven” Jurisdictions
Until December 2008, under Brazilian tax laws, a Low Tax Jurisdiction (“LTJ”) was defined as a country or location that does
not impose taxation on income, or imposes the income tax at a rate lower than 20%. There was also the concept of Tax Favorable
Jurisdiction (“TFJ”) which also included the jurisdictions where local laws do not allow access to information related to shareholding
composition, ownership of investments, or the identity of the beneficial owners of earnings that are attributed to non-resident. There
was a list of TFJs enacted by Brazilian tax authorities by means of Normative Instruction No. 188/2002.
On June 24, 2008, Law No. 11,727 introduced the concept of Privileged Tax Regimes (“PTRs”), which encompasses the
countries and jurisdictions that: (i) do not tax income or tax it at a maximum rate lower than 20%; (ii) grant tax advantages to a non-
resident entity or individual (a) without the need to carry out a substantial economic activity in the country or a said territory or
(b) conditioned on the non-exercise of a substantial economic activity in the country or a said territory; (iii) do not tax or taxes
proceeds generated abroad at a maximum rate lower than 20.0%; or (iv) restrict the ownership disclosure of assets and ownership
rights or restricts disclosure about economic transactions carried out.
As a consequence, in 2010, a new list was enacted by Brazilian tax authorities, via Normative Instruction 1,037/10 (“NI
1,037/10”), which includes the countries considered as TFJs and the locations considered as granting
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PTRs. Under Section 2 of NI 1,037/10, companies incorporated as LLCs in the US, and companies benefiting from some holding
regimes in Europe, may be considered as granting PTRs. We highlight that there would be solid legal grounds to sustain that the list
should be interpreted as an exhaustive list, so that only the countries and locations listed should be viewed as TFJs and PTRs,
according to their specific qualification. The interpretation of the current Brazilian tax legislation should lead to the conclusion that
the concept of PTR should only apply for certain Brazilian tax purposes, such as transfer pricing and thin capitalization. According to
this interpretation, the concept of PTR should not be applied in connection with the taxation of dividends, interest on shareholders’
equity and gains related to investments made by non-Brazilian holders in Brazilian corporations, such as TmarPart. Regulations and
non-binding tax rulings issued by Brazilian federal tax authorities seem to confirm this interpretation.
Notwithstanding the above, we recommend that you consult your own tax advisors regarding the consequences of the
implementation of Law No. 11,727, NI 1,037/10 and of any related Brazilian tax law or regulation concerning LTJs, TFJs, or PTRs.
On November 28, 2014, the Brazilian Revenue Service issued Rule No. 488, which reduces the threshold income tax rate for
determining a TFJ from 20% to 17%. This rule also applies for purposes of the definition of PTRs. In any event, differing
interpretations by the tax authorities in the application of this rule may result in a lower number of jurisdictions being characterized as
TFJ. Furthermore, the RFB issued Normative Instruction No. 1,530/14 providing that compliance with such standards requires:
(a) signature or negotiations completion for a treaty or agreement allowing the exchange of information related to identification of
income beneficiaries, shareholding structure, ownership of goods or rights, or economic transactions that are carried out; and
(b) commitment to the criteria set out in international anti-tax evasion forums of which Brazil is a member. A new list of TFJs and
PTRs has not been issued to date.
Tax on Foreign Exchange Transactions (IOF/Exchange Tax)
Brazilian law imposes a Tax on Foreign Exchange Transactions, or IOF/Exchange, on the conversion of reais into foreign
currency and on the conversion of foreign currency into reais. The currently applicable rate for most types of foreign exchange
transactions is 0.38%. However, other rates apply to specific types of transactions.
Any inflow of funds related to investments carried out on the Brazilian financial and capital markets by 4,373 Holders is
currently subject to the IOF/Exchange Tax at a rate of zero percent. Foreign exchange transactions related to outflows of funds in
connection with investments carried out on the Brazilian financial and capital markets are subject to the IOF/Exchange Tax at a rate
of zero percent.
The IOF/Exchange also levies at a zero percent rate in case of dividends and interest on shareholders’ equity paid by a Brazilian
corporation, such as TmarPart, to non-Brazilian holders.
The Brazilian government is permitted to increase the rate of the IOF/Exchange at any time by up to 25% on the foreign
exchange transaction amount. However, any increase in rates will only apply to transactions carried out after such increase in rates
enters into force.
The purchase of ADSs by a non-Brazilian holder outside Brazil generally does not require the execution of a foreign exchange
agreement with the Brazilian Central Bank. If this is the case, the IOF/Exchange Tax is not due. The IOF/Exchange Tax is levied at a
zero percent rate in connection with foreign exchange agreements, without any actual flows of funds, that are required for a
cancellation of ADSs and exchange for shares traded on a Brazilian stock exchange.
Tax on Transactions Involving Securities (IOF/ Securities Tax)
Brazilian law imposes a Tax on Transactions Involving Bonds and Securities, or IOF/Bonds and Securities, due on transactions
involving bonds and securities, including those carried out on a Brazilian stock exchange.
The rate of IOF/Bonds and Securities applicable to most transactions involving shares and ADSs is currently zero, although the
Brazilian government may increase such rate at any time up to 1.5% of the transaction amount per day, but only in respect of future
transactions.
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The transfer (cessão) of shares traded on a Brazilian stock exchange for the issuance of depositary receipts to be traded outside
Brazil, such as ADSs, is currently subject to the IOF/Bonds and Securities at a zero percent rate.
New Tax Regime Created by Law No. 12,973
Normative Instruction No. 1,397/2013, or NI 1,397/2013, published in the Official Gazette on September 17, 2013, was enacted
to regulate the transitional tax regime, or RTT, in force between January 1, 2008 and December 31, 2014, to adjust, for tax purposes,
the net profit calculated under the IFRS rules in accordance with Law 11,638/2007. According to NI 1,397/2013, for purposes of
calculating dividends and interest on net equity, taxpayers must use the accounting books prepared according to the criteria in force
on December 31, 2007, and not IFRS. According to such provisions, depending on the tax basis used by the taxpayer, certain
dividend distributions may be subject to a 15% withholding tax (or 25% if the taxpayer resides in a “tax haven” jurisdiction).
Provisional Measure 627/2013 was converted into Law No. 12,973, enacted on May 13, 2014 (“Law 12,973/14”), which
revoked the RTT and introduced a new tax regime, in line with the current Brazilian accounting standards (IFRS). According to Law
12,973/14, companies electing to be taxed under the new regime on January 1, 2014 as opposed to January 1, 2015 will not be subject
to taxation under NI 1,397/2013 on their dividend distributions based on 2014 profits. Companies that did not elect to be taxed under
the new regime on January 1, 2014, might be subject to withholding income tax on a part of the dividend distributions based on 2014
profits, according to the rules set forth under NI 1,397/2013.
Other Brazilian Taxes
There are no Brazilian inheritance, gift or succession taxes applicable to the ownership, transfer or disposition of our common
shares, preferred shares or ADSs by a non-Brazilian holder except for gift and inheritance taxes levied by some states in Brazil. There
are no Brazilian stamp, issue, registration, or similar taxes or duties payable by non-Brazilian holders of our common shares,
preferred shares or ADSs.
U.S. Federal Income Tax Considerations
The following is a discussion of the material U.S. federal income tax consequences that may be relevant with respect to the
acquisition, ownership and disposition of the common shares, preferred shares or ADSs of Oi, which are evidenced by ADRs. This
description addresses only the U.S. federal income tax considerations of U.S. Holders (as defined below) that are initial purchasers of
the common shares, preferred shares or ADSs of Oi and that will hold such shares or ADSs as capital assets. This description does not
address tax considerations applicable to holders that may be subject to special tax rules, such as banks, financial institutions,
insurance companies, real estate investment trusts, grantor trusts, regulated investment companies, dealers or traders in securities or
currencies, tax-exempt entities, pension funds, persons that received the common shares, preferred shares or ADSs of Oi pursuant to
an exercise of employee stock options or rights or otherwise as compensation for the performance of services, persons that will hold
the common shares, preferred shares or ADSs of Oi as a position in a “straddle” or as a part of a “hedging,” “conversion” or other risk
reduction transaction for U.S. federal income tax purposes, persons that have a “functional currency” other than the U.S. dollar,
persons that will own the common shares, preferred shares or ADSs of Oi through partnerships or other pass through entities, holders
subject to the alternative minimum tax, certain former citizens or long-term residents of the United States or holders that own (or are
deemed to own) 10% or more (by voting power) of the shares of Oi.
This description does not address any state, local or non-U.S. tax consequences of the acquisition, ownership and disposition of
the common shares, preferred shares or ADSs of Oi by U.S. Holders. Moreover, this description does not address the consequences of
any U.S. federal tax other than income tax, including but not limited to the U.S. federal estate and gift taxes. This description is based
on (1) the Internal Revenue Code of 1986, as amended (the “Code”), existing and temporary U.S. Treasury Regulations and judicial
and administrative interpretations thereof, in each case as in effect and available on the date of this annual report, as well as proposed
Treasury Regulations available on the date of this annual report, and (2) in part, the representations of the depositary and the
assumption that each obligation in the deposit agreement and any related agreement will be performed in accordance with its terms.
All of the foregoing is subject to change, which change could apply retroactively and could affect the tax consequences described
below. Holders should consult their tax advisers to determine the particular tax
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consequences to such holders of the acquisition, ownership and disposition of the common shares, preferred shares or ADSs of Oi,
including the applicability and effect of U.S. state, local and non-U.S. tax laws.
As used herein, the term “U.S. Holder” means, for U.S. federal tax purposes, a beneficial owner of common shares, preferred
shares or ADSs of Oi that is:
•
•
•
•
an individual citizen or resident of the United States;
a corporation organized under the laws of the United States, any state thereof or the District of Columbia;
an estate the income of which is subject to U.S. federal income taxation regardless of its source; or
a trust if (1) a court within the United States is able to exercise primary supervision over its administration, and (2) one or
more United States persons have the authority to control all of the substantial decisions of such trust.
If a partnership (or any other entity treated as a partnership for U.S. federal income tax purposes) holds the common shares,
preferred shares or ADSs of Oi, the tax treatment of a partner in such partnership will generally depend on the status of the partner
and the activities of the partnership. A partnership or its partners should consult their tax advisor as to its tax consequences.
Treatment of ADSs
In general, for U.S. federal income tax purposes, a holder of an ADR evidencing an ADS will be treated as the beneficial owner
of the common shares or preferred shares of Oi represented by the applicable ADS. The U.S. Treasury Department has expressed
concern that depositaries for ADSs, or other intermediaries between the holders of shares of an issuer and the issuer, may be taking
actions that are inconsistent with the claiming of U.S. foreign tax credits by U.S. Holders of such receipts or shares. Such actions
include, for example, a pre-release of an ADS by a depositary. Accordingly, the analysis regarding the availability of a U.S. foreign
tax credit for Brazilian taxes, the sourcing rules described below and the availability of the reduced tax rate for dividends received by
certain non-corporate holders, each could be affected by future actions that may be taken by the U.S. Treasury Department.
Passive Foreign Investment Company Rules
A Non-U.S. corporation will be classified as a PFIC for U.S. federal income tax purposes in any taxable year in which, after
applying certain look-through rules, either (1) at least 75 percent of its gross income is “passive income,” or (2) at least 50 percent of
the average value of its gross assets is attributable to assets that produce “passive income” or is held for the production of passive
income. Passive income for this purpose generally includes dividends, interest, royalties, rents and gains from commodities and
securities transactions. For purposes of the PFIC asset test, the aggregate fair market value of the assets of a publicly traded foreign
corporation generally is treated as being equal to the sum of the aggregate value of the outstanding stock and the total amount of the
liabilities of such corporation (the “Market Capitalization”).
Based on certain estimates of the gross income and gross assets of Oi, the nature of its business, the size of its investment in
certain subsidiaries, and its anticipated Market Capitalization, Oi believes that it will be classified as a PFIC for its taxable year ended
December 31, 2015. In addition, Oi believes there is a significant risk it will be a PFIC for the taxable year ending December 31,
2016 and for future taxable years, unless the market price of Oi’s common shares or preferred shares significantly increases or Oi
reduces the amount of cash and other passive assets it holds relative to the amount of non-passive assets it holds. The application of
the PFIC rules is subject to uncertainty in several respects, and Oi must make a separate determination after the close of each taxable
year as to whether it was a PFIC for such year. Moreover, Oi has not obtained an opinion from counsel regarding the PFIC status of
Oi for any taxable period.
If Oi is a PFIC for any taxable year during which a U.S. Holder holds common shares, preferred shares or ADSs of Oi, Oi
generally will continue to be treated as a PFIC with respect to such U.S. Holder for all succeeding years
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during which such U.S. Holder holds common shares, preferred shares or ADSs of Oi, unless Oi ceases to be a PFIC and such U.S.
Holder makes a “deemed sale” election with respect to such common shares, preferred shares or ADSs of Oi. If such election is made,
such U.S. Holder will be deemed to have sold such common shares, preferred shares or ADSs of Oi held by such U.S. Holder at their
fair market value on the last day of the last taxable year in which Oi qualified as a PFIC, and any gain from such deemed sale would
be subject to the consequences described in the following paragraph. After the deemed sale election, such U.S. Holder’s common
shares, preferred shares or ADSs of Oi with respect to which the deemed sale election was made will not be treated as shares in a
PFIC, and such U.S. Holder would not be subject to the rules described below with respect to any “excess distribution” such U.S.
Holder receives from Oi or any gain from an actual sale or other disposition of such common shares, preferred shares or ADSs of Oi,
unless Oi subsequently becomes a PFIC. The rules dealing with deemed sale elections are complex. U.S. Holders are encouraged
to consult their tax advisor as to the possibility and consequences of making a deemed sale election if Oi ceases to be treated as
a PFIC and such election becomes available to U.S. Holders.
For each taxable year that Oi is treated as a PFIC with respect to a U.S. Holder, any excess distribution (generally a distribution
in excess of 125% of the average distribution over a three-year period or shorter holding period for Oi’s common shares or preferred
shares) and realized gain will be treated as ordinary income and will be subject to tax as if (1) the excess distribution or gain had been
realized ratably over the U.S. Holder’s holding period, (2) the amount deemed realized in each year had been subject to tax in each
such year at the highest marginal rate for such year (other than income allocated to the current period or any taxable period before Oi
became a PFIC, which would be subject to tax at the U.S. Holder’s regular ordinary income rate for the current year and would not be
subject to the interest charge discussed below), and (3) the interest charge generally applicable to underpayments of tax had been
imposed on the taxes deemed to have been payable in those years. U.S. Holders should consult their own tax advisors regarding the
tax consequences of Oi being treated as a PFIC with respect to such U.S. Holders. The tax liability for amounts allocated to taxable
years prior to the year of disposition or excess distribution cannot be offset by any net operating losses for such years, and gains (but
not losses) realized on the sale or other disposition of common shares, preferred shares or ADSs of Oi cannot be treated as capital,
even if a U.S. Holder holds the common shares, preferred shares or ADSs of Oi as capital assets. In addition, a U.S. Holder’s tax
basis in common shares, preferred shares or ADSs of Oi that are acquired from a decedent would not receive a step-up to fair market
value as of the date of the decedent’s death but instead would be equal to the decedent’s basis, if lower.
If Oi is treated as a PFIC with respect to a U.S. Holder for any taxable year, to the extent any of Oi’s subsidiaries are also PFICs
or Oi makes direct or indirect equity investments in other entities that are PFICs, such U.S. Holder may be deemed to own shares in
such lower-tier PFICs that are directly or indirectly owned by Oi in that proportion which the value of the common shares, preferred
shares or ADSs of Oi such U.S. Holder owns bears to the value of all of Oi’s common shares, preferred shares and ADSs, and such
U.S. Holder may be subject to the adverse tax consequences described in the preceding two paragraphs with respect to the shares of
such lower-tier PFICs that such U.S. Holder would be deemed to own. U.S. Holders should consult their tax advisor regarding the
application of the PFIC rules to any of Oi’s subsidiaries.
If Oi is treated as a PFIC with respect to a U.S. Holder of the common shares, preferred shares or ADSs of Oi, such U.S. Holder
may be able to make certain elections that may alleviate certain of the tax consequences referred to above. Where a company that is a
PFIC meets certain reporting requirements, a U.S. Holder can avoid certain adverse PFIC consequences described above by making a
“qualified electing fund,” or QEF, election to be taxed currently on its proportionate share of the PFIC’s ordinary income and net
capital gains. However, Oi does not intend to comply with the necessary accounting and record keeping requirements that would
allow a U.S. Holder to make a QEF election with respect to Oi.
If the common shares, preferred shares or ADSs of Oi are “regularly traded” on a “qualified exchange,” a U.S. Holder may
make a mark-to-market election with respect to the common shares, preferred shares or ADSs of Oi, as the case may be. If a U.S.
Holder makes the mark-to-market election, for each year in which Oi is a PFIC, the holder will generally include as ordinary income
the excess, if any, of the fair market value of the common shares, preferred shares, or ADSs of Oi, as the case may be, at the end of
the taxable year over their adjusted tax basis, and will be permitted an ordinary loss in respect of the excess, if any, of the adjusted tax
basis of the common shares, preferred shares or ADSs of Oi, over their fair market value at the end of the taxable year (but only to the
extent of the net amount of previously included income as a result of the mark-to-market election). If a U.S. Holder makes the
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election, the holder’s tax basis in the common shares, preferred shares or ADSs of Oi, as the case may be, will be adjusted to reflect
the amount of any such income or loss. Any gain recognized on the sale or other disposition of the common shares, preferred shares
or ADSs of Oi will be treated as ordinary income. The common shares, preferred shares and ADSs of Oi will be considered
“marketable stock” if they are traded on a qualified exchange, other than in de minimis quantities, on at least 15 days during each
calendar quarter. The NYSE is a qualified exchange and the BM&FBOVESPA may constitute a qualified exchange for this purpose
provided the BM&FBOVESPA meets certain trading volume, listing, financial disclosure, surveillance and other requirements set
forth in applicable U.S. Treasury Regulations. However, Oi cannot be certain that the common shares, preferred shares or ADSs of Oi
will continue to trade on the BM&FBOVESPA or the NYSE, respectively, or that the common shares, preferred shares or ADSs of Oi
will be traded on at least 15 days in each calendar quarter in other than de minimis quantities. U.S. Holders should be aware,
however, that for each taxable year that Oi is treated as a PFIC with respect to a U.S. Holder, the interest charge regime described
above could be applied to indirect distributions or gains deemed to be attributable to such U.S. Holder in respect of any of Oi’s
subsidiaries that also may be determined to be a PFIC, and the mark-to-market election generally would not be effective for such
subsidiaries. Each U.S. Holder should consult its own tax advisor to determine whether a mark-to-market election is available and the
consequences of making an election if Oi were characterized as a PFIC.
If a U.S. Holder owns common shares, preferred shares, or ADSs of Oi during any year in which Oi was a PFIC, such U.S. Holder
generally must file IRS Form 8621 with respect to Oi, generally with the U.S. Holder’s federal income tax return for that year.
Taxation of Dividends
Subject to the discussion below above “—Passive Foreign Investment Company Rules,” in general, the gross amount of a distribution
made with respect to a common share, preferred share or ADS of Oi (which for this purpose shall include distributions of interest
attributable to shareholders’ equity before any reduction for any Brazilian taxes withheld therefrom) will, to the extent made from the
current or accumulated earnings and profits of Oi, as determined under U.S. federal income tax principles, constitute a dividend to a
U.S. Holder for U.S. federal income tax purposes. Non-corporate U.S. Holders may be taxed on dividends from a qualified foreign
corporation at the lower rates applicable to long-term capital gains (i.e., gains with respect to capital assets held for more than one
year). A foreign corporation is treated as a qualified foreign corporation with respect to dividends received from that corporation on
shares or ADSs that are readily tradable on an established securities market in the United States. U.S. Treasury Department guidance
indicates that the ADSs of Oi (which are listed on the NYSE), but not the common or preferred shares of Oi, are readily tradable on
an established securities market in the United States. Thus, subject to the discussion above under “—Passive Foreign Investment
Company Rules,” dividends that Oi pays on the ADS, but not on the common shares or preferred shares of Oi, currently meet the
trading conditions discussed above required for these reduced tax rates. However, there can be no assurance that the ADSs will be
considered readily tradable on an established securities market in later years. Furthermore, a U.S. Holder’s eligibility for such
preferential rate is subject to certain holding period requirements and the non-existence of certain risk reduction transactions with
respect to the ADSs and such preferential rate is not available if Oi is a PFIC for the taxable year in which such dividend is paid or
was a PFIC for the taxable year preceding the taxable year in which such dividend is paid. Such dividends will not be eligible for the
dividends received deduction generally allowed to corporate U.S. Holders. Subject to the discussion above under “—Passive Foreign
Investment Company Rules,” if a distribution exceeds the amount of the current and accumulated earnings and profits of Oi, it will be
treated as a non-taxable return of capital to the extent of the U.S. Holder’s tax basis in the common share, preferred share or ADS of
Oi on which it is paid and thereafter as capital gain. Oi does not maintain calculations of the earnings and profits of Oi under U.S.
federal income tax principles. Therefore, U.S. Holders should expect that distributions by Oi generally will be treated as dividends for
U.S. federal income tax purposes.
A dividend paid in reais will be includible in the income of a U.S. Holder at its value in U.S. dollars calculated by reference to
the prevailing spot market exchange rate in effect on the day it is received by the U.S. Holder in the case of the common shares or
preferred shares of Oi or, in the case of a dividend received in respect of ADSs of Oi, on the date the dividend is received by the
depositary, whether or not the dividend is converted into U.S. dollars. Assuming the payment is not converted at that time, the U.S.
Holder will have a tax basis in reais equal to that U.S. dollar amount, which will be used to measure gain or loss from subsequent
changes in exchange rates. Any gain or loss realized by a U.S. Holder that subsequently sells or otherwise disposes of reais, which
gain or loss is attributable to currency fluctuations after the date of receipt of the dividend, will be ordinary gain or loss. The
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amount of any distribution of property other than cash will be the fair market value of such property on the date of distribution.
The gross amount of any dividend paid (which will include any amounts withheld in respect of Brazilian taxes) with respect to a
common share, preferred share or ADS of Oi will be subject to U.S. federal income taxation as foreign source dividend income,
which may be relevant in calculating a U.S. Holder’s foreign tax credit limitation. Subject to limitations under U.S. federal income
tax law concerning credits or deductions for foreign taxes and certain exceptions for short-term and hedged positions, any Brazilian
withholding tax will be treated as a foreign income tax eligible for credit against a U.S. Holder’s U.S. federal income tax liability (or
at a U.S. Holder’s election, may be deducted in computing taxable income if the U.S. Holder has elected to deduct all foreign income
taxes for the taxable year). The limitation on foreign taxes eligible for the U.S. foreign tax credit is calculated separately with respect
to specific “baskets” of income. For this purpose, the dividends should generally constitute “passive category income,” or in the case
of certain U.S. Holders, “general category income.” The rules with respect to foreign tax credits are complex, and U.S. Holders are
urged to consult their own tax advisors regarding the availability of the foreign tax credit under their particular circumstances.
Treatment of Preferred Stock
Section 305 of the Code provides special rules for the tax treatment of preferred stock. According to the U.S. Treasury
Regulations under that section, the term preferred stock generally refers to stock which enjoys certain limited rights and privileges
(generally associated with specified dividend and liquidation priorities) but does not participate in corporate growth to any significant
extent. While Oi’s preferred shares have some preferences over its common shares, the preferred shares are not fixed as to dividend
payments or liquidation value. Consequently, although the matter is not entirely clear, because the determination is highly factual in
nature, it is more likely than not that the preferred shares of Oi will be treated as “common stock” within the meaning of section 305
of the Code. If the preferred shares are treated as “common stock” for purposes of section 305 of the Code, distributions to U.S.
Holders of additional shares of such “common stock” or preemptive rights relating to such “common stock” with respect to their
preferred shares or ADSs that are made as part of a pro rata distribution to all shareholders in most instances will not be subject to
U.S. federal income tax. On the other hand, if the preferred shares are treated as “preferred stock” within the meaning of section 305
of the Code, and if a U.S. Holder receives a distribution of additional shares or preemptive rights as described in the preceding
sentence, such distributions (including amounts withheld in respect of any Brazilian taxes), as discussed more fully below, will be
treated as dividends to the same extent and in the same manner as distributions payable in cash. In that event, the amount of such
distribution (and the basis of the new shares or preemptive rights so received) will equal the fair market value of the shares or
preemptive rights on the date of distribution.
Sale, Exchange or Other Disposition of the Common Shares, Preferred Shares or ADSs of Oi
A deposit or withdrawal of common shares or preferred shares by a U.S. Holder in exchange for the ADS that represent such
shares will not result in the realization of gain or loss for U.S. federal income tax purposes. Subject to the discussion above under “—
Passive Foreign Investment Company Rules,” a U.S. Holder generally will recognize capital gain or loss upon a sale, exchange or
other disposition of a common share, preferred share or ADS of Oi held by the U.S. Holder or the depositary, as the case may be, in
an amount equal to the difference between the U.S. Holder’s adjusted basis in its common shares, preferred shares or ADSs of Oi
(determined in U.S. dollars) and the U.S. dollar amount realized on the sale, exchange or other disposition. If a Brazilian tax is
withheld on the sale, exchange or other disposition of a share, the amount realized by a U.S. Holder will include the gross amount of
the proceeds of that sale, exchange or other disposition before deduction of the Brazilian tax. In the case of a non-corporate U.S.
Holder, the maximum marginal U.S. federal income tax rate applicable to capital gain generally will be lower than the maximum
marginal U.S. federal income tax rate applicable to ordinary income (other than, as discussed above, certain dividends) if such
holder’s holding period for such common share, preferred share or ADS of Oi exceeds one year (i.e., such gain is a long-term capital
gain). Capital gain, if any, realized by a U.S. Holder on the sale or exchange of a common share, preferred share or ADS of Oi
generally will be treated as U.S. source income for U.S. foreign tax credit purposes. Consequently, in the case of a disposition or
deposit of a common share, preferred share or ADS of Oi that is subject to Brazilian tax, the U.S. Holder may not be able to use the
foreign tax credit for that Brazilian tax unless it can apply the credit against U.S. tax payable on other income from foreign sources in
the appropriate income category, or, alternatively, it may take a deduction for the Brazilian tax if
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it elects to deduct all of its foreign income taxes. The deductibility of capital losses is subject to limitations under the Code.
The initial tax basis of a U.S. Holder’s common shares, preferred shares or ADSs of Oi will be the U.S. dollar value of the reais-
denominated purchase price determined on the date of purchase. If the common shares, preferred shares or ADSs of Oi are treated as
traded on an “established securities market,” a cash basis U.S. Holder, or, if it elects, an accrual basis U.S. Holder, will determine the
dollar value of the cost of such common shares, preferred shares or ADSs by translating the amount paid at the spot rate of exchange
on the settlement date of the purchase. The conversion of U.S. dollars to reais and the immediate use of that currency to purchase
common shares, preferred shares or ADSs generally will not result in taxable gain or loss for a U.S. Holder.
With respect to the sale or exchange of common shares, preferred shares or ADSs of Oi, the amount realized generally will be
the U.S. dollar value of the payment received determined on the date of disposition. If the common shares, preferred shares or ADSs
of Oi are treated as traded on an “established securities market,” a cash basis taxpayer, or, if it elects, an accrual basis taxpayer, will
determine the U.S. dollar value of the amount realized by translating the amount received at the spot rate of exchange on the
settlement date of the sale.
Other Brazilian Taxes
Any Brazilian IOF/Exchange Tax or IOF/Bonds and Securities Tax (as discussed under “—Brazilian Tax Considerations”
above) may not be treated as a creditable foreign tax for U.S. federal income tax purposes, although a U.S. Holder may be entitled to
deduct such taxes if it elects to deduct all of its foreign income taxes. U.S. Holders should consult their tax advisors regarding the
U.S. federal income tax consequences of these taxes.
3.8% Medicare Tax On “Net Investment Income”
Certain U.S. Holders who are individuals, estates or trusts may be required to pay an additional 3.8% tax on, among other
things, dividends and capital gains from the sale or other disposition of common shares, preferred shares, or ADSs of Oi.
Information Reporting and Backup Withholding
In general, information reporting will apply to dividends in respect of the common shares, preferred shares, or ADSs of Oi and
the proceeds from the sale, exchange or redemption of the common shares, preferred shares, or ADSs of Oi that are paid to a U.S.
Holder within the United States (and in certain cases, outside the United States) by a U.S. payor or U.S. middleman, unless such U.S.
Holder is an exempt recipient such as a corporation. A backup withholding tax may apply to such payments if a U.S. Holder fails to
provide a taxpayer identification number or certification of other exempt status or fail to report in full dividend and interest income.
Any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against a U.S. Holder’s U.S.
federal income tax liability provided the required information is furnished to the Internal Revenue Service in a timely manner.
Certain U.S. Holders who are individuals are required to report information relating to an interest in the common shares,
preferred shares, or ADSs of Oi, subject to certain exceptions (including an exception for common shares, preferred shares, or ADSs
of Oi held in accounts maintained by U.S. financial institutions). U.S. Holders are urged to consult their tax advisors regarding their
information reporting obligations, if any, with respect to their acquisition, ownership and disposition of common shares, preferred
shares, or ADSs of Oi.
Documents on Display
Statements contained in this annual report regarding the contents of any contract or other document filed as an exhibit to this
annual report summarize their material terms, but are not necessarily complete, and each of these statements is qualified in all
respects by reference to the full text of such contract or other document.
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We also file financial statements and other periodic reports with the CVM, which are available for investor inspection at the
CVM’s offices located at Rua Sete de Setembro, 111, 2nd floor, Rio de Janeiro, RJ, and Rua Cincinato Braga, 340, 2nd, 3rd and 4th
floors, São Paulo, SP. The telephone numbers of the CVM in Rio de Janeiro and São Paulo are +55-21-3554-8686 and +55-11-2146-
2000, respectively.
Copies of our annual report on Form 20-F and documents referred to in this annual report and our by-laws are available for
inspection upon request at our headquarters at Rua do Lavradio, 71, 2 andar – Centro, CEP 20.230-070 Rio de Janeiro, RJ, Brazil.
Our filings are also available to the public through the internet at our website at www.oi.com.br/ir. The information included on our
website or that might be accessed through our website is not included in this annual report and is not incorporated into this annual
report by reference.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks related to changes in exchange rates and interest rates. The principal market for the products and
services of our continuing operations is Brazil, and substantially all of the revenues of our continuing operations are denominated in
reais.
Exchange Rate Risk
We are exposed to foreign exchange risk because a significant portion of our equipment costs, such as costs relating to
switching centers and software used for upgrading network capacity, are primarily denominated in foreign currencies or linked to
foreign currencies, primarily the U.S. dollar. In 2015, approximately 32.4% of our capital expenditures were U.S. dollar-denominated
or linked to the U.S. dollar. A hypothetical, instantaneous 10.0% depreciation of the real against the U.S. dollar as of December 31,
2015 would have resulted in an increase of R$780.8 million in the cost of our capital expenditures in 2015, assuming that we would
have incurred all of these capital expenditures notwithstanding the adverse change in the exchange rates.
Our financing cost and the amount of financial liabilities that we record are also exposed to exchange rate risk. As of
December 31, 2015 R$47,372 million, or 78.5%, of our total consolidated indebtedness was denominated in foreign currency. At
December 31, 2015, we protected 99.5% of our indebtedness affected by exchange rate variation against significant variations in
exchange rates (primarily U.S. dollars and euros) by using foreign currency swaps, non-deliverable forwards and foreign currency
investments. The aggregate amount of our hedge position, including our U.S. dollar and euro cash positions, was US$12,077 million
as of December 31, 2015. Other than with respect to our portfolio of short-term non-deliverable forwards, the maturity of our swap
contracts is coupled to the maturity of debt that is hedged by these swap contracts. As of December 31, 2015, the fair value of our
swap contracts and non-deliverable forwards was a receivable in the amount of R$4,876 million. As of December 31, 2015, the
aggregate notional principal amount of our swap contracts and non-deliverable forwards was approximately US$15,989 million,
which mature in one to nine years.
During 2016, in connection with our consideration of potential plans to restructure our indebtedness, we have not rolled over our
non-deliverable forwards and have selectively settled several of our long-term currency swaps. As a result, our exposure to foreign
currency fluctuations has increased substantially. In 2015, we experienced losses on foreign currency and monetary restatement due
to the depreciation of the real against foreign currencies of R$1,799 million, including results recorded on our exchange rate hedges
(non-deliverable forwards, swaps and foreign currency investments). As we were almost 100% hedged, the potential additional losses
on foreign currency and monetary restatement during 2015 that would result from a hypothetical, instantaneous 10.0% depreciation of
the real against the U.S. dollar and the euro as of December 31, 2015 would be approximately R$53 million after giving effect to our
results under our exchange rate swaps, assuming that the amount and composition of our debt instruments were unchanged. The
potential increase in our total consolidated debt obligations that would result from a hypothetical, instantaneous 10.0% depreciation
of the real against the U.S. dollar and the euro as of December 31, 2015 would be approximately R$1,530 million, considering the net
impact of the increase in our debt obligations and the decrease in our swap position. For further information about our swap
agreements, see note 3 to our consolidated financial statements.
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We are exposed to interest rate risk because a significant portion of our indebtedness bears interest at floating rates. As of
December 31, 2015, our total outstanding indebtedness was R$54,981 million, of which R$20,159 million, or 33.40%, bore interest at
floating rates, including R$11,209 million of real-denominated indebtedness that bore interest at rates based on the CDI rate, TJLP
rate or IPCA rate, and R$8,950 million of foreign currency-denominated indebtedness that bore interest at rates based on U.S. dollar
and Euro LIBOR. As of December 31, 2015, we had interest rate swap agreements under which 59.60% of our consolidated
indebtedness exposed to U.S. dollar and Euro LIBOR, which represents 14.83% of our total indebtedness, was converted into CDI
rates, matching the interest rate index of our investments. As of December 31, 2015, we did not have any outstanding derivative
agreements to limit our exposure to variations in the CDI rate, TJLP rate or IPCA rate.
We invest our excess liquidity (R$16,826 million as of December 31, 2015) mainly in (1) certificates of deposit and time
deposits issued by global and domestic financial institutions with AAA and AA ratings from international rating agencies, (2) in
short-term instruments denominated in reais that generally pay interest at overnight interest rates based on the CDI rate which
partially mitigates our exposure to Brazilian interest rate risk, and (3) in investment funds created by top Brazilian asset managers
exclusively for us. The fund managers of the investment funds created for us are responsible for managing our funds, subject to the
direction of our senior management and board of directors. Currently, these funds are comprised mainly of government bonds and
other low-risk financial instruments linked to the CDI rate.
As we hedged our foreign currency denominated debt against exchange rate fluctuations, the cost of such indebtedness is linked
to fluctuations in the CDI rate rather than the exchange rate. The potential additional interest expense during 2016 that would result
from a hypothetical, instantaneous and unfavorable change of 100 basis points in the interest rates on January 1, 2016 would be
approximately R$132 million after giving effect to our results under our interest rate swaps, considering the impact in our debt
obligations, but excluding the additional interest income that we would receive on our financial investments. This sensitivity analysis
is based on the assumption of an unfavorable 100 basis points movement of the interest rates applicable to each homogeneous
category of financial liabilities and sustained over a period of one year. A homogeneous category is defined according to the currency
in which financial assets and liabilities are denominated and assumes the same interest rate movement within each homogeneous
category (e.g., reais). As a result, our interest rate risk sensitivity model may overstate the impact of interest rate fluctuation for such
financial instruments, as consistently unfavorable movements of all interest rates are unlikely.
Hedging Policy
We employ financial risk management strategies using cross-currency swaps, interest rate swaps, series swaps and non-
deliverable forwards. Our financial risk management strategy is designed to protect us against devaluation of the real against foreign
currencies and increases in foreign currency interest rates, according to our foreign-currency exposure in connection with our
financings. We do not enter into derivatives transactions for speculative or any other purposes.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
The depositary collects its fees for the delivery and surrender of ADSs directly from investors depositing shares or
surrendering ADSs or from intermediaries acting for them. The depositary also collects fees for making distributions to investors by
deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may
collect its annual fee for depositary services by deductions from cash distributions or by directly billing investors or by charging the
book-entry system accounts of participants acting for them. The depositary may generally refuse to provide fee-attracting services
until its fees for those services are paid.
Persons depositing or withdrawing shares must pay:
•
US$5.00 (or less) per 100 ADSs (or portion of 100 ADSs) for the issuance of ADSs, including issuances resulting from a
distribution of shares or rights or other property;
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•
•
•
•
•
•
•
•
US$5.00 (or less) per 100 ADSs (or portion of 100 ADSs) for the cancellation of ADSs for the purpose of withdrawal,
including in the event of the termination of the deposit agreement;
US$0.02 (or less) per ADS (or portion thereof) for any cash distribution;
US$0.02 (or less) per ADS (or portion thereof) per calendar year for depositary services;
in the event of distributions of securities (other than our Class A preferred shares), a fee equivalent to the fee for the
execution and delivery of ADRs referred to above, which would have been charged, as a result of the deposit of such
securities (treating such securities as Class A Preferred Shares for the purposes of this fee);
registration or transfer fees for the transfer and registration of shares on our share register to or from the name of
the depositary or its agent when you deposit or withdraw shares;
expenses of the depositary for (1) cable, telex and facsimile transmissions (when expressly provided in the
deposit agreement), and (2) converting foreign currency to U.S. dollars;
taxes and other governmental charges the depositary or the custodian have to pay on any ADS or share underlying an ADS,
for example, stock transfer taxes, stamp duty or withholding taxes, as necessary; and
any charges incurred by the depositary or its agents for servicing the deposited securities, as necessary.
Subject to certain terms and conditions, the depositary has agreed to reimburse us for certain expenses it incurs that are
related to establishment and maintenance expenses of the ADS program, including the standard out-of-pocket maintenance costs for
the ADRs, which consist of the expenses of postage and envelopes for mailing annual and interim financial reports, printing and
distributing dividend checks, electronic filing of U.S. Federal tax information, mailing required tax forms, stationery, postage,
facsimile, and telephone calls. There are limits on the amount of expenses for which the depositary will reimburse us, but the amount
of reimbursement available to us is not necessarily tied to the amount of fees the depositary collects from investors.
During the year ended December 31, 2015, we did not receive reimbursements from the depositary of our ADSs.
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ITEM 13.
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Under the Trust Deed governing each of the Bonds issued by PTIF (other than the PTIF 6.25% Notes due 2016), or the PTIF Bonds, we
were required to file audited financial statements of PTIF as of and for the year ended December 31, 2014 with the Dutch Chamber of
Commerce no later than January 31, 2016. On April 29, 2016, Citicorp Trustee Company Limited, the trustee under this Trust Deed, or the
PTIF Trustee, delivered a written notice to PTIF and Oi noting that the failure of PTIF to provide the 2014 audited financial statements
constituted a potential event of default under the PTIF Bonds and requesting the delivery of those financial statements. PTIF is continuing to
work with its auditor to complete the preparation of its 2014 audited financial statements as soon as possible.
The PTIF Trustee has notified PTIF that if PTIF fails to deliver the financial statements on or prior to May 29, 2016 and the PTIF
Trustee determines that this failure is materially prejudicial to the interests of the holders of the PTIF Bonds, the PTIF Trustee could declare
that the PTIF Bonds are immediately due and repayable. Under the terms of the PTIF Bonds, the PTIF Trustee is not obliged to exercise its
discretion to declare any PTIF Bonds immediately due and repayable or to take any other action to enforce the rights of the holders of the
PTIF Bonds unless it shall have been indemnified to its satisfaction and specifically directed or requested to do so by a requisite percentage of
the holders of the PTIF Bonds in accordance with the terms and conditions of the PTIF Bonds.
The terms of the instruments governing a substantial portion of our indebtedness contain cross-acceleration clauses and if any series of
the PTIF Bonds were accelerated, this acceleration would enable the creditors under other indebtedness to accelerate that indebtedness. Were
a substantial amount of our outstanding indebtedness to be accelerated, we may not have sufficient funds to repay such debt when due.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
Not applicable.
ITEM 15.
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our chief executive officer, or CEO, and chief financial officer, or CFO, are responsible for establishing and maintaining our disclosure
controls and procedures. These controls and procedures were designed to ensure that information that we are required to disclose in the reports
that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the applicable rules
and forms of the SEC, and that it is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow
timely decisions regarding required disclosure.
We performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of December
31, 2015 under the supervision of our CEO and CFO. There are inherent limitations to the effectiveness of any system of disclosure controls
and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly,
even effective controls and procedures can only provide reasonable assurance of achieving their control objectives.
Based on our evaluation, our CEO and CFO concluded that our disclosure controls and procedures were not effective as of December
31, 2015, and that the design and operation of our disclosure controls and procedures were not effective to provide reasonable assurance that
all material information relating to our company was reported as required because material weaknesses in the current operation of our internal
control over financial reporting were identified as described below.
Management’s Annual Report on Internal Control over Financial Reporting and Report of Independent Registered Public
Accounting Firm
Our management is responsible for establishing and maintaining adequate internal controls over financial reporting.
Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of consolidated financial statements for external purposes in accordance with applicable generally accepted
accounting principles. Our internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets, (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with applicable
generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our
management and directors, and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of our assets that could have a material effect on the consolidated financial statements.
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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of the effectiveness of internal control to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our CEO and CFO, our management conducted an assessment of the
effectiveness of our internal control over financial reporting as of December 31, 2015 based on the criteria established in “Internal
Control —Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based
on this assessment, our management concluded that as of December 31, 2015, our internal control over financial reporting was not
effective because material weaknesses existed. A material weakness is a control deficiency, or combination of control deficiencies, in
internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the annual
consolidated financial statements will not be prevented or detected on a timely basis. The material weaknesses identified were:
•
Our financial statement closing process, including transformation of our statutory financial statements into U.S. GAAP
consolidated financial statements, contains design and operating deficiencies severe enough that material errors may occur
and may not be detected on a timely basis by management in the normal course of business.
•
We do not have sufficient and skilled accounting and finance personnel necessary to perform appropriate processes and
controls to timely, consistently and appropriately identify, capture and analyze financially significant information in U.S.
GAAP. As a result, audit adjustments were proposed and recorded by us in order to properly reflect certain non-routine
transactions in our U.S. GAAP financial statements.
Our independent registered public accounting firm, KPMG Auditores Independentes, has issued an adverse opinion on the
effectiveness of our internal control over financial reporting as of December 31, 2015 as stated in their report beginning on page F-3.
Remediation of Material Weakness
We have implemented and continue to implement measures designed to remediate the material weakness and, in the short term,
to mitigate the potential adverse effects of this material weakness.
We are committed to continuing to improve our internal control processes and will continue to diligently review our financial
reporting controls and procedures in order to ensure our compliance with the requirements of the Sarbanes-Oxley Act and the related
rules promulgated by the SEC.
Actions taken and planned to be taken by management to improve the internal control over financial reporting include training
session on U.S. GAAP matters for key members of our financial team, hiring external experts on U.S. GAAP to advise us on specific
technical accounting of non-usual transactions, senior level accounting personnel for our U.S. GAAP department to allow
implementing additional prevent and detect controls to improve annual financial statement closing process.
Changes in Internal Control over Financial Reporting
Other than as set forth above, there have been no changes in our internal controls over financial reporting that occurred during
the year ended December 31, 2015 that have materially affected or are reasonably likely to materially affect our internal control over
financial reporting as of December 31, 2015.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Our fiscal council currently includes an “audit committee financial expert” within the meaning of this Item 16A. Our fiscal
council has determined that Pedro Wagner Pereira Coelho is our fiscal council financial expert. Mr. Coelho’s biographical
information is included in “Item 6. Directors, Senior Management and Employees.” Mr. Coelho is independent, as that term is
defined in Rule 303A.02 of the New York Stock Exchange’s Listed Company Manual.
ITEM 16B. CODE OF ETHICS
We have adopted a code of ethics that applies to members of our board of directors, fiscal council and board of executive
officers, as well as to our other employees.
A copy of our code of ethics may be found on our website at http://ri.oi.com.br/conteudo_en.asp?
idioma=1&conta=44&tipo=43644. The information included on our website or that might be accessed through our website is not
included in this annual report and is not incorporated into this annual report by reference.
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ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit and Non-Audit Fees
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The following table sets forth the fees billed to us by our independent registered public accounting firm, KPMG Auditores
Independentes, during the fiscal years ended December 31, 2015 and 2014.
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Audit fees (1)
Audit-related fees
Tax fees
All other fees
Total fees
Year ended December 31,
2014
2015
(in millions of reais)
R$ 4.8
0.6
1.4
0.4
R$ 7.2
R$
10.4
0.3
1.6
2.2
R$ 14.4
(1) Audit fees consist of the aggregate fees billed by KPMG Auditores Independentes in connection with the audits of our annual
financial statements, interim reviews of our quarterly financial information, issuance of comfort letters, review of financial
statements and review of documents filed with the CVM and the SEC.
Pre-Approval Policies and Procedures
Our fiscal council and board of directors have approved an Audit and Non-Audit Services Pre-Approval Policy that sets forth
the procedures and the conditions pursuant to which services proposed to be performed by our independent auditors may be pre-
approved. This policy is designed to (1) provide both general pre-approval of certain types of services through the use of an annually
established schedule setting forth the types of services that have already been pre-approved for a certain year and, with respect to
services not included in an annual schedule, special pre-approval of services on a case-by-case basis by our fiscal council and our
board of directors, and (2) assess compliance with the pre-approval policies and procedures. Our management periodically reports to
our fiscal council the nature and scope of audit and non-audit services rendered by our independent auditors and is also required to
report to our fiscal council any breach of this policy of which our management is aware.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
We are relying on the general exemption from the listing standards relating to audit committees contained in Rule 10A-3(c)(3)
under the Exchange Act for the following reasons:
•
•
•
•
•
we are a foreign private issuer that has a fiscal council, which is a board of auditors (or similar body) established and
selected pursuant to and as expressly permitted under Brazilian law;
Brazilian law requires our fiscal council to be separate from our board of directors;
members of our fiscal council are not elected by our management, and none of our executive officers is a member of our
fiscal council;
Brazilian law provides standards for the independence of our fiscal council from our management;
our fiscal council, in accordance with its charter, makes recommendations to our board of directors regarding the
appointment, retention and oversight of the work of any registered public accounting firm engaged (including, the
intermediation of disagreements between our management and our independent auditors regarding financial reporting) for
the purpose of preparing or issuing an audit report or performing other audit, review or attest services for our company, as
Brazilian law requires that our board of directors appoint, retain and oversee the work of our independent public
accountants;
•
our fiscal council (1) has implemented procedures for receiving, retaining and addressing complaints regarding accounting,
internal control and auditing matters, including the submission of confidential, anonymous complaints from employees
regarding questionable accounting or auditing, and (2) has authority to engage independent counsel and other advisors as it
determines necessary to carry out its duties; and
•
our company compensates our independent auditors and any outside advisors hired by our fiscal council and provides
funding for ordinary administrative expenses incurred by the fiscal council in the course of its duties.
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We, however, do not believe that our reliance on this general exemption will materially adversely affect the ability of our fiscal
council to act independently and to satisfy the other requirements of the listing standards relating to audit committees contained in
Rule 10A-3 under the Exchange Act.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
Not Applicable.
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
Not Applicable.
ITEM 16G. CORPORATE GOVERNANCE
According to the corporate governance rules of the NYSE, foreign private issuers that are listed on the NYSE, such as Oi, are
subject to a more limited set of corporate governance requirements than those imposed on U.S. domestic issuers. As a foreign private
issuer, Oi must comply with the following four requirements imposed by the NYSE:
•
•
•
•
Oi must satisfy the audit committee requirements of Rule 10A-3 under the Exchange Act;
Oi’s Chief Executive Officer must promptly notify the NYSE in writing if any executive officer of Oi becomes aware of
any material non-compliance with any of the applicable NYSE corporate governance rules;
Oi must provide a brief description of any significant ways in which Oi’s corporate governance practices differ from those
required to be followed by U.S. domestic issuers under the NYSE corporate governance rules; and
Oi must submit an executed written affirmation annually to the NYSE and an interim written affirmation to the NYSE each
time a change occurs to Oi’s board of directors or any committees of Oi’s board of directors that are subject to section
303A, in each case in the form specified by the NYSE.
Significant Differences
The significant differences between Oi’s corporate governance practices and the NYSE’s corporate governance standards are
mainly due to the differences between the U.S. and Brazilian legal systems. Oi must comply with the corporate governance standards
set forth under the Brazilian Corporation Law, the rules of the CVM and the applicable rules of the BM&FBOVESPA, as well as
those set forth in Oi’s by-laws.
The significant differences between Oi’s corporate governance practices and the NYSE’s corporate governance standards are set
forth below.
Independence of Directors and Independence Tests
In general, the NYSE corporate governance standards require listed companies to have a majority of independent directors and
set forth the principals by which a listed company can determine whether a director is independent. In general, listed companies are
required to comply with the following NYSE corporate governance standards:
•
•
have a majority of independent directors;
have a nominating/corporate governance committee composed of independent directors with a charter that complies with
the NYSE corporate governance rules; and
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•
have a compensation committee composed of independent directors with a charter that complies with the NYSE corporate
governance rules.
Although Brazilian Corporation Law and Oi’s by-laws establish rules in relation to certain qualification requirements of its
directors, neither Brazilian Corporation Law nor Oi’s by-laws require that Oi have a majority of independent directors nor require
Oi’s board of directors or management to test the independence of Oi’s directors before such directors are appointed.
Executive Sessions
The NYSE corporate governance standards require non-management directors of a listed company to meet at regularly
scheduled executive sessions without management.
According to the Brazilian Corporation Law, up to one-third of the members of Oi’s board of directors can be elected to
management positions. The remaining non-management directors are not expressly empowered to serve as a check on Oi’s
management, and there is no requirement that those directors meet regularly without management. Notwithstanding the foregoing,
Oi’s board of directors consists entirely of non-management directors; therefore Oi believes it would be in compliance with this
NYSE corporate governance standard.
Nominating/Corporate Governance and Compensation Committees
The NYSE corporate governance standards require that a listed company have a nomination/corporate governance committee
and a compensation committee, each composed entirely of independent directors and each with a written charter that addresses
certain duties.
Although not required under Brazilian law, Oi has a People, Designation and Compensation Committee to assist its board of
directors, with the purpose of (1) supervising human resources strategies and attracting and retaining talent for Oi and its subsidiaries
and matters related to the organizational structure; (2) monitoring the succession program, the processes of selecting members of the
management bodies and internal committees and special programs for human resources, at the discretion of the chairman of the board
of directors; (3) analyzing and defining the total remuneration strategy and evaluating the performance of the members of the
administrative bodies and the internal committees and the employees of Oi and its subsidiaries; and (4) making an annual evaluation
of performance, based on defined goals, of the members of the administrative bodies and internal committees of Oi.
Although not required under Brazilian law, Oi has a Corporate Governance and Finance Committee to assist its board of
directors, with the purpose of: (1) monitoring the policies for corporate governance, maintaining the level of governance adopted by
our Company and ensuring the effective adoption of best practices; (2) monitoring the principles and practices of conduct of Oi and
its subsidiaries; (3) monitoring compliance with the directives established in the Listing Regulations of the Level 1 of the
BM&FBOVESPA and other policies adopted by our Company, as well as other applicable legislation, regulations and foreign good
practices, including, among others, conditions for maintaining Oi’s listing on the NYSE; and (4) supervising financial and tax
planning, the annual budget, the financial performance of the business and various financial matters at the discretion of the chairman
of the board of directors, at the level of Oi and of its subsidiaries.
Oi believes that these committees substantially serve the functions of the committees required under NYSE corporate
governance standards, although the terms of reference of these committees may not include each of the duties required under the
NYSE corporate governance standards.
Audit Committee and Audit Committee Additional Requirements
The NYSE corporate governance standards require that a listed company have an audit committee with a written charter that
addresses certain specified duties and that is composed of at least three members, all of whom satisfy the independence requirements
of Rule 10A-3 under the Exchange Act and section 303A.02 of the NYSE’s Listed Company Manual.
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As a foreign private issuer that qualifies for the general exemption from the listing standards relating to audit committees set
forth in Section 10A-3(c)(3) under the Exchange Act, Oi is not subject to the independence requirements of the NYSE corporate
governance standards. See “Item 16D. Exemptions from the Listing Standards for Audit Committees.”
Shareholder Approval of Equity Compensation Plans
The NYSE corporate governance standards require that shareholders of a listed company must be given the opportunity to vote
on all equity compensation plans and material revisions thereto, subject to certain exceptions.
Under Brazilian Corporation Law, shareholder pre-approval is required for the adoption and revision of any equity
compensation plans, but this decision may be delegated to the board of directors.
Corporate Governance Guidelines
The NYSE corporate governance standards require that a listed company must adopt and disclose corporate governance
guidelines that address certain minimum specified standards which include: (1) director qualification standards; (2) director
responsibilities; (3) director access to management and independent advisors; (4) director compensation; (5) director orientation and
continuing education; (6) management succession; and (7) annual performance evaluation of the board of directors.
Oi must comply with certain corporate governance standards set forth under Brazilian Corporation Law, CVM rules and the
applicable rules of the BM&FBOVESPA for Level 1 companies. See “Item 9. The Offer and Listing—Regulation of Brazilian
Securities Markets” and “Item 9. The Offer and Listing—Trading on the BM&FBOVESPA—BM&FBOVESPA Corporate
Governance Standards.” The Level 1 rules do not require Oi to adopt and disclose corporate governance guidelines covering the
matters set forth in the NYSE’s corporate governance standards. However, certain provisions of Brazilian Corporation Law that are
applicable to Oi address certain aspects of director qualifications standards and director responsibilities.
Code of Business Conduct and Ethics
The NYSE corporate governance standards require that a listed company must adopt and disclose a code of business conduct
and ethics for directors, officers and employees and promptly disclose any waivers of the code for directors or officers. Each code of
business conduct and ethics should address the following items: conflicts of interest; corporate opportunities; confidentiality; fair
dealing; protection and proper use of company assets; compliance with laws, rules and regulations (including insider trading laws);
and encouraging the reporting of any illegal or unethical behavior.
Although the adoption of a code of ethics is not required by Brazilian law, Oi has adopted a code of ethics applicable to its
directors, officers and employees, which addresses each of the items listed above. See “Item 16B. Code of Ethics.”
ITEM 16H. MINE SAFETY DISCLOSURE
Not Applicable.
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ITEM 17. FINANCIAL STATEMENTS
We have responded to Item 18 in lieu of responding to this item.
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ITEM 18. FINANCIAL STATEMENTS
Reference is made to Item 19 for a list of all financial statements filed as part of this annual report.
ITEM 19. EXHIBITS
(a) Financial Statements
Management’s Report on Internal Controls over Financial Reporting
Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting
Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements
Consolidated Balance Sheets of Oi S.A. as of December 31, 2015 and 2014
Consolidated Statements of Operations of Oi S.A. for the years ended December 31, 2015, 2014 and 2013
Consolidated Statements of Comprehensive Income (Loss) of Oi S.A. for the years ended December 31, 2015, 2014 and
2013
Consolidated Statements of Changes in Equity of Oi S.A. for the years ended December 31, 2015, 2014 and 2013
Consolidated Statements of Cash Flows of Oi S.A. for the years ended December 31, 2015, 2014 and 2013
Notes to the Consolidated Financial Statements
F-2
F-3
F-4
F-5
F-7
F-8
F-9
F-10
F-13
(b) List of Exhibits
1.01 By-laws of Oi S.A., as amended through November 13, 2015 (English translation).
2.01
2.02
4.01
4.02
4.03
4.04
Form of Amended and Restated Deposit Agreement, among Oi S.A., The Bank of New York Mellon, as Depositary, and all
Owners and Holders from time to time of American Depositary Shares issued thereunder (incorporated by reference to
Exhibit 1 to Form F-6 of Oi S.A. filed on February 28, 2012).
Form of Amended and Restated Deposit Agreement, among Oi S.A., The Bank of New York Mellon, as Depositary, and all
Owners and Holders from time to time of American Depositary Shares issued thereunder (incorporated by reference to
Exhibit 1 to Form F-6 of Oi S.A. filed on February 28, 2012).
Exchange Agreement, dated September 8, 2014, among PT International Finance B.V., PT Portugal, SGPS, S.A., Portugal
Telecom, SGPS, S.A., Oi S.A. and Telemar Participações S.A. (English translation) (incorporated by reference to Exhibit
99.17 to Amendment No. 4 to Schedule 13D of Telemar Participações S.A. filed on September 17, 2014).
Call Option Agreement, dated September 8, 2014, among PT International Finance B.V., PT Portugal, SGPS, S.A., Portugal
Telecom, SGPS, S.A., Oi S.A. and Telemar Participações S.A. (English translation) (incorporated by reference to Exhibit
99.18 to Amendment No. 4 to Schedule 13D of Telemar Participações S.A. filed on September 17, 2014).
Private Instrument for the Assignment of Rights and Obligations and Other Covenants, dated March 24, 2015, among PT
International Finance B.V., PT Portugal, SGPS, S.A., Portugal Telecom, SGPS, S.A., Telemar Participações S.A. and Oi
S.A. (English translation) (incorporated by reference to Exhibit 4.06 to Form 20-F of Oi S.A. filed on May 7, 2015).
First Amendment to the Call Option Agreement and Other Covenants, dated March 31, 2015, among PT International
Finance B.V., Portugal Telecom, SGPS, S.A., Telemar Participações S.A. and Oi S.A. (English translation) (incorporated by
reference to Exhibit 4.07 to Form 20-F of Oi S.A. filed on May 7, 2015).
4.05
Terms of Commitment, dated September 8, 2014, among Portugal Telecom, SGPS, S.A., Oi S.A. and Telemar Participações
S.A. (English translation) (incorporated by reference to Exhibit 99.19 to Amendment No. 4 to
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Schedule 13D of Telemar Participações S.A. filed on September 17, 2014).
4.06
4.07
4.08
4.09
4.10
4.11
4.12
4.13
4.14
4.15
First Amendment to the Terms of Commitment, dated March 31, 2015, among Portugal Telecom, SGPS, S.A., Oi S.A. and
Telemar Participações S.A. (English translation) (incorporated by reference to Exhibit 4.09 to Form 20-F of Oi S.A. filed on
May 7, 2015).
Concession Agreement for Local, Switched, Fixed-Line Telephone Service between ANATEL and Brasil Telecom S.A.,
No. 109/2011, dated June 30, 2011 (English translation) (incorporated by reference to Exhibit 10.5 to Form F-4 of Brasil
Telecom S.A. filed on September 1, 2011).
Schedule of Omitted Concession Agreements for Local Switched, Fixed-Line Telephone Service (incorporated by reference
to Exhibit 4.05 to Form 20-F of Oi S.A. filed on April 27, 2012).
Concession Agreement for Domestic Long-Distance, Switched, Fixed-Line Telephone Service between ANATEL and
Brasil Telecom S.A., No. 143/2011, dated June 30, 2011 (English translation) (incorporated by reference to Exhibit 10.6 to
Form F-4 of Brasil Telecom S.A. filed on September 1, 2011).
Schedule of Omitted Concession Agreement for Domestic Long-Distance, Switched, Fixed-Line Telephone Service
(incorporated by reference to Exhibit 4.07 to Form 20-F of Oi S.A. filed on April 27, 2012).
Statement of Authorization for Personal Mobile Services between ANATEL and Brasil Telecom Celular S.A., No.
026/2002, dated December 18, 2002 (English translation) (incorporated by reference to Exhibit 4.05 to Form 20-F of Brasil
Telecom S.A. filed on July 13, 2009).
Schedule of Omitted Authorizations for Personal Mobile Services (incorporated by reference to Exhibit 4.09 to Form 20-F
of Oi S.A. filed on April 27, 2012).
Instrument of Authorization for the Use of Radio Frequency Blocks for 2G services between ANATEL and 14 Brasil
Telecom Celular S.A., No. 24/2004, dated May 3, 2004 (English translation) (incorporated by reference to Exhibit 4.07 to
Brasil Telecom S.A.’s annual report on Form 20-F filed on July 13, 2009).
Schedule of Omitted Instruments of Authorization for the Use of Radio Frequency Blocks for 2G services (incorporated by
reference to Exhibit 4.11 to Form 20-F of Oi S.A. filed on April 27, 2012).
Instrument of Authorization for the Use of Radio Frequency Blocks for 3G services between ANATEL and 14 Brasil
Telecom Celular S.A., No. 24/2008, dated April 29, 2008 (English translation) (incorporated by reference to Exhibit 4.09 to
Brasil Telecom S.A.’s annual report on Form 20-F filed on July 13, 2009).
4.16
Schedule of Omitted Instruments of Authorization for the Use of Radio Frequency Blocks for 3G services (incorporated by
reference to Exhibit 4.13 to Form 20-F of Oi S.A. filed on April 27, 2012).
8.01 List of subsidiaries.
12.01 Certification of the Chief Executive Officer of Oi S.A. pursuant to the Sarbanes-Oxley Act of 2002.
12.02 Certification of the Chief Financial Officer of Oi S.A. pursuant to the Sarbanes-Oxley Act of 2002.
13.01
Certifications of the Chief Executive Officer and the Chief Financial Officer of Oi S.A. pursuant to the Sarbanes-Oxley Act
of 2002.
There are numerous instruments defining the rights of holders of long-term indebtedness of Oi S.A. and its consolidated
subsidiaries, none of which authorizes securities that exceed 10% of the total assets of Oi S.A. and its subsidiaries on a consolidated
basis. Oi S.A. hereby agrees to furnish a copy of any such agreements to the SEC upon request.
215
OI S.A.
FORM 20-F
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The registrant 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.
Date: May 19, 2016
OI S.A.
Date: May 19, 2016
/s/ Bayard de Paoli Gontijo
Name: Bayard de Paoli Gontijo
Title: Chief Executive Officer
/s/ Flavio Nícolay Guimarães
Name: Flavio Nícolay Guimarães
Title: Chief Financial Officer
OI S.A.
FORM 20-F
RR Donnelley ProFile
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Page 1 of 1
INDEX TO FINANCIAL STATEMENTS
Management’s Report on Internal Controls over Financial Reporting
Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting
Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements
Consolidated Balance Sheets of Oi S.A. as at December 31, 2015 and 2014
Consolidated Statements of Operations of Oi S.A. for the years ended December 31, 2015, 2014 and 2013
Consolidated Statements of Comprehensive Income (Loss) of Oi S.A. for the years ended December 31, 2015, 2014 and
2013
Consolidated Statements of Changes in Equity of Oi S.A. for the years ended December 31, 2015, 2014 and 2013
Consolidated Statements of Cash Flows of Oi S.A. for the years ended December 31, 2015, 2014 and 2013
Notes to the Consolidated Financial Statements
F-2
F-3
F-4
F-5
F-7
F-8
F-9
F-10
F-13
F-1
OI S.A.
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MANAGEMENT’S REPORT ON INTERNAL CONTROLS OVER FINANCIAL REPORTING
Management’s Annual Report on Internal Control over Financial Reporting and Report of Independent Registered Public
Accounting Firm
Our management is responsible for establishing and maintaining adequate internal controls over financial reporting.
Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with applicable generally accepted
accounting principles. Our internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets, (2)
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with applicable generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance
with authorizations of our management and directors, and (3) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our CEO and CFO, our management conducted an assessment of our internal
control over financial reporting as of December 31, 2015 based on the criteria established in “Internal Control—Integrated
Framework (2013)” issued by COSO.
As a result of management’s assessment of our internal control over financial reporting as of December 31, 2015, management
concluded that the following material weakness in our internal control over financial reporting existed:
Our financial statement closing process, including transformation of our statutory financial statements into U.S. GAAP consolidated
financial statements, contains design and operating deficiencies severe enough that material errors may occur and may not be detected
on a timely basis by management in the normal course of business.
We do not have sufficient and skilled accounting and finance personnel necessary to perform appropriate processes and controls to
timely, consistently and appropriately identify, capture and analyze financially significant information in U.S. GAAP. As a result,
audit adjustments were proposed and recorded by us in order to properly reflect certain non-routine transactions in our U.S. GAAP
financial statements.
Because of the existence of this material weakness, management has concluded that our internal control over financial reporting was
ineffective as of December 31, 2015.
The effectiveness of our internal control over financial reporting has been audited by KPMG Auditores Independentes as stated in
their report included in this Annual Report on Form 20-F, which expresses an adverse opinion on the effectiveness of our internal
control over financial reporting as of December 31, 2015. Ours independent registered public accountants, KPMG Auditores
Independentes, audited the consolidated financial statements included in this Annual Report on Form 20-F, and their adverse opinion
on the effectiveness of our internal control did not affect their audit report to our financial statements.
May 19, 2016
/s/ Bayard De Paoli Gontijo
Name: Bayard De Paoli Gontijo
Title: Chief Executive Officer
/s/ Flavio Nicolay Guimarães
Name: Flavio Nicolay Guimarães
Title: Chief Financial Officer
F-2
OI S.A.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting
To the Board of Directors and Shareholders of
Oi S.A.
We have audited Oi S.A.’s (the “Company”) internal control over financial reporting as of December 31, 2015, based on criteria
established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Oi S.A.’s management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying
Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material
effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement of the company’s annual financial statements will not be prevented or detected on
a timely basis. A material weakness related to the Company’s policies and procedures with respect to the preparation of financial
statements in accordance with US generally accepted accounting principles has been identified and included in management’s
assessment.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Oi S.A. and subsidiaries as of December 31, 2015 and 2014, and the related consolidated statements of
operations, comprehensive income loss, changes in shareholders’ equity, and cash flows for each of the years in the three-year period
ended December 31, 2015.
This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2015
consolidated financial statements, and this report does not affect our report dated May 19, 2016, which included an explanatory
paragraph regarding the Company’s ability to continue as a going concern, on those financial statements.
In our opinion, because of the effect of the aforementioned material weakness on the achievement of the objectives of the control
criteria, Oi S.A. has not maintained effective internal control over financial reporting as of December 31, 2015, based on the COSO
criteria.
/s/ KPMG Auditores Independentes
KPMG Auditores Independentes
Rio de Janeiro, Brazil
May 19, 2016
F-3
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Oi S.A.
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We have audited the accompanying consolidated balance sheets of Oi S.A. and subsidiaries (the “Company”) as of December 31,
2015 and 2014, and the related consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity,
and cash flows for each of the years in the three-year period ended December 31, 2015. These consolidated financial statements are
the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
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 well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of
Oi S.A. and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going
concern. As discussed in Note 1 to the consolidated financial statements, the Company has experienced a substantial decline in cash
flows from operating activities which, considered together with the Company’s liquidity risks, raise substantial doubt about its ability
to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated
financial statements do not include any adjustments that might result from the outcome of this uncertainty.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
Company’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control —
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our
report dated May 19, 2016 expressed an adverse opinion on the effectiveness of the Company’s internal control over financial
reporting.
/s/ KPMG Auditores Independentes
KPMG Auditores Independentes
Rio de Janeiro, Brazil
May 19, 2016
F-4
OI S.A.
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Oi S.A. and Subsidiaries
Consolidated Balance Sheets as at December 31, 2015 and 2014
(In thousands of Brazilian reais - R$, unless otherwise stated)
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Current assets
Cash and cash equivalents
Short-term investments
Trade accounts receivable, less allowance for doubtful accounts of R$561,139 in 2015
and R$513,787 in 2014
Derivative financial instruments
Other taxes
Recoverable taxes
Judicial Deposits
Pension plan assets
Held-for-sale assets
Other assets
Total current assets
Non-current assets
Long-term investments
Other taxes
Deferred taxes
Derivative financial instruments
Judicial Deposits
Investments
Property, plant and equipment, net
Intangible assets
Pension plan assets
Other assets
Total non-current assets
Total assets
Current liabilities
Trade payables
Loans and financing
Derivatives financial instruments
Payroll, related taxes and benefits
Current income taxes payable
Other taxes
Tax financing program
Contingencies
Liability for pensions benefits
Dividends and interest on capital
Licenses and concessions payable
Liabilities associated to held-for-sale assets
Other payables
Total current liabilities
Non-Current liabilities
Loans and financing
Derivative financial instruments
Other taxes
Tax financing program
Contingencies
Liability for pensions benefits
Licenses and concessions payable
Other payables
Total non-current liabilities
See accompanying notes to consolidated financial statements.
F-5
Note 12/31/2015
12/31/2014
7 14,898,063
7 1,801,720
2,449,206
171,415
7,450,040
8 8,379,719
340,558
606,387
3/17
1,054,255
10
922,986
1,158,133
9 1,062,851
1,133,639
11 1,258,227
23
1,744
753
26 7,686,298 34,254,682
1,597,283
1,662,157
38,214,287 49,675,829
154,890
111,285
125,966
7
741,911
659,899
10
3,694,238
856,457
9
3/17 6,780,316
2,880,923
11 13,119,130 12,260,028
12
148,411
13 25,817,821 26,244,309
14 11,780,136 13,553,821
1,103,337
23 1,529,194
327,242
296,505
61,120,314 61,065,505
99,334,601 110,741,334
4,359,785
15 5,035,793
4,463,728
16 11,809,598
523,951
3/17 1,988,948
744,439
660,415
477,282
9
339,624
1,667,599
10 1,553,651
94,041
19
78,432
1,058,521
20 1,020,994
129,662
144,589
23
185,138
96,433
911,930
675,965
745,000 27,178,222
1,021,719
25,605,031 42,580,052
18
26
21 1,219,624
16 48,047,819 31,385,667
521,395
142,971
3/17
874,727
924,337
10
896,189
19
716,656
4,073,247
20 3,413,972
346,873
399,431
23
685,975
18
6,607
2,602,556
21 3,052,913
57,083,130 41,008,205
OI S.A.
FORM 20-F
RR Donnelley ProFile
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Oi S.A. and Subsidiaries
Consolidated Balance Sheets as at December 31, 2015 and 2014
(In thousands of Brazilian reais - R$, unless otherwise stated)
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Shareholders’ equity
Preferred shares, no par value
Authorized 157,727 shares; issue and outstanding 155,915 shares in 2015 and 565,036 in
2014
22
4,094,909 14,292,197
Common shares, no par value
Authorized 668,034 shares; issue and outstanding 519,752 shares in 2015 and 277,730 in
17,343,465 7,146,023
2014
Total share capital
Share issue costs
Capital reserves
Treasury shares
Obligations in equity instruments
Other comprehensive income
Accumulated losses
Total equity attributable to Oi S.A. and subsidiaries
Noncontrolling interest
Total shareholders’ equity
Total liabilities and shareholders’ equity
See accompanying notes to consolidated financial statements.
F-6
(444,943)
21,438,374 21,438,220
(309,592)
17,762,546 17,640,287
(5,531,092) (2,367,552)
(2,894,619)
131,082
(17,159,098) (7,993,946)
15,455,893 25,643,880
26 1,190,547 1,509,197
16,646,440 27,153,077
99,334,601 110,741,334
(609,894)
OI S.A.
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Oi S.A. and Subsidiaries
Consolidated Statements of Operations for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
Net operating revenue
Cost of sales and services
Gross profit
Operating (expenses) income
Selling expenses
General and administrative expenses
Other operating income (expenses), net
Income (loss) before financial expenses and taxes
Financial (expenses), net
Income (loss) before taxes
Income tax and social contribution
Income (loss) from continuing operations
Income (loss) for the year from discontinued operations, net
Net income (loss) for the year
Net income (loss) attributable to owners of the Company
Net income (loss) attributable to non-controlling interests
2015
2014
Note
4 27,353,765 28,247,099 28,422,147
5 (16,250,083) (16,257,192) (16,466,773)
11,103,682 11,989,907 11,955,374
2013
5
5
5
6
9
26
(4,719,811) (5,565,757) (5,532,045)
(3,912,178) (3,834,563) (3,683,440)
(1,258,655) 2,023,622 1,243,100
1,213,038 4,613,209 3,982,989
(6,538,008) (4,548,922) (3,301,956)
681,033
(5,324,970)
64,287
(3,379,927)
(8,704,897)
(758,268)
(693,981)
(867,139) (4,086,449)
(9,572,036) (4,780,430)
(9,159,343) (4,781,720)
1,290
(412,693)
(76,610)
604,423
—
604,423
604,423
—
Net income (loss) allocated to common shares – basic and diluted
Net income (loss) allocated to preferred shares - basic and diluted
(3,947,142) (1,569,149)
(5,212,201) (3,212,571)
189,711
414,712
Weighted average number of outstanding shares
(in thousands of shares)
Common shares – basic and diluted
Preferred stock – basic and diluted
Net income (loss) per share attributable to owners of the Company (in
Reais):
Common shares - basic and diluted
Preferred stock - basic and diluted
Net income (loss) per share from continuing operation attributable to
owners of the Company:
Common shares - basic and diluted
Preferred shares - basic and diluted
Net income (loss) per share from discontinued operation attributable to
owners of the Company:
Common shares - basic and diluted
Preferred shares - basic and diluted
See accompanying notes to consolidated financial statements.
F-7
314,518
415,321
202,312
414,200
51,476
112,527
(12.55)
(12.55)
(7.76)
(7.76)
3.69
3.69
(11.36)
(11.36)
(1.13)
(1.13)
3.69
3.69
(1.19)
(1.19)
(6.63)
(6.63)
—
—
OI S.A.
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Oi S.A. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
Net income (loss) for the year
Other comprehensive income (loss)
Foreign currency translation adjustments
Less reclassification of losses included in discontinued operations
Available-for-sale
Unrealized gain
Portion of loss recognized in other comprehensive income for other-than-temporary losses
on investment
Pension and other postretirement benefits plans:
Net actuarial loss from continuing operations
Less amortization of prior service cost and actuarial gain (loss) included in net periodic
pension cost
Net actuarial gain (loss) from discontinued operations
Less reclassification of actuarial gains included in discontinued operations
Pension and other postretirement benefits plans
Changes in effective portion of the fair value of hedging financial instrument
Less reclassification adjustment for gains (losses) included in net income (loss)
Tax effect on other comprehensive income (loss):
Pensions from continuing operations
Pensions from descontinued operations
Less reclassification of pension tax effects included in discontinued operations
Hedging financial instruments
Other comprehensive income (loss)
Less comprehensive income (loss) attributable to noncontrolling interest
Net comprehensive income (loss) attributable to controlling shareholders
See accompanying notes to consolidated financial statements.
F-8
2015
2014
(9,572,036) (4,780,430) 604,423
2013
172,597
(481,499)
(308,902)
384,677
793,006
1,907,018
408,329
(2,315,347)
(408,329)
—
408,329
—
—
121,664
(327,215) 236,481
39,151
1,954
(910,654)
26,142
901,453
1,062,268 (1,235,915) 262,623
(802,063)
4,113
(797,950)
163,550 (206,998)
(4,114)
186,047 (211,112)
22,497
110,589
196,000
(89,292)
(194,020)
71,778
(17,514)
(10,218,969) (4,793,959) 638,420
(63,256)
243,333
(194,020)
(318,650)
124,726
(9,900,319) (4,918,685) 638,420
OI S.A.
FORM 20-F
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FORM 20-F
RR Donnelley ProFile
START PAGE
NY8690AM021227
11.9.13
NCR quinr0nd
NYC
ˆ200F4SiTSm8!t1b%>Š
6*
0C
200F4SiTSm8!t1b%>
19-May-2016 11:56 EST
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171431 FIN 9
HTM
ESS
Page 2 of 2
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OI S.A.
FORM 20-F
RR Donnelley ProFile
START PAGE
NY8690AM021467
11.9.13
NCR keebj0nm
NYC
Oi S.A. and Subsidiaries
Consolidated Statements of Cash Flows
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
Operating activities
Net income (loss) for the year
Discontinued operations, net of tax
Adjustments to reconcile net income to cash provided by operating activities
Interest loss on financial instruments
Derivatives financial instruments
Depreciation and amortization
Impairment of available-for-sale securities
Allowance for doubtful accounts
Contingencies
Liabilities for pension plans
Impairment of assets
Deferred income tax expense
Other, net
Changes in operating assets and liabilities, net of acquisition
Accounts receivable
Inventories
Other taxes
Held-for-trading
Redemption of held-for-trading
Trade payables
Payroll, related taxes and benefits
Contingencies
Net increase in income tax and social contribution
Liabilities for pension plans
Changes in assets and liabilities held for sale
Cash flows from operating activities - continuing operations
Cash flows from operating activities - discontinued operations
Net cash (used) generated by operating activities
See accompanying notes to consolidated financial statements.
F-10
19-May-2016 15:40 EST
ˆ200F4SiTSmBlk9tZ}Š
9*
0C
200F4SiTSmBlk9tZ}
171431 FIN 10
HTM
ESS
Page 1 of 1
2015
2014
2013
(9,572,036) (4,780,430)
604,423
867,139 4,086,449
6,442,647 1,311,198 1,881,041
(5,795,744)
(425,027) (1,131,012)
6,195,039 5,766,702 5,691,824
447,737
726,944
566,617
(107,368)
524,870
2,598,351
89,059
849,779
649,463
381,949
463,087
(133,415)
(162,974)
429,024
18,293
136,267
(341,888)
(331,758) (1,546,618)
74,776
119,887
(1,622,343) (1,057,184)
(38,721)
(790,262)
556,009
(53,696)
(594,144)
(8,790,093) (4,754,150) (6,230,243)
7,958,169 5,021,859 8,203,246
(250,056)
(972)
(934,039)
(221,654)
(124,246)
(221,347)
(198,428)
(775,583)
(133,511)
(131,156)
117,271
(351,128)
(1,079,323)
154,873
(139,325)
(786,914)
(1,539,013) 3,652,787 7,035,312
485,342 1,877,782
(1,053,671) 5,530,569 7,035,312
OI S.A.
FORM 20-F
RR Donnelley ProFile
START PAGE
NY8690AM021258
11.9.13
NCR keebj0nm
NYC
Oi S.A. and Subsidiaries
Consolidated Statements of Cash Flows
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
Investing activities
Capital expenditures
Proceeds from the sale of property, plant and equipment
Cash received for the sale of PT Portugal (Note 26)
Judicial deposits
Redemption of judicial deposits
Acquisition of investment in PT Portugal on May 5, 2014
Cash and cash equivalents transferred to held-for-sale assets
Other
Cash flows from investing activities - continuing operations
Cash flows from investing activities - discontinued operations
Net cash generated by (used in) investing activities
Financing activities
Borrowings net of costs
Repayment of principal of borrowings, financing
Cash impacts on derivatives transactions
Licenses and concessions
Tax refinancing program
Capital increase
Issue premium and related costs
Payment of dividends and interest on capital
Cash and cash equivalents acquired by merger
Cash flows from financing activities - continuing operations
Cash flows from financing activities - discontinued operations
Net cash used in financing activities
Foreign exchange differences on cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents beginning of year
Cash and cash equivalents end of year
Non-cash transactions
19-May-2016 18:23 EST
ˆ200F4SiTSmD96Y3%.Š
4*
0C
200F4SiTSmD96Y3%.
171431 FIN 11
HTM
ESS
Page 1 of 1
2015
2014
2013
(3,681,484) (5,370,351) (5,976,488)
4,127
14,996 4,453,611
17,218,275
(2,044,796) (1,660,987) (1,693,945)
958,529
1,039,221
722,836
1,087,904
(730,572)
191,546
(62,528)
12,737,758 (1,489,468) (6,770,305)
8,091
(194,739) (2,813,437)
12,543,019 (4,302,905) (6,770,305)
7,218,639 2,665,098 3,434,762
(11,308,213) (4,587,978) (3,483,640)
(84,318)
(710,968)
(174,455)
2,704,155
(348,545)
(93,266)
(465,961)
(204,779)
(870,215)
8,230,606
(403,375)
(57,608)
20,346
(5,172) (1,280,162)
(1,864,492) 4,358,224 (2,298,781)
(492,194) (5,532,725)
(2,356,686) (1,174,501) (2,298,781)
3,316,195
(28,787)
50,443
12,448,857
24,376 (1,983,331)
2,449,206 2,424,830 4,408,161
14,898,063 2,449,206 2,424,830
Acquisition of Property, Plant and Equipment and Intangible assets (incurring liabilities)
Offset of judicial deposits against contingencies
Share exchange (Note 22.b and Note 27)
2015
2014
568,973 (122,072) 637,884
374,295 405,329 495,259
2013
3,163,540
See accompanying notes to consolidated financial statements.
F-11
OI S.A.
FORM 20-F
RR Donnelley ProFile
START PAGE
ncrdoc1
11.9.13
NCR delar0ma
NYC
Oi S.A. and Subsidiaries
Consolidated Statements of Cash Flows
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
Other transactions
Income tax and social contribution paid
Financial charges paid
See accompanying notes to consolidated financial statements.
F-12
17-May-2016 23:44 EST
ˆ200F4SiTVNsCBdQ6]Š
1*
0C
200F4SiTVNsCBdQ6]
171431 FIN 12
HTM
ESS
Page 1 of 1
2015
(626,703)
2013
(640,152)
(4,057,529) (2,852,682) (2,448,391)
2014
(755,512)
18-May-2016 22:22 EST
ˆ200F4SiTVN@04oc6=Š
3*
0C
200F4SiTVN@04oc6=
171431 FIN 13
HTM
ESS
Page 1 of 1
OI S.A.
FORM 20-F
RR Donnelley ProFile
START PAGE
ncrdoc1
11.9.13
NCR greev0nd
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
1.
BASIS OF PRESENTATION
Oi S.A. (“Company” or “Oi”), is a Switched Fixed-line Telephony Services (“STFC”) concessionaire, operating since July 1998 in
Region II of the General Concession Plan (“PGO”), which covers the Brazilian states of Acre, Rondônia, Mato Grosso, Mato Grosso
do Sul, Tocantins, Goiás, Paraná, Santa Catarina, Rio Grande do Sul, and the Federal District, in the provision of STFC as a local and
intraregional long-distance carrier. Since January 2004, the Company has also provided domestic and international long-distance
services in all Regions. Additionally, since January 2005, it has provided local services outside of Region II. These services are
provided under concessions granted by Agência Nacional de Telecomunicações - ANATEL (National Telecommunications Agency),
the regulator for the Brazilian telecommunications industry.
The Company is domiciled in Brazil, with headquarters located at Rio de Janeiro, at Rua do Lavradio, 71 – Rio de Janeiro.
The Company also holds: (i) through its wholly-owned subsidiary Telemar Norte Leste S.A. (“TMAR”), a concession to provide
fixed telephone services in Region I and international long-distance services nationwide; and (ii) through its indirect subsidiary Oi
Móvel S.A. (“Oi Móvel”) a license to provide mobile telephony services in Region I, II and III.
The local and nationwide STFC long-distance concession agreements between the Company and its subsidiary, TMAR, and
ANATEL are effective through December 31, 2025. These concession agreements provide for reviews on a five-year basis and, in
general, provide for a greater degree of intervention by ANATEL in the management of the business than the licenses to provide
private services, and also include several consumer protection provisions, as determined by ANATEL the regulator. On December 30,
2015, ANATEL announced that the due date for the review to be implemented by the end of 2015 had been postponed to
December 31, 2016.
The Company also holds investments in Africa, where the Company provides fixed and mobile telecommunications services
indirectly through Africatel Holding BV (“Africatel”). The Company provides services in Namibia, Mozambique, and São Tomé,
among other countries, through its subsidiaries Mobile Telecommunications Limited (“MTC”), Listas Telefónicas de Moçambique
(“LTM”), and CST – Companhia Santomense de Telecomunicações, SARL (“CST”). Additionally, Africatel holds an indirect 25%
stake in Unitel S.A. (“Unitel”) and a 40% stake in Cabo Verde Telecom, S.A. (“CVT”), which provide telecommunications services
in Angola and Cape Verde. In Asia, the Company provides fixed and mobile telecommunications services through its subsidiary
Timor Telecom.
Certain items in these consolidated financial statements have been reclassified to conform to the current period presentation.
Summary of acquisitions, corporate restructuring and divestures
Company’s capital increase through the contribution by Pharol (formerly Portugal Telecom, SGPS, S.A., “Pharol”) of all PT Portugal
shares
F-13
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR delar0ma
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
17-May-2016 23:44 EST
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As mentioned below, as part of the business combination, a capital increase of the Company was approved, which was partially paid-
in through the contribution, by Pharol, of all the shares issued by PT Portugal SGPS, S.A. (“PT Portugal”).
Pursuant to the Definitive Agreements executed on February 19, 2014, which described the steps necessary to implement this
Transaction, the Company’s Board of Directors decided at the meetings held on April 28 and 30, 2014, to increase capital by
R$13,217,865 through a public distribution of Company common and preferred shares, with the issue of 2,142,279,524 common
shares, including 396,589,982 common shares in the form of American Depositary Shares (“ADSs”), and 4,284,559,049 preferred
shares, including 828,881,795 preferred shares in the form of ADSs.
On May 5, 2014, Banco BTG Pactual S.A., as Public Offering Stabilizing Underwriter, exercised, part of the distribution option for
120,265,046 Oi common shares and 240,530,092 Oi preferred shares (“Overallotment Shares”), amounting to R$742,035. As a result,
on said date the Company capital increased to R$21,431,109.
The shares were issued at the price of R$2.17 per common share and R$2.00 per preferred share. The common shares in the form of
ADSs (“ADSs ON”, each representing one common share) were issued at the price of US$0.970 per ADS ON, and the preferred
shares in the form of ADSs (“ADSs PN”, each representing one preferred share) were issued at the price of US$0.894 per ADS PN.
Finally, the issued shares were paid in (i) in assets, by Pharol through the contribution to the Company of all PT Portugal SGPS, S.A.
(“PT Portugal”) shares, which held all the (i.a) operating assets of Pharol amounting to R$30,299 (mostly represented by available-
for-sale securities, tangible and intangible assets), except its direct or indirect interests in the Company and in Contax Participações
S.A., and (i.b) liabilities of Pharol at the contribution date amounting to R$33,115 (mostly represented by non-current debt), as
determined in the Valuation Report prepared by Banco Santander (Brasil) S.A. (“PT Assets”), approved at the Company’s
Shareholders’ Meeting held on March 27, 2014; and (ii) cash, on the subscription date, in local legal tender amounting to R$8.25
billion. Accordingly, the Company’s capital increase totaled the gross amount of R$13.96 billion, including PT’s assets valued at
R$5.71 billion.
Sale of PT Portugal Shares
The sale of all the shares of PT Portugal to Altice Portugal S.A. (“Altice”), involving basically the operations of PT Portugal in
Portugal and in Hungary, was completed on June 2, 2015 (see note 26 for financial impacts). After this sale, the Company retained its
stakes in the following former PT Group subsidiaries:
(i)
100% of the shares of PT Participações SGPS, S.A. (“PT Participações”), holding of the operations in Africa, through
Africatel Holdings BV (“Africatel”), and Timor, through Timor Telecom, S.A. (“Timor Telecom”);
(ii) 100% of the shares of Portugal Telecom International Finance B.V. (“PTIF”), CVTEL B.V. (“CVTEL”), and Carrigans
Finance S.à.r.l. (“Carrigans”).
F-14
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR greev0nd
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
Corporate reorganization
18-May-2016 22:22 EST
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On March 31, 2015, the shareholders of TmarPart acting at a pre-meeting of the shareholders of TmarPart (1) unanimously approved
the adoption of an alternative share structure, after analyzing options and taking into consideration the obstacles to the completion of
the previously announced merger of shares of Oi and TmarPart, and (2) authorized the managements of TmarPart and Oi to begin
taking the applicable steps to implement the alternative share structure. The alternative share structure was intended to achieve many
of the primary purposes of the merger of shares of Oi and TmarPart, including the adoption by our company of the best corporate
governance practices required by BM&FBovespa’s Novo Mercado segment and the elimination of the control of Oi through the
various shareholders’ agreements governing Oi, while maintaining the goal of implementing a transaction that would result in the
listing of the shares of Oi on the Novo Mercado.
The implementation of the alternative share structure consisted of the corporate ownership simplification transactions (described
below), the adoption of new by-laws of our company, the election of a new board of directors of our company, and a voluntary share
exchange through which holders of our preferred shares were entitled to exchange their preferred shares for our common shares
(“voluntary convertion”).
On September 1, 2015, we and several of our direct and indirect shareholders undertook the following transactions, which we refer to
collectively as the corporate ownership simplification transactions:
•
•
•
•
•
•
•
AG Telecom merged with and into PASA;
LF Tel merged with and into EDSP;
PASA and EDSP merged with and into Bratel Brasil;
Valverde merged with and into TmarPart;
Venus RJ Participações S.A., Sayed RJ Participações S.A. and PTB2 S.A. merged with and into Bratel Brasil;
Bratel Brasil merged with and into TmarPart; and
TmarPart merged with and into our company.
In connection with these transactions, all of the shareholders agreements to which we were an intervening party and through which
the direct and indirect shareholders of TmarPart had rights to influence our management and operations were terminated. In the
merger of TmarPart with and into Oi, the net assets of TmarPart, in the amount of R$122,412 were merged into the shareholders’
equity of Oi and as a result of the merger, TmarPart ceased to exist. The merger of TmarPart with and into Oi also resulted in the
recognition its shareholders’ equity of a tax benefit related to the step up of tax basis the goodwill in the amount of R$982,768 with a
corresponding valuation allowance by the same amount derived from the acquisition of equity interest in TmarPart recorded by Bratel
Brasil, AG Telecom, LF Tel, in accordance with applicable Brazilian law. This tax benefit was recorded directly in equity as it was a
transaction among and with shareholders’ of Oi.
In the merger of TmarPart with and into Oi, shareholders of TmarPart received the same number of shares of Oi as were held by
TmarPart immediately prior to the merger of TmarPart with and into Oi in proportion to their holdings in TmarPart. No withdrawal
rights for the holders of shares of Oi were available in connection with the merger of TmarPart with and into Oi.
F-15
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR brzoj0nd
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
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At an extraordinary shareholders meeting of our company held on September 1, 2015, our shareholders (1) adopted amended by-laws
for our company that were intended to increase the corporate governance standards applicable to our company as well as to limit the
voting rights of holders of a large concentration of common shares, and (2) elected a new board of directors with terms of office until
the shareholders’ meeting that approves our financial statements for the year ending December 31, 2017.
With regard to the Voluntary Conversion, a total of 314,250,655 Oi preferred shares, or 66.84% of total preferred shares ex-treasury,
were offered for conversion by their holders, attaining the minimum acceptance threshold of 2/3 of the holders of preferred shares ex-
treasury to which the Voluntary Conversion was subject, was reached.
The Company’s Board of Directors ratified the voluntary conversion, accepted the conversion requests filed by the holders of
Preferred ADSs, and approved the summon of the Extraordinary Shareholders’ Meeting to reflect the new share structure, as a result
of the Voluntary Conversion, in the Company’s Bylaws.
Going concern considerations
During 2015, our operations generated negative cash flows of R$1,054 million. As a result, we financed investing activities, debt
service and working capital from our cash and cash equivalents and short-term cash investments. Historically, we have financed our
investments in property, plant and equipment through the use of bank loans, vendor financing, capital markets and other forms of
financing.
As of December 31, 2015, our consolidated cash and cash equivalents and short-term cash investments amounted to R$16,700 million
and our consolidated indebtedness amounted to R$ 59,857 million. We anticipated that we will be required to spend approximately
R$19,725 million to meet our short-term contractual obligations and commitments during 2016, and an additional approximately
R$30,672 million to meet our long-term contractual obligations and commitments in 2017 and 2018. As a result this financial
situation doubt about Company’s ability to continue on a going concern basis.
Oi’s operating and business focus remains unchanged and Oi is still committed to continuing to make investments that ensure a
continue improvement of its quality of service, which it believes will allow it to continue to bring technological advances to its
customers all over Brazil. Oi also continues to undertake efforts for the operating upgrading and transformation of its business by
focusing on austerity, infrastructure optimization, process revision, and sales actions.
On March 9, 2016, we announced that we had retained PJT Partners as our financial advisor to assist us in evaluating financial and
strategic alternatives to optimize our liquidity and debt profile. On April 25, 2016, we entered into a customary non-disclosure
agreement with Moelis & Company, who acts as advisor for a diverse ad hoc group of holders of the bonds issued by Oi and its
subsidiaries, as an initial step towards discussions of a potential restructuring of its indebtedness.
F-16
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR soria0ma
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
17-May-2016 23:44 EST
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Our financial statements for the year ended December 31, 2015 have been prepared assuming that we will continue as a going
concern, based on our cash flow projections and the successful implementation of strategic alternatives to optimize the liquidity and
debt profile. Our projections depend on factors such as attainment of traffic volume targets, customer base, launching of bundled
products attractive to customers, service sales prices, foreign exchange fluctuation and the success of the efforts to identify and
implement financial and strategic alternatives to optimize the liquidity and debt profile.
Should one of more of the assumptions underlying the Company cash flow projections and other forecasts, the financial support of
the Company, or the outcome of the efforts to identify and implement financial and strategic alternatives to optimize the Company
liquidity and debt profile not be met, this could be an indication of material uncertainties that would generate doubts as to the
Company’s ability to realize its assets and settle its obligations at their carrying amounts.
2.
SIGNIFICANT ACCOUNTING POLICIES
The accounting policies detailed below have been consistently applied in all periods presented in this Consolidated financial
statements.
Use of estimates
In preparing the financial statements in conformity with U.S. Generally Accepted Accounting Principles, the Company’s management
uses estimates and assumptions based on historical experience and other factors, including expected future events, which are
considered reasonable and relevant. The use of estimates and assumptions frequently requires judgments related to matters that are
uncertain with respect to the outcomes of transactions and the amount of assets and liabilities. Actual results of operations and the
financial position may differ from these estimates. Significant items subject to such estimates and assumptions include the useful
lives of fixed assets, allowances for doubtful accounts, the valuation of derivatives, the valuation of available-for-sale investment,
deferred tax assets, valuation of fixed assets, pension plan, income tax uncertainties and contingencies.
Consolidated Financial Statements
The accompanying consolidated financial statements include the accounts of Oi S.A. and its majority owned subsidiaries. All
significant intercompany balances and transactions have been eliminated in consolidation. The Company accounts for investments
over which it has significant influence but not a controlling financial interest using the equity method of accounting.
Beginning June 2, 2015, the remaining assets and liabilities of PT Portugal not sold to Altice (Note 1) have been fully consolidated by
the Company in each line item of the balance sheet, except for the assets and liabilities of the operations in Africa and Asia, which are
consolidated and stated in a single line item of the balance sheet as assets held for sale, based on management’s expectation and
decision of holding these assets and liabilities for sale.
F-17
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR soria0ma
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
New Accounting Standards
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Long-Term Debt and Debt Issuance Costs - In April 2015, the Financial Accounting Standards Board (FASB) issued Accounting
Standards Update (ASU) No. 2015-03, “Interest – Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs” (ASU
2015-03), which resulted in the reclassification of debt issuance costs from “Other Assets” to inclusion as a reduction of our
reportable “Long-Term Debt” balance on our consolidated balance sheets. Since ASU 2015-03 does not address deferred issuance
costs for line-of-credit arrangements, the FASB issued ASU No. 2015-15, “Interest – Imputation of Interest: Presentation and
Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements” (ASU 2015-15), in August 2015.
ASU 2015-15 allows a company to defer debt issuance costs associated with line-of-credit arrangements, including arrangements
with no outstanding borrowings, classify them as an asset, and amortize them over the term of the arrangements. We elected to adopt
ASU 2015-03 early, with full retrospective application as required by the guidance. Adopting ASU 2015-03 resulted in the
reclassification of approximately R$473,800 from other assets to loans and financing within the consolidated balance sheets as of
December 31, 2014.
Deferred Income Taxes and Liabilities - In November 2015, the FASB issued ASU No. 2015-17, “Income Taxes (Topic 740) –
Balance Sheet Classification of Deferred Taxes” (ASU 2015-17), which requires companies report their deferred tax liabilities and
deferred tax assets, together as a single noncurrent item on their classified balance sheets. The Company elected to early adopt the
new standard for the current reporting period, which is permitted, and applied a retrospective transition method. Adopting ASU 2015-
17 resulted in the reclassification of R$1,631,155 from current to noncurrent deferred income tax assets within the consolidated
balance sheets as of December 31, 2014.
Revenue Recognition - In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic
606)” (ASU 2014-09) and has since modified the standard with ASU 2015-14, “Deferral of the Effective Date”, ASU 2016-08
“Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” and ASU 2016-10 “Identifying Performance
Obligations and Licensing”. These standards replace existing revenue recognition rules with a comprehensive revenue measurement
and recognition standard and expanded disclosure requirements. ASU 2014-09 becomes effective for annual reporting periods
beginning after December 15, 2018, at which point we plan to adopt the standard. Upon initial evaluation, we believe the key changes
in the standard that impact our revenue recognition relate to the allocation of contract revenues between various services and
equipment, and the timing in which those revenues are recognized. We are still in the process of determining the impact on the timing
of revenue recognition and the allocation of revenue to products.
Business Combinations - In September 2015, the FASB issued ASU No. 2015-16, “Business Combinations – Simplifying the
Accounting for Measurement- Period Adjustments” (ASU 2015-16), which results in the ability to recognize, in current period
earnings, any changes in provisional amounts during the measurement period after the closing of an acquisition, instead of restating
prior periods for these changes. This standard had no impact on our consolidated balance sheet as of December 31, 2015, or our
consolidated operating results and cash flows for the year ended.
F-18
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR soria0ma
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
17-May-2016 23:44 EST
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Leases (Topic 842) - In February 2016, the FASB issued ASU 2016-02 which supersedes FASB ASC Topic 840, Leases, and makes
other conforming amendments to U.S. GAAP. ASU 2016-02 requires, among other changes to the lease accounting guidance, lessees
to recognize most leases on-balance sheet via a right of use asset and lease liability, and additional qualitative and quantitative
disclosures. ASU 2016-02 is effective for the Company for annual periods in fiscal years beginning after December 15, 2018, permits
early adoption, and mandates a modified retrospective transition method. The Company is required to adopt ASU 2016-02 on January
1, 2019, but is evaluating whether to early adopt the new standard. The Company will adopt the new standard on January 1, 2019, and
is currently evaluating the effect that ASU 2016-02 will have on its consolidated financial statements.
Recognition and Measurement of Financial Assets and Financial Liabilities - In January 2016, the FASB issued ASU 2016-01 which
makes targeted improvements to the accounting for, and presentation and disclosure of, financial instruments, except those accounts
for under the equity method or those that result in consolidation. ASU 2016-01 requires that most equity investments be measured at
fair value, with subsequent changes in fair value recognized in net income. ASU 2016-01 does not affect the accounting for
investments that would otherwise be consolidated or accounted for under the equity method. The new standard also impacts financial
liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. The provisions of
ASU 2016-01 are effective for the Company for annual periods in fiscal years beginning after December 15, 2018. The Company will
adopt the new standard on January 1, 2019, and is currently evaluating the effect that ASU 2016-01 will have on its consolidated
financial statements.
Functional and presentation currency
The Company and its subsidiaries operate primarily as telecommunications operators in Brazil, Africa, and Asia, and engage in
activities typical of this industry. The items included in the financial statements of each group company are measured using the
currency of the main economic environment of the respective company’s operations (“functional currency”). The consolidated
financial statements are presented in Brazilian reais (R$), which is the Company’s functional and presentation currency.
To define its functional currency, management considered the currency that influences:
•
•
•
•
the sales prices of its goods and services;
the costs of services and sales;
the cash flows arising from receipts from customers and payments to suppliers;
interest, investments and financing.
Transactions and balances
F-19
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR soria0ma
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
17-May-2016 23:44 EST
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Foreign currency-denominated transactions are translated into the functional currency using the exchange rates prevailing on the
transaction dates. Foreign exchange gains and losses arising on the settlement of the transaction and the translation at the exchange
rates prevailing at year end, related foreign currency-denominated monetary assets and liabilities are recognized in the statement of
profit or loss, except when qualified as hedge accounting and, therefore, deferred in equity as cash flow hedges.
Group companies with a different functional currency
The profit or loss and the financial position of all Group entities, none of which uses a currency from a hyperinflationary economy,
whose functional currency is different from the presentation currency are translated into the presentation currency as follows:
•
•
•
•
assets and liabilities are translating at the rate prevailing at the end of the reporting period;
revenue and expenses disclosed in the statement of profit or loss are translated using the average exchange rate;
all the resulting foreign exchange differences are recognized as a separate component of equity in other comprehensive
income; and
goodwill and fair value adjustments, arising from the acquisition of a foreign entity are treated as assets and liabilities of
the foreign entity and translated at the closing exchange rate.
As at December 31, 2015 and 2014, the foreign currency-denominated assets and liabilities were translated into Brazilian reais using
mainly the following foreign exchange rates:
Closing rate
Average rate
Currency
Euro
US dollar
Cabo Verdean escudo
Sao Tomean dobra
Kenyan shilling
Namibian dollar
Mozambican metical
Segment information
2014
2015
4.2504
3.9048
0.0390
2014
3.2270
2.6562
0.0339
2015
4.2158 3.2525
3.8711 2.6394
0.0298 0.0287
0.000174 0.000154 0.000132 0.000131
0.0293 0.0268
0.2297 0.2169
0.0767 0.0742
0.0339
0.2606
0.0838
0.0382
0.2510
0.0832
The presentation of information relating to operating segments is consistent with the internal reports provided to the chief operating
decision maker of the Company. The results of segment operations are regularly reviewed in order to make decisions about the
allocation of resources to assess operational performance and for strategic decision-making.
F-20
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR soria0ma
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
Business combinations
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The Company uses the acquisition method to account for business combinations. The consideration transferred for the acquisition of a
subsidiary is the fair value of the assets transferred, the liabilities incurred, and the equity instruments issued. The consideration
transferred includes the fair value of assets and liabilities resulting from a contingent consideration contract, where applicable. The
identifiable assets acquired and the liabilities and contingent liabilities assumed in a business combination are initially measured
at their fair values at the date of acquisition. The Company depreciates amounts recognized according to the useful lives of the
underlying assets, and tests such assets to determine any asset impairment losses when there is evidence of impairment. The
Company tests goodwill for impairment on an annual basis.
Investment Securities
Investment securities at December 31, 2015 and 2014 consist of short-term and long-term investments classified as trading and an
investment at Unitel classified as available-for-sale. Trading and available-for-sale securities are recorded at fair value. Unrealized
holding gains and losses on trading securities are included in earnings. Unrealized holding gains and losses, net of the related tax
effect, on available-for-sale securities are excluded from earnings and are reported as a separate component of accumulated other
comprehensive income until realized.
A decline in the market value of any available-for-sale below cost that is deemed to be other-than-temporary results in an impairment
to reduce the carrying amount to fair value. To determine whether an impairment is other-than-temporary, the Company considers all
available information relevant to the collectibility of the security, including past events, current conditions, and reasonable and
supportable forecasts when developing estimate of cash flows expected to be collected. Evidence considered in this assessment
includes the reasons for the impairment, the severity and duration of the impairment, changes in value subsequent to year-end,
forecasted performance of the investee, and the general market condition in the geographic area or industry the investee operates in.
Accounts receivable
Accounts receivable from telecommunications services provided are stated at the tariff or service amount on the date they are
provided and do not differ from their fair values.
These receivables also include receivables from services provided and not billed by the end of the reporting period and receivables
related to handset, SIM cards, and accessories. The allowance for doubtful accounts estimate is recognized in an amount considered
sufficient to cover possible losses on the realization of these receivables. The allowance for doubtful accounts estimate is prepared
based on historic default rates.
The allowance for doubtful accounts is set up to recognize probable losses on accounts receivable taking into account the measures
implemented to restrict the provision of services to and collect late payments from customers.
F-21
OI S.A.
FORM 20-F
RR Donnelley ProFile
NY8690AM021466
11.9.13
NCR brzoj0nd
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
19-May-2016 15:38 EST
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There are cases of agreements with certain customers to collect past-due receivables, including agreements that allow customers to
settle their debts in installments. The actual amounts not received may be different from the allowance recognized, and additional
accruals might be required.
Non-current assets held for sale and discontinued operations
Non-current assets are classified as assets held for sale when their carrying amount is recoverable, principally through a sale, and
when such sale is highly probable. These assets are stated at the lower of their carrying value and fair value less costs to sell.
Disposals that represent a strategic shift that should have or will have a major effect on the Company’s operations and financial
results qualify as discontinued operations. The results of discontinued operations are reported in discontinued operations in the
consolidated statements of income for current and prior periods commencing in the period in which the business meets the criteria of
a discontinued operation, and include any gain or loss recognized on closing or adjustment of the carrying amount to fair value less
cost to sell.
Property, plant and equipment
Property, plant and equipment is stated at cost of purchase or construction, less accumulated depreciation. Historical costs include
expenses directly attributable to the acquisition of assets. They also include certain costs for facilities, when it is probable that the
future economic benefits related to such costs will flow to the Company. The borrowings and financing costs directly attributable to
the purchase, construction or production of a qualifying asset are capitalized in the initial cost of such asset. Qualifying assets are
those that necessarily require a significant time to be ready for use.
Subsequent costs are added to the carrying amount as appropriate, when, and only when, these assets generate future economic
benefits and can be reliably measured. The residual balance of the replaced asset is derecognized. Maintenance and repair costs are
recorded in profit or loss as incurred.
Depreciation is calculated on a straight-line basis, based on the estimated useful lives of the assets. The useful lives are reviewed
annually by the Company.
Intangible assets
Acquired intangible assets with finite useful lives are recognized at cost, less amortization and accumulated impairment losses.
Amortization is recognized on a straight-line basis over the asset’s estimated useful life. The estimated useful life and method of
amortization are reviewed at the end of each annual reporting period, and the effect of any changes in estimates is accounted for on a
prospective basis. Intangible assets with indefinite useful lives are carried at cost less accumulated impairment losses.
F-22
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR soria0ma
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
17-May-2016 23:44 EST
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Software licenses purchased are capitalized based on the costs incurred to purchase the software and make it ready for use. Software
maintenance costs are expensed as incurred.
Long-lived assets
Long-lived assets, such as property, plant, and equipment, and purchased intangible assets subject to amortization, are reviewed for
impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If
circumstances require a long-lived asset or asset group be tested for possible impairment, the Company first compares undiscounted
cash flows expected to be generated by that asset or asset group to its carrying amount. If the carrying amount of the long-lived asset
or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying
amount exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models,
quoted market values and third-party independent appraisals, as considered necessary.
Derivative financial instruments and hedging activities
Derivative financial instruments are contracted to mitigate exposure to market risks arising from changes in exchange rates on foreign
currency-denominated debts and short-term investments held abroad, and also from changes in earnings.
Derivatives are initially recognized at cost at the inception of the derivative contract and are subsequently measured at fair value
based on future cash flow estimates associated to the respective instrument. Changes in the fair value of any of these derivatives are
recorded directly in earnings.
The Company uses hedge accounting for derivative financial instruments. The purpose of this practice is to reduce the volatility of the
gains or losses recognized due to changes in the fair values of these derivative financial instruments. Derivative financial instruments
that qualify for hedge accounting are submitted to periodic prospective and retrospective effectiveness tests using the dollar offset
method.
Derivative instruments contracted and designated as hedging instruments are formally identified through initial designation
documentation. Derivative financial instruments classified as cash flows hedges were designated for hedge accounting.
The effective portion, is recognized in Other Comprehensive Income, net of taxes, and is reclassified to financial income (expenses)
in the same period or periods during which the hedge transaction affects earnings. The ineffective portion, measured after the
quarterly effectiveness tests, is recognized in financial income (expenses) in the same period it occurs.
Changes in the fair values of derivative financial instruments that are not designated for purposes of hedge accounting are recognized
as financial income or expenses in profit or loss in the period they occur.
The hedge relationship expires and the designation is removed when:
F-23
OI S.A.
FORM 20-F
RR Donnelley ProFile
NY8690AM021469
11.9.13
NCR feucs0nd
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
19-May-2016 11:43 EST
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(i)
The derivative contract is settled, terminated or settled, or if the Company or its subsidiary TMAR voluntarily removes the
designation. If the hedged item continues to exist, the balances accumulated in other comprehensive income related to the
changes in the fair value of the derivative are transferred to profit or loss for the year in which the hedged interest expenses and
foreign exchange fluctuations are allocated.
(ii)
The debt was either prepaid or settled. In this case, the balance accumulated in other comprehensive income is immediately
transferred to financial income or expenses in profit or loss for the year the designation is terminated.
The required information on derivative instruments and the effects recognized by the Company are described in Note 3.
Contingencies
Liabilities for loss contingencies arising from claims, assessment, litigation, fines and penalties are recorded when it is probable that
the liability has been incurred and the amount can be reasonably estimated, based on opinion of the management and its in-house and
outside legal counsel, and the amounts are recognized based on the cost of the expected outcome of ongoing lawsuits.
Pension and other postretirement plans
The Company and its subsidiaries have defined benefit and defined contribution plans. The Company also sponsors a defined benefit
health care plan for retirees and employees.
In the defined contribution plan, the sponsor makes fixed contributions to a fund managed by a separate entity. The contributions are
recognized as employee benefit expenses as incurred. The sponsor does not have the legal or constructive obligation of making
additional contributions, in the event the fund lacks sufficient assets to pay all employees the benefits related to the services provided
in the current year and prior years.
For the defined benefit plans, the Company records annual amounts relating to its pension and postretirement plans based on
calculations that incorporate various actuarial and other assumptions, including discount rates, mortality, assumed rates of return,
compensation increases, turnover rates and healthcare cost trend rates. The Company reviews its assumptions on an annual basis and
makes modifications to the assumptions based on current rates and trends when it is appropriate to do so. The effect of modifications
to those assumptions is recorded in accumulated other comprehensive income and amortized to net periodic cost over future periods
using the corridor method. The Company believes that the assumptions utilized in recording its obligations under its plans are
reasonable based on its experience and market conditions.
The Company recognizes the over or under-funded status of a defined benefit postretirement plan as an asset or liability in its balance
sheet and to recognizes changes in that funded status in the year in which the changes occur through other comprehensive income.
F-24
OI S.A.
FORM 20-F
RR Donnelley ProFile
NY8690AM021469
11.9.13
NCR feucs0nd
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
19-May-2016 11:44 EST
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The Company is not required to record actuarial calculations for multi-employer pension plans such as the PBS-A and contributions
to such plans are recorded on an accrual basis. Refunds from these plans are recorded only upon the cash receipt.
Revenue recognition
Revenues correspond basically to the amount of the payments received or receivable from sales of services in the regular course of
the Company’s and its subsidiaries’ activities.
Service revenue is recognized when services are provided. Local and long distance calls are charged based on time measurement
according to the legislation in effect. The services charged based on monthly fixed amounts are calculated and recorded on a straight-
line basis. Prepaid services are recognized as unearned revenues and recognized in revenue as services are used by customers.
Revenue from sales of handsets and accessories is recognized when these items are delivered and accepted by the customers.
Discounts on services provided and sales of cell phones and accessories are taken into consideration in the recognition of the related
revenue. Revenues involving transactions with multiple elements are identified in relation to each one of their components and the
recognition criteria are applied on an individual basis. Revenue is not recognized when there is significant uncertainty as to its
realization.
Expense recognition
Expenses are recognized on an accrual basis, considering their relation with revenue realization. Prepaid expenses attributable to
future years are deferred over the related periods.
Financial income and expenses
Financial income is recognized on an accrual basis and comprises interest on receivables settled after the due date, gains on short-
term investments and gains on derivative instruments. Financial expenses represent interest effectively incurred and other charges on
borrowings, financing, derivative contracts, and other financial transactions.
Income taxes
Income taxes are recorded under the asset and liability method. Deferred taxes are recognized for temporary differences and tax loss
carryforwards are recorded in assets or liabilities, as applicable. The Company recognizes the effect of income tax positions only if
those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that
is greater than 50 percent likely of being realized. Changes in recognition or measurement are reflected in the period in which the
change in judgment occurs.
The company and its subsidiaries file income tax returns in all jurisdictions in which they do business (Brazil is the only major tax
jurisdiction). In Brazil, income tax returns are subject to
F-25
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR soria0ma
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
17-May-2016 23:45 EST
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review and adjustment by the tax authorities during a period of five calendar years. Positions challenged by the taxing authorities may
be settled or appealed by the company. All audit periods prior to 2010 are closed for federal examination purposes.
As of December 31, 2015 the company has no unrecognized tax benefits, nor any interest and penalties thereon. Interest and
penalties on an underpayment of income taxes are recognized as part of interest expense and other expenses, respectively.
3.
FINANCIAL INSTRUMENTS AND RISK ANALYSIS
3.1. Overview
The table below summarizes our financial assets and financial liabilities carried at fair value at December 31, 2015 and 2014.
Accounting
measurement
Carrying
amount
Fair value
Carrying
amount
Fair value
2015
2014
Assets
Cash and banks
Cash equivalents
Short-term investments
Derivative financial instruments
Accounts receivable (i)
Held-for-sale assets (Note 26)
1,111,840 1,111,840
532,285
Fair value
13,786,223 13,786,223 1,916,921 1,916,921
Fair value
1,927,686 1,927,686
282,700
Fair value
Fair value
7,386,703 7,386,703 3,221,481 3,221,481
Amortized cost 8,379,719 8,379,719 7,455,687 7,455,687
532,285
282,700
Available-for-sale financial asset
Dividends receivable
Fair value
3,541,314 3,541,314 4,284,416 4,284,416
Amortized cost 2,042,191 2,042,191 1,261,826 1,261,826
Liabilities
Trade payables (i)
Borrowings and financing
Borrowings and financing (ii)
Debentures
Senior notes
Derivative financial instruments
Dividends and interest on capital
Licenses and concessions payable (iii)
Tax refinancing program (iii)
Other payables (payable for the acquisition of equity
Amortized cost 5,004,833 5,004,833 4,331,286 4,331,286
Amortized cost 17,049,280 17,049,280 15,335,155 15,335,155
Amortized cost 4,138,025 4,128,539 7,776,876 7,513,867
Amortized cost 38,670,111 22,159,838 12,737,364 12,199,092
666,922
Fair value
666,922
2,510,343 2,510,343
96,433
Amortized cost
185,138
185,138
918,537 1,361,940 1,361,940
Amortized cost
990,230
990,230
795,088
Amortized cost
96,433
918,537
795,088
interest) (iii)
Amortized cost
382,230
382,230
408,978
408,978
(i) The balances of accounts receivables and trade payables have near terms and, therefore, they are not adjusted to fair value.
(ii) Part of this balance of borrowings and financing with the BNDES and export credit agencies correspond to exclusive markets
and, therefore, the fair values of these instruments is similar to
F-26
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR soria0ma
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
17-May-2016 23:45 EST
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their carrying amounts. A portion of the balance of borrowings and financing refers to the bonds issued in the international
market, for which is there is a secondary market, and their fair values are different from their carrying amounts.
(iii) The licenses and concessions payable, the tax refinancing program, and other obligations (payable for the acquisition of equity
interest) are stated at the amounts that these obligations are expected to be settled and are not adjusted to fair value.
Fair value of financial instruments
The Company and its subsidiaries have measured their financial assets and financial liabilities at fair value using available market
inputs and valuation techniques appropriate for each situation. The interpretation of market inputs for the selection of such techniques
requires considerable judgment and the preparation of estimates to obtain an amount considered appropriate for each situation.
Accordingly, the estimates presented may not necessarily be indicative of the amounts that could be obtained in an active market. The
use of different assumptions for the calculation of the fair value may have a material impact on the amounts.
(a)
Derivative financial instruments
The method used for calculating the fair value of derivative financial instruments was the future cash flows associated to each
instrument contracted, discounted at market rates prevailing at December 31, 2015.
(b)
Non-derivative financial instruments measured at fair value
The fair value of securities traded in active markets is equivalent to the amount of the last closing quotation available at the end of the
reporting period, multiplied by the number of outstanding securities.
For the remaining contracts, the Company carries out an analysis comparing the current contractual terms and conditions with the
terms and conditions effective for the contract when they were originated. When terms and conditions are dissimilar, fair value is
calculated by discounting future cash flows at the market rates prevailing at the end of the period, and when similar, fair value is
similar to the carrying amount on the reporting date.
(c)
Fair value measurement hierarchy
Fair value is the price for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties, in an
arm’s length transaction on measurement date. The fair value is be based on the assumptions that market participants consider in
pricing an asset or a liability, and in the establishment a hierarchy that prioritizes the information used to build such assumptions. The
fair value measurement hierarchy attaches more importance to available market inputs (i.e., observable data) and a less weight to
inputs based on data without transparency (i.e., unobservable data). Additionally, the Company considers all nonperformance risk
aspects, including the entity’s credit, when measuring the fair value of a liability.
F-27
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR soria0ma
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
17-May-2016 23:45 EST
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The classification of an instrument in the fair value measurement hierarchy is based on the lowest level of input significant for its
measurement. We present below a description of the three-level hierarchy:
Level 1—inputs consist of prices quoted (unadjusted) in active markets for identical assets or liabilities to which the entity has access
on measurement date;
Level 2—inputs are different from prices quoted in active markets used in Level 1 and consist of directly or indirectly observable
inputs for the asset or liability. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for
identical assets or liabilities in markets that are not active; or inputs that are observable for the asset or liability or that can support the
observed market inputs by correlation or otherwise for substantially the entire asset or liability.
Level 3—inputs used to measure an asset or liability are not based on observable market variables. These inputs represent
management’s best estimates and are generally measured using pricing models, discounted cash flows, or similar methodologies that
require significant judgment or estimate.
There were no transfers between levels between December 31, 2015 and December 31, 2014.
Assets
Cash and banks
Cash equivalents
Short-term investments
Derivative financial instruments
Available-for-sale financial asset (Note 26)
Liabilities
Derivative financial instruments
Fair value
measurement
hierarchy
Fair value
2015
Fair value
2014
Level 1
Level 2
Level 2
Level 2
Level 3
1,111,840
13,786,223
1,927,686
7,386,703
3,541,314
532,285
1,916,921
282,700
3,221,481
4,284,416
Level 2
2,510,343
666,922
3.2. Measurement of financial assets and financial liabilities at amortized cost
The fair value of the financial instruments mentioned below are substantially close to its carrying amounts due to the following
reasons:
•
•
Accounts receivables: near-term maturity of bills.
Trade payables, dividends and interests on capital: all obligations are due to be settled in the short term.
F-28
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR soria0ma
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
17-May-2016 23:45 EST
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•
•
Borrowings and financing: all transactions are adjusted for inflation based on contractual indices.
Licenses and concessions payable, tax refinancing program and other payables (payable for the acquisition of equity interests):
all payables are adjusted for inflation based on the contractual indices.
3.3. Financial risk management
The Company’s and its subsidiaries’ activities an exposed them to several financial risks, such as: market risk (including currency
variation risk, interest rate risk on fair value, interest rate risk on cash flows, and price risk), credit risk, and liquidity risk. The
Company and its subsidiaries use derivative financial instruments to mitigate certain exposures to these risks.
Risk management is carried out by the Company’s treasury officer, in accordance with the policies approved by management.
The Hedging and Cash investments Policies, approved by the Board of Directors, document the management of exposures to market
risk factors generated by the financial transactions of Oi Group companies.
Under Company policies, market risks are identified based on the features of financial transactions contracted and to be contracted
during the year. Several scenarios are then simulated for each of the risk factors using statistical models, used as basis to measure the
impacts on Group’s financial income (expenses). The Board of Directors meeting of January 2016 widened this concept, to also
monitor impacts on Group’s financial cash flow, gross debt and net debt. Based on this analysis, the Executive Committee annually
agrees with the Board of Directors a guideline to be followed in each financial year.
To ensure a proper risk management, the Company can contract and reverse hedging instruments, including derivative transactions
such as swaps and currency forwards. The contract of such instruments depends on, among other factors, available funds within the
credit limit set by banks. The Company and its subsidiaries do not use derivative financial instruments for other purposes.
According to their nature, financial instruments may involve known or unknown risks, and it is important to assess to the best
judgment the potential of these risks.
3.4.1. Market risk
(a)
Foreign exchange risk
Financial assets
F-29
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR soria0ma
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
17-May-2016 23:45 EST
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Foreign currency-denominated cash equivalents and short-term investments are basically maintained in securities issued by financial
institutions abroad similar to Bank Certificates of Deposit (CDBs) traded in Brazil (time deposits), and euro-denominated time
deposits and United States dollars (“dollar” or “dollars”).
The risk associated to these assets arises from the possible exchange rate changes that may reduce the balance of these assets when
translated into Brazilian reais. The Company’s and its subsidiaries’ assets subject to this risk represent approximately 73.22%
(11.41% at December 31, 2014) of our total cash and cash equivalents and short-term investments.
Net investment in foreign subsidiaries
The risks related to the Company’s investments in foreign currency arise mainly from the investments in the subsidiaries in Africa.
The Company does not have any contracted instrument to hedge against the risk associated to the net investments in foreign
companies.
Foreign exchange risk sensitivity analysis
Management estimated the impact of a potential depreciation of the euro and the US dollar by 25% and 50%, using as benchmark for
the possible and remote scenarios, respectively, as follows:
Description
Probable scenario
US dollar
Euro
Possible scenario
US dollar
Euro
Remote scenario
US dollar
Euro
Description
US dollar cash
Euro cash
Total associated to exchange rates
Financial liabilities
Rate
2015
Depreciation
3.9048
4.2504
2.9286
3.1878
1.9524
2.1252
0%
0%
25%
25%
50%
50%
2015
Individual risk
Dollar
Euro
Probable
scenario
Possible
scenario
642,418
12,438,363
13,080,781
481,814
9,328,772
9,810,586
Remote
scenario
321,209
6,219,182
6,540,391
The Company and its subsidiaries have foreign currency-denominated or foreign currency-indexed borrowings and financing. The
risk associated with these liabilities is related to the possibility of changes in foreign exchange rates that could increase the balance of
such liabilities. The Company and subsidiaries borrowings and financing exposed to this risk represent approximately 78.5% (41.7%
at December 31, 2014) of total liabilities from borrowings and financing, less the contracted currency hedging transactions. In order
to minimize this type of risk, we enter into foreign exchange
F-30
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR soria0ma
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
17-May-2016 23:45 EST
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hedges with financial institutions. Of the consolidated foreign currency-denominated debt, 99.5% (100.0% at December 31, 2014) is
protected by exchange swaps, currency forwards, and short-term investments in foreign currency. The cash denominated in euros and
in US dollar operates as a natural hedge for the foreign denominated debt.
These foreign currency-denominated financial assets and financial liabilities are presented in the balance sheet as follows:
2015
2014
Carrying
amount
Fair value
Carrying
amount
Fair value
Financial assets
Cash and banks
Cash equivalents
Short-term investments
Derivative financial instruments
Financial liabilities
Borrowings and financing (Note 16)
Derivative financial instruments
Derivative financial instruments are summarized as follows:
761,788
761,788
26,759
10,553,452 10,553,452
198,047
86,807
1,765,541
6,940,963 3,025,464 3,025,464
26,759
198,047
86,807
1,765,541
6,940,963
46,935,152 30,727,817 14,781,242 14,342,043
425,784
1,915,910
1,915,910
425,784
US$/R$ cross currency swaps
US$/fixed rate cross currency swaps
EUR/R$ cross currency swaps
EUR/R$ non-deliverable forwards (NDFs)
US$/R$ cross currency swaps
R$/US$ cross currency swaps
US$/R$ non-deliverable forwards (NDFs)
EUR/R$ non-deliverable forwards (NDFs)
Options (USD/R$ put option)
Options (EUR/R$ put option)
Options (EUR/R$ call option)
Derivatives designated for hedge accounting
Fair value
Amounts (payable)/receivable
Maturity (years)
2015
0.1 - 8.2
4.8
1.9 - 4.3
< 1 year
4,954,291
819,647
(169,513)
2014
1,816,206
649,293
23,524
Derivatives not designated for hedge accounting
Fair value
Amounts (payable)/receivable
Maturity (years)
< 1 year
< 1 year
< 1 year
< 1 year
3.3 - 4.8
3.8
3.8
2015
31,467
(27,965)
(156,707)
(427,452)
8,783
24,767
(32,265)
2014
24,122
(31,290)
107,718
10,107
The main foreign currency hedge transactions contracted with financial institutions to minimize the foreign exchange risk are as
follows:
Cross currency swap contracts (plain vanilla)
F-31
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR soria0ma
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
17-May-2016 23:45 EST
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US$/R$: Refer to foreign exchange swaps to protect its US dollar-denominated debt payments. Under these contracts, the asset
position is in US dollars plus a fixed interest rate or in US LIBOR plus a fixed interest rate, and the liability position a percentage of
interbank deposit rate (CDI) or a fixed rate in Brazilian Real. The main risk of loss in the asset position of these instruments is the US
dollar exchange rate change; however, such losses would be fully offset by the US dollar-denominated debt’s maturities.
R$/US$: Refer to foreign exchange swaps to reverse swap contracts. Under these contracts, the asset position is in US dollar plus a
fixed rate and the liability position is a percentage of CDI. The main risk of loss in the liability position of these instruments is the US
dollar exchange rate change; however, such possible losses would be fully offset by the maturities of the reversed US dollar-
denominated swaps.
Non-deliverable forwards (NDFs)
US$/R$: Refer to future US dollar purchase transactions using NDFs to hedge against a depreciation of the Brazilian real in relation
to the US dollar. The main strategy for these contracts is to set the foreign exchange rate for the contract period at a fixed amount,
thus mitigating the risk of adverse fluctuations on US dollar-denominated debt. In order to extend the hedging period, we can roll
over these instruments by selling US dollars for the period equivalent to the short-term NDF in the portfolio and simultaneously
purchase US dollars for longer positions.
Euro/R$: Refer to future Euro dollar purchase transactions using NDFs to hedge against a depreciation of the Brazilian real in relation
to the US dollar. The main strategy for these contracts is to set the foreign exchange rate for the contract period at a fixed amount,
thus mitigating the risk of adverse fluctuations on euro-denominated debt. In order to extend the hedging period, we can roll over
these instruments by selling euro for the period equivalent to the short-term NDF in the portfolio and simultaneously purchase euro
for longer positions.
Options (put options)
Refers to the purchase of dollar put options related to debt’s principal to hedge against an appreciation of the real against the dollar.
The main strategy of these options is to set a threshold foreign exchange rate for a set of swaps during the contract period, thus
mitigating unfavorable changes in the long position of these derivatives.
As at December 31, 2015 and 2014, the derivative transactions in the amounts shown below were recognized in financial income
(expenses) (see Note 6):
Gain (loss) on currency swaps
Currency forwards
Options
Total
F-32
2015
4,539,844
1,322,916
(21,850)
5,840,910
2014
674,228
(317,740)
356,488
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR soria0ma
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
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The movements below, related to currency hedges designated for hedge accounting treatment, were recognized in other
comprehensive income:
Table of movements in hedge accounting effects in other comprehensive income
Balance in 2012
Loss on designated hedges
Transfer on ineffective portion to profit or loss
Amortization of hedges to profit or loss at effective rate
Deferred taxes on hedge accounting
Balance in 2013
Gain on designated hedges
Transfer on ineffective portion to profit or loss
Amortization of hedges to profit or loss at the effective rate
Deferred taxes on hedge accounting
Balance in 2014
Gain on designated hedges
Transfer on ineffective portion to profit or loss
Amortization of hedges to profit or loss at the effective rate
Deferred taxes on hedge accounting
Balance in 2015
128,127
(126,511)
(16,611)
36,072
36,397
57,474
143,524
10,443
9,081
(55,437)
165,085
(697,726)
(7,626)
8,336
236,985
(294,946)
(a.1) Foreign exchange risk sensitivity analysis
As at December 31, 2015, management estimated the depreciation scenarios of the Brazilian real in relation to other currencies at
yearend. The rates used for the probable scenario were the rates prevailing at the end of December 2015. The probable rates were then
depreciated by 25% and 50% and used as benchmark for the possible and remote scenarios, respectively.
Description
Probable scenario
US dollar
Euro
Possible scenario
US dollar
Euro
Remote scenario
US dollar
Euro
Rate
2015
Depreciation
3.90480
4.25040
4.88100
5.31300
5.85720
6.37560
0%
0%
25%
25%
50%
50%
F-33
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR soria0ma
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
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As at December 31, 2015, management estimated the outflow for the payment of interest and principal of its debt associated to
exchange rates based on the interest rates prevailing at the end of this annual reporting period and the exchange rates above.
The impacts of foreign exchange exposure, in the sensitivity scenarios estimated by the Company, are shown in the table below:
Description
US dollar debt
Derivatives (net position - US$)
US dollar cash
Euro debt
Derivatives (net position - euro)
Euro cash
Total associated to exchange rates
(b)
Interest rate risk
Financial assets
2015
Individual
risk
Probable
scenario
Possible
scenario
Remote
scenario
Dollar appreciation 23,054,987 28,818,734 34,582,481
Dollar depreciation (22,470,237) (28,087,796) (33,705,356)
Dollar depreciation
(963,627)
Euro appreciation 24,316,758 30,395,948 36,475,137
Euro depreciation (11,606,953) (14,508,691) (17,410,430)
Euro depreciation (12,438,363) (15,547,954) (18,657,545)
320,660
(803,023)
267,218
(642,418)
213,774
Cash equivalents and short-term investments in local currency are substantially maintained in financial investment funds exclusively
managed for the Company and its subsidiaries, and investments in private securities issued by prime financial institutions.
The interest rate risk linked to these assets arises from the possibility of decreases in these rates and consequent decrease in the return
on these assets.
Financial liabilities
The Company and its subsidiaries have borrowings and financing subject to floating interest rates, based on the Long-term Interest
Rate (TJLP) or the CDI, in the case of real-denominated debt, and on the LIBOR, in the case of U.S. dollar-denominated debt.
As at December 31, 2015, approximately 33.4% (60.3% at December 31, 2014) of the incurred debt, less adjustment for derivative
transactions, was subject to floating interest rates. After the derivative transactions, approximately 59.6% (79.4% at December 31,
2014) of the consolidated debt was subject to floating interest rates. The most material exposure of Company’s and its subsidiaries’
debt after the hedging transactions is to CDI. Therefore, a continued increase in this interest rate would have an adverse impact on
future interest payments and hedging adjustments.
We continuously monitor these market rates to assess the possible contracting of derivatives to reduce the risk of fluctuation of these
rates.
F-34
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR soria0ma
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
These assets and liabilities are presented in the balance sheet as follows:
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Financial assets
Cash equivalents
Short-term investments
Derivative financial instruments
Financial liabilities
Borrowings and financing
Derivative financial instruments
2015
2014
Carrying
amount
Fair value
Carrying
amount
Fair value
3,232,771 3,232,771 1,718,874 1,718,874
195,893
196,017
195,893
196,017
162,145
445,740
162,145
445,740
18,307,705 18,298,218 17,722,928 17,717,628
241,138
241,138
594,433
594,433
The amounts of contracted derivatives to manage exposure to floating interest rates on outstanding debt are summarized below:
Fixed rate/DI rate swaps
US$ LIBOR/US$ fixed rate swaps
US$ LIBOR/US$ fixed rate swaps
US$ fixed rate/US$ LIBOR swaps
Derivatives designated for hedge accounting
Maturity (years)
4.8
< 1 year
Fair value
Amounts (payable)/receivable
2015
(146,121)
2014
(37,627)
(1,413)
Derivatives not designated for hedge accounting
Maturity (years)
0.1- 6.1
6.1
Fair value
Amounts (payable)/receivable
2015
(448,312)
445,740
2014
(200,771)
194,690
The main derivative transactions contracted with financial institutions to minimize the interest rate risk are as follows:
Interest rate swaps
US$ LIBOR/US$ fixed rate: Refer to interest rate swaps to protect debt payments associated to US dollar floating rates from
exchange fluctuation. Under these contracts, the asset position in US dollar LIBOR and the liability position is a fixed rate. The risk
of loss in the asset position of these instruments is, therefore, the fluctuation of the US dollar LIBOR; however, such possible losses
would be fully offset by maturities of US dollar-denominated debt associated to LIBOR.
US$ fixed rate/US$ LIBOR: Refers to the interest rate swap transaction that changes US dollar-denominated debt payments from
fixed rate to floating rate. Under this contract, the asset position is a US dollar fixed rate and the liability position is subject to LIBOR
aimed at reducing the cost of the underlying debt, as part of the Company’s interest-bearing liabilities management strategy.
F-35
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR austj0ma
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
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R$ fixed rate/CDI: Refer to interest rate swaps to convert a foreign exchange swap liability position at a fixed rate into R$ to a
liability subject to a DI percentage. This transaction is intended to swap the foreign exchange fluctuation of a certain dollar-
denominated debt to a floating DI position, cancelling the debt’s current fixed rate position.
As at December 31, 2015 and 2014, the amounts shown below were recorded as gain or loss on derivatives: (see Note 6).
Gain (loss) on interest rate swap
Total
2015
(43,808)
(43,808)
2014
70,896
70,896
The movements below, related interest rate hedges designated for hedge accounting treatment, were recognized in other
comprehensive income:
Table of movements in hedge accounting effects in other comprehensive income
Balance in 2012
Loss on designated hedges
Transfer on ineffective portion to profit or loss
Amortization of hedges to profit or loss at effective rate
Deferred taxes on hedge accounting
Balance in 2013
Gain on designated hedges
Transfer on ineffective portion to profit or loss
Amortization of hedges to profit or loss at the effective rate
Deferred taxes on hedge accounting
Share of subsidiary’s hedge accounting
Balance in 2014
Gain on designated hedges
Transfer on ineffective portion to profit or loss
Amortization of hedges to profit or loss at the effective rate
Deferred taxes on hedge accounting
Balance in 2015
12,057
(80,487)
500
(24,075)
35,381
(56,624)
20,029
(97)
3,070
(7,820)
(41,442)
(104,339)
78
3,325
34,319
(108,059)
(b.1) Interest rate fluctuation risk sensitivity analysis
F-36
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR austj0ma
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
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Management believes that the most significant risk related to interest rate fluctuations arises from its liabilities associated to the TJLP,
the USD LIBOR, and mainly the CDI. This risk is associated to an increase in those rates.
As at December 31, 2015, management estimated the fluctuation scenarios of the rates CDI, TJLP and USD LIBOR. The rates used
for the probable scenario were the rates prevailing at the end of the reporting period. These rates have been stressed by 25 and
50 percent, and used as benchmark for the possible and remote scenarios. Important to consider that in the beginning of January 2015,
the TJLP increased from 5.0% p.a. to 5.5% p.a., which was the start of successive increases. For the quarter beginning April 2015, the
TJLP increased to 6.0%, remaining at 6.5% in July and in October 1-December 31, 2015 it increased to 7.0%.
Before the end of the first quarter of 2016, the National Monetary Council had decided for a new increase for this rate, this time to
7.5% p.a., effective in January 1 - March 31, 2016.
Probable scenario
CDI
14.14%
TJLP
7.0%
6M USD
LIBOR
0.84615%
2015
Interest rate scenarios
Possible scenario
Remote scenario
CDI
17.68%
TJLP
8.8%
6M USD
LIBOR
1.05769%
CDI
21.21%
TJLP
10.5%
6M USD
LIBOR
1.26923%
As at December 31, 2015, management estimated the future outflows for the payment of interest and principal of its debt associated
to CDI, TJLP, and USD LIBOR based on the interest rates above.
Such sensitivity analysis considers payment outflows in future dates. Thus, the aggregate of the amounts for each scenario is not
equivalent to the fair values, or even the present values of these liabilities. The fair values of these liabilities, should the Company’s
credit risk remain unchanged, would not be impacted in the event of fluctuations in interest rates, as the interest rates used to estimate
future cash outflows would be the same rates that discount such flows to present value.
The impacts of exposure to interest rates, in the sensitivity scenarios estimated by the Company, are shown in the table below:
2015
Individual
Transaction
risk
CDI-indexed debt
CDI increase
Derivative financial instruments (net position - CDI) CDI increase
TJLP increase
TJLP-indexed debt
US$ LIBOR increase
US$ LIBOR-indexed debt
Derivative instruments (net position - LIBOR)
US$ LIBOR decrease
Total associated to interest rates
Remote
scenario
Possible
scenario
Probable
scenario
2,120,449 2,516,488 2,980,156
10,669,673 13,047,050 15,566,283
942,049 1,119,643 1,304,957
715,699
562,123
(231,488)
(198,734)
14,095,560 17,132,083 20,335,607
660,468
(211,566)
F-37
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR feucs0nd
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
3.4.2. Credit risk
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The concentration of credit risk associated to trade receivables is immaterial due to the diversification of the portfolio. Doubtful
receivables are adequately covered by an allowance for doubtful accounts.
Transactions with financial institutions (short-term investments and borrowings and financing) are made with prime entities, avoiding
the concentration risk. The credit risk of financial investments is assessed by setting caps for investment in the counterparts, taking
into consideration the ratings released by the main international risk rating agencies for each one of such counterparts. As at
December 31, 2015, approximately 99.20% of the consolidated short-term investments were made with counterparties with an AAA,
AA or sovereign risk rating.
The Company had credit risks related to dividends receivable associated to the investment in Unitel (Note 26).
3.4.3. Liquidity risk
The liquidity risk also arises from the possibility of the Company being unable to settle its liabilities on maturity dates and obtain cash
due to market liquidity restrictions.
During 2015, our operations generated negative cash flows of R$1,054 million. As a result, we financed investing activities, debt
service and working capital from our cash and cash equivalents and short-term cash investments. Historically, we have financed our
investments in property, plant and equipment through the use of bank loans, vendor financing, capital markets and other forms of
financing.
As of December 31, 2015, our consolidated cash and cash equivalents and short-term cash investments amounted to R$16,700 million
and our consolidated indebtedness amounted to R$ 59,857million. We anticipated that we will be required to spend approximately
R$19,725 million to meet our short-term contractual obligations and commitments during 2016, and an additional approximately
R$30,672 million to meet our long-term contractual obligations and commitments in 2017 and 2018.
On March 9, 2016, we announced that we had retained PJT Partners as our financial advisor to assist us in evaluating financial and
strategic alternatives to optimize our liquidity and debt profile. On April 25, 2016, we entered into a customary non-disclosure
agreement with Moelis & Company, who acts as advisor for a diverse ad hoc group of holders of the bonds issued by Oi and its
subsidiaries, as an initial step towards discussions of a potential restructuring of its indebtedness.
F-38
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR wernm0nd
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
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The following are the contractual maturities of the financial liabilities, including estimated interest payments, where applicable:
Less than
One Year
One to Three
Years
Three to
Five Years
(in millions of reais)
More than
Five Years
Total
Continuing operations:
Loans and financings (i)
Debentures (ii)
Unconditional purchase obligations (iii)
Concession fees (iv)
Usage rights (v)
Pension plan contributions (vi)
R$15,282 R$ 24,998 R$16,894 R$ 6,243 R$63,417
5,809
2,578
2,379
919
1,443
R$19,725 R$ 30,672 R$17,891 R$ 8,257 R$76,545
1,622
1,477
288
912
144
4,170
758
306
7
433
—
—
1,437
—
577
17
343
348
—
289
The amounts disclosed in the tables take into account the contractual undiscounted payment outflow estimates, these amounts are not
reconciled with the amounts disclosed in the balance sheet for borrowings and financing, derivative financial instruments, and trade
payables.
(i)
Includes (1) estimated future payments of interest on our loans and financings, calculated based on interest rates and foreign
exchange rates applicable at December 31, 2015 and assuming that all amortization payments and payments at maturity on our
loans and financings will be made on their scheduled payment dates, and (2) estimated future cash flows on our derivative
obligations, calculated based on interest rates and foreign exchange rates applicable as of December 31, 2015 and assuming that
all payments on our derivative obligations will be made on their scheduled payment dates;
(ii)
Includes estimated future payments of interest on our debentures, calculated based on interest rates applicable as of December
31, 2015 and assuming that all amortization payments and payments at maturity on our debentures will be made on their
scheduled payment dates;
(iii) Consists of (1) obligations in connection with a business process outsourcing agreement, and (2) purchase obligations for
network equipment pursuant to binding obligations which include all significant terms, including fixed or minimum quantities to
be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction;
(iv) Consists of estimated bi-annual fees due to ANATEL under our concession agreements expiring in 2025. These estimated
amounts are calculated based on our results for the year ended December 31, 2015;
(v) Consists of payments due to ANATEL for radio frequency licenses. Includes accrued and unpaid interest as of December 31,
2015; and
(vi) Consists of expected contributions to amortize the actuarial deficit of the BrTPREV plan.
Capital management
The Company seeks to manage its equity structure according to best market practices.
The objective of the Company’s capital management strategy is to ensure that liquidity levels and financial leverage to allow the
sustained growth of the Group, the compliance with the strategic investment plan, and generation of returns to our shareholders.
The Company may change its capital structure, according to existing economic and financial conditions, to optimize its financial
leverage and debt management (Note 1).
The indicators commonly used to measure capital structure management are: gross debt to accumulated twelve-month EBITDA
(earnings before interest (financial income and expenses), taxes, depreciation and amortization, and other nonrecurring results), net
debt (gross debt less cash
F-39
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR austj0ma
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
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and cash equivalents and short-term investments) to accumulated twelve-month EBITDA, and the interest coverage ratio.
3.4.4. Risk of acceleration of maturity of borrowings and financing
Under some debt instruments of the Company, default events can trigger the accelerated maturity of other debt instruments. The
impossibility to incur in new debt might prevent the company from investing in its business and incur in required or advisable capital
expenditures, which would reduce future sales and adversely impact its profitability. Additionally, the funds necessary to meet the
payment commitments of the borrowings raised can reduce the amount of funds available for capital expenditures.
The risk of accelerated maturity arising from noncompliance of financial covenants associated to the debt is detailed in Note 16,
section ‘Covenants’.
4.
NET OPERATING REVENUE
Gross operating revenue
Deductions from gross revenue
Taxes
Discounts and other deductions
Net operating revenue
5.
OPERATING EXPENSES
Operating expenses by nature
Third-party services
Depreciation and amortization
Rentals and Insurance
Personnel
Network maintenance service
Interconnection
Contingencies
Allowance for doubtful accounts
Advertising and publicity
Handset and other costs
Impairment losses (i)
Taxes and other income (expenses)
2015
2014
2013
44,519,320
45,357,481 45,252,584
(17,165,555)
(8,148,655)
(9,016,900)
(17,110,382) (16,830,437)
(8,906,909) (9,538,623)
(8,203,473) (7,291,814)
27,353,765
28,247,099 28,422,147
2015
2014
2013
(6,317,233)
(6,195,039)
(3,599,830)
(2,719,530)
(1,901,569)
(1,808,845)
(861,500)
(721,175)
(405,626)
(284,637)
(590,641)
(1,013,056)
(6,258,606) (6,119,733)
(5,766,702) (5,691,824)
(3,119,521) (2,119,684)
(2,829,307) (2,534,222)
(1,923,074) (2,328,140)
(2,689,815) (3,965,623)
(656,849)
(922,779)
(556,500)
(515,377)
(779,314)
(649,463)
(674,275)
(730,444)
(1,459,012) (1,397,982)
F-40
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR greev0nd
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
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Other operating income (expenses), net (ii)
Operating expenses by function
Cost of sales and/or services
Selling expenses
General and administrative expenses
Other operating income
Other operating expenses
Equity pick up
Total operating expenses
277,954
(26,140,727)
3,245,643 2,369,555
(23,633,890) (24,439,158)
(16,250,083)
(4,719,811)
(3,912,178)
1,630,056
(2,866,828)
(21,883)
(26,140,727)
(16,257,192) (16,466,773)
(5,565,757) (5,532,045)
(3,834,563) (3,683,440)
4,466,914 3,193,024
(2,437,411) (1,932,174)
(17,750)
(23,633,890) (24,439,158)
(5,881)
(i) As at December 31, 2015, the Company conducted the annual impairment test and recognized a loss on goodwill amounting to
R$501,465 related to goodwill and trademarks for the Telecommunication services in Brazil due to a significant change in the
macroeconomic conditions in Brazil and R$89,176 related to Africa which is being reported as held for sale. The fair value of
the reporting unit was estimated using the expected present value of future cash flows.
(ii) The other net operating income (expenses) for the year ended December 31, 2015 primarily include the reversal of a civil
contingency amounting to R$325,709 arising from the revision of the calculation methodology and R$47,756 in costs relating to
terminations of employments contracts in this period. Other net operating income (expenses) for the year ended December 31,
2014 primarily includes the gain of R$2.4 billion on the sale, net of transaction expenses, recognized in the context of the
agreement entered into on December 3, 2013 by the Company and SBA Torres Brasil for the transfer of 100% of the shares of
one of its subsidiaries that held 2,007 telecommunication towers used to provide mobile telephony services and R$355 million
resulting from the revision of the calculation methodology of the provisions for losses in corporate lawsuits and the reversal of
R$476 million from the provision related to the adhesion to the REFIS tax refinancing program.
6.
FINANCIAL INCOME (EXPENSES)
Financial income
Exchange differences on translating foreign short-term
investments (trading)
Interest on other assets
Income from short-term investments
Interest on related parties loans
Other income (i)
Total
Financial expenses and other charges
a) Borrowing and financing costs
2015
2014
2013
3,349,783
740,417
235,042
29,057
1,010,235
5,364,534
32,444
762,498
354,526
1,066
194,233
1,344,767
69,626
694,734
278,598
332,259
1,375,217
Inflation and exchange losses on third-party borrowings
Interest on borrowings payable to third parties
(10,908,438)
(3,178,461)
(1,464,510)
(1,979,414)
(2,013,066)
(1,591,915)
F-41
OI S.A.
FORM 20-F
RR Donnelley ProFile
NY8690AM021466
11.9.13
NCR brzoj0nd
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
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Interest on debentures
Derivatives
Subtotal:
b) Other charges
Loss on available for sale financial assets (ii)
Interest on other liabilities
Tax on transactions and bank fees
Inflation adjustment to provisions
Interest on taxes in installments - tax financing program
Other expenses (iii)
Subtotal:
Total
Financial income (expenses)
(871,977)
5,797,102
(9,161,774)
(953,863)
427,384
(3,970,403)
(860,400)
1,158,520
(3,306,861)
(447,737)
(833,276)
(712,799)
(176,297)
(93,784)
(476,875)
(2,740,768)
(11,902,542)
(6,538,008)
(814,148)
(385,824)
(233,276)
(132,194)
(357,844)
(1,923,286)
(5,893,689)
(4,548,922)
(643,318)
(193,048)
(246,205)
(81,262)
(206,479)
(1,370,312)
(4,677,173)
(3,301,956)
(i) Refers basically to the gain on debenture repayment transactions and includes USD187.5 million (R$733 million) related with
our portion of dividends approved by Unitel.
(ii) Refers basically to the loss of R$408 million due to other-than-temporary impairment of the investment in Unitel classified as
available-for-sale.
(iii) Represented mainly by financial fees and commissions.
7.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Short-term investments made by the Company and its subsidiaries in the years ended December 31, 2015 and 2014, are classified as
trading securities and are measured at their fair values.
(a)
Cash and cash equivalents
Cash and banks
Cash equivalents
Total
Time deposits
Bank certificates of deposit (CDBs)
Repurchase agreements
Other
Cash equivalents
F-42
2015
1,111,840
13,786,223
14,898,063
2014
532,285
1,916,921
2,449,206
2015
10,734,985
1,387,158
1,637,798
26,282
13,786,223
2014
205,523
920,116
773,487
17,795
1,916,921
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR austj0ma
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
(b)
Short-term investments
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Time deposits
Private securities
Government securities
Total
Current
Non-current
2015
1,700,386
125,966
101,334
1,927,686
1,801,720
125,966
2014
111,285
171,415
282,700
171,415
111,285
The Company and its subsidiaries hold short-term investments in Brazil and abroad for the purpose of earning interest on cash,
benchmarked to CDI in Brazil, LIBOR for the US dollar-denominated portion, and EURIBOR for the euro-denominated portion.
8.
TRADE ACCOUNTS RECEIVABLE, NET
Billed services
Unbilled services
Mobile handsets and accessories sold
Allowance for doubtful accounts
Total
The aging list of trade receivables is as follows:
Current
Past-due up to 60 days
Past-due from 61 to 90 days
Past-due from 91 to 120 days
Past-due from 121 to 150 days
Over 150 days past-due
Total
2015
6,733,219
1,296,562
911,077
(561,139)
8,379,719
2014
5,481,028
1,450,777
1,032,022
(513,787)
7,450,040
2015
6,855,027
1,296,612
146,608
121,916
124,887
395,808
8,940,858
2014
5,878,915
1,388,330
136,200
113,212
102,139
345,031
7,963,827
The movements in the allowance for doubtful accounts were as follows:
Balance at Jan 1, 2014
Acquisition of investments - PT Portugal
(654,042)
(652,964)
F-43
OI S.A.
FORM 20-F
RR Donnelley ProFile
NY8690AM021469
11.9.13
NCR greev0nd
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
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Allowance for doubtful accounts
Trade receivables written off as uncollectible
Foreign exchange differences
Transfer to assets held for sale
Balance in 2014
Allowance for doubtful accounts
Trade receivables written off as uncollectible
Balance in 2015
(684,017)
712,128
6,841
758,267
(513,787)
(692,935)
645,583
(561,139)
9.
INCOME TAXES
(a) Tax rate reconciliation
Income taxes encompass the income tax and the social contribution in Brazil. The income tax rate is 25% and the social contribution
rate is 9%, an aggregate nominal tax rate of 34%. Income tax expense attributable to income (loss) from continuing operations was an
income tax expense of R$3,379,927, R$758,268 and R$76,610 for the years ended December 31, 2015, 2014 and 2013, respectively.
Total income taxes for the years ended December 31, 2015, 2014 and 2013 were allocated as follows:
Income (expenses) from continuing operations
Expenses from discontinued operations
Total income tax recognized in earnings
2015
2014
2013
(3,379,927) (758,268) (76,610)
(327,115) (92,545)
(3,707,042) (850,813) (76,610)
Income tax recognized in other comprehensive income
(194,020) 243,333 (17,514)
Income tax expense attributable to income from continuing operations consists of:
Income tax and social contribution
Current taxes
Deferred taxes
Total
2015
2014
2013
(781,576) (622,001) (418,498)
(2,598,351) (136,267) 341,888
(3,379,927) (758,268) (76,610)
The tax rate reconciliation from continuing operation consists of the following:
F-44
OI S.A.
FORM 20-F
RR Donnelley ProFile
NY8690AM021267
11.9.13
NCR wynnm0nd
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
Income (loss) before taxes (i)
Income tax and social contribution
Income tax and social contribution at statutory rate (34%)
Valuation allowance (ii)
Effect of foreign rate differential (iii)
Tax effects on permanent additions (iv)
Tax effects on permanent exclusions
Tax effect of REFIS permanent additions (v)
Tax incentives (basically, operating income) (vi)
Tax amnesty program (vii)
Other
Income tax and social contribution effect on profit or loss
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Page 1 of 1
2015
(5,324,970)
2014
64,287 681,033
2013
(21,858) (231,552)
1,810,490
5,848 (68,654)
(4,755,151)
(106,388)
(23,795) (13,046)
(268,989) (688,719) (76,433)
114,052 376,241 280,844
(443,401)
7,332
(165,676)
(15,597)
36,281 31,573
—
658
(3,379,927) (758,268) (76,610)
—
1,135
(i)
In 2013, substantially all pre tax income and income tax are related to Brazilian Companies. In 2015 and 2014 income before
taxes and income tax for continuing operations is as follows:
Income (loss) before taxes
Income tax
Current taxes
Deferred taxes
Income (loss) before taxes
Income tax
Current taxes
Deferred taxes
2015
Foreign
Brazil
(4,428,005)
(3,191,186)
operations
Total
(896,965) (5,324,970)
(188,741) (3,379,927)
(589,090)
(2,602,096)
(192,486)
(781,576)
3,745 (2,598,351)
2014
Foreign
Brazil
(145,581)
(615,406)
operations
209,868
(142,862)
Total
64,287
(758,268)
(479,061)
(136,345)
(142,940)
78
(622,001)
(136,267)
(ii) Refers to valuation allowance due to change in judgment about the recoverability of deferred tax assets. The change in the
beginning-of-the year balance of the valuation allowance due to change in judgment about the recoverability of deferred tax
assets amounts to R$2,845,521.
(iii) Refers to the effects of the difference between the applicable tax rate in Brazil and the tax rates applicable to other Group
(iv)
companies located abroad.
In 2015 the main effects of permanent addition refers to: (1) the impairment of Unitel available-for-sale investment which is not
tax deductible in the amount of R$152 million (Note 26), (2) the impairment of goodwill and trademarks for the
Telecommunication services in Brazil and impairment of goodwill related to África, which is not tax deductible in the amount of
R$91 million and (3) nondeductible fines in the amount of R$25 million. In 2014 the main effects refers to the impairment of PT
SGPS shares held subsidiary TMAR which is not tax deductible in the amount of R$266 million.
F-45
OI S.A.
FORM 20-F
RR Donnelley ProFile
NY8690AM021267
11.9.13
NCR wynnm0nd
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
19-May-2016 17:11 EST
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(v)
In 2014, the main effects are linked to goodwill amortization (pre-merger period), settlement of principal, fine and interest
utilizing tax loss carryforwards as permitted by Article 2 of Law 12996/2014 and Article 33 of Law 13043/2014.
(vi) These tax incentives correspond mainly to a 75% reduction in the current income tax due on operating income obtained as a
result of telecommunication services rendered in certain northern and northeast regions of Brasil, where the Company holds
facilities for the purpose of rendering those services. This tax benefit is usually granted for a 10 year period, limited up to
January 1, 2024.
(vii) Refers to uncertain tax position taken in prior periods which were assessed by the taxing authorities. Although the Company
believed in prior periods that these positions would be more-likely-than-not of being sustained, it has decided to adhere to
PRORELIT and avoid substantial costs to keep on going discussions with government. PRORELIT program allowed taxpayers
to settle federal tax debts accrued prior to June 30th, 2015, excluding tax debts that are subject to tax installment payments.
In order to enroll, tax payers were requested to resign of their litigation rights with respect to the settled debt amount and pay at least
30% of their outstanding consolidated tax debt accrued through June 30th, 2015 in cash. The remaining 70% of the debt would be
settled with tax loss carryforwards. Apart from the initial 30% down payment, no guarantees or collateral is needed.
The Company has submitted its application for PRORELIT to settle several tax debts. Nevertheless, tax authorities have a five years
term to ratify the amounts of tax loss carryforwards utilized by taxpayers.
A reconciliation of the beginning and ending amount of total unrecognized tax benefits for the year ended December 31, 2015 as
follows:
Balance, beginning of year
Increase related to prior year tax position
Settlements
Balance, end of year
(b) Significant components of current and deferred taxes
Current recoverable taxes
Recoverable income tax (IRPJ) (i)
Recoverable social contribution (CSLL) (i)
IRRF/CSLL - withholding income taxes (ii)
Income taxes recoverable (v)
Total current
Current taxes payable
Income tax payable
Social contribution payable
Total current
Deferred taxes assets
Income tax and social contribution on merged goodwill (iii)
Income tax and social contribution on temporary differences (iv)
Income tax and social contribution on tax loss carryforwards (iv)
Total - deferred taxes assets
F-46
2015
84,650
165,676
(250,326)
2014
84,650
84,650
ASSETS
2015
2014
416,125
153,059
346,389
147,278
1,062,851
485,929
182,772
428,488
60,944
1,158,133
LIABILITIES
2015
2014
211,571
128,053
339,624
306,366
170,916
477,282
2015
2014
2,423,763
3,885,435
4,134,378
10,443,576
1,605,513
2,499,243
3,447,938
7,552,694
OI S.A.
FORM 20-F
RR Donnelley ProFile
NY8690AM021267
11.9.13
NCR wynnm0nd
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
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Business combinations – other intangibles
Pension plan assets
Total deferred tax liabilities
Valuation allowance (iv)
Total deferred taxes, net
(3,047,832)
(299,574)
(3,347,406)
(3,464,404)
(176,397)
(3,640,801)
(6,239,713)
(217,655)
856,457
3,694,238
(i) Refer mainly to prepaid income tax and social contribution that will be offset against federal taxes payable in the future.
(ii) Refer to corporate income tax credits on short-term investments, related parties loans, government entities, and other that are
used as deductions from income tax for the years, and social contribution withheld at source on services provided to government
agencies.
(iii) Refer to: (i) deferred income tax and social contribution assets calculated as tax benefit originating from the goodwill paid on
acquisition by the Company and recognized by the merged companies in the course of 2009. The realization of the tax basis
arises from the amortization of the goodwill balance based on the STFC license and in the appreciation of property, plant and
equipment, the utilization of which is estimated to occur through 2025, and (ii) deferred income tax and social contribution
assets originating from the goodwill paid on the acquisition of interests by the Company in 2008-2011, recognized by the
companies merged with and into TmarPart and by TmarPart merged with and into the Company on September 1, 2015, which
was based on the Company’s expected future earnings and the amortization of which is estimated to occur through 2025
(Note 1).
(iv) For the year ended December 31, 2015, total valuation allowance increased from R$217,655 million to R$6,239,713 million,
reflecting valuation allowance totaling R$6,022,058 recognized for the companies that, as at December 31, 2015, do not expect
to generate sufficient future taxable profits, based on consistent assumptions and timing used in the analysis of the potential
impairment of long-lived assets and goodwill, against which tax assets could be offset. Most of our deferred tax assets have been
reduced by a valuation allowance to the amount supported by reversing taxable temporary difference. The deferred tax assets
not offset by valuation allowance are dependent upon the generation of future pretax income in certain of our tax-paying
components in Brazil that have a history of profitability and an expectation of continued profitability. Management believes it is
more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax assets
that are not subject to the valuation allowance. However, deferred income tax assets can be reduced in the near term if estimates
of future taxable income during the carryforward period are reduced.
The net changed in valuation allowance in 2014 was R$217,655. No valuation allowance was recorded prior to 2014.
The tax loss carryfowards of approximately R$12,159,935, corresponding to R$4,134,378 million of deferred tax assets, do not
expire, and may be carried forward indefinitely.
(v) Refer mainly to prior years’ prepaid income tax and social contribution that will be offset against federal taxes payable.
F-47
OI S.A.
FORM 20-F
RR Donnelley ProFile
NY8690AM021467
11.9.13
NCR keebj0nm
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
Movements in deferred income tax and social contribution
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Deferred tax assets arising on:
Temporary differences
Contingencies
Allowance for doubtful accounts
Profit sharing
Foreign exchange differences
Merged goodwill (i)
Hedge accounting (ii)
Other temporary items
Tax loss carryforwards
Income tax loss carryforwards
Social contribution carryforwards
Total - deferred taxes assets
Business combinations – other intangibles
Provisions for pension funds (ii)
Total deferred tax liabilities
Valuation allowance
Recognized in
deferred tax
income/
expenses
Other
comprehensive
income
Balance in
2014
Other
Balance in
2015
1,668,750
592,279
86,534
556,389
1,605,513
(63,695)
(341,015)
(129,407)
66,591
(22,291)
1,221,972
(164,517)
(89,489)
1,539,343
658,870
64,243
1,778,361
982,767 2,423,763
207,608
(362,990)
67,514
271,303
2,513,846
934,093
7,552,694
731,485
273,339
1,887,683
(234,122) 3,011,209
(84,263) 1,123,169
731,896 10,443,576
271,303
(3,464,404)
(176,397)
(3,640,801)
(217,655)
416,572
(68,500)
348,072
(4,755,151)
(3,047,832)
(54,677)
(299,574)
(3,347,406)
(54,677)
(216,626) (1,050,281) (6,239,713)
Total net deferred tax
3,694,238
(2,519,396)
(318,385)
856,457
(i) As a result of the merger of TmarPart with and into Oi on September 1, 2015, the Company recognized the income tax and
social contribution benefit arising on the utilization of goodwill paid on the acquisition of interests in the Company in 2008-
2011, recognized by the companies merged with and into TmarPart and by TmarPart merged with and into the Company, which
was based on the Company’s expected future earnings.
(ii) Please see statements of comprehensive income for impacts attributed to other comprehensive income items as well as
reclassification to earnings.
10. OTHER TAXES
Recoverable State VAT (ICMS) (i)
Taxes on revenue (PIS and COFINS)
Other
Total
Current
Non-current
F-48
ASSETS
2015
1,285,800
200,029
97,056
1,582,885
922,986
659,899
2014
1,512,543
181,772
101,851
1,796,166
1,054,255
741,911
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR austj0ma
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
17-May-2016 23:45 EST
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State VAT (ICMS)
ICMS Agreement No. 69/1998
Taxes on revenue (PIS and COFINS)
FUST/FUNTTEL/broadcasting fees
Other
Total
Current
Non-current
LIABILITIES
2015
759,922
33,998
668,888
861,212
153,968
2,477,988
1,553,651
924,337
2014
709,126
80,287
664,278
807,576
281,059
2,542,326
1,667,599
874,727
(i) Recoverable ICMS arises mostly from prepaid taxes and credits claimed on purchases of property, plant and equipment, which
can be offset against ICMS payable within 48 months, pursuant to Supplementary Law 102/2000.
11.
JUDICIAL DEPOSITS
In some situations the Company makes, by legal requirement or to provide guarantees, judicial deposits to ensure the continuity of
ongoing lawsuits. These judicial deposits can be required for lawsuits with a likelihood of loss, as assessed by the Company based on
the opinion of its legal counsel, as probable, possible, or remote.
Civil
Tax
Labor
Total
Current
Non-current
As set forth by relevant legislation, judicial deposits are adjusted for inflation.
12.
INVESTMENTS
Joint venture
Investments in associates
Tax incentives, net of allowances for losses
Other investments
Total
Summary of the movements in investment balances
F-49
2015
9,459,735
2,548,720
2,368,902
14,377,357
1,258,227
13,119,130
2014
8,919,658
2,466,187
2,007,822
13,393,667
1,133,639
12,260,028
2015
63,837
39,003
31,579
20,471
154,890
2014
74,803
21,558
31,579
20,471
148,411
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR austj0ma
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
17-May-2016 23:45 EST
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Balance at January 1, 2014
Share of profits of subsidiaries
Subsidiaries’ dividends and interest on capital
Other
Balance in 2014
Share of profits of subsidiaries
Associates’ share of other comprehensive income
Other
Balance in 2015
173,640
(5,881)
(4,968)
(14,380)
148,411
(21,883)
11,266
17,096
154,890
13.
PROPERTY, PLANT AND EQUIPMENT
Works in
progress
Automatic
switching
equipment
Transmission
and other
equipment (i)
Infrastructure
Buildings
Other assets
Total
Cost of PP&E (gross amount)
Balance at Jan 1, 2014
4,569,682 19,476,331 45,332,907 26,991,988 3,598,183 5,201,130 105,170,221
Acquisition of investments
- PT Portugal
Additions
Write-offs
Transfers
Foreign exchange
differences
452,844 6,004,681
63,899
(4,595)
317,773
3,029,820
(2,083)
(4,944,777)
4,537,199 16,357,177 2,957,154 9,693,740 40,002,795
271,954 4,765,387
(198,192)
(68,853)
308,985
(105,159)
(1,711,939)
997,941
(75,547)
6,045,939
92,788
(2,146)
592,592
(8,662)
(368,441)
20,468
288,829
255,552
785,557
148,022
469,466 1,967,894
Transfers to assets held for
(468,545) (6,338,824)
(4,900,950) (17,171,247) (2,995,379) (10,373,620) (42,248,565)
2,657,409 19,808,094 52,193,041 25,455,362 4,391,214 4,885,567 109,390,687
243,459 3,622,342
2,893,198
(15,659)
(690,360)
538,262
18,370
19,285
1,656,581 19,887,701 54,387,097 26,453,239 4,287,337 5,669,999 112,341,954
15,792
(521,106)
1,502,411
780
270,031
(68,650)
1,992,540
135
185,588
(80,208)
(209,257)
14,274
(4,737)
70,070
(3,894,026)
(17,075,110) (34,307,252) (21,505,346) (2,568,768) (3,988,687) (79,445,163)
(5,685,512)
(458,367)
3,521
(3,027)
(3,169,003) (11,029,655) (1,238,292) (7,840,705) (28,963,167)
(585,636) (4,708,856)
(189,874)
(2,700,926)
119,507
(5,016)
61,653
93,663
351,649
(2,132,253)
(774,053)
51,428
2,022,793
7,921
(145,499)
(275,108)
(168,315)
(534,544)
(63,973)
(393,646) (1,435,586)
6,032,368
3,559,523 11,706,376 1,273,000 8,621,957 31,193,224
(17,461,235) (38,856,573) (20,063,001) (2,441,274) (4,324,295) (83,146,378)
(253,892) (4,035,577)
666,954
(2,225,984)
66,245
94,258
(109)
(1,048,933)
519,546
(5,608)
(169)
(107,140)
63,234
53,913
0
(9,132)
(17,886,743) (40,922,163) (20,598,165) (2,431,267) (4,685,795) (86,524,133)
14,433
(113,187)
(8,854)
(399,628)
3,496
(29,376)
F-50
sale
Balance in 2014
Additions
Write-offs
Transfers
Other
Balance in 2015
Accumulated depreciation
Balance at Jan 1, 2014
Acquisition of investments
- PT Portugal
Depreciation expenses
Write-offs
Transfers
Foreign exchange
differences
Transfers to assets held for
sale
Balance in 2014
Depreciation expenses
Write-offs
Transfers
Other
Balance in 2015
Property, plant and
equipment, net
OI S.A.
FORM 20-F
RR Donnelley ProFile
NY8690AM021469
11.9.13
NCR feucs0nd
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
19-May-2016 11:44 EST
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Balance in 2014
Balance in 2015
Annual depreciation rate (average)
2,657,409 2,346,859
1,656,581 2,000,958
13,336,468
13,464,934
5,392,361
5,855,074
1,949,940
1,856,070
561,272
984,204
26,244,309
25,817,821
11%
10%
8%
8%
12%
(i) Transmission and other equipment includes transmission and data communication equipment.
Additional disclosures
Pursuant to ANATEL’s concession agreements, all property, plant and equipment items capitalized by the Company that are
indispensable for the provision of the services granted under said agreements are considered returnable assets and are part of the
concession’s cost. These assets are surrendered to ANATEL upon the termination of not renewed concession agreements.
As at December 31, 2015, the residual balance of the Company’s returnable assets is R$8,055,876 (R$8,199,356 at December 31,
2014) and consist of assets and installations in progress, switching and transmission equipment, payphones, outside network
equipment, power equipment, and systems and operation support equipment.
In the year ended December 31, 2015, financial charges and transaction costs incurred on works in progress were capitalized at the
average rate of 10% per year (9% in 2014) and totaling R$15,463 (R$60,275 in 2014).
14.
INTANGIBLE ASSETS
Cost of intangibles (gross
amount)
Goodwill
Intangibles in
progress
Data processing
systems
Regulatory
licenses (i)
Customer
portfolio
Other
Total
Balance at Jan 1, 2014
409,012
184,387
6,657,925 18,994,358
1,588,916 27,834,598
Acquisition of investments -
PT Portugal
Additions
Write-offs
Transfers
Foreign exchange
differences
Transfers to assets held for
sale
Balance in 2014
Additions
Transfers
Other
Balance in 2015
Accumulated amortization
Balance at Jan 1, 2014
10,574,704
52,819
487,895
(1,574)
(519,904)
575,983
248,470
451,615
1,656,050 3,215,523 3,091,687 19,166,766
282,688 1,019,053
(16,605)
(15,031)
(31,888)
36,401
507,532
1,256
44,200
78,963
153,469
124,238
909,658
(11,082,236)
409,012
92,453
501,465
(48,161)
156,718
438,445
(469,322)
125,841
136,982
459,078
1,382
(667,884) (1,736,767) (3,368,992) (3,291,736) (20,195,776)
1,817,163 28,685,806
7,310,309 18,992,604
626,758
0
93,835
1,878,738 29,406,399
0
(1,143,075) (13,168,466)
7,907,751 18,992,604
51,331
10,244
(5,348,057) (6,677,334)
Acquisition of investments -
PT Portugal
Amortization expenses
Write-offs
Transfers
Foreign exchange
differences
(428,721)
(514,850)
(571,298) (1,210,359)
0
(26,246)
11,673
(28,171)
(260)
F-51
(169,982)
(7,970)
(2,155,564) (3,099,135)
(424,030) (2,375,669)
38,046
(152,121)
26,373
(89,734)
260
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR feucs0nd
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
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Transfers to assets held for sale
Balance in 2014
Amortization expenses
Other
Balance in 2015
Intangible assets, net
Balance in 2014
Subtotal 2015
Impairment Losses
Balance in 2015
Annual amortization rate (average)
489,838
(5,874,996)
(662,068)
(1,276)
(6,538,340)
578,878
(7,849,911)
(1,137,568)
(8,987,479)
177,952 2,378,692
3,625,360
(1,407,078) (15,131,985)
(191,901) (1,991,537)
(1,276)
(1,598,979) (17,124,798)
409,012 156,718 1,435,313
501,465 125,841 1,369,411
(501,465)
11,142,693
10,005,125
125,841 1,369,411
10,005,125
410,085
279,759
279,759
13,553,821
12,281,601
(501,465)
11,780,136
20%
9%
16%
(i)
Includes mainly the fair value of intangible assets related to purchase of control of BrT (now Oi, S.A.).
15.
TRADE PAYABLES
Infrastructure, network and plant maintenance materials
Services
Rental of polls and rights-of-way
Other
Total
2015
1,282,493
3,059,394
372,103
321,803
5,035,793
2014
1,708,777
1,985,629
445,642
219,737
4,359,785
16.
LOANS AND FINANCING
Borrowings and financing by type
Senior notes
Local currency
Foreign currency (i)
Financial institutions
CCB – Bank Credit Note
Certificates of Real Estate Receivables (CRI)
Development Banks and Export Credit Agencies
Revolver credit facility
Public debentures
Subtotal
Incurred debt issuance cost
Total
Current
Non-current
2015
2014
38,670,111 12,737,364
Maturity (principal and
interest)
TIR %
1,090,716
1,136,801 Dec 2015 to Sep 2016 11.62
37,579,395 11,600,563 Dec 2015 to Feb 2022 15.24
17,540,795 15,778,442
2,416,314
1,397,504
10,986,710
2,740,267
4,144,760
4,503,810 Dec 2015 to Jan 2028 12.08
1,496,674 Dec 2015 to Aug 2022 14.10
9,777,958 Dec 2015 to Dec 2033 12.28
Dec 2015 to Oct 2016 21.65
7,807,389 Dec 2015 to Jul 2021 11.82
(498,249)
60,355,666 36,323,195
(473,800)
59,857,417 35,849,395
4,463,728
11,809,598
48,047,819 31,385,667
(i) On June 2, 2015, PT Portugal was sold to Altice S.A. As part of the PT Portugal sale process, the debt of PTIF previously
classified as liabilities associated to held-for-sale assets remained with Oi, together with cash in similar amount, and was
reclassified to the Company’s debt. The original debt consists basically of EMTN notes issued, maturing in 2016-2025.
F-52
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR austj0ma
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
Breakdown of the debt by currency
Euro
US dollar
Brazilian reais
Total
Breakdown of the debt by index
Fixed rate
LIBOR
CDI
TJLP
IPCA
INPC
Total
Maturity schedule of the debt and debt issuance costs allocation schedule
2016
2017
2018
2019
2020
2021 and following years
Total
Description of main borrowings and financing
Senior Notes - foreign and local currency
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2015
24,221,508
22,713,644
12,922,265
59,857,417
2014
2,412,691
12,368,551
21,068,153
35,849,395
2015
39,892,444
8,812,005
6,347,119
3,148,581
1,475,381
181,887
59,857,417
2014
14,146,444
2,762,046
9,811,490
5,149,392
3,798,431
181,592
35,849,395
Debt
11,927,129
8,495,856
6,532,989
7,072,157
14,563,635
11,763,900
60,355,666
In June 2015, Oi Holanda issued senior notes in the amount of €600 million, bearing interest at 5.625% per annum and maturing in
2021, the proceeds of which are to be used to refinance Oi’s and its subsidiaries’ debt. Using this issue’s proceeds, the Company
bought back a total of €148 million in previously issued notes maturing in February 2016, bearing interest at 5.625% and maturing in
March 2016, bearing interest at 5.242%. Additionally, the Company notes maturing in February 2016, bearing interest at 5.625%, the
notes maturing in March 2017, bearing interest at 5.242%, and the notes maturing in December 2017, bearing interest of 5.125% were
exchanged for newly issued notes totaling €173 million.
F-53
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR greev0nd
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
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In July 2015, Portugal Telecom International Finance (PTIF) rebought for immediate cancelation 169,793 Notes from holders that
opted to exercise the right to sell the retail bond’s senior notes issued in July 2012 originally amounting to €400 million.
As at December 31, 2015 the Company held own debentures acquired in the market for approximately US$33 million, which it
retains in its portfolio for cancellation or to be held to maturity.
Financial institutions
Development Banks and Export Credit Agencies
The Company and its subsidiaries obtained financing facilities with BNDES and other development banks from the North and
Northeast regions to finance and the upgrading of their nationwide fixed and mobile networks and to meet their regulatory obligations
and obligations to the Export Credit Agencies of financing part of the investments in equipment and services that incorporate
international technology. The main export credit agencies with that are the Company’s and its subsidiaries’ counterparties are: SEK –
Swedish Export Corporation; CDB – China Development Bank; ONDD – Office National Du Ducroire; and FEC – Finnish Export
Credit.
In February 2015, US$42.8 million (R$123.2 million) were disbursed under a US$ 257 million financing agreement entered into by
the Company with ONDD (“Office National Du Ducroire/Nationale Delcrederedienst”) in March 2013, to finance part of our
investments.
In March 2015, US$141.3 million (R$461.1 million) were disbursed under a US$397.4 million financing agreement entered into by
Oi with Finnvera (“Finnish Export Credit Ltd”) in October 2014, to finance part of our investments.
In December 2015, TMAR obtained new credit facilities with CDB - China Development Bank totaling US$1,200 million aimed at
supporting the refinancing of its debt and the debt of its parent company Oi and financing the purchase of equipment and services
from Huawei Technologies. The US$632.5 (R$2,515 million) was disbursed.
The export credit facility guaranteed by EKN contained a requirement to prepay all outstanding amounts in the event that our credit
rating was downgraded below Ba2 by Moody’s or BB by Fitch. As a result of the actions by these rating agencies, the Company was
required to prepay the outstanding principal amount under this export credit agreement of R$202 million in April 2016.
Revolver credit facility
Disbursements from the revolver credit facility entered into by Oi with Citigroup Global Markets Inc., HSBC Securities (USA) Inc.
Merril Lynch, Pierce, Fenner & Smith Incorporated, and RBS Securities Inc. included US$1,000 million in October 2011, and
US$300 million (R$955.7 million) and US$400 million (R$1,167.7 million), in May 2015 and April, respectively. These amounts are
intended to provide working capital to Oi and its subsidiaries or for other purposes in general.
In September 2015, the Company prepaid the total disbursed amounting to R$1,300 million of the revolver credit facility raised with
a syndicate of commercial banks, consisting of Banco do Brasil, Bradesco, HSBC, and Santander. This facility totals R$1,500
million.
Public debentures
F-54
OI S.A.
FORM 20-F
RR Donnelley ProFile
NY8690AM021469
11.9.13
NCR feucs0nd
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
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In 2015, the Company rebought and immediately cancelled the following publicly distributed nonconvertible, unsecured debentures:
(1) 38,965 debentures of the 9th Issue 1st Series; (2) 155,713 debentures of the 9th Issue 2nd Series; (3) 24,002 5th Issue debentures of
the 5th Issue 2nd Series, and (4) 100 debentures of the 7th Issue.
Guarantees
BNDES financing facilities are collateralized by receivables of the Company and its subsidiaries TMAR and Oi Móvel. The
Company provides guarantees to its subsidiaries TMAR and Oi Móvel for such financing facilities, totaling R$2,684 million.
Beginning May 5, 2014, the outstanding EMTN notes of subsidiary PTIF have been guaranteed by Oi amounting to R$19,228.
Covenants
The financing agreements of the Company and subsidiaries TMAR and Oi Móvel with the BNDES and other financial institutions,
and the debentures issued contain covenants that require the Oi and/or TMAR, as applicable, to maintain certain financial ratios.
Compliance with these covenants is determined either on a quarterly or an annual basis, depending on the financing agreement.
In 2015, Oi renegotiated the terms of all of its debt covenants to a ratio of 6.00:1.00 total net debt-to-EBITDA. For some contracts
this ratio should be revised back to its original terms during 2016 while for others this ratio will be in place until the end of 2016. Oi
intends to renegotiate the terms of the contracts that will expire during the year 2016. As no covenant violation occurred up to the
date that these financial statements were issued the debts are classified as current or non-current based on their original maturity.
In addition, most of the renegotiated terms in effect for 2016 require Oi to use the net proceeds from the sale of PT Portugal to reduce
its debt or make acquisitions as part of the consolidation of the Brazilian telecommunications industry.
Under the Trust Deed governing each of the Bonds issued by PTIF (other than the PTIF 6.25% Notes due 2016), or the PTIF Bonds,
we were required to file audited financial statements of PTIF as of and for the year ended December 31, 2014 with the Dutch
Chamber of Commerce no later than January 31, 2016. On April 29, 2016, Citicorp Trustee Company Limited, the trustee under this
Trust Deed, or the PTIF Trustee, delivered a written notice to PTIF and Oi noting that the failure of PTIF to provide the 2014 audited
financial statements constituted a potential event of default under the PTIF Bonds and requesting the delivery of those financial
statements. PTIF is continuing to work with its auditor to complete the preparation of its 2014 audited financial statements as soon as
possible.
The PTIF Trustee has notified PTIF that if PTIF fails to deliver the financial statements on or prior to May 29, 2016 and the PTIF
Trustee determines that this failure is materially prejudicial to the interests of the holders of the PTIF Bonds, the PTIF Trustee could
declare that the PTIF Bonds are immediately due and repayable. Under the terms of the PTIF Bonds, the PTIF Trustee is not obliged
to exercise its discretion to declare any PTIF Bonds immediately due and repayable or to take any other action to enforce the rights of
the holders of the PTIF Bonds unless it shall have been indemnified to its satisfaction and specifically directed or requested to do so
by a requisite percentage of the holders of the PTIF Bonds in accordance with the terms and conditions of the PTIF Bonds.
F-55
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR wynnm0nd
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
17-May-2016 23:45 EST
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As of December 31, 2015 the total indebtedness was classified between short-term and long-term liabilities under the consolidated
balance sheet based on the maturity of the debt instrument or contract.
The terms of the instruments governing a substantial portion of our indebtedness contain cross-acceleration clauses and if any series
of the PTIF Bonds were accelerated, this acceleration would enable the creditors under other indebtedness to accelerate that
indebtedness. Were a substantial amount of our outstanding indebtedness to be accelerated, we may not have sufficient funds to repay
such debt when due.
Upon the closing of the financial statements for the year ended December 31, 2015 there was no covenants violation that would allow
the acceleration of the maturity of other debts.
Committed and unused credit facilities
In December 2014 the Company signed a financing agreement with Banco do Nordeste do Brasil (BNB) in the amount of R$370.6
million to finance part of the investments in the Northeast of Brazil. There was no disbursement from this facility to date.
17. DERIVATIVE FINANCIAL INSTRUMENTS
Assets
Currency swaps
Interest rate swaps
Non-deliverable forwards (NDFs)
Options
Total
Current
Non-current
Liabilities
Currency swaps
Interest rate swaps
Non-deliverable forwards (NDFs)
Options
Total
Current
Non-current
2015
2014
6,805,084
445,740
102,329
33,550
7,386,703
606,387
6,780,316
2,871,904
196,017
153,560
3,221,481
340,558
2,880,923
1,197,157
594,433
686,488
32,265
2,510,343
1,988,948
521,395
413,573
241,138
12,211
666,922
523,951
142,971
18.
LICENSES AND CONCESSIONS PAYABLE
F-56
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR albaa1ma
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
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SMP
STFC concessions
Total
Current
Non-current
2015
905,601
12,936
918,537
911,930
6,607
2014
1,238,209
123,731
1,361,940
675,965
685,975
Licenses and concessions payable corresponds to the amounts payable to ANATEL for the radiofrequency concessions and the
licenses to provide the SMP services, and STFC service concessions, obtained at public auctions.
The payment schedule is as follows:
2016
2017
2018
2019
Total
911,930
3,147
3,147
313
918,537
19.
TAX FINANCING PROGRAM
The outstanding balance of the Tax Debt Refinancing Program is broken down as follows:
Law 11941/09 and Law 12865/2013 tax financing program
REFIS II - PAES
Total
Current
Non-current
2015
791,696
3,392
795,088
78,432
716,656
2014
983,904
6,326
990,230
94,041
896,189
The amounts of the tax refinancing program created under Law 11941/2009, divided into principal, fine and interest, which include
the debt declared at the time the deadline to join the program was reopened as provided for by Law 12865/2013 and Law 12996/2014,
are broken down as follows:
Tax on revenue (COFINS)
Income tax
Tax on revenue (PIS)
Social security (INSS – SAT)
Social contribution
Tax on banking transactions (CPMF)
Other
Total
F-57
2015
2014
Total
Fines
Interest Total
Principal
176,567 6,762 203,899 387,228 563,846
42,576 4,201 54,120 100,897 119,447
64,756 1,266 38,116 104,138 102,598
9,881 13,852
10,414 1,362 13,875 25,651 30,985
19,196 2,156 26,959 48,311 39,717
44,916 5,238 68,828 118,982 119,785
358,952 23,660 412,476 795,088 990,230
527 2,675 6,679
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR albaa1ma
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
The payment schedule is as follows:
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2016
2017
2018
2019
2020
2021 to 2023
2024 to 2025
Total
78,432
90,010
90,010
90,010
90,010
270,030
86,586
795,088
The tax refinancing plans under Law 11941/2009 and Law 12865/2013 are divided into 180 monthly installments. Companies are
required to ensure the timely payment of all the installments and will be excluded from the program if they have three installments
outstanding, whether consecutive or otherwise, or fail to pay one installment, if all the others have been paid.
The Company’s and its subsidiaries’ debts included in said tax refinancing programs are divided into several types of debts,
determined by the nature (social security or otherwise) and agency responsible for the management of the related debt (either the
Brazilian Federal Revenue Service, or RFB, or the National Treasury Attorney General’s Office, or PGFN).
To date, the Company is aware of the consolidation of some of these types of tax refinancing programs, while other are still being
consolidated by the RFB or the PGFN and are, therefore, subject to confirmation of the amounts payable in installments and
outstanding balances.
Regarding the installment plans already verified by the tax authorities, the Company was notified of the acceptance of revision
request filed by one of the Company’s subsidiaries to exclude debts previously settled, resulting in a significant reduction of the
outstanding balances related to one of the types of tax refinancing programs. Thus, the Company made some accounting adjustments
to adjust the corresponding balances of the line items where such obligations were recognized to the amount verified by the RFB at
the end of the consolidation revision procedure, resulting in the reversal of liabilities previously amounting to R$168,541.
The Company and some of its subsidiaries’ joined the new tax installment program governed by Article 2 of Law 12996/2014, under
which they can include federal tax debts past due through December 31, 2013. In its application to the new program, the Company
elected to pay its debt in 30 monthly installments.
In November 2014 the balances of the tax installment plans entered into by the Company and its subsidiaries under Article 2 of Law
12996/2014 were fully settled as provided for by Article 33 of Law 13043/2014, i.e., the companies offset their own tax loss
carryforwards against 70% of their tax debts R$256,118 in Company and R$302,014 on a consolidated basis, and settled the
remaining 30% of R$109,765 in Company and R$129,435 on a consolidated basis in cash. The Company and its subsidiaries
complied with all the requirements set out in said Law and the administrative order that regulated its enforcement and the related
deadlines, including the payment of amounts that had to be paid in cash, while the utilization of tax loss carryforwards is still subject
to analysis and confirmation by the Federal Revenue Service.
F-58
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR albaa1ma
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
20. CONTINGENCIES
Broken down as follows:
Type
Labor
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(viii)
(ix)
(x)
(xi)
(xii)
(xiii)
Overtime
Sundry premiums
Indemnities
Stability/reintegration
Additional post-retirement benefits
Salary differences and related effects
Lawyer/expert fees
Severance pay
Labor fines
Employment relationship
Severance Pay Fund (FGTS)
Joint liability
Other claims
Total
Tax
(i)
(ii)
(iii)
(iv)
(v)
State VAT (ICMS)
Tax on services (ISS)
INSS (joint liability, fees, and severance pay)
Tax on net income (ILL)
Other claims
Total
Civil
(i)
(ii)
(iii)
(iv)
Corporate
ANATEL
Small claims courts
Other claims
Total
Total provisions
Current
Non-current
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2015
2014
329,510
110,664
99,607
97,783
70,942
38,013
25,291
15,016
10,275
6,967
6,694
610
38,105
849,477
471,506
131,963
152,113
126,070
83,417
52,852
29,382
20,235
15,562
5,717
9,359
1,581
55,267
1,155,024
308,144
71,201
29,394
6,882
76,736
492,357
363,025
71,666
31,735
20,691
45,504
532,621
1,111,742
1,148,621
361,474
471,295
3,093,132
1,549,525
1,104,163
282,209
508,226
3,444,123
4,434,966
1,020,994
3,413,972
5,131,768
1,058,521
4,073,247
In compliance with the relevant Law, the provisions are adjusted for inflation on a monthly basis.
Breakdown of contingent liabilities, by nature
The breakdown of contingent liabilities with a possible unfavorable outcome and, therefore, not recognized in accounting, is as
follows:
F-59
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR albaa1ma
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
17-May-2016 23:45 EST
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Labor
Tax
Civil
Total
Summary of movements in provision balances
Balance at Jan 1, 2014
Acquisition of investments - PT Portugal
Inflation adjustment
Additions/(reversals)
Write-offs for payment/terminations
Foreign exchange differences
Liabilities on held-for-sale assets
Balance in 2014
Merger of TmarPart and subsidiaries
Inflation adjustment
Additions/(reversals)
Write-offs for payment/terminations
Balance in 2015
Labor
1,142,274
7,471
147,825
116,230
(250,830)
5
(7,951)
1,155,024
6,987
(15,016)
(113,636)
(183,882)
849,477
2015
779,776
24,047,529
1,238,279
26,065,584
2014
1,082,677
21,059,009
1,146,745
23,288,431
Tax
Civil
Total
640,372 3,833,671 5,616,317
141,709
86,198
233,276
(29,680)
470,597
13,895
48,040
115,131
340,472
36
(45,037)
(848,190) (1,181,613)
(82,593)
110
69
(148,628)
(95,640)
532,621 3,444,123 5,131,768
13,902
176,297
566,617
(123,772) (1,145,964) (1,453,618)
492,357 3,093,132 4,434,966
785
158,260
635,928
6,130
33,053
44,325
Pursuant to our legal counsel’s assessments and based on more complete historic information, we revised the likelihood of
unfavorable outcome of a set of labor lawsuits to which the Company is jointly and severally liable to remote, resulting in a decrease
in the previously recognized amount.
We revised the methodology used to calculate the provisions for losses in civil lawsuits—corporate lawsuits involving the financial
participation agreements, including statistical techniques, as a result of the higher experience accumulated in the matter. The change
in estimates generated a R$325,709 reversal in the provisions for civil contingencies—corporate, recognized in other operating
income (expenses), net.
Summary of the main matters related to the recognized provisions and contingent liabilities
Contingencies
Labor
(i)
(ii)
Overtime - refers to the claim for payment of salary and premiums for alleged overtime hours;
Sundry premiums - refer to claims of hazardous duty premium, based on Law 7369/85, regulated by Decree 93412/86, due to
the alleged risk from employees’ contact with the electric power grid, health hazard premium, pager pay, and transfer
premium;
(iii)
Indemnities - refers to amounts allegedly due for occupational accidents, leased vehicles, occupational diseases, pain and
suffering, and tenure;
F-60
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR albaa1ma
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
17-May-2016 23:45 EST
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(iv)
(v)
(vi)
Stability/reintegration - claim due to alleged noncompliance with an employee’s special condition which prohibited
termination of the employment contract without cause;
Supplementary retirement benefits - differences allegedly due on the benefit salary referring to payroll amounts;
Salary differences and related effects - refer mainly to claims for salary increases due to alleged noncompliance with trade
union agreements. As for the effects, these refer to the impact of the salary increase allegedly due on the other amounts
calculated based on the employee’s salary;
(vii) Lawyers/expert fees - installments payable to the plaintiffs’ lawyers and court appointed experts, when necessary for the case
investigation, to obtain expert evidence;
(viii) Severance pay - claims of amounts which were allegedly unpaid or underpaid upon severance;
(ix)
(x)
Labor fines - amounts arising from delays or nonpayment of certain amounts provided for by the employment contract, within
the deadlines set out in prevailing legislation and collective bargaining agreements;
Employment relationship - lawsuits filed by outsourced companies’ former employees claiming the recognition of an
employment relationship with the Company or its subsidiaries by alleging an illegal outsourcing and/or the existence of
elements that evidence such relationship, such as direct subordination;
(xi)
Supplement to FGTS fine - arising from understated inflation, refers to claims to increase the FGTS severance fine as a result
of the adjustment of accounts of this fund due to inflation effects.
The Company filed a lawsuit against Caixa Econômica Federal to assure the reimbursement of all amounts paid for this
purpose;
(xii)
Joint liability - refers to the claim to assign liability to the Company, filed by outsourced personnel, due to alleged
noncompliance with the latter’s labor rights by their direct employers;
(xiii) Other claims - refer to different litigation including rehiring, profit sharing, qualification of certain allowances as
compensation, etc.
Tax
(i)
ICMS - Refers to the provision considered sufficient by management to cover the various tax assessments related to: (a) levy
of ICMS and not ISS on certain revenue; (b) claim and offset of credits on the purchase of goods and other inputs, including
those necessary for
F-61
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR albaa1ma
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
17-May-2016 23:45 EST
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network maintenance; and (c) tax assessments related to alleged noncompliance with accessory obligations.
(ii)
ISS - the Company and TMAR have provisions for tax assessment notices challenged because of the levy of ISS on several
value added, technical, and administrative services, and equipment leases.
(iii)
INSS - Provision related basically to probable losses on lawsuits discussing joint liability and indemnities.
(iv)
ILL - TMAR offset the ILL paid up to calendar 1992 based on Federal Supreme Court (“STF”) decisions that declare the
unconstitutionality of this tax. However, even though there is case law on the matter, a provision is maintained, as there is no
final decision of the criteria for the adjustments of these credits.
(v)
Other claims - Refer basically to provisions to cover Real Estate Tax (IPTU) assessments and several tax assessments related
to income tax and social contribution collection.
Civil
(i)
Corporate – Financial Participation Agreements - these agreements were governed by Administrative Rules 415/1972,
1181/1974, 1361/1976, 881/1990, 86/1991, and 1028/1996. Subscribers held a financial interest in the concessionaire after
paying in a certain amount, initially recorded as capitalizable funds and subsequently recorded in the concessionaire’s equity,
after a capital increase was approved by the shareholders’ meeting, thus generating the issuance of shares. The lawsuits filed
against the former CRT - Companhia Riograndense de Telecomunicações, a company acquired by the Company, challenge the
way shares were granted to subscribers based on said financial participation agreements.
The Company used to recognize a provision for the risk of unfavorable outcome in these lawsuits based on certain legal
doctrine. During 2009, however, decisions issued by appellate courts led the Company to revisit the amount accrued and the
risk classification of the relevant lawsuits. The Company, considering obviously the peculiarities of each decision and based on
the assessment made by its legal department and outside legal counsel, changed its estimate on the likelihood of an unfavorable
outcome from possible to probable. In 2009, the Company’s management, based on the opinions of its legal department and
outside legal counsel, revised the measurement criteria of the provision related to the financial interest agreements. Said
revision contemplated additional considerations regarding the dates and the arguments of the final and unappealable decisions
on ongoing lawsuits, as well as the use of statistical criteria to estimate the amount of the provision for those lawsuits. The
Company currently accrues these amounts mainly taking into consideration (i) the criteria above, (ii) the number of ongoing
lawsuits by matter discussed, and (iii) the average amount of historical losses, broken down by matter in dispute. In addition to
these criteria, in 2013 the courts recognized, in several decisions, the enforcement of the twenty-year statute of limitations for
the lawsuits that met this criterion and the Company, based on the opinion of its in-house and outside legal
F-62
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR albaa1ma
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
17-May-2016 23:45 EST
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counsel, understands that the likelihood of loss is remote. Therefore, it is not necessary to set up a provision.
At the end of 2010, the website of the Superior Court of Justice (STJ) disclosed news that this court had set compensation
criteria to be adopted by the Company to the benefit of the shareholders of the former CRT for those cases new shares,
possibly due, could not be issued because of the sentence issued. According to this court judgment news, which does not
correspond to a final decision, the criteria must be based on (i) the definition of the number of shares that each claimant would
be entitled, measuring the capital invested at the book value of the share reported in the company’s monthly trial balance on
the date it was paid-in, (ii) after said number of shares is determined, it must be multiplied by its quotation on the stock
exchange at the closing of the trading day the final and unappealable decision is issued, when the claimant becomes entitled to
sell or disposed of the shares, and (iii) the result obtain must be adjusted for inflation (IPC/INPC) from the trading day of the
date of the final and unappealable decision, plus legal interest since notification. In the case of succession, the benchmark
amount will be the stock market price of the successor company.
Based on current information, management believes that its estimate would not be materially impacted as at December 31,
2015, had these criteria already been adopted. There may be, however, significant changes in the items above, mainly
regarding the market price of Company shares.
(ii)
ANATEL - refers basically to alleged noncompliance with General Universal Service Targets Plan (“PGMU”), General
Quality Targets Plan (“PGMQ”), and the Quality Indicators Regulation (“RIQ”) obligations;
In December 2013, ANATEL approved Resolution 629/2013, which approves the Regulation for the execution and monitoring
of the Policy Adjustment Agreements (TAC). The TAC that allow telecommunications operators to request, in the context of
proceedings for which no final and unappealable decision has been issued at the administrative level by ANATEL, that such
fines be settled through investments in infrastructure, with additional incentives for projects in underdeveloped areas or
through direct benefits to consumers, as well as the revision of the policies that resulted in said fines. In April 2015, Oi filed a
proposal containing (a) corrective actions for approximately 500 policies that covers almost all the main reasons for the
regulatory penalties imposed by ANATEL and (b) an “additional commitment” to offset Oi’s contingencies falling within the
scope of the TAC.
Since then, ANATEL is assessing and discussing the content of this proposal with Oi, in compliance with the formalities
provided for under the TAC, to meet the premises that drove the approval of this Regulation. Currently, the TAC negotiation
process is at its final stage and we expect to sign the agreements on Universal Service and Quality targets in the coming
months. Up to December 31, 2015, the proceedings being judged by ANATEL and discussed in the context of the TAC totaled
approximately R$5 billion, consisting of fines at several procedural stages—approximately R$3 billion in fines imposed and
R$2 billion in estimated fines.
F-63
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR albaa1ma
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
17-May-2016 23:45 EST
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If Oi fails to comply with its commitments set forth in the TAC or discharge the obligations established by ANATEL
regulations, it will be subject to penalties, such as: warnings, fines, and, in a worst case scenario, ANATEL’s intervention,
temporary suspensions of services, or cancellation of its concessions and licenses. If the TAC does not provide for a specific
policy, the related administrative proceeding returns to the ordinary review proceeding, where Oi will discuss with ANATEL
its nature and amounts involved, as well as the implementation of corrective measures, if necessary.
In 2015, ANATEL revised the penalization methodologies concerning the main types of infractions, notably User Rights and
Guarantees, Quality (targets and indicators), and Station Licensing, and initiated a Public Hearing process for the revision of
the Universal Service and Barriers to Inspections methodologies. Oi and the other industry players contributed to the Public
Consultations conducted by ANATEL on these matters by emphasizing the need for improvement that can contribute to
penalty fairness that ensures the educational nature of penalties and the economic feasibility of the operators, thus reducing
disputes in courts and favoring the expansion of industry investments. As at December 31, 2015, the Company had fines
outside the jurisdiction of ANATEL that were determined under the former penalty calculation methodology and are being
discussed in courts. The Company disagrees and is challenging some of the alleged noncompliance events, and is also
challenging the unfairness of the amount of some imposed fines in light of the pinpointed noncompliance event.
(iii)
Small claims courts - claims filed by customers for which the individual indemnification compensation amounts do not exceed
the equivalent of forty minimum wages; and
(iv) Other claims - refer to several ongoing lawsuits relating to contract terminations, certain agencies requesting the reopening of
customer service centers, compensation claimed by former suppliers and building contractors, in lawsuits filed by equipment
vendors against Company subsidiaries, revision of contractual terms and conditions due to changes introduced by a plan to
stabilize the economy, and litigation mainly involving discussions on the breach of contracts, to which management and its
legal counsel attribute a probable likelihood of an unfavorable outcome, etc.
Possible contingencies
The Company and its subsidiaries are also parties to several lawsuits in which the likelihood of an unfavorable outcome is classified
as possible, in the opinion of their legal counsel, and for which no provision for contingent liabilities has been recognized.
The main contingencies classified with possible likelihood of an unfavorable outcome, according to the Company´s management’s
opinion, based on its legal counsel’s assessment, are summarized below:
Labor
F-64
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR albaa1ma
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
17-May-2016 23:45 EST
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Refer to several lawsuits claiming, but not limited to, the payment of salary differences, overtime, hazardous duty and health hazard
premium, and joint liability, which total approximately R$779,776 (R$1,082,677 in 2014).
Tax
The main ongoing lawsuits have the following matters:
(i)
(ii)
ICMS - several ICMS assessment notifications, including two main matters: ICMS levied on certain revenue from services
already subject to ISS or which are not part of the ICMS tax base, and utilization of ICMS credits claimed on the purchase of
goods and other inputs, in the approximate amount of R$10,144,485 (R$7,554,421 in 2014);
ISS - alleged levy of this tax on subsidiary telecommunications services and discussion regarding the classification of the
services taxed by the cities listed in Supplementary Law 116/2003, amounting approximately to R$2,908,031 (R$2,588,849 in
2014);
(iii) INSS - tax assessments to add amounts to the contribution salary allegedly due by the Company, amounting approximately to
R$1,029,470 (995,994 in 2014); and
(iv) Federal taxes - several tax assessment notifications regarding basically the disallowances made on the calculation of taxes,
errors in the completion of tax returns, transfer of PIS and COFINS and FUST related to changes in the interpretation of these
taxes tax bases by ANATEL. These lawsuits amount approximately to R$9,965,543 (R$9,919,745 in 2014).
Civil
The main ongoing lawsuits do not have any court decision which has been issued, and are primarily related, but not limited to,
challenging of network expansion plans, compensation for pain and suffering and material damages, collection lawsuits, and bidding
processes. These lawsuits total approximately R$1,238,279 (R$1,146,745 in 2014).
Guarantees
The Company has bank guarantee letters and guarantee insurance granted by several financial institutions and insurers to guarantee
commitments arising from lawsuits, contractual obligations, and biddings with ANATEL. The total adjusted amount of contracted
guarantees and guarantee insurance, effective at December 31, 2015, corresponds to R$5,394,597 (R$5,816,071 in 2014), Company,
and R$15,577,522 (R$16,488,245 in 2014), on a consolidated basis. The commission charges on these contracts are based on market
rates.
21. OTHER PAYABLES
F-65
OI S.A.
FORM 20-F
RR Donnelley ProFile
NY8690AM021267
11.9.13
NCR wynnm0nd
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
19-May-2016 17:20 EST
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Unearned revenues (i)
Advances from customers
Provisions for indemnities payable (Note 26)
Payable for the acquisition of equity interest
Consignation to third parties
Provision for asset decommissioning
Other
Total
Current
Non-current
2015
2,039,183
767,905
668,534
382,230
43,160
15,437
356,088
4,272,537
1,219,624
3,052,913
2014
2,475,391
635,681
408,978
43,062
14,835
46,328
3,624,275
1,021,719
2,602,556
Primarily refers (1) amounts received in advance for the assignment of the right to the commercial operation and use of
infrastructure assets that are recognized in revenues over the effective period of the underlying agreements and (2) prepaid
mobile telephony services that are recognized in revenue when the customers use the services.
EQUITY
Share capital
(i)
22.
(a)
Subscribed and paid-in capital is R$21,438,374 (R$21,438,220 at December 31, 2014), represented by the following no-par value
shares:
Total capital in shares
Common shares
Preferred shares
Total
Treasury shares
Common shares
Preferred shares
Total
Outstanding shares
Common shares
Preferred shares
Total outstanding shares
Number of shares (in thousands)
2015
2014
668,034
157,727
825,761
148,282
1,812
150,094
519,752
155,915
675,667
286,155
572,317
858,472
8,425
7,281
15,706
277,730
565,036
842,766
Preferred shares are nonvoting, but are assured priority in the payment of the noncumulative minimum dividends equal to the higher
of 6% per year of the amount obtained by dividing capital stock by the total number of shares of the Company or 3% per year of the
amount obtained by dividing book equity by the total number of shares of the Company.
The Company is authorized to increase its capital under a Board of Directors’ resolution, in common and preferred shares, up to the
share capital top limit of R$34,038,701,741.49, within the legal top limit of 2/3 for the issuance of new nonvoting preferred shares.
F-66
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR albaa1ma
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
17-May-2016 23:45 EST
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By resolution of the Shareholders’ Meeting or Board of Directors’ Meeting, the Company’s capital can be increased by capitalizing
retained earnings or reserves previously set up for this purpose by the Shareholders’ Meeting. Under these conditions, the
capitalization can be made without any change in the number of shares.
Capital is represented by common and preferred shares with no par value. The Company is not required to maintain the current
proportion of common to preferred share on capital increases.
On February 25, 2015 the Board of Directors approved a capital increase of R$154 without the issue of new shares, through the
capitalization of the investment reserve.
In October 2015, the voluntary conversion of Company preferred shares into common shares was completed (Note 1).
(b)
Treasury shares
Treasury shares as at December 31, 2015 originate from the corporate events that took place in the first quarter of 2015, the second
quarter of 2014, and the first half of 2012, described below:
(i) On February 27, 2012, the Extraordinary Shareholders’ Meeting of Oi S.A. approved the Merger Protocol and Justification of
Coari with and into the Company and, as a result, the cancelation of the all the treasury shares held by the Company on that
date;
(ii) On February 27, 2012, the Extraordinary Shareholders’ Meeting of Oi S.A. approved the Merger Protocol and Justification of
TNL with and into the Company, and the Company’s shares then held by TNL, as a result of the merger of Coari with and into
the Company, were canceled, except for 24,647,867 common shares that remained in treasury;
(iii) Starting April 9, 2012, Oi paid the reimbursement of shares to withdrawing shareholders.
(iv) As a result of the Company’s capital increase approved by the Board of Directors on April 30 and May 5, 2014, and due to
subscription made by Pharol in PT Portugal assets, R$263,028 was reclassified to treasury shares.
(v) Under the exchange agreement entered into with Pharol on September 8, 2014 (Note 27), approved at Pharol’s extraordinary
shareholders’ meeting, by the Brazilian Securities and Exchange Commission - CVM, and at Oi’s extraordinary shareholders’
meeting, on March 30, 2015 the Company conducted a share exchange under which Pharol delivered to PTIF Oi shares divided
into 474,348,720 OIBR3 shares and 948,697,440 OIBR4 shares (47,434,872 and 94,869,744 after the reverse stock split,
respectively); in exchange, the Company delivered Rio Forte securities to PT SGPS, in the total principal amount of R$3,163
million (€897 million).
The treasury shares position corresponding to items (i), (ii) and (iii) referred to above, not taking into consideration item (iv) because
this refers to a reclassification derived from cross-shareholdings, is as follows:
F-67
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR feucs0nd
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
17-May-2016 23:45 EST
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Balance in 2013
Reverse share split
Balance in 2014
Share exchange
Share conversion
Balance in 2015
(*) Number of shares in thousands
Common
shares (*)
84,251
(75,826)
8,425
47,435
92,422
148,282
Amount
880,378
880,378
1,054,513
3,274,047
5,208,938
Preferred shares
(*)
72,808
(65,527)
7,281
94,870
(100,339)
1,812
Amount
1,224,146
1,224,146
2,109,026
(3,274,047)
59,125
Historical cost in purchase of treasury shares (R$ per share)
Weighted average
Minimum
Maximum
2015
13.40
3.79
15.25
2014
13.40
3.79
15.25
(c)
Capital reserves
Capital reserves consist mainly of the Special Reserve on Merger that is represented by the corporate reorganizations primarily due to
the corporate reorganization approved on February 27, 2012. In 2015, the increase in this reserve refers the net assets recorded related
to merger of TmarPart approved on September 1, 2015 amounting to R$1,105,180 (Note 1).
(d)
Dividends and interest on capital
Dividends are calculated pursuant to the Company’s Bylaws and the Brazilian Corporate Law and dividends preferred or priority
dividends are calculated pursuant to the Company’s Bylaws.
Preferred shares are nonvoting, but are assured priority in the payment of the noncumulative minimum dividends equal to the higher
of 6% per year of the amount obtained by dividing capital stock by the total number of shares of the Company or 3% per year of the
amount obtained by dividing book equity by the total number of shares of the Company.
By decision of the Board of Directors, the Company can pay or credit, as dividends, interest on capital pursuant to Article 9,
paragraph 7, of Law 9249/1995. The interest paid or credited will be offset against the annual mandatory minimum dividend amount,
pursuant to Article 43 of the Bylaws.
At the Company’s Annual Shareholders’ Meeting held on April 29, 2015 the allocation of loss for 2014, amounting to R$4,407,711,
was approved as follows: (i) offset against the legal reserve amounting to R$383,527 and R$4,024,184 to accumulated losses.
The Company reported loss for the year ended December 31, 2015 amounting to R$4,934,908. On March 23, 2016 the Board of
Directors approved the Company profit allocation proposal, subject to approval by the Annual Shareholders’ Meeting, to line item
accumulated losses.
F-68
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR albaa1ma
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
17-May-2016 23:45 EST
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The mandatory minimum dividends, which are calculated pursuant to Article 202 of Law 6404/1976 (Brazilian Corporate Law), were
not calculated because the Company reported losses in 2015 and 2014.
(e)
Share issue costs
This line item includes the share issue costs net of taxes amounting to R$377,429, of which R$194,464 is taxes. These costs are
related to the following corporate transactions: (1) capital increase, in accordance with the plan for the business combination between
the Company and Pharol and (2) the corporate reorganization of February 27, 2012, and (3) merger of TmarPart with and into Oi.
These costs directly attributable to the mentioned events are basically represented by expenses on the preparation of prospectus and
reports, third-party professional services, fees and commissions, transfer costs, and registration costs.
(f)
Other comprehensive income
We recognize in this line item other comprehensive income, which includes hedge accounting gains and losses, actuarial gains and
losses, foreign exchange differences arising on translating the net investment in foreign subsidiaries, and the tax effects related to
these components, which are not recognized in the statement of profit or loss.
23.
(a)
LIABILITIES FOR PENSION BENEFITS
Pension funds
The Company and its subsidiaries sponsor retirement benefit plans for their employees, provided that they elect to be part of such
plan. The table below shows the existing pension plans at December 31, 2015.
Benefit plans
Sponsors
Manager
TCSPREV
BrTPREV
TelemarPrev
PBS-Telemar
PAMEC
PBS-A
PBS-TNCP
CELPREV
PAMA
Oi, Oi Móvel, BrT Multimídia and Oi Internet
Oi, Oi Móvel, BrT Multimídia and Oi Internet
Oi, TMAR, Oi Móvel and Oi Internet
TMAR
Oi
TMAR and Oi
Oi Móvel
Oi Móvel
Oi and TMAR
Sistel – Fundação Sistel de Seguridade Social
FATL – Fundação Atlântico de Seguridade Social
FATL
FATL
FATL
FATL
Oi
Sistel
Sistel
Sistel
Sistel
For purposes of the pension plans described in this note, the Company can also be referred to as the “Sponsor”.
F-69
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR albaa1ma
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
17-May-2016 23:45 EST
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The sponsored plans are valued by independent actuaries at the end of the annual reporting period. The Bylaws provide for the
approval of the pension plan policy, and the joint liability attributed to the defined benefit plans is governed by the agreements
entered into with the pension fund entities, with the agreement of the National Pension Plan Authority (PREVIC), as regards the
specific plans. PREVIC is the official agency that approves and oversees said plans.
The sponsored defined benefit plans are closed to new entrants because they are close-end pension funds. Participants’ and the
sponsors’ contributions are defined in the funding plan.
Underfunded status
The unfunded status are as follows:
BrTPREV plan
PAMEC plan
Financial obligations - BrTPREV plan (i)
Total
Current
Non-current
2015
399,754
2,585
141,681
544,020
144,589
399,431
2014
473,554
2,981
476,535
129,662
346,873
(i) Represented by the agreement of financial obligations, entered into by the Company and Fundação Atlântico intended for the
payment of the mathematical provision without coverage by the plan’s assets. This obligation represents the additional
commitment between the provision recognized pursuant to the actuarial assumptions and the financial obligations agreement
calculated based on the laws applicable to close-end pension funds, regulated by PREVIC.
Specifically in 2015, the real interest rate adopted under actuarial assumptions was significantly higher than the PREVIC interest rate
which led to a significant gain in the obligation, recognized in other comprehensive income by the Company.
Over funded status
These assets are broken down as follows:
TCSPREV plan
TelemarPrev plan
PBS – Telemar plan
Other
Total
Current
Non-current
Characteristics of the sponsored pension plans
F-70
2015
1,061,456
482,938
33,477
(47,924)
1,529,947
753
1,529,194
2014
932,403
237,308
10,104
(74,734)
1,105,081
1,744
1,103,337
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR albaa1ma
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
1)
FATL
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FATL, closed-end, multiple sponsor, multiple plan pension fund, is a nonprofit, private pension-related entity, with financial and
administrative independence, headquartered in Rio de Janeiro, State of Rio de Janeiro, engaged in the management and administration
of pension benefit plans for the employees of its sponsors.
Plans
(i)
BrTPREV
Variable contribution pension Benefit Plan, enrolled with the National Register of Benefit Plans (CNPB) under No. 2002.0017-74.
The monthly, mandatory Basic Contribution of the BrTPREV group Participants corresponds to the product obtained, in whole
numbers, by applying a percentage to the Contribution Salary (SP), according to the Participant’s age and option, as follows: (i) Age
up to 25 years old - Basic Contribution cohort of 3 and 8 percent of the SP; (ii) Age 26 to 30 years old - Basic Contribution cohort of
4 to 8 percent of the SP; (iii) Age 31 to 35 years old - Basic Contribution cohort of 5 to 8 percent of the SP; (iv) Age 36 to 40 years
old - Basic Contribution cohort of 6 to 8 percent of the SP; (v) Age 41 to 45 years old - Basic Contribution cohort of 7 to 8 percent of
the SP; and (vi) Age 46 years old or more - Basic Contribution cohort of 8 percent of the SP.
The monthly Contribution of the Fundador/Alternativo group (merged) Participants corresponds to the sum of: (i) 3 percent charged
on the Contribution Salary; (ii) 2 percent charged on the Contribution Salary that exceeds half of the highest Official Pension Scheme
Contribution Salary, and (iii) 6.3 percent charged on the Contribution Salary that that exceeds the highest Official Pension Scheme
Contribution Salary.
A BrTPREV group Participant’s Voluntary Contribution corresponds to the product obtained, in whole numbers, by applying a
percentage of up 22 percent, elected by the Participant, to the Participation Salary. The Sporadic Contribution of a BrTPREV group
Participant is optional and both its amount and frequency are freely chosen by the Participant, provided it is not lower than one (1)
UPBrT (BrT’s pension unit). The Sponsor does not make any counterpart contribution to the Participant’s Voluntary or Sporadic
Contribution.
The Plan’s Charter provides for contribution parity by the Participants and the Sponsors. The plan is funded under the capitalization
approach.
(ii)
PBS-Telemar
Defined benefit pension Benefit Plan, enrolled with the CNPB under No. 2000.0015-56.
The contributions from Active Participants of the PBS-Telemar Benefit Plan correspond to the sum of: (i) 0.5 to 1.5 percent of the
Contribution Salary (according to the participant’s age on enrollment
F-71
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR albaa1ma
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
17-May-2016 23:45 EST
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Page 1 of 1
date); (ii) 1% of Contribution Salary that exceeds half of one Standard Unit; and (iii) 11% of the Contribution Salary that exceeds one
Standard Unit. The Sponsors’ contributions are equivalent to 8% of the payroll of active participants of the plan. The plan is funded
under the capitalization approach.
(iii) TelemarPrev
Variable contribution pension Benefit Plan, enrolled with the CNPB under No. 2000.0065-74.
A participant’s regular contribution is comprised of two portions: (i) basic - equivalent to 2% of the contribution salary; and (ii)
standard - equivalent to 3% of the positive difference between the total contribution salary and the social security contribution. The
additional extraordinary contributions from participants are optional and can be made in multiples of 0.5% of the Contribution Salary,
for a period of not less than six (6) months. Nonrecurring extraordinary contributions from a participant are also optional and cannot
be lower than 5% of the Contribution Salary ceiling.
The Plan’s Charter requires the parity between participants’ and sponsors’ contributions, up to the limit of 8% of the Contribution
Salary, even though a sponsor is not required to match Extraordinary Contributions made by participants. The plan is funded under
the capitalization approach.
(iv) TCSPREV
Variable contribution pension Benefit Plan, enrolled with the CNPB under No. 2000.0028-38.
The monthly, mandatory Basic Contribution of the TCSPREV group Participants corresponds to the product obtained, in whole
numbers, by applying a percentage, chosen by the Participant, to the Contribution Salary (SP) as follows: (i) Age up to 25 years old -
basic contribution cohort of 3 and 8 percent of the SP; (ii) Age 26 to 30 years old - basic contribution cohort of 4 to 8 percent of the
SP; (iii) Age 31 to 35 years old - basic contribution cohort of 5 to 8 percent of the SP; (iv) Age 36 to 40 years old - basic contribution
cohort of 6 to 8 percent of the SP; (v) Age 41 to 45 years old - basic contribution cohort of 7 to 8 percent of the SP; and (vi) Age 46
years old or more - basic contribution cohort of 8 percent of the SP.
The TCSPREV group Participant’s Voluntary Contribution corresponds to the product obtained, in whole numbers, by applying a
percentage of up 22%, elected by the Participant, to the Participation Salary. The Sporadic Contribution of a Participant is optional
and both its amount and frequency are freely chosen by the Participant, provided it is not lower than one (1) UPTCS (TCSPREV’s
pension unit). The Sponsor does not make any counterpart contribution to the Participant’s Voluntary or Sporadic contribution.
The Plan’s Charter provides for contribution parity by the Participants and the Sponsors. The plan is funded under the capitalization
approach.
2)
SISTEL
F-72
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR albaa1ma
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
17-May-2016 23:45 EST
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Sistel is a nonprofit, private welfare and pension entity, established in November 1977, which is engaged in creating private plans to
grant benefits in the form of lump sums or annuities, supplementary or similar to the government retirement pensions, to the
employees and their families who are linked to Sistel’s sponsors.
Plans
(i)
PBS-A
Multiemployer pension plan jointly sponsored with other sponsors associated to the provision of telecommunications services and
offered to participants who held the status of beneficiaries on January 1, 2000.
Contributions to the PBS-A are contingent on the determination of an accumulated deficit and the Company is jointly and severally
liable, along with other fixed-line telecommunications companies, for 100% of any insufficiency in payments owed to members of
the PBS-A plan. As of December 31, 2015, the PBS-A plan had a surplus of R$2,636,281. No significant contribution in 2015, 2014
and 2013.
(ii)
PBS-TNCP
PBS-TNCP plan is funded under the capitalization approach. PBS-TNCP plan has been closed to new members since April 2004.
Contributions to the PBS-TNCP plan are contingent on the determination of an accumulated deficit. As of December 31, 2015, the
PBS-TNCP plan had a surplus of R$25,351. No significant contribution in 2015, 2014 and 2013.
(iii) CELPREV
In 2004, Amazônia (merged with and into TNL PCS) obtained from PREVIC the approval to create a new Pension Plan. The variable
contribution plan, called CelPrev Amazônia (“CELPREV”), was offered to the employees who did not participate of the PBS-TNCP
plan, and to new employees hired by its subsidiary. The participants of the PBS-TNCP plan were offered the possibility and
encouraged to migrate to the CELPREV plan. Approximately 27.3% of Amazônia’s active employees that were participants in the
PBS-TNCP plan migrated to the CELPREV plan. As of December 31, 2015, the CELPREV plan had a surplus of R$2,412. No
significant contribution in 2015, 2014 and 2013.
(v) PAMA
F-73
OI S.A.
FORM 20-F
RR Donnelley ProFile
NY8690AM021469
11.9.13
NCR feucs0nd
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
19-May-2016 15:24 EST
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PAMA is a multiemployer healthcare plan for retired employees aimed at providing medical care to beneficiaries, with copayments
by and contributions from the latter. The PAMA plan has been closed to new members since February 2000, other than new
beneficiaries of current members and employees that are covered by the PBS-A plan who have not yet elected to join the PAMA plan.
In December 2003, the Company began sponsoring the PCE –Special Coverage Plan, or the PCE plan, a health-care plan managed by
Sistel. The PCE plan is open to employees that are covered by the PAMA plan. From February to July 2004, December 2005 to April
2006, June to September 2008, July 2009 to February 2010, March to November 2010, February 2011 to March 2012 and March
2012 until today, the Company offered incentives to our employees to migrate from the PAMA plan to the PCE plan.
In October 2015, in compliance with a court order, Sistel transferred the surpluses of the PBS-A benefits plan, amounting to R$3,042
million, to ensure the solvency of the plan PAMA. Of the total amount transferred, R$2,127 million is related to the plans sponsored
by the Company, apportioned proportionally to the obligations of the defined benefit plan.
As of December 31, 2015, the PAMA plan had a surplus of R$1,154,176. No significant contribution in 2015, 2014 and 2013.
3)
PAMEC-BrT - Assistance plan managed by the Company
Defined benefit plan intended to provide medical care to the retirees and survivor pensioners linked to the TCSPREV pension plan
managed by FATL.
The contributions for PAMEC-BrT were fully paid in July 1998, through a bullet payment. However, as this plan is now
administrated by the Company, after the transfer of management by Fundação 14 in November 2007, there are no assets recognized to
cover current expenses, and the actuarial obligation is fully recognized in the Company’s liabilities.
Funded Status
Changes in the actuarial obligations, fair value of assets and amounts recognized in the balance sheet
TCSPREV BrTPREV
TelemarPrev
PBS-
Telemar
2015
PAMEC TCSPREV
BrTPREV TelemarPrev
PBS-
Telemar
PAMEC
2014
Projected benefit
obligation at
the beginning
of the year
Service cost
Interest cost
Benefits paid
Participant’s
contributions
Changes in
actuarial
assumptions
Projected benefit
obligation at
the end of the
year
586
502,433 2,023,849 2,885,744 247,833
80
328,289 28,089
(219,465) (19,942)
142
57,066 228,738
(44,535) (177,696)
2,785
2,981 481,055 1,941,701 2,722,980 235,884
121
219,630 310,467 26,755
(167,661) (216,394) (18,507)
797
54,689
(36,569)
345
(122)
3,592
230
3,418
396
(110)
43
52
(18,420)
(74,280)
(204,806) (11,956)
(619)
2,461
29,949
65,099 3,528
(723)
497,130 2,000,753 2,792,547 244,147
2,585 502,433 2,023,849 2,885,744 247,833
2,981
F-74
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR bellc0ma
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
17-May-2016 23:45 EST
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TCSPREV BrTPREV
TelemarPrev
PBS-
Telemar
PAMEC TCSPREV
BrTPREV TelemarPrev
PBS-
Telemar
PAMEC
2015
2014
Fair value of
plan assets
at the
beginning of
the year
Actual return
on plan
assets
Company’s
contributions
Participant’s
contributions
1,434,836 1,550,295 3,123,052 257,937
1,442,657 1,301,556 3,204,535 264,224
168,285
88,465
371,898 39,516
28,748
293,096 134,911 12,091
139,935
71
123,304
77
Benefits paid
(44,535) (177,696)
42
(219,465) (19,942)
(36,569)
52
(167,661) (216,394) (18,507)
Fair value of
plan assets
at the end of
the year
1,558,586 1,600,999 3,275,485 277,624
1,434,836 1,550,295 3,123,052 257,937
TCSPREV BrTPREV
TelemarPrev
PBS-
Telemar
PAMEC TCSPREV
BrTPREV TelemarPrev
PBS-
Telemar
PAMEC
2015
2014
Funded
(unfunded)
status of plan (1,061,456) 399,754
(482,938) (33,477) 2,585
(932,403)
473,554 (237,308) (10,104) 2,981
Net periodic defined benefit pension cost for the years ended December 31, 2015, 2014 and 2013 includes the following:
Net service cost
Interest cost
Expected return on plan assets
Amortization of net actuarial losses (gains)
Amortization of prior year service costs (gains)
Amortization of initial transition obligation
TCSPREV
586
57,066
(162,701)
BrTPREV
142
228,738
(180,363)
(5,636)
1,552
2015
TelemarPrev PBS-Telemar
80
28,089
(29,293)
2,785
328,289
(356,313)
47,438
PAMEC
345
(4,203)
Net periodic pension cost (benefit)
(110,684)
50,069
17,996
(1,124)
345
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR bellc0ma
NYC
17-May-2016 23:45 EST
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Page 2 of 2
Net service cost
Interest cost
Expected return on plan assets
Amortization of net actuarial losses (gains)
Amortization of prior year service costs (gains)
Amortization of initial transition obligation
TCSPREV
BrTPREV
797
54,689
(150,078)
(5,831)
(5,636)
230
219,630
(151,143)
6,940
1,552
2014
TelemarPrev PBS-Telemar
121
26,755
(30,117)
3,592
310,467
(367,435)
9,131
PAMEC
396
(4,202)
Net periodic pension cost (benefit)
(106,059)
77,209
(48,447)
(3,241)
396
Net service cost
Interest cost
Expected return on plan assets
Amortization of net actuarial losses (gains)
Amortization of prior year service costs (gains)
Amortization of initial transition obligation
Net periodic pension cost (benefit)
TCSPREV
BrTPREV
1,837
49,310
(145,230)
(19,443)
(5,636)
782
194,520
(130,340)
23,698
1,552
(119,162)
90,212
2013
TelemarPrev PBS-Telemar
235
23,839
(27,942)
12,206
282,508
(305,649)
30,174
PAMEC
427
(4,203)
15,036
(3,868)
427
F-75
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR bellc0ma
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
The net periodic pension cost expected to be recognized in 2016 are as follows:
17-May-2016 23:45 EST
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Net service cost
Interest cost
Expected return on plan assets
Amortization of net actuarial losses (gains)
Amortization of prior year service costs (gains)
Amortization of initial transition obligation
Net periodic pension cost (benefit)
TCSPREV
551
62,214
(193,747)
BrTPREV
154
249,319
(191,438)
(5,636)
1,552
2016
TelemarPrev PBS-Telemar
78
30,475
(32,876)
2,042
350,701
(381,993)
4,380
PAMEC
330
(136,618)
59,587
(24,870)
(2,323)
330
The sponsors’ contributions to the pension plans managed by FATL and SISTEL estimated for 2016 amount R$144,598 and R$30,
respectively.
The following actuarial assumptions were used to determine the actuarial present value of the Company’s projected benefit
obligation:
Discount rate for determining projected benefit
obligations
Expected long-term rate of return on plan assets
Annual salary increases
Rate of compensation increase
Inflation rate assumption used in the above
Discount rate for determining projected benefit
obligations
Expected long-term rate of return on plan assets
Annual salary increases
Rate of compensation increase
Inflation rate assumption used in the above
Discount rate for determining projected benefit
obligations
Expected long-term rate of return on plan assets
Annual salary increases
Rate of compensation increase
Inflation rate assumption used in the above
Investment policy of the plans
F-76
2015
BrTPREV
and
PAMEC
TelemarPrev
and
PBS-Telemar
13.10%
13.10%
7.08%
5.50%
5.50%
13.10%
13.10%
5.50%
5.50%
5.50%
2014
BrTPREV
and
PAMEC
TelemarPrev
and
PBS-Telemar
11.83%
11.83%
7.93%
5.50%
5.50%
11.83%
11.83%
7.93%
5.50%
5.50%
2013
BrTPREV
and
PAMEC
TelemarPrev
and
PBS-Telemar
11.83%
11.83%
7.93%
5.50%
5.50%
11.83%
11.83%
7.93%
5.50%
5.50%
TCSPREV
13.10%
13.10%
6.45%
5.50%
5.50%
TCSPREV
11.83%
11.83%
7.93%
5.50%
5.50%
TCSPREV
11.83%
11.83%
7.93%
5.50%
5.50%
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR bellc0ma
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
17-May-2016 23:45 EST
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The investment policies and strategies for the two single-employer benefit pension plans PBS-Telemar and TelemarPrev are subject
to Resolution N° 3,121 of the National Monetary Council, which establishes investment guidelines.
TelemarPrev is a defined contribution plan with individual capitalization. Management allocates the investments in order to conciliate
the expectations of the sponsors, active and assisted participants. The assets on December 31, 2015 consists mainly of the following
portfolio: 91% in debt securities, 5% in equity of Brazilian companies and 4% in real estate and other assets.
PBS-Telemar plan is closed for new participants and the vast majority of the current participants are receiving their benefits. The
mathematical reserves are readjusted annually considering an interest rate of 6% per annum over the variation of the National
Consumer Price Index (“INPC”). Therefore, management’s strategy is to guarantee resources that exceed this readjustment.
Management also prepares a long-term cash-flow to match assets and liabilities. Therefore, debt securities investments are preferred
when choosing the allocation of its assets, representing 88% of the portfolio in December 31, 2015.
The investment policies and strategies for BrTPREV, TCSPREV and PAMEC, which is approved annually by the pension fund’s
board states that the investment decisions should consider: (i) capital preservation; (ii) diversification; (iii) risk tolerance; (iv)
expected returns versus benefit plan’s interest rates; (v) compatibility between investments liquidity and pensions’ cash flows and (vi)
reasonable costs. It also defines volume ranges for the different types of investment allowed for pension funds, which are: domestic
fixed income, domestic equity, loans to pension fund’s members and real estate. In the fixed income portfolio, only low credit risk
securities are allowed.
Derivative instruments are only permitted for hedging purposes. Loans are restricted to certain credit limits. Tactical allocation is
decided by the investment committee, consisted of the pension fund’s officers, investment manager and one member designated by
the Board. Execution is performed by the Finance Department.
The average ceilings set for the different types of investment permitted for pension funds are as follows:
ASSET SEGMENT
Fixed income
Variable income
Structured investments
Investments abroad
Real estate
Loans to participants
TCSPREV
BrTPREV
100.00%
17.00%
20.00%
5.00%
8.00%
15.00%
100.00%
17.00%
20.00%
5.00%
8.00%
15.00%
PBS-
Telemar
100.00%
10.00%
20.00%
2.00%
8.00%
15.00%
TelemarPrev
100.00%
17.00%
20.00%
5.00%
8.00%
15.00%
The allocation of plan assets as at December 31, 2015 is as follows:
F-77
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR feucs0nd
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
18-May-2016 13:37 EST
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ASSET SEGMENT
Fixed income
Variable income
Equity securities
Real estate
Loans to participants
Total
TCSPREV
BrTPREV
84.25%
3.25%
11.45%
0.72%
0.33%
100.00%
92.17%
1.32%
5.21%
0.69%
0.62%
100.00%
PBS-
Telemar
88.01%
1.78%
9.12%
0.74%
0.35%
100.00%
TelemarPrev
91.40%
2.21%
5.08%
0.70%
0.61%
100.00%
Expected contribution and benefits
The estimated benefit payments, which reflect future services, as appropriate, are expected to be paid as follows (unaudited):
2016
2017
2018
2019
2020
2021 until 2025
(b)
Employee profit sharing
TCSPREV
44,429
46,725
49,143
51,562
54,040
308,753
BrTPREV PBS-Telemar TelemarPrev
230,887
244,260
258,614
272,844
287,623
1,684,353
195,106
203,295
211,461
219,708
228,076
1,261,909
23,028
24,131
25,367
26,650
27,866
157,295
In the year ended December 31, 2015, the Company and its subsidiaries recognized provisions for employee profit sharing based on
individual and corporate goal attainment estimates totaling R$70,199 in Company and R$210,054 on a consolidated basis.
(c)
Share-based compensation
The Long-term Incentive Program (2015-2017), approved by the Company’s Board of Directors on March 13, 2015, seeks a greater
alignment with the Company’s management cycle and business priorities. The Program consists of the payment of gross cash reward,
in accordance with the Law Laws and Regulations, as a result of the compliance with the goals set for 2015-2017. The gross cash
reward is benchmarked to the quotation of Company shares. We also disclose that the beneficiaries are not entitled to receiving
Company shares since the Program does not provide for the transfer of shares to its beneficiaries. This share-based compensation
program has been recorded as a liability in the consolidated financial statements. No relevant provisions were recorded in 2015
considering the Company performance.
24.
SEGMENT INFORMATION
The Company uses operating segment information for decision-making. The Company identified only one operating segment that
corresponds to the telecommunications business in Brazil.
In addition to the telecommunications business in Brazil, the Company conducts other businesses that individually or in aggregate do
not meet any of the quantitative indicators that would require their disclosure as reportable business segments. These businesses refer
basically to the following companies: Mobile Telecommunications Limited in Namibia, Companhia Santomense de
Telecomunicações, Listas Telefónicas de Moçambique, ELTA – Empresa de Listas Telefónicas de Angola, and Timor Telecom,
which provide fixed and mobile telecommunications services and publish telephone directories, and which have been consolidated
since May 2014.
The revenue generation is assessed by the Company based on a view segmented by customer, into the following categories:
F-78
OI S.A.
FORM 20-F
RR Donnelley ProFile
NY8690AM021467
11.9.13
NCR keebj0nm
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
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•
•
•
Residential Services, focused on the sale of fixed telephony services, including voice services, data communication
services (broadband), and pay TV;
Personal Mobility, focused on the sale of mobile telephony services to subscription and prepaid customers, and mobile
broadband customers; and
SMEs/Corporate, which includes corporate solutions offered to our small, medium-sized, and large corporate customers.
Telecommunications in Brazil
In preparing the financial statements for this reportable segment, the transactions between the companies included in the segment
have been eliminated. The financial information of this reportable segment for the years ended December 31, 2015, 2014 and 2013 is
as follows:
2015
2014
2013
Residential
Personal mobility
SMEs/Corporate
Other services and businesses
Net operating revenue
Operating expenses
Depreciation and amortization
Interconnection
Personnel
Third-party services
Network maintenance services
Handset and other costs
Advertising and publicity
Rentals and Insurance
Provisions/reversals
Allowance for doubtful accounts
Impairment losses
Taxes and other expenses
Other operating income, net
OPERATING INCOME BEFORE FINANCIAL INCOME
9,779,218
8,430,890
7,973,893
257,090
9,995,205 10,302,910
9,011,200 9,289,893
8,311,458 8,454,923
374,421
26,441,091 27,613,160 28,422,147
295,297
(5,996,157)
(1,757,277)
(2,618,139)
(6,154,900)
(1,860,646)
(226,826)
(379,537)
(3,553,881)
(860,166)
(692,935)
(501,465)
(902,507)
277,954
(5,630,238) (5,691,824)
(2,674,915) (3,965,623)
(2,749,404) (2,534,222)
(6,163,447) (6,119,733)
(1,906,789) (2,328,140)
(515,377)
(556,500)
(3,095,667) (2,119,684)
(656,849)
(922,779)
(702,379)
(656,487)
(779,314)
(628,605)
(1,440,968) (1,397,982)
3,206,943 2,369,555
(EXPENSES) AND TAXES
1,214,609
4,391,890 3,982,989
FINANCIAL INCOME (EXPENSES)
Financial income
Financial expenses
PRETAX INCOME
Income tax and social contribution
4,493,042
(11,013,939)
1,332,723 1,375,217
(5,870,193) (4,677,173)
(5,306,288)
(145,580)
681,033
(3,202,817)
(615,406)
(76,610)
LOSS FROM CONTINUING OPERATIONS
(8,509,105)
(760,986)
604,423
Reconciliation of revenue and income (loss) and information per geographic market
F-79
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR greev0nd
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
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In the years ended December 31, 2015, 2014 and 2013, the reconciliation of the revenue of the segment Telecommunications in
Brazil and total consolidated revenue is as follows:
Net operating revenue
Revenue related to the reportable segment
Revenue related to other businesses (i)
Consolidated net operating revenue
2015
2014
2013
26,441,091 27,613,160
633,939
27,353,765 28,247,099
912,674
28,422,147
28,422,147
(i)
In 2014 the Africa and Timor business were consolidated after May 1.
In the years ended December 31, 2015, 2014 and 2013, the reconciliation between the profit (loss) before taxes of the segment
telecommunications in Brazil and the consolidated profit (loss) before taxes is as follows:
Profit (loss) before taxes
Telecommunications in Brazil
Other businesses (i)
Consolidated income before taxes
2015
2014
2013
(5,306,288) (145,580) 681,033
(18,682) 209,867
(5,324,970) 64,287 681,033
(i)
In 2014 the Africa and Timor business were consolidated after May 1.
Total assets, liabilities and property, plant and equipment and intangible assets per geographic market as at December 31, 2015 and
2014 are as follows:
2015
Brazil
Other, primarily Africa
Brazil
Other, primarily Africa
Property,
plant and
equipment
assets
91,648,303 81,943,161 25,817,821 11,780,136 3,565,454
116,030
Intangible
assets
Total
liabilities
7,686,298
466,049
943,534
745,000
Total
assets
Capital
expenditures
on property,
plant and
equipment and
intangible
assets
2014
Property,
plant and
equipment
assets
103,098,596 82,736,984 26,244,309 13,553,821 5,259,714
110,637
Intangible
assets
Total
liabilities
7,642,738
506,347
997,015
851,273
Total
assets
Capital
expenditures
on property,
plant and
equipment and
intangible
assets
No single customer accounts for more than 10% of consolidated revenue.
25. RELATED-PARTY TRANSACTIONS
F-80
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR bellc0ma
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
Transactions with joint venture, associates, and unconsolidated entities
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Accounts receivable and other assets
PT-ACS
Fundação PT
Sportinvest Multimédia
Siresp
Fibroglobal
Yunit
Contax
Other entities
Accounts payable and other liabilities
PT-ACS
Fundação PT
Sportinvest Multimédia
Siresp
Fibroglobal
Yunit
Contax
TODO
Ability
Veotex
Hispamar
Other entities
Revenue
Revenue from services rendered
Contax
TODO
Other entities
Costs/expenses
Operating costs and expenses
PT-ACS
Sportinvest Multimédia
Fibroglobal
Veotex
TODO
Hispamar
Other entities
F-81
2015
4,916
4,916
2015
53,246
52,425
821
2014
191,159
15,114
7,387
105,492
40
48,134
7,454
3,307
4,231
2014
68,259
599
2
291
6
9,564
669
41,832
5,587
7
345
9,357
2015
2014
67
67
31,873
30,754
1,026
93
2015
2014
(240,511)
(207,366)
(33,145)
(232,176)
(3,887)
(669)
(10,974)
(10,221)
(22,984)
(152,041)
(31,400)
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR bellc0ma
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
17-May-2016 23:46 EST
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The balances and transactions with joint venture, associates, and unconsolidated entities result from business transactions carried out
in the normal course of operations, namely the provision of telecommunications services by the Company to these entities and the
acquisition of these entities’ contents and the rent of their infrastructure.
Compensation of key management personnel
The compensation of the officers responsible for planning, managing and controlling the Company’s activities, i.e., directors and
executive officers, totaled R$25,441 (R$25,409 at December 31, 2014) in the Company and R$25,649 (R$25,565 December 31,
2014) on a consolidated basis.
26. HELD-FOR-SALE ASSETS AND DISCONTINUED OPERATIONS
Sale of PT Portugal shares to Altice
On December 9, 2014, the Company and Altice entered into a purchase and sale agreement of all PT Portugal shares to Altice,
basically involving the operations conducted by PT Portugal in Portugal and in Hungary.
On January 22, 2015, Pharol shareholders approved the sale by Oi of all PT Portugal shares to Altice, under the terms and conditions
of the Share Purchase and Sale Agreement. Accordingly, the suspensive condition provided for in said agreement to its effectiveness
was implemented.
On June 2, 2015, the sale by Oi to Altice of its entire stake in PT Portugal was completed. Altice Portugal paid a total of €5,789
million for PT Portugal, of which €4,920 million were received in cash by Oi and €869 million were immediately allocated to settle
PT Portugal euro-denominated debt. There is also a provision for the payment of an earn-out of €500 million related to PT Portugal’s
future generation of revenue and Oi provided a set of guarantees and representations usual in this type of agreements to the buyer.
Classification of the investment sales transactions as discontinued operations
On May 5, 2014, the Company acquired PT Portugal and since then it also fully consolidated its profits or losses, assets and
liabilities. In December 2014, with the approval of the sale of the investments in PT Portugal to Altice, the Company classified its
operations in Portugal as held-for-sale assets and liabilities, and discontinued operations.
With the sale of PT Portugal shares to Altice, the loss on divesture is presented as discontinued operations in a single line of the
income statement, as follows:
F-82
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
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NCR greev0nd
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Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
17-May-2016 23:46 EST
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Allowance for impairment loss at fair value of the PT Portugal
investment and divesture-related expenses
Loss on sale of PT Portugal and divesture-related expenses (i)
Comprehensive income transferred to the income statement (ii)
Loss for the period of discontinued operations (iii)
Profit for the period from discontinued operations (iv)
2015
2014
(625,464)
(225,934)
(15,741)
(867,139)
(3,836,388)
(250,061)
(4,086,449)
(i) The loss on the sale of PT Portugal includes: (1) the derecognized investment cost that includes goodwill arising on the business
combination between the Company and PT less the R$3.8 billion allowance for loss recognized in December 2014, and selling
expenses totaling R$1.3 billion; and (2) the R$0.7 billion revenue related to cash proceeds received directly by the Company.
The final price is subject to possible post-closing adjustments to be determined in the following months based on changes in the
cash, debt, and working capital positions at the closing date.
(ii) Refers to the cumulative foreign exchange differences gains totaling R$0.5 billion and actuarial losses from pensions and
postretirement benefits plans totaling R$0.7 billion recognized in other comprehensive income, transferred from equity to profit
or loss for the year due to divesture.
(iii) Refers to PT Portugal’s loss recognized as equity in profits of subsidiaries for 2015 and 2014.
(iv) The profit or loss from discontinued operations includes the effect of taxes amounting to R$327,115 (R$92,545 in 2014).
Approval of preparatory actions for the sale of Africatel
At the Board of Directors’ meeting held on September 16, 2014, Oi’s management was authorized to take all the necessary actions to
divest Oi’s stake in Africatel, representing 75% of Africatel’s share capital, and/or dispose of its assets. Oi will lead the sale process,
even though we believe that it would be in the best interests of both Africatel shareholders to maximize the value of their investments,
that this sale be coordinated with Samba Luxco, a Helios Investors L.P. affiliate that holds the remaining 25% of Africatel’s share
capital. Oi is committed to working with its local partners and each one of the operating companies where Africatel holds investments
to ensure a coordinated transition of its interests in these companies.
Notwithstanding the above, our indirect subsidiary Africatel GmbH & Co. KG (“Africatel GmbH”), direct holder of the Oi’s
investment in Africatel, received on September 16, 2014 a letter from Samba Luxco, where Samba Luxco exercised an alleged right
to sell the shares it holds in Africatel (put option), pursuant to Africatel’s shareholders’ agreement. According to this letter, this put
option results from the indirect transfer of Africatel shares, previously indirectly held by Pharol, to the Company as the payment for
the capital increase made in May 2014. In the letter, Samba Luxco purported to exercise the alleged put right and thereby require
Africatel GmbH to acquire its shares in Africatel.
F-83
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR bellc0ma
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
17-May-2016 23:46 EST
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The Company believes that there was not any action or event that, under Africatel’s shareholders’ agreement terms, would trigger the
right to exercise the put option. Accordingly, without prejudice to the value the Company attributes to maintaining a relationship of
mutual respect with Samba Luxco, Africatel GmbH intends to challenge the exercise of this put option by Samba Luxco in the current
circumstances, which, pursuant to Africatel’s shareholders’ agreement, which was duly notified in Africatel GmbH’s reply to Samba
Luxco’s letter, on September 26, 2014.
On November 12, 2014, the International Court of Arbitration of the International Chamber of Commerce notified Africatel GmbH
that Samba Luxco had commenced arbitral proceedings against Africatel GmbH to enforce its purported put right or, in the
alternative, certain ancillary rights and claims. Africatel GmbH presented its answer to Samba Luxco’s request for arbitration on
December 15, 2014. The arbitral tribunal was constituted on March 12, 2015 and held a first management conference in London on
May 8, 2015.
On July 22, 2015, Samba Luxco submitted its Statement of Claim, and on October 9, 2015, Pharol and Africatel GmbH submitted
their Statement of Defence. On January 25, 2016, Samba Luxco submitted its Reply and, on March 14, 2016, Pharol and Africatel
GmbH submitted their Rejoinder.
The proceedings have been bifurcated, with the merits hearing currently scheduled to take place during November 2016. Dates for a
quantum hearing (if necessary) have been reserved in March 2017.
With regard to Africatel’s indirect stake in Unitel, through its subsidiary PT Ventures, it is worth noting that on October 13, 2015, PT
Ventures initiate the arbitration proceeding against Unitel’s shareholders as a result of the violation by the latter of several rules of
Unitel’s shareholders’ agreement and the Angolan law, including the fact that such shareholders caused Unitel not to pay the
dividends paid to PT Ventures and retain the information and clarifications on such payment. Additionally, on October 20, 2015, PT
Ventures filed an action for a declaration of sentence against Unitel with an Angolan court, claiming the recognition of PT Ventures’
right to receive the outstanding dividends declared in 2010, and the dividends for the years 2011, 2012, and 2013.
The other shareholders of Unitel have asserted to PT Ventures that they believe that Pharol’s sale of a non-controlling interest in
Africatel to Samba Luxco in 2007 constituted a breach the Unitel shareholders’ agreement. PT Ventures disputes this interpretation of
the relevant provisions of the Unitel shareholders’ agreement and believes that such provisions apply only to a transfer of Unitel
shares by PT Ventures itself. By the date of this report, the Company had not been notified of any proceedings initiated with respect
to Pharol’s sale of a non-controlling stake in Africatel to Samba Luxco.
The assets and liabilities of the African operations are stated at the lower of their carrying amounts and their fair values less costs to
sell.
The African operations are consolidated in the income statement since May 5, 2014.
The main components of the assets for held sale and liabilities associated to assets held for sale of the African operations are as
follows:
F-84
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
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NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
18-May-2016 13:39 EST
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Held-for-sale assets
Cash, cash equivalents and short-term investments
Accounts receivable
Dividends receivable (i)
Available-for-sale financial asset (ii)
Other assets
Investments
Property, plant and equipment
Intangible assets
Goodwill (iii)
Liabilities directly associated to assets held for sale
Borrowings and financing
Trade payables
Provisions for pension plans
Other liabilities
Non-controlling interests (*)
Total assets held for sale and liabilities associated to assets held for
sale
Operations in
Africa
2015
7,686,298
214,413
217,992
2,042,191
3,541,314
230,318
61,425
466,049
356,900
555,696
745,000
9,557
85,730
923
648,790
1,190,547
5,750,751
(*) Represented mainly by the Samba Luxco’s 25% stake in Africatel Holdings, BV and, consequently, in its net assets.
Held-for-sale assets
Cash, cash equivalents and short-term investments
Accounts receivable
Dividends receivable (i)
Available-for-sale financial asset (ii)
Other assets
Investments
Property, plant and equipment
Intangible assets
Goodwill
Liabilities directly associated to assets held for sale
Borrowings and financing
Trade payables
Provisions for pension plans
F-85
PT Portugal
operations
26,611,944
590,111
2,270,140
1,948
1,085,751
134,272
10,560,140
5,271,808
6,697,774
26,326,949
18,892,793
2,260,503
3,347,667
African
operations
2014
7,642,738
170,056
195,690
1,261,826
4,284,416
164,121
63,267
506,347
376,441
620,574
Total
34,254,682
760,167
2,465,830
1,263,774
4,284,416
1,249,872
197,539
11,066,487
5,648,249
7,318,348
851,273
83,843
97,600
997
27,178,222
18,976,636
2,358,103
3,348,664
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR feucs0nd
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
18-May-2016 13:39 EST
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Other liabilities
Non-controlling interests
1,825,986
668,833
2,494,819
1,509,197
1,509,197
Total assets held for sale and liabilities associated to assets held
for sale
284,995
5,282,268
5,567,263
(i) Refers to dividends receivable from Unitel. In 2015, the Company’s recognized dividends not yet received based on the
expected recoverable amount and took into account, for this valuation, the existence of lawsuits filed to collect these amounts,
the expected favorable decisions on these lawsuits, and the existence of cash at Unitel for the payment of these dividends. The
dividends not paid by Unitel to PT Ventures refer to fiscal years 2010, 2011, 2012, and 2013, totaling US$661million;
(ii) Refers mainly to the fair value of the indirect interest financial investment of 18.75% of Unitel’s share capital, classified as held
for sale. The fair value of this investment at the date of acquisition was estimated based on the valuation made by Banco
Santander (Brasil), which used a series of estimates and assumptions, including cash flows forecasts for a four-year period, the
choice of a growth rate to extrapolate the cash flows projections, and definition of appropriate discount rates. The Company has
the policy of monitoring and periodically updating the main assumptions and material estimates used in the fair value
measurement, and also takes into consideration in this assessment possible impacts of actual events related to the investment,
notably the lawsuits filed against Unitel and its shareholders in 2015. As at December 31, 2015 and in the context of the
updating of assumptions referred to above, the Company determined a fair value of the investment in Unitel of R$3,436 million
and recognized in profit or loss a loss of R$408 million. The Company believes that the fair value measured under the
Discounted Cash Flows method and using the discount rate assumptions (from 15.5% to 17.5%), foreign exchange rates, and
other Angolan official financial indicators, corresponds to the best estimate of the realizable value of the investment in Unitel.
(iii) As at December 31, 2015, the Company conducted the annual impairment test of its assets related to the operations in África
and recognized a loss on goodwill amounting to R$89,176.
27. OTHER INFORMATION
(a)
Rio Forte securities
On June 30, 2014, the Company was informed, through a notice disclosed by Pharol, of the investment made by PT International
Finance BV (“PTIF”) and PT Portugal, companies contributed by Pharol to Oi in the capital increase, in a commercial paper of Rio
Forte Investments S.A. (“Securities” and “Rio Forte”, respectively), a company part of the Portuguese group Espírito Santo (“GES”),
when both PTIF and PT Portugal were Pharol subsidiaries.
F-86
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR bellc0ma
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
17-May-2016 23:46 EST
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According to said notice, the Securities had been issued in the total amount of €897 million, and bore average annual interest of 3.6%
and matured on July 15 and July 17, 2014 (€847 and €50 million, respectively), stressing that since April 28, 2014 no other
investment and/or renewal of this type of investments had been made.
Both PT Portugal and PTIF (collectively “Oi Subsidiaries”) became Company subsidiaries due to the assignment of all PT Portugal
shares to the Company by Pharol, on May 5, 2014, to pay in the Company’s capital increase approved on April 28 and 30, 2014.
The Securities matures in July 2014 and subsequently the cure period for payment of the securities ended without Rio Forte paying
the amount due. The Luxembourg Commercial Court denied Rio Forte’s request for controlled management on October 17, 2014 and
Rio Forte’s bankruptcy was declared on December 8, 2014.
Agreements entered into by the Company, TmarPart, and Pharol related to the investments made in Rio Forte commercial
papers
On September 8, 2014, after obtaining the due corporate approvals, the Company, the Oi Subsidiaries, TmarPart, and Pharol entered
into definitive agreements related to the investments made in the Securities. The agreements provided for (i) an exchange (the
“Exchange”) through which Oi Subsidiaries transferred the Securities to Pharol in exchange for preferred shares and common shares
of the Company held by Pharol, as well as (ii) the assignment by Oi Subsidiaries of a call option on the Company shares to the benefit
of Pharol (“Call Option”).
On March 26, 2015, in order to comply with the conditions presented by the CVM’s Board to grant the waivers necessary for the
implementation of the Share Exchange and Call Option, according to the decision issued on March 4, 2015, the Company held a
Shareholders’ Meeting which approved the terms and conditions of the Share Exchange and Call Option agreements.
On March 31, 2015, the Company announced, the consummation of the Exchange, under which Pharol delivered to the Oi
Subsidiaries Oi unencumbered shares corresponding to 47,434,872 OIBR3 (common shares) and 94,869,744 OIBR4 (preferred
shares) (“Exchanged Shares”); and in exchange Oi, through PTIF, delivered the Securities to Pharol, totaling €897 million, with no
cash involved.
With implementation of the Exchange, Pharol became the holder of the Securities and the sole responsible for negotiating with Rio
Forte and the decisions related to the Securities, and the Company is responsible for the supporting documentation to Pharol to take
the necessary actions to collect the receivables represented by the Securities.
As a result of the consummation of the Exchange, Pharol’s direct interest in Oi decreased from 104,580,393 common shares and
172,025,273 preferred shares, representing 37.66% of the voting capital (ex-treasury) and 32.82% of the total capital of Oi (ex-
treasury) to 57,145,521 common shares and 77,155,529 preferred shares, representing 24.81% of the voting capital (ex-treasury) and
19.17% of the total capital of Oi (ex-treasury). Oi shares received by PTIF as a result of the Exchange will remain in treasury.
F-87
OI S.A.
FORM 20-F
RR Donnelley ProFile
ncrdoc1
11.9.13
NCR bellc0ma
NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
17-May-2016 23:46 EST
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Main terms of the Call Option for the Purchase of Shares (“Option Contract”)
Under the Call Option Agreement entered into on September 8, 2014 by Pharol, PTIF, PT Portugal, Oi, and TmarPart, and amended
on March 31, 2015, the call option on Oi shares granted Pharol became exercisable with the consummation of the Exchange,
beginning March 31, 2015, at any time, during a six-year period.
Under the terms of the Call Option Agreement, the Call Option will involve 47,434,872 Oi common shares and 94,869,744 Oi
preferred shares (“Shares Subject to the Option”) and can be exercised, in whole or in part, at any time, pursuant to the following
terms and conditions:
(i) Term: six (6) years, noting that Pharol’s right to exercise the Option on the Shares Subject to the Option will be reduced by the
percentages below:
Date of Reduction
As from 03/31/2016
As from 03/31/2017
As from 03/31/2018
As from 03/31/2019
As from 03/31/2020
As from 03/31/2021
% of Shares Subject to the Option that cease to the
subject to the Option each year
10%
18%
18%
18%
18%
18%
(ii) Exercise Price: R$1.8529 per Company preferred share and R$2.0104 per Company common share, before the reverse share split
approved on November 18, 2014, as adjusted by the interbank deposit rate (CDI), plus 1.5% per annum, calculated on a pro rata
temporis basis, from the date of the Exchange to the date of the effective payment of each exercise price, in whole or in part, of the
Option. The exercise price of the shares will be paid in cash, at the transfer date of the Shares Subject to the Option.
Oi is not required to maintain the Exchanged Shares in treasury. In the event that PTIF or any of Oi’s subsidiaries do not hold, in
treasury, a sufficient number of Shares Subject to the Option to transfer to Pharol, the Option may be financially settled through
payment by the Oi Subsidiaries of the amount corresponding to the difference between the market price of the Shares Subject to the
Option and the respective exercise price corresponding to these shares.
While the Option is effective, Pharol may not purchase Oi shares, directly or indirectly, in any manner other than by exercising the
Option. Pharol may not transfer or assign the Option, nor grant any rights under the Option, including security, without the consent of
Oi. If Pharol issues, directly or indirectly, derivatives that are backed by or referenced to Oi shares, it shall immediately use the
proceeds derived from such a derivative transaction, directly or indirectly, to acquire the Shares Subject to the Option.
Oi may terminate the Option if (i) the Bylaws of Pharol are amended voluntarily to remove or amend the provision that limits the
voting right to 10% of all votes corresponding to the capital stock of Pharol; (ii) Pharol directly or indirectly engages in activities that
compete with the
F-88
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FORM 20-F
RR Donnelley ProFile
NY8690AM021469
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NYC
Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
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activities of Oi or its subsidiaries in the countries in which they operate; (iii) Pharol violates certain obligations under the Option
Contract.
On March 31, 2015, the Option Agreement was amended to provide for (i) the possibility of Pharol assigning or transferring the Call
Option, regardless of previous consent by Oi, provided that such assignment or transfer covers at least 1⁄4 of the Shares Subject to the
Option, and Pharol can freely use the use the proceeds of such transactions, (ii) the possibility of Pharol, subject to previous, written
consent from Oi, creating or granting any rights arising on the Call Option or, pledging the guarantees supported by the Call Option,
and (iii) the grant of a right of first refusal to Oi for the acquisition of the Call Option, should Pharol wish to sell, assign, transfer,
contribute the capital of another entity, transmit, or otherwise sell or dispose of the Call Option.
This amendment has been executed with a suspensive condition and would only be effective after an authorization from the CVM to
amend the Option Agreement were granted. However, at a meeting held on December 16, 2015, the CVM’s board decided to refuse
the entire request filed by the Company for waiver of the requirements of CVM Instructions 10/1980 and 390/2003 to amend the
Option Agreement.
These Instructions determine that the acquisition and sale of shares of a publicly held company must be conducted in a stock
exchange and that the stock options transactions of a publicly held company must be conducted in the markets where the company’s
shares are traded, and interdicts any private transactions. The waiver of these requirements would allow the enforcement of the
provisions of the amendment to the Call Option Agreement related to (i) the possibility of privately transferring the Call Option from
Pharol to Oi; (ii) granting a right of first refusal to Oi to acquire the Call Option; and (iii) the possibility of making the payment of the
Option acquisition price in Oi shares, if the right of first refusal if exercised.
As at December 31, 2015, the fair value of the Call Option is estimated at R$4 million calculated by the Company using the
Black-Scholes model and theoretical share volatility assumptions, using the Revenue Approach valuation technique.
(b)
Consolidation of the telecommunications industry in the Brazilian market
On August 26, 2014, Oi entered into an agreement with Banco BTG Pactual S.A. (“BTG Pactual”) under which the latter will act as
commissioner to develop feasible alternatives to render viable participating in the industry consolidation in the Brazilian
telecommunications market. As already reported to the market, BTG Pactual held discussions with third parties regarding a possible
transaction and the role of BTG Pactual includes contracting other market players that could be interested in the transaction, as
Company agent for the transaction.
On October 23, 2015, the company received from LetterOne Technology (UK) LLP, one of the companies in the Letter One
investment group (“L1 Technology”), a letter containing an exclusivity proposal in a potential transaction for the specific purpose of
allowing a consolidation in the Brazilian telecommunications industry involving a potential business combination with TIM
Participações S.A. (“TIM Participações”). Under the proposal, L1 Technology would be willing to
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FORM 20-F
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Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
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make a capital contribution of up to US$4.0 billion to the Company, contingent to the consolidation transaction.
After assessing the proposal, the Company sent to counter-proposal to L1 Technology on October 28, de 2015, under which Oi and
L1 Technology would mutually grant each other an exclusivity right over a seven-month periods, starting on October 23, 2015,
especially regarding business combinations involving telecommunications companies or telecommunications assets in Brazil. Since
L1 Technology accepted the terms of the counterproposal, Oi and L1 Technology are now bound by the exclusivity agreement during
the seven-period starting October 23, 2015.
If the transaction under construction materializes, it is expected a decrease in Oi’s leverage to become a more robust player, and the
generation of major synergies and gains of scale, promoting the creation of value for all shareholders. A potential union of Oi with
TIM Participações should result in the incorporation of a more complete, better-positioned operator, capable of competing with global
players already operating in Brazil. Consumers should benefit from this trend, consequently strengthening the Company.
On February 25, 2016, Oi disclosed a Material Fact Notice where it informed that it has been notified by L1 Technology that L1
Technology had disclosed a notice stating that it had been informed by TIM that the latter was no longer interested in proceeding with
the negotiations on the possibility of a business combination with Oi in Brazil. L1 Technology informed that without TIM’s
involvement it could not proceed with transaction as previously planned. In light of this information, Oi will assess the impacts of this
notice on the possibilities of consolidation in the Brazilian market.
(c)
Completion of the share auction
The last auction to sell the shares resulting from the reverse split of share fractions approved by the shareholders at Extraordinary
Shareholders’ Meeting held on November 18, 2014 was held on June 30, 2015.
As a result of the three auctions held, 1,069,131 Company common shares and 1,162,652 Company preferred shares were sold
(“Share”), representing all the shares resulting from the reverse split of share fractions.
The net proceeds of the sale of the Shares totaled R$13,632 and were deposited on July 10, 2015 on behalf of the share fraction
holders, proportionately to the number of shares held.
(d)
New York Stock Exchange (NYSE) Listing Rule
In September 2015, the Company was notified by the NYSE that Oi was not complying with the continued listing rule, which
requires that the average closing price of the listed securities of a company cannot go below US$1.00 per share in any consecutive
30-day trading period.
On January 22, 2016, in order to comply with the minimum share price requirement established by NYSE, Oi disclosed a Notice to
the Market announcing the change in Company’s common shares
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Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
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ratio of the Depositary Receipts Program, Level II, Sponsored (“Common DR”) so that each Common DR, which was previously one
(1) common share, represents five (5) common shares as from February 1, 2016.
28.
SUBSEQUENT EVENTS
Optimization of the Company’s liquidity and debt profile
The Company has retained PJT Partners as financial advisor to assist Oi in evaluating financial and strategic alternatives to optimize
its liquidity and debt profile. In addition on April 25, 2016, the Company announced that it has entered into a customary non-
disclosure agreement with an advisor to a diverse ad hoc group of holders of the bonds issued by the Company and certain of its
affiliated companies, as an initial step toward discussions regarding the terms of a potential restructuring.
Oi’s operating and business focus remains unchanged and Oi is still committed to continuing to make investments that ensure a
continual improvement of its quality of service, which it believes will allow it to continue to bring technological advances to its
customers all over Brazil. Oi also continues to undertake efforts for the operating upgrading and transformation of its business by
focusing on austerity, infrastructure optimization, process revision, and sales actions.
Debenture holders’ general meeting of the 5th and the 9th Issuance of the Company’s Debentures
On April 15, 2016, general debenture holders’ meetings were held for: (i) the 5th Issue of Unsecured, Nonconvertible Public
Debentures (“5th Issue”); and (ii) the 9th Issue of Simple, Unsecured, Nonconvertible Debentures in up to Two Series, for Public
Distribution (“9th Issue” and collectively with the 5th Issue, “Debentures”), both issued by the Company (“GDMs” or individually “5th
Issue GDM” and “9th Issue GDM”).
Contrarily to the 8th and 10th issues of debentures, where the Company obtained a waiver on the calculation of the leverage ratio, the
same waiver was not granted for the Debentures. Since the Company did not comply with this financial ratio for the Debentures, the
related fiduciary agents called the GDMs.
With regard to the 5th Issue, the minimum quorum to open the GDM was not reached and the 5th Issue fiduciary agent published, on
April 19, 2016, a second call of said meeting for April 27, 2016, which did not reach the minimum quorum either. Pursuant to the
debenture indenture, the fiduciary agent declared the accelerated maturity of the outstanding debentures, resulting in the repayment of
R$1,519,961.56.
With regard to the 9th Issue, the fiduciary agent declared the accelerated maturity of the outstanding debentures pursuant to Clause
6.23 of the 9th Issue debenture indenture, resulting in the repayment of R$21,518,990.58 at April 20th, 2016.
F-91
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FORM 20-F
RR Donnelley ProFile
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Oi S.A. and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2015, 2014 and 2013
(In thousands of Brazilian reais - R$, unless otherwise stated)
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The Debenture accelerated maturity declaration did not result, nor will it result, in the accelerated maturity of the other Company
debt, both domestic and foreign (cross-default).
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Exhibit 1.01
OI S.A.
Corporate Taxpayer’s Registry (CNPJ/MF) No. 76.535.764/0001-43
Board of Trade (NIRE) No. 33.3.0029520-8
Publicly Held Company
Bylaws
CHAPTER I
LEGAL SYSTEM
Article 1 - Oi S.A. (“Company”) is a publicly held company, which is governed by the present Bylaws and applicable
legislation.
1st Paragraph - Once the Company is admitted to the special listing segment known as Level 1 Corporate Governance of the
BM&FBOVESPA S.A. - Bolsa de Valores, Mercadorias e Futuros (“BM&FBOVESPA”), the Company, its shareholders, management and
members of its Audit Committee, shall be subject to the provisions of the Listing Regulations of the Level 1 Corporate Governance of
BM&FBOVESPA (“Level 1 Listing Regulations”).
2nd Paragraph - The Company, its management and shareholders shall comply with the provisions of the regulations for listed
issuers and admission for securities trading, including rules regarding delisting and exclusion from trading securities admitted for trading
on organized markets administered by BM&FBOVESPA.
3rd Paragraph - Capitalized terms, when not defined in these Bylaws, shall have the meaning given to them in the Level 1
Listing Regulations.
Article 2 - The object of the Company is to offer telecommunications services and all activities required or useful for the
delivery of these services, in accordance with concessions, authorizations and permits granted thereto.
Sole Paragraph - In connection with achieving of its object, the Company may include goods and rights of third parties in its
assets, as well as:
I.
II.
III.
IV.
V.
VI.
hold equity interests in the capital of other companies;
organize fully-owned subsidiaries for the performance of activities comprising its object, which are recommended to be
decentralized;
perform or procure the importation of goods and services that are necessary for the execution of the activities comprised
in its object;
render technical assistance services to other telecommunications companies, performing activities of common interest;
perform research and development activities seeking to develop the telecommunications sector;
enter into contracts and agreements with other telecommunications service companies or any person or entity, seeking to
ensure the operation of its services, without prejudicing its activities and responsibilities; and
VII.
perform other activities related or correlated to the Company’s corporate object.
Article 3 - The Company is headquartered in the City of Rio de Janeiro, State of Rio de Janeiro, and may, by decision of its
Board of Executive Officers, in compliance with Article 39, create, change the address and close branches and offices of the Company.
Article 4 - The duration of the Company is indefinite.
CHAPTER II
CAPITAL STOCK
Article 5 - The subscribed capital stock, totally paid in, is R$21,438,374,154.00 (twenty one billion, four hundred thirty eight
million, three hundred and seventy four thousand, one hundred and fifty four Brazilian reais), represented by 825,760,902 (eight hundred
twenty five million, seven hundred and sixty thousand and nine hundred and two) shares, of which 668,033,661 (six hundred sixty eight
million, thirty three thousand, six
OI S.A.
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200F4SiTVNe$w8fgy
hundred and sixty one) are common shares and 157,727,241 (one hundred fifty seven million, seven hundred twenty seven thousand,
two hundred and forty one) are preferred shares, all registered shares, with no par value.
1st Paragraph - The issuance of participation certificates and new preferred shares by the Company is prohibited.
2nd Paragraph - The preferred shares may be converted into common shares, at the time and under the conditions
approved by the Board of Directors of the Company.
3rd Paragraph - All of the shares of the Company are book-entry shares, and are held in a deposit account with a financial
institution authorized by the Brazilian Securities Commission (Comissão de Valores Mobiliários - “CVM”), on behalf of their
holders, and are not available in certificated form.
4th Paragraph - Transfer and registration costs, as well as the cost of service on the book-entry shares may be charged
directly to the shareholder by the depositary institution as provided in Article 35, 3rd Paragraph of Law No. 6,404 of December 15,
1976 (“Corporate Law”).
Article 6 - The Company is authorized to increase its capital stock by resolution of the Board of Directors, in common
shares, until its capital stock reaches R$34,038,701,741.49, it being understood that the Company may no longer issue preferred
shares in capital increases by public or private subscription.
Sole Paragraph - Within the authorized capital limit, the Board of Directors may:
i.
ii.
deliberate on the issuance of bonds and debentures convertible into shares; and
according to a plan approved at a Shareholders’ Meeting, grant an option to purchase stock to its management,
employees of the Company or of its subsidiaries and/or individuals who render services to them, without the
shareholders having preemptive rights to the subscription of such stock.
Article 7 - Through a resolution of the Shareholders’ Meeting or of the Board of Directors, as the case may be, the
Company’s capital stock may be increased by capitalizing profit or reserves.
Sole Paragraph - Any such capitalization shall be made with no alteration to the number of shares issued by the
Company.
Article 8 - The capital stock is represented by common and preferred shares, with no par value, and there is no requirement
that the shares maintain their current proportions in future capital increases.
Article 9 - Through resolution of a Shareholders’ Meeting or the Board of Directors, as the case may be, the period for
exercising the preemptive right for the subscription of shares, subscription of bonds or debentures convertible into shares in the cases
provided in Article 172 of the Corporate Law, may be excluded or reduced.
Article 10 - Non-payment by the subscriber of the issuance price as provided in the list or call shall cause it to be legally in
default, for the purposes of Articles 106 and 107 of the Corporate Law, being subject to payment of the overdue amount adjusted for
inflation in accordance with the fluctuation of the Market Price Index - IGP-M in the shortest period permitted by law, in addition to
interest of 12% (twelve percent) per year, “pro rata temporis” and a fine of 10% (ten percent) of the amount overdue, duly adjusted
for inflation.
CHAPTER III
SHARES
Article 11 - The capital stock is represented by common and preferred nominal shares, without par value.
Article 12 - Each common share is entitled to the right to one vote at the deliberations of the Shareholders’ Meetings.
OI S.A.
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Sole Paragraph - Ordinary shares entitle their holders to the right to be included in a public offering of shares resulting
from the Sale of Control of the Company at the same price and under the same terms offered to the Selling Controlling Shareholder,
pursuant to Article 41 of these Bylaws.
Article 13 - The preferred shares have no right to vote and are assured priority in the payment of the minimum and non-
cumulative dividend of 6% (six percent) per year calculated as a percentage of the amount resulting from dividing the capital stock by
the total number of shares of the Company, or 3% (three percent) per year calculated as a percentage of the book value of
shareholders’ equity divided by the total number of shares of the Company, whichever is higher.
1st Paragraph - The preferred shares of the Company, in compliance with the terms of the first paragraph of this Article,
shall be granted the right to vote, through separate voting, in the decisions related to the hiring of foreign entities related to the
controlling shareholders, in the specific cases of management service agreements, including technical assistance.
2nd Paragraph - The preferred shares of the Company, in compliance with the terms of the first paragraph of this Article,
shall be granted the right to vote in the decisions related to employment of foreign entities related to the controlling shareholders, in
terms of management services, including technical assistance, and the amounts of which shall not exceed the following percentages of
annual sales for the Fixed Switched Telephone Service of the Telecommunication Transport Network and the Mobile Highway
Telephone Service, less tax and contributions deducted: (i) 1% (one percent) per year, up to December 31, 2000; (ii) 0.5% (zero point
five percent) per year, from January 1, 2001 to December 31, 2002; and (iii) 0.2% (zero point two percent) per year, as of January 1,
2003.
3rd Paragraph - The preferred shares shall acquire the right to vote if the Company fails to pay the minimum dividends to
which they are entitled for 3 (three) consecutive years, in accordance with the terms of this article.
CHAPTER IV
SHAREHOLDERS’ MEETING
Article 14 - The Shareholders’ Meeting shall be held ordinarily once a year and extraordinarily when convened pursuant to
law or to these Bylaws.
Article 15 - The Shareholders’ Meeting shall be convened by the Board of Directors, or the manner in sole paragraph of
Article 123 of the Corporate Law.
Article 16 - The Shareholders’ Meeting shall be convened by the Chairman of the Board of Directors. In the absence or
disability of the Chairman, the Shareholders’ Meeting shall be convened by any member of the Board of Directors present, chosen by
those present at the Meeting. In case of absence and/or disability of any of the Board Members, in compliance with the mechanics set
forth under this Article, those present at the Meeting shall be responsible for choosing the chairman of the Meeting and the chairman
shall choose the corresponding secretary.
Article 17 - Before convening the Shareholders’ Meeting, the duly identified shareholders shall sign the Shareholders’
Attendance Book, which shall include their names and the number of shares they hold.
1st Paragraph - The signing of the shareholders’ attendance list shall be ended by the Chairman of the Meeting at the time
the Shareholders’ Meeting is convened.
2nd Paragraph - The shareholders who attend the Shareholders’ Meeting after it has been convened may participate in the
meeting, but they will not be entitled to vote on any resolution.
Article 18 - The following formal requirements for attendance at the Shareholders’ Meeting will be required to be
complied with by the Company and the Board, in addition to the procedures and requirements provided for by law:
OI S.A.
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(i) Up to 2 (two) business days prior to the Shareholders’ Meeting, each shareholder shall have sent to the Company, at the
address indicated in the Call Notice, proof of or a statement issued by the depositary institution of the custodian, containing
its respective equity interest, and issued by the competent body within 3 (three) business days prior to the Shareholders’
Meeting; and (i) if the shareholder is a Legal Entity, certified copies of its Certificate of Incorporation, Bylaws or Articles
of Association, the minutes of the meeting electing its Board of Directors (if any) and minutes of the election of the Board
of Executive Officers that contains the election of the legal representative(s) attending the Shareholders’ Meeting; or (ii) if
the shareholder is an Individual, certified copies of its identity documents and tax identification number; and (iii) if the
shareholder is a Fund, certified copies of the regulations of the Fund and the Bylaws or Articles of Association of the
manager of the Fund, as well as minutes of the meeting of the election of the legal representative(s) attending the Meeting.
In addition to the documents listed in (i), (ii) and (iii), as the case may be, when the shareholder is represented by a proxy,
it shall submit along with such documents the respective proxy, with special powers and notarized signature, as well as
certified copies of the identity documents and minutes of the meeting of the election of the legal representative who signed
the proxy to confirm its powers of representation, in addition to the identity documents and tax identification numbers of
the attorney in fact in attendance.
(ii) A copy of the documents referred to in the previous paragraph may be submitted, and the original documents referred to in
the subsection above shall be presented to the Company prior to convening the Shareholders’ Meeting.
Article 19 - The resolutions of the Meeting, except as otherwise provided by law or by these Bylaws, shall be taken by a
majority vote of those present or represented, not counting abstentions.
Article 20 - The discussions and deliberations of the Shareholders’ Meeting shall be written in the book of minutes, signed
by the members of the board and by the shareholders present, which represent, at least, the majority required for the deliberations
made.
1st Paragraph - The minutes may be drafted in summarized form, including dissent and objections.
2nd Paragraph - Except for resolutions to the contrary by the Shareholders’ Meeting, the minutes shall be published
without signatures of the shareholders.
Article 21 - In addition to the other duties provided by law and by these Bylaws, the Shareholders’ Meeting shall be solely
responsible for the following:
(i)
(ii)
(iii)
elect and remove members from the Board of Directors and the Audit Committee;
establish the aggregate remuneration of members of the Board of Directors and members of the Audit Committee;
approve plans to grant stock options to purchase shares to officers and employees of the Company or companies
under its direct or indirect control and/or individuals who provide services to the Company;
(iv)
deliberate on the allocation of annual net income and the distribution of dividends;
(v)
(vi)
authorize management to file for bankruptcy, request bankruptcy protection or file for bankruptcy protection;
deliberate on a proposed delisting of the Company from the special listing segment of Level 1 Corporate
Governance of BM&FBOVESPA; and
(vii)
choose the institution or specialized companies to evaluate the Company in the cases provided for in the Corporate
Law and in these Bylaws.
OI S.A.
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200F4SiTVNe$zeN6:
CHAPTER V
COMPANY’S MANAGEMENT
Section I
General Rules
Article 22 - Management of the Company shall be overseen by the Board of Directors and by the Board of Executive
Officers.
1st Paragraph - The appointment of members of management will not require a guarantee and will be accomplished
through execution of the instrument of appointment in the Minutes Book of the Meetings of the Board of Directors or the Board of
Executive Officers, as appropriate. The appointment of members of management shall be subject to the prior subscription of the Term
of Consent of Management (Termo de Anuência dos Administratores) in accordance with the Level 1 Listing Regulations and the
Statement of Consent to the Code of Ethics and the Disclosure and Securities Trading Policies adopted by the Company, and
compliance with applicable legal requirements.
2nd Paragraph - The positions of Chairman of the Board of Directors and Chief Executive Officer or principal executive
of the Company may not be held by the same person.
Section II
Board of Directors
Article 23 - The Board of Directors is comprised of 11 (eleven) members and an equal number of alternates, each alternate
bound to one member, all elected and dismissible through the Shareholders’ Meeting, with a combined term of 2 (two) years;
reelection permitted and subject to the provisions of Article 69 hereof.
1st Paragraph - Only the individuals who meet the following, in addition to legal and regulatory requirements, can be
elected to serve on the Board of Directors: (i) do not hold positions in companies that may be considered competitors of the Company
or its subsidiaries in the marketplace, in particular, on advisory, management and/or audit committees; and (ii) have no conflict of
interest with the Company or with its subsidiaries.
2nd Paragraph - Holders of preferred shares shall be entitled to elect, by separate vote, a member of the Board of Directors
and its respective alternate.
3rd Paragraph - Amendments of the terms set forth in the 2nd Paragraph of this Article shall require separate approval by
the holders of preferred shares.
4th Paragraph - The members the Board of Directors shall remain in office after the end of the term until appointment of
their replacements.
Article 24 - The Chairman of the Board of Directors shall be appointed by the Shareholders’ Meeting that deliberates on
the election of the Board Members.
1st Paragraph - The Chairman of the Board of Directors shall be responsible for convening the meeting of the Board of
Directors and arranging for convening the Shareholders’ Meetings, when approved by the Board of Directors.
2nd Paragraph - In the event of a permanent vacancy in the position of Chairman of the Board of Directors, the new
chairman will be appointed by the Board of Directors from among its members, at a meeting specially convened for this purpose.
Article 25 - At least 20% (twenty percent) of the members of the Board of Directors shall be Independent Members of the
Board of Directors, as defined below, and expressly declared as such in the minutes of the Shareholders’ Meeting electing them, and
shall be considered as independent members of the Board of Directors elected pursuant to the provisions under Article 141, §§ 4 and
5 of the Corporate Law.
1st Paragraph - For purposes hereof, the definition of Independent Member of the Board of Directors provided for in the
Novo Mercado Listing Regulations shall be adopted, according to which an “Independent Council Member” is defined by: (i) having
no
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employment relationship with the Company, except for an interest in its capital stock; (ii) not being a Controlling Shareholder, spouse
or up to a second degree relative, and not being or having been, for the past 3 (three) years, related to a company or entity related to
the Controlling Shareholder (persons related to public education and/or research institutions are excluded from this restriction);
(iii) not having been in the past three 3 (three) years, an employee or executive of the Company, the Controlling Shareholder or a
subsidiary of the Company; (iv) not being a direct or indirect supplier or buyer of services and/or products of the Company to an
extent that would imply loss of independence; (v) not being an employee or member of management of a company or entity offering
or requesting services and/or products to the Company, to an extent that would imply loss of independence; (vi) not being a spouse or
second degree relative of any members of management of the Company; and (vii) not receiving any remuneration from the Company
other than that related to the position as a member of the Board of Directors (cash earnings from equity interests in the Company’s
capital stock are excluded from this restriction).
2nd Paragraph - When, in connection with the percentage referred to in the first paragraph of this Article, the result is a
fractional number of members of the Board of Directors, the number will be rounded to the nearest whole number: (i) immediately
higher, when the fraction is equal or more than 0.5 (five tenths); or (ii) immediately lower, when the fraction is less than 0.5 (five
tenths).
Article 26 - Except as provided in Article 27 hereof, the election of members of the Board of Directors will be done
through a slate system.
1st Paragraph - In the election covered by this Article, only the following may compete as part of the slates: (a) those
nominated by the Board of Directors; or (b) those that are nominated, pursuant to the 3rd Paragraph of this Article, by any shareholder
or group of shareholders.
2nd Paragraph - The Board of Directors shall, before or on the day of convening the Shareholders’ Meeting to elect the
members of the Board of Directors, disclose the management’s proposal, indicating the members of the proposed slate and post a
statement signed by each member of the slate nominated thereby, at the Company, including: (a) his or her complete qualifications;
(b) a complete description of his or her professional experience, mentioning professional activities previously performed, as well as
professional and academic qualifications; and (c) information about disciplinary and judicial proceedings in which he or she has been
convicted in a final and unappealable decision, as well as information, if applicable, on the existence of cases of being barred or
conflict of interest, pursuant to Article 147, 3rd Paragraph of the Corporate Law.
3rd Paragraph - The shareholders or group of shareholders who wish to propose another slate to compete for positions on
the Board of Directors shall, with at least 5 (five) days before the date set for the Shareholders’ Meeting, submit to the Board of
Directors affidavits signed by each of the candidates nominated by them, including the information mentioned in the foregoing
paragraph above , and the Board of Directors shall immediately disclose information, by notice published on the Company’s website
and electronically submitted to CVM and BM&FBOVESPA, that the documents related to the other slates submitted are available to
the shareholders at the Company’s headquarters.
4th Paragraph - The names of those nominated by the Board of Directors or by shareholders shall be identified, as the case
may be, as candidates to be Independent Members of the Board of Directors, subject to the provisions of Article 25 above.
5th Paragraph - The same person may participate in two or more slates, including the one nominated by the Board of
Directors.
6th Paragraph - Each shareholder can only vote in favor of one slate, and the candidates of the slate that receives the most
votes at the Shareholders’ Meeting shall be declared elected.
Article 27 - In the election of members of the Board of Directors, the shareholders may require, pursuant to law, the
adoption of a cumulative voting process, provided they do so at least 48 (forty-eight) hours prior to the Shareholders’ Meeting,
subject to the requirements set forth by law and by the CVM regulations.
OI S.A.
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1st Paragraph - The Company, immediately after receiving such request, shall disclose the information that the election
shall be carried out by the cumulative voting process by notices published on its website and electronically submitted to CVM and
BM&FBOVESPA.
2nd Paragraph - Once the Shareholders’ Meeting has been convened, the board will, in view of the signatures in the
Shareholders’ Attendance Book and the number of shares held by the shareholders present, calculate the number of votes to which
each shareholder is entitled.
3rd Paragraph - In the event of election of the Board of Directors by the cumulative voting process, there will be no
elections by slates and the members of the slates referred to in Article 26 shall be considered as candidates for members of the Board
of Directors, as well as the candidates that may be nominated by a shareholder who is present at the Shareholders’ Meeting, provided
that statements signed by such candidates are submitted to the Shareholders’ Meeting, as provided for in the 2nd Paragraph of Article
26 hereof.
4th Paragraph - Each shareholder shall have the right to accumulate votes assigned to him for a single candidate or
distribute them among several candidates, and those who receive the most votes shall be declared elected.
5th Paragraph - The positions that, by virtue of a tie, are not filled, will undergo a new vote, by the same process,
adjusting the number of votes for each shareholder, given the number of positions to be filled.
6th Paragraph - Whenever the election has been conducted by a cumulative voting process, the removal of any member of
the Board of Directors by the Shareholders’ Meeting shall result in the removal of the other members, and there shall be a new
election.
7th Paragraph - If the Company is under control of a controlling shareholder or group, as defined under Article 116 of the
Corporate Law, minority shareholders holding common shares may, as provided for in the 4th Paragraph of Article 141 of the
Corporate Law, request the separate election of one member of the Board of Directors, and the rules set forth under Article 26 above
shall not apply to such election.
Article 28 - If a member of the Board of Directors who is resident and domiciled abroad is elected, his appointment is
subject to having an attorney-in-fact appointed who is resident and domiciled in Brazil, with powers to receive summons in an action
that may be brought against him, based on corporate law. The validity of the proxy shall be at least 3 (three) years after termination of
the term of the respective member of the Board of Directors.
Article 29 - The Board of Directors shall meet, ordinarily, in accordance with the schedule to be disclosed by the
Chairman in the first month of each fiscal year, which shall provide for at least monthly meetings and extraordinary meetings
whenever required.
1st Paragraph - Call notices for meetings of the Board of Directors shall be made in writing, by letter, telegram, fax and/or
email, and must include the place, date and time of the meeting and the agenda.
2nd Paragraph - The Board of Directors’ meetings shall be convened at least 5 (five) days in advance, and, regardless of
the call formalities, shall be deemed a regular meeting if attended by all members of the Board of Directors.
3rd Paragraph - In urgent cases, the Chairman of the Board of Directors may convene a meeting of the Board of Directors
with less advance notice than that provided for in 2nd Paragraph of this Article.
4th Paragraph - Members of the Board of Directors may attend the meetings by conference call, video conferencing or by
any other means of communication that allows all Council Members to see and/or hear each other. In this case, the Council Members
shall be considered present at the meeting, and minutes shall be drawn up and signed by all present by the next meeting.
OI S.A.
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Article 30 - The meeting of the Board of Directors shall be convened with the presence of a majority of its members and
decisions will be taken by majority vote of those present, and the Chairman of the Board in the event of a tie, shall have the casting
vote.
Sole Paragraph - A member of the Board of Directors may not participate in Board of Directors’ resolutions related to
matters in which it has conflicting interests with the Company, and shall (i) inform other members of the Board of Directors regarding
his or her inability; and (ii) inform, in the minutes of the meeting, the nature and extent of his or her interest.
Article 31 - Except as provided in Article 24, 2nd Paragraph above, in the event of absence or temporary disability,
members of the Board of Directors will be replaced by their alternates.
Sole Paragraph - Considering the provisions of Article 24, 2nd Paragraph above, in the case of a vacancy in a position of a
member of the Board of Directors, his or her alternate shall assume the vacant position. If the alternate does so assume the vacant
position, the provisions of Article 150 of the Corporate Law shall be complied with, except as provided in the 6th Paragraph of Article
27 hereof.
Article 32 - In addition to the duties provided by law and by these Bylaws, the Board of Directors shall be responsible for
the following:
i.
ii.
iii.
iv.
v.
vi.
vii.
determine the general guidelines of Company and subsidiary business and monitor execution thereof;
convene the Shareholders’ Meeting;
approve the Company’s and its subsidiaries’ annual budget, and the business goals and strategies provided for the
subsequent period;
approve the remuneration policy of the Company’s management and employees, setting goals to be achieved in
variable remuneration programs, subject to applicable law;
issue statements and submit the management report and the Board of Executive Officers’ accounts to the
Shareholders’ Meeting;
elect and dismiss, at any time, Executive Officers and establish their duties, subject to legal and statutory
provisions;
supervise the management of Executive Officers, examine, at any time, the Company’s books, request
information on contracts entered into or to be entered into or on any other acts;
viii.
appoint and dismiss the independent auditors;
ix.
x.
xi.
xii.
xiii.
xiv.
xv.
xvi.
xvii.
approve and amend the Charter of the Board of Directors;
establish the location of the Company’s headquarters;
submit the proposed allocation of net income to the Shareholders’ Meeting;
approve the acquisition of shares issued by the Company to be canceled or held in treasury for subsequent sale;
authorize the issue of shares by the Company within the limits authorized under Article 7 hereof, establishing the
conditions of issue, including price and payment term;
approve investments and disinvestments by the Company or its subsidiaries in the capital of other companies that
exceed the authority of the Board of Executive Officers, as well as authorize minority investments and the
entering into of shareholders agreements by the Company and its subsidiaries;
approve loans, financing or other transactions resulting in debt to the Company or to its subsidiaries, the value of
which exceeds the authority of the Board of Executive Officers;
approve the issuance and cancellation of debentures and the issuance of debentures convertible into shares, within
the limit of authorized capital, and of non-convertible debentures of the Company and its subsidiaries;
authorize the Board of Executive Officers to purchase, sell, create liens or encumbrances of any nature on
permanent assets, render guarantees generally, enter into contracts of any kind, waive rights and transactions of
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xviii.
xix.
xx.
xxi.
xxii.
xxiii.
xxiv.
xxv.
xxvi.
xxvii.
xxviii.
any kind of the Company and its subsidiaries in amounts equal to or greater than the authority of the Board of
Executive Officers;
authorize the granting of security interests or guarantees by the Company and its subsidiaries in favor of third
parties in excess of the amount under the authority of the Board of Executive Officers;
approve extraordinary contributions to private pension plans sponsored by the Company’s subsidiaries;
decide in favor of or against any public offering for acquisition of shares issued by the Company, by a considered
opinion, disclosed within 15 (fifteen) days from publication of the notice of a public offering of the acquisition of
shares, which shall include at least (a) the appropriateness and opportunity of the public offering to acquire shares
with regards to the interest of the shareholders and with regards to the liquidity of the securities it holds; (b) the
impact of the public offering of shares on the Company’s interests; (c) the strategic plans disclosed by the
offering party in relation to the Company; (d) other points that the Board of Directors deems relevant, as well as
the information required by the applicable rules established by the CVM;
define the list of three companies specialized in economic valuation of companies, to prepare the valuation report
of the Company’s shares, in the case of a public offering to acquire shares for cancellation of public company
registration or delisting from the Level 1 Corporate Governance;
in view of the commitment of the Company and of the subsidiaries to sustainable development, authorize the
practice of pro bono acts on behalf of its employees or the community, at an amount in excess of the authority of
the Board of Executive Officers;
nominate the representatives of the governing bodies of pension funds sponsored by subsidiaries of the Company;
approve the proposal of the Board of Executive Officers with respect to the Rules of the Statutory Board with the
power and duties of the Statutory Officers of the Company;
approve the Charters of the Advisory Committees to the Management of the Company and its subsidiaries;
authorize the granting of stock options to its management, employees or individuals who provide services to the
Company, within the limit of authorized capital; and
distribute the remuneration fixed by the Shareholders’ Meeting among the members of the Board of Directors and
Board of Executive Officers.
oversee that the Company, during the licensing term and its renewal, bind itself to assuring the effective
existence, on national territory, of centers for deliberation and implementation of strategic, management and
technical decisions involved in the accomplishment of the License Agreement of the Public Switched Telephone
Network (PSTN), the Authorization Term for Telecommunication Transport Network Service, the Authorization
Term for Mobile Highway Telephone Service, and also making this obligation reflect on the composition and the
decision making procedures of its management organs.
1st Paragraph - In each fiscal year, at the first meeting following the Ordinary Shareholders’ Meeting, the Board of
Directors shall approve the authority of the Company’s Board of Executive Officers and its subsidiaries, according to the duties
provided for in this Article.
2nd Paragraph - The Company is prohibited from granting loans or guarantees of any kind to shareholders that are part of
the controlling block, to the controlling shareholders thereof to companies under common control, and to companies they directly or
indirectly control.
Article 33 - The Board of Directors may create Advisory Committees for the Company’s management, and appoint their
members, which may be regular or alternate members of the Board of Directors.
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1st Paragraph - Without affecting other Advisory Committees to be created by the Board of Directors, the Company must
have a Remuneration Board, whose objectives and authority will be defined by the Board of Directors.
2nd Paragraph - Employees and Executive Officers cannot be nominated as members of any Committee.
Article 34 - The Company’s Internal Audit shall be subordinate to the Board of Directors.
Section III
Board of Executive Officers
Article 35 - The Board of Executive Officers shall be comprised of a minimum of 3 (three) and a maximum of 6 (six)
members elected by the Board of Directors, and the positions of Chief Executive Officer and Chief Financial Officer shall always be
filled, and the remaining Officers shall not have a specific designation.
1st Paragraph - The position of Investor Relations Officer may be exercised together or separately from other positions.
2nd Paragraph - The term of office of Executive Officers shall be 2 (two) years, re-election permitted and subject to the
provisions of Article 70 hereof. The Executive Officers shall remain in office until the appointment of their replacements.
3rd Paragraph - The Board of Executive Officers will act as a joint decision-making body, except for the individual
functions of each of its members, in accordance with these Bylaws.
Article 36 - The Executive Officers are responsible for complying with and causing the compliance with the present
Bylaws, the resolutions made at the Shareholders’ Meetings, the meetings of the Board of Directors and the meetings of Board of
Executive Officers, and perform all acts that shall be necessary for normal operation of the Company.
1st Paragraph - The Chief Executive Officer shall be responsible for the following:
I - submitting to the Board of Directors proposals approved at the meetings of the Board of Executive Officers, if
applicable;
II - keeping the members of the Board of Directors informed of the activities and the progress of corporate business;
III - directing and coordinating the activities of the other Executive Officers;
IV - submitting to the Board of Directors a proposal of the Internal Rules of the Company with the powers and duties of
the Statutory Officers of the Company;
V - providing the casting vote at the meetings of the Board of Executive Officers; and
VI - performing other activities as conferred by the Board of Directors.
2nd Paragraph - The other Executive Officers shall be responsible for assisting and supporting the Chief Executive Officer
in the management of the Company’s business and shall perform the duties assigned to them by the Board of Directors under the
guidance and coordination of the Chief Executive Officer.
3rd Paragraph - In the absence or temporary disability of the Chief Executive Officer, he or she will be replaced by any
Officer appointed by him or her.
4th Paragraph - Subject to the provisions of the 3rd Paragraph of Article 39, in cases of absence or temporary disability of
the Chief Executive Officer and of any Executive Officer appointed by him or her, the position of Chief Executive Officer shall be
held by another Executive Officer appointed by the absent or disabled Executive Officer who is, pursuant to the first paragraph of this
Article, performing the duties of the Chief Executive Officer.
OI S.A.
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5th Paragraph - The other members of the Board of Executive Officers will be replaced when absent or temporarily
disabled by another Executive Officer appointed by the Board of Executive Officers. The Executive Officer that is replacing another
absent Executive Officer shall cast the vote of the absent Executive Officer, in addition to his own vote.
6th Paragraph - The Executive Officers may attend the meetings of the Board of Executive Officers by conference call,
video conferencing or by any other means of communication that allows all Executive Officers to see and/or hear each other. In this
case, the Executive Officer shall be considered present at the meeting and minutes shall be drawn up to be signed by all present by the
next meeting.
Article 37 - In the event of a vacancy in the position of Chief Executive Officer, Chief Financial Officer, Investor
Relations Officer or General Counsel, and until the Board of Directors deliberates on the election for the vacant position, the duties of
the vacant position will be assumed by the Executive Officer appointed by the Board of Executive Officers.
Article 38 - Subject to the provisions contained herein, the following shall be necessary to bind the Company: (i) the joint
signature of 2 (two) Members of the Board of Directors; (ii) the signature of 1 (one) Member of the Board of Directors together with
an attorney-in-fact, or (iii) the signature of 2 (two) attorneys-in-fact jointly invested with specific powers. Service of judicial or
extrajudicial notifications will be made to the Member of the Board of Directors appointed by the Board of Directors or a proxy
appointed in compliance with this Article.
1st Paragraph - The Company may be represented by only one Executive Officer or one attorney in fact, both in any case
duly authorized in compliance with this Article, to perform the following acts:
i.
ii.
iii.
iv.
v.
vi.
- receive and pay amounts owed to and by the Company;
- issue, negotiate, endorse and discount trade bills related to its sales;
- sign correspondence that does not create obligations for the Company;
- represent the Company in Meetings and shareholders’ meetings of companies in which the Company holds a stake;
- represent the Company in court, except for acts that result in waiver of rights; and
- perform simple administrative routine acts, including with public agencies, mixed capital companies, boards of
trade, Labor Courts, INSS (Instituição Nacional de Seguro Social), FGTS (Fundo de Garantia do Tempo de
Serviço) and their banks for payment, and others of the same type.
2nd Paragraph - The powers of attorney granted by the Company, which shall be signed by 2 (two) Executive Officers
together, shall specify the powers granted and shall have a maximum validity of 1 (one) year, except those with the powers of ad
judicia and/or ad judicia et extra clauses and/or power to represent the Company in court or administrative proceedings, which will
have a maximum term of indefinite validity.
Article 39 - The Board of Executive Officers, as a collective body, shall be responsible for the following:
i.
ii.
iii.
iv.
v.
establish specific policies and guidelines under the general guidance of the business transactions established by the
Board of Directors;
draft the budget, the manner of its execution and the general plans of the Company, for approval by the Board of
Directors;
examine the proposals of subsidiaries for market development, an investment and budget plan, and submit them to
the Board of Directors;
approve the agenda of proposals of the Company and its subsidiaries to negotiate with the Regulating Body;
examine the management report and accounts of the Board of Executive Officers, as well as the proposal for
allocation of net income, submitting them to the Audit Committee, the Independent Auditors and the Board of
Directors;
vi.
appoint members of management of the Company’s subsidiaries;
OI S.A.
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vii.
establish voting guidelines in the Shareholders’ Meeting of subsidiaries and associated companies;
viii. create, close and change the addresses of branches and offices of the Company;
ix.
x.
deliberate on other matters it deems being of joint authority of the Board, or assigned thereto by the Board of
Directors; and
approve the performance of acts under the authority of the Board of Executive Officers approved by the Board of
Directors.
1st Paragraph - The Chief Executive Officer will be responsible for convening ex officio or at the request of 2 (two) or
more Executive Officers and chairing meetings of the Board of Executive Officers.
2nd Paragraph - The Board meeting shall be convened with the presence of a majority of its members and resolutions will
be taken by majority vote of those present.
3rd Paragraph - In the absence of the Chief Executive Officer, the Executive Officer nominated in accordance with
Article 36, paragraphs 3 and 4, hereof, shall chair the meeting of the Board of Executive Officers, and the alternate Chief Executive
Officer shall not cast a vote.
CHAPTER VI
AUDIT COMMITTEE
Article 40 - The Audit Committee is the supervisory body of the Company’s management, and shall be permanent.
Article 41 - The Audit Committee shall be comprised of 3 (three) to 5 (five) members and an equal number of alternates,
elected by the Shareholders’ Meeting, pursuant to law, with the duties, powers and remuneration provided by law.
1st Paragraph - The members of the Audit Committee shall be independent, and to this end, shall meet the following
requirements: (i) not be or have been in the past three years, an employee or member of management of the Company or a subsidiary
or a company under common control (ii) not receive any direct or indirect remuneration from the Company or a subsidiary or a
company under common control, except the remuneration for being a member of the Audit Committee.
2nd Paragraph - The appointment of the members of the Audit Committee shall be subject to their prior execution of the
Statement of Consent to the Code of Ethics and the Disclosure and Securities Trading Policies adopted by the Company, as well as
compliance with applicable legal requirements.
3rd Paragraph - The members of the Audit Committee, at their first meeting, shall elect the Chairman thereof, who shall
comply with the resolutions of the body.
4th Paragraph - The Audit Committee may request the Company to appoint qualified staff to act as secretary and provide
technical support.
Article 42 - The term of the members of the Audit Committee shall end at the first Ordinary Shareholders’ Meeting
subsequent to its formation.
Article 43 - The Audit Committee shall meet, ordinarily, on a quarterly basis and extraordinarily when required, drawing
up the minutes of these meetings in the proper book.
1st Paragraph - The meetings shall be convened by the Chairman of the Audit Committee or by 2 (two) of its members
together.
2nd Paragraph - Audit Committee meetings shall be convened with the presence of a majority of its members and
decisions shall be taken by majority vote of those present, the Chairman of the Committee having the casting vote in the event of a
tie.
OI S.A.
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3rd Paragraph - The members of the Audit Committee may participate in the Shareholders’ Meetings by conference call,
video conference or by any other means of communication that allows all members to see and/or hear each other. In this case, the
members of the Audit Committee shall be considered present at the meeting and minutes shall be draw up to be signed by all
individuals present by the next meeting.
Article 44 - The members of the Audit Committee shall be replaced, in case of temporary absence or vacancy, by their
alternates.
Article 45 - Besides cases of death, resignation, removal and others provided by law, the position is considered vacant
when a member of the Audit Committee fails to appear without just cause at 2 (two) consecutive meetings or 3 (three) non-
consecutive meetings in the fiscal year.
Sole Paragraph - In the event that there is a vacant position of in the Audit Committee and the alternate does not assume
the position, the Shareholders’ Meeting will meet immediately to elect a replacement.
Article 46 - The same provisions of the 2nd Paragraph of Article 26 hereof shall apply to members of the Audit
Committee.
CHAPTER VII
PUBLIC OFFERINGS
Section I
Sale of Control
Article 47 - Sale of Control of the Company, either through a single transaction or a series of transactions, shall be
undertaken pursuant to a condition precedent that the Purchaser undertakes to carry out a public offering to acquire the common
shares of the other Company shareholders, subject to the conditions and terms set forth in applicable law and in these Bylaws, in
order to ensure them equal treatment given to the Selling Controlling Shareholder.
Sole Paragraph - For the purposes hereof, the following capitalized terms below shall have the following meanings:
“Controlling Shareholder” - means the shareholder(s) or the Shareholder Group exercising Control over the Company.
“Selling Controlling Shareholder” - means the Controlling Shareholder that is procuring the Sale of Control of the
Company.
“Controlling Shares” - means the tranche of shares that directly or indirectly assures to the holder(s) individual and/or
shared Control of the Company.
“Outstanding Shares” - means all shares issued by the Company, except shares held by the Controlling Shareholder, held
by persons related thereto, held by the Company’s management and treasury shares.
“Purchaser” - means the party to whom the Selling Controlling Shareholder transfers the Controlling Shares in a Sale of
Company Control.
“Sale of Company Control” - means remunerated transfer of the Controlling Shares to a third party.
“Shareholder Group” - means the group of people: (i) bound by voting contracts or agreements of any kind, either directly
or through subsidiaries, parent companies or under common control; or (ii) among which there is a control relationship; or
(iii) under common control.
“Control” - means the power effectively used to direct corporate activities and directly or indirectly guide the operation of
the Company’s bodies, in fact or in law, regardless of the equity interest held. There is a presumption regarding control
OI S.A.
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ownership with regard to the party or Shareholder Group holding shares that has assured them an absolute majority of
votes of the shareholders present in the 3 (three) recent shareholder meetings of the Company, even if they do not hold
shares, to ensure an absolute majority of the voting capital.
“Economic Value” - means the value of the Company and of its shares, to be determined by a specialized company by
using a recognized methodology or based on another criterion to be defined by the CVM.
Article 48 - The public offering referred to in Article 47 above shall also be carried out: (i) when there is remunerated
assignment of subscription rights of shares and other securities or rights related to securities convertible into shares, which will result
in the Sale of Company Control; or (ii) in case of sale of control of the company that possesses Control of the Company, and in this
case, the Selling Controlling Shareholder shall be required to declare the value assigned to the Company in this sale and attach
documentation supporting this value to BM&FBOVESPA.
Article 49 - The party that acquires Control through a private agreement for the purchase of shares executed with the
Controlling Shareholder, involving any number of shares, shall be required to:
(i)
(ii)
conduct the public offering referred to under Article 47 above;
pay, as indicated below, an amount equal to the difference between the public offering price and the amount paid
per common share acquired on the stock exchange in the 6 (six) months prior to acquiring Control, duly adjusted for
inflation until the date of payment. Such amount shall be distributed among all of the individuals who sold the
Company’s common shares in the trading sessions in which the Purchaser made the acquisitions, in proportion to
the net daily selling balance of each one, and BM&FBOVESPA shall implement the distribution, pursuant to its
regulations; and
(iii)
take appropriate measures to restore the minimum percentage of 25% (twenty five percent) of the Company’s total
outstanding shares, within the 6 (six) months following the acquisition of Control.
Article 50 - The Company shall not register any transfer of shares to the Purchaser or to those that may come to hold
Control for so long as it (they) do not subscribe the Statement of Consent of the Controlling Shareholders referred to under the Level
1 Listing Regulations.
Article 51 - No shareholders’ agreement that provides for the exercise of Control may be registered at the Company’s
headquarters for so long as its signatories have not signed the Statement of Consent of the Controlling Shareholders referred to under
Level 1 Listing Regulations.
Sole Paragraph - A shareholders’ agreement on exercising voting rights that conflicts with the provisions hereof shall not
be filed by the Company.
Article 52 - In the public offering of shares to be carried out by the Controlling Shareholder or by the Company for
cancellation of public company registration, the minimum price to be offered shall correspond to the Economic Value determined in
the valuation report prepared pursuant of Article 54 hereof, subject to applicable laws and regulations.
Section II
Cancellation of Registration of a Public Company and Delisting from Markets
Article 53 - If there is a decision to delist from the Level 1 Corporate Governance so that the securities issued thereby start
to be traded outside Level 1 Corporate Governance, or due to corporate restructuring, in which the company resulting from such
restructuring does not have its securities admitted to trading at Level 1 Corporate Governance within 120 (one hundred twenty) days
from the date of the Shareholders’ Meeting approving the transaction, the Controlling Shareholder shall carry out a public offering of
the common shares held by the remaining shareholders of the Company, for at least the Economic Value
OI S.A.
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determined in a valuation report prepared pursuant to Article 54, in compliance with legal and regulatory rules.
1st Paragraph - The announcement of the public offering referred to in Articles 47 and 53 above shall be communicated to
BM&FBOVESPA and disclosed to the market immediately after the Company’s Shareholders’ Meeting that has approved the
delisting or approved such restructuring.
2nd Paragraph - The Controlling Shareholder shall be exempted from carrying out the public offering for acquisition of
common shares referred to under the heading of this Article if the Company is delisted from Level 1 Corporate Governance due to the
execution of the Company’s participation contract in the special BM&FBOVESPA segment known as Level 2 Corporate Governance
(“Level 2”) or in the Novo Mercado (“Novo Mercado”) or if the company resulting from corporate restructuring obtains authorization
to trade securities at Level 2 or in the Novo Mercado within 120 (one hundred twenty) days from the date of the Shareholders’
Meeting that approved the transaction.
Article 54 - The valuation reports referred to in this Article shall be prepared by a specialized company with proven
experience and independent from any power of decision by the Company, its managers and Controlling Shareholder, in addition to
meeting the requirements of the 1st Paragraph of Article 8 of the Corporate Law and includes the responsibility provided for in the 6th
Paragraph of the same Article.
1st Paragraph. The choice of the specialized institution or company responsible for determining the Company’s Economic
Value shall be made solely at the Shareholders’ Meeting, upon presentation by the Board of Directors of a list of three names, and the
respective resolution, not considering blank votes, and considering one vote for each common share, shall be taken by majority vote
of the shareholders representing the Outstanding Shares present at that Shareholders’ Meeting, which, if convened upon first call,
shall require the presence of shareholders representing at least 20% (twenty percent) of the total Outstanding Shares, or, if when call a
second time, may have the presence of any number of shareholders representing the Outstanding Shares.
2nd Paragraph. The costs for preparing the valuation report shall be fully borne by the offering party.
Article 55 - In the event there is no Controlling Shareholder, if there is a decision to delist from the Level 1 Corporate
Governance so that the securities issued thereby start to be traded outside Level 1 Corporate Governance, or due to corporate
restructuring, in which the company resulting from such restructuring does not have its securities admitted to trading at Level 1
Corporate Governance within 120 (one hundred twenty) days from the date the Shareholders’ Meeting approved the transaction, the
delisting will be contingent on the public offering of shares on the same terms provided for in Article 53 above, except as provided in
2nd Paragraph of Article 53 above.
1st Paragraph. Such Shareholders’ Meeting shall define those responsible for the public offering of shares, and such
responsible parties must be in attendance at the Shareholders’ Meeting and shall expressly assume the obligation to make the offer.
2nd Paragraph. If those responsible for the public offering of shares have not been defined, in the case of corporate
restructuring in which the resulting company does not have its securities admitted to trading on Level 1 Corporate Governance, the
shareholders who voted for the corporate restructuring shall conduct such offering.
Article 56. The delisting of the Company from Level 1 Corporate Governance due to noncompliance with the obligations
of Level 1 Listing Regulations is subject to a public offering of shares for at least the Economic Value of the shares, to be determined
in a valuation report referred to in Article 54 hereof, subject to the applicable laws and regulations.
1st Paragraph. The Controlling Shareholder shall conduct the public offering for acquisition of shares under the heading
of this Article.
OI S.A.
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2nd Paragraph. In the event there is no Controlling Shareholder and if the Company is delisted from Level 1 Corporate
Governance because of breach of the obligations under the Level 1 Listing Regulations, by resolution at the Shareholders’ Meeting,
the public offering of shares shall be conducted by the shareholders that voted in favor of the resolution that led to the breach.
3rd Paragraph. In the event there is no Controlling Shareholder and the delisting from the Level 1 Corporate Governance
referred to in the first paragraph hereof takes place by an act or fact of management, members of the Company’s management shall
convene a Shareholders’ Meeting pursuant to Article 123 of the Corporate Law, to make the necessary decisions, the agenda of which
shall include deliberation on how to remedy the breach of the obligations under the Level 1 Regulations or, where appropriate, to
deliberate on delisting the Company from Level 1 Corporate Governance.
4th Paragraph. If the Shareholders’ Meeting mentioned in the 3rd paragraph above deliberates on the Company being
delisted from Level 1 Corporate Governance, such Shareholders’ Meeting shall define those responsible for the public offering of
shares referred to above, who shall be in attendance at the Shareholders’ Meeting and shall expressly undertake the obligation to
conduct the offering.
Article 57 - The creation of a single public offering of shares is permitted for more than one of the purposes specified in
this Article or in the regulations issued by the CVM, provided that it is possible to tailor the procedures of all modalities of the public
offering of shares, the parties receiving the offer are not prejudiced and authorization is obtained from the CVM when required by
applicable law.
Article 58 - The Company, in the event of a voluntary public offering of shares, or the shareholders, in cases where they
are responsible for conducting a public offering of shares provided for herein or in the regulations issued by the CVM, may ensure its
execution by any shareholder or third party. The Company or the shareholder, as applicable, is not exempt from the obligation to
make the public offering of shares until it is concluded, in compliance with applicable rules.
CHAPTER VIII
FISCAL YEAR AND FINANCIAL STATEMENTS
Article 59 - The fiscal year coincides with the calendar year, starting on January 1 and ending on December 31 of each
year, and the Board of Executive Officers at the end of each year shall prepare the Balance Sheet and other financial statements as
required by law.
Article 60 - The Board of Directors shall present in the Shareholders’ Meeting, together with the financial statements, the
proposal for the allocation of the net income of the fiscal year, as set forth by the provisions herein and the law.
Sole Paragraph - 25% (twenty-five percent) of the adjusted net income shall be mandatorily distributed as dividends, as
set forth in Article 62 below.
Article 61 - Dividends shall be paid first to the preferred shareholders up to the predetermined limit, subsequently,
common shareholders shall be paid up to the amount paid on preferred shares; the balance shall be apportioned for all the shares,
under equal conditions.
Article 62 - After subtracting the accumulated losses from the reserve for payment of income tax and, if applicable, the
reserve for management’s stake in the annual earnings, net income will be allocated as follows:
a)
b)
5% (five percent) of net income will be allocated to the legal reserve until it reaches 20% (twenty percent) of the
capital stock;
a portion corresponding to at least 25% (twenty five percent) of the adjusted net income in accordance with Article
202, item I of the Corporate Law, shall be used to pay mandatory dividends to shareholders, offsetting the semi-
annual and interim dividends that have been declared;
OI S.A.
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c)
by proposal of the management bodies, a portion corresponding to up to 75% (seventy five percent) of the adjusted
net income in accordance with Article 202, item I of the Corporate Law, shall be used to form the Equity
Replenishment Reserve, in order to replenish the capital and equity position of the Company, in order to allow for
investments and debt reduction; and
d)
the remaining balance will be allocated as approved by the Shareholders’ Meeting.
Sole Paragraph - The balance of the Equity Replenishment Reserve, added to the balances of the other profit reserves,
except the realizable profit reserves and reserves for contingencies, may not exceed 100% (one hundred percent) of the capital stock
and upon reaching this limit, the Shareholders’ Meeting may deliberate on the use of excess to increase capital stock or on the
distribution of dividends.
Article 63 - The Company may, by resolution of the Board of Directors, pay or credit, as dividends, interest on capital
pursuant to Article 9, paragraph 7, of Law No. 9,249, dated 12/26/95. The interest paid will be offset against the amount of the
mandatory minimum annual dividend due both to shareholders of common shares and of preferred shares.
1st Paragraph - The dividends and interest on capital covered by the first paragraph of this section will be paid at the times
and in the manner specified by the Board of Executive Officers, and any amounts that are not claimed within 3 (three) years after the
date of the commencement of payouts shall escheat to the company.
2nd Paragraph - The Board of Directors may authorize the Board of Executive Officers to deliberate on the matter of the
first paragraph of this Article.
Article 64 - The Company, by resolution of the Board of Directors may, within the legal limits:
(i)
(ii)
prepare semiannual or shorter period balance sheets and, based thereon, declare dividends; and
declare interim dividends from retained earnings or profit reserves in the most recent annual or semiannual balance
sheet.
Article 65 - The Company may, by resolution of the Shareholders’ Meeting, within the legal limits and as specified under
the Corporate Law, offer profit sharing to its management and employees.
Sole Paragraph - The Company may, by resolution of the Board of Directors, offer profit sharing to workers, as provided
by Law No. 10,101/2000.
CHAPTER IX
LIQUIDATION OF THE COMPANY
Article 66 - The Company will be dissolved, entering into liquidation, in the cases provided for by law or by resolution of
the Shareholders’ Meeting, which will determine the manner of liquidation and will elect the liquidator and the audit committee for
the liquidation period, establishing the respective fees thereof.
Article 67 - The Company’s corporate bodies shall, within the scope of their duties, take all measures necessary to prevent
the company from being barred, for breach of the provisions of Article 68 of Law No. 9,472, and its regulations, from directly or
indirectly operating telecommunication service concessions or licenses.
CHAPTER X
ARBITRATION
Article 68 - The Company, its shareholders, managers and members of the Audit Committee undertake to resolve through
arbitration, before the Market Arbitration Chamber (Câmara de Arbitragem do Mercado), any and all disputes that may arise between
them, related to or arising from, in particular, the application, validity, effectiveness, interpretation,
OI S.A.
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breach and its effects of the provisions of the Corporate Law , the Company’s Bylaws, the rules issued by the National Monetary
Council, the Central Bank of Brazil and the CVM, as well as other rules applicable to the capital markets in general, besides those
included in Level 1 Rules, Arbitration Rules, Sanction Rules and the Participation Agreement in Level 1 Corporate Governance.
Sole Paragraph - Notwithstanding the validity of this arbitration clause, the filing of emergency measures by the Parties,
prior to formation of the Arbitral Tribunal, shall be referred to the Support Arbitrator, pursuant to item 5.1 of the Arbitration Rules of
the Market Arbitration Chamber.
CHAPTER XI
FINAL AND TEMPORARY PROVISIONS
Article 69 - Exceptionally, the members of the Board of Directors elected on the date of approval hereof by the
Company’s Shareholders’ Meeting shall have a combined term of office until the Annual Shareholders’ Meeting approves the
financial statements for the year ended December 31, 2017. As of such Meeting, the term of the Board of Directors, even if re-
elected, shall be the one set out under Article 23 hereof.
Article 70 - Exceptionally, the members of the Board of Executive Officers elected at the first Meeting of the Board of
Directors held after the date of approval hereof by the Company’s Shareholders’ Meeting, shall have a combined term of office until
the first meeting of the Board of Directors to be held after the Annual Shareholders’ Meeting to approve the financial statements for
the year ended December 31, 2017. As of such meeting, the term of office of the members of the Board of Executive Officers, even if
re-elected, will be that which is set out under Article 35, 2nd Paragraph hereof.
Sole Paragraph - Until the Ordinary Shareholders’ Meeting that approves the financial statements for the year ended
December 31, 2017, the quorum for the removal of members of the Board shall be majority of the Board of Directors.
Article 71 - The amendment of the Company’s Bylaws approved at the Shareholders’ Meeting held on September 1, 2015
aims to achieve, earlier than planned, the adoption of high levels of corporate governance practices by Oi, as well as the dispersion of
voting rights, in line with the governance commitments made to the market, given that Oi shall continue pursuing the migration of its
shareholder base to the Novo Mercado segment of BM&FBOVESPA, always in accordance with desirability and social interest.
Article 72 - Any shareholder of the Company or group of shareholders representing a common interest or bound by a
voting agreement that holds or may holds at any time, individually or together, a stake of more than 15% (fifteen percent) of the
number of shares into which the voting capital stock of Company is divided, subject to the provisions of 1st Paragraph below, will
have their voting rights limited to 15% (fifteen percent) of the number of shares of the Company in which the voting capital stock is
divided.
1st Paragraph - The voting restriction provided for under this Article shall be considered terminated and will immediately
and irrevocably cease to have any effect with respect to a Company shareholder exercising voting rights, in any of the following
cases:
(i)
(ii)
if, as a result of one or more transactions to increase its capital stock, whether public or private, or a corporate
restructuring transaction, there is a dilution of the existing shareholder base on the date of approval hereof, greater
than 50% (fifty percent), i.e. when the number of new shares issued in capital increases by private or public
subscription is equal to or greater than the number of shares issued on this date (adjusted for any stock splits, reverse
splits or similar events);
if, as a result of a public offering aiming to acquire all of the Company’s outstanding shares and in which the
offering party acquires at least 20% of the outstanding shares, the respective offering party or group of shareholders
representing the same interest or bound by a voting agreement to the offering party, starts to hold, alone or together,
more than 50% (fifty percent) of the number of shares in which the voting capital stock of the Company is divided;
or
OI S.A.
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(iii)
if, at any time, no shareholder of the Company or group of shareholders representing the same interest or bound by a
voting agreement, individually or together, holds more than 15% (fifteen percent) of the number of shares in which
the voting capital stock of the Company is divided.
2nd Paragraph - In any of the cases of the 1st Paragraph, the administration will disclose a Material Fact, notifying the
market of the termination of the limitation provided in this Article 72.
3rd Paragraph - The restriction set forth in the first paragraph of this Article does not apply to the custodian of shares that
have deposited for the purpose of issuing certificates or representative deposits of these shares, but does apply to the holders of
certificates or representative deposits of the shares issued by the Company.
4th Paragraph - Votes exceeding the limit established in this Article shall not be calculated in the Shareholders’ Meeting.
5th Paragraph - In calculating the percentage provided for in the first paragraph of this Article, shares held by the shares
held by the following parties shall be considered as belonging to the shareholder: (a) third parties in their own name but on behalf of
the shareholder; (b) a parent company, subsidiary, affiliate, or under common control of the shareholder; (c) holders of voting rights
with whom the shareholder has signed an agreement for the exercise thereof; or (d) members of the administrative and supervisory
bodies of the shareholder.
Article 73 - The conversion of preferred shares into common shares approved by the Shareholders’ Meeting held on the
same date as approval of these Bylaws shall be conducted at the rate of 0.9211 common share for each preferred share issued by the
Company.
*****
OI S.A.
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Subsidiaries of Oi S.A.
Name of Subsidiary
Oi Móvel S.A.
Brasil Telecom Comunicação Multimídia Ltda.
BrT Card Serviços Financeiros Ltda.
Brasil Telecom Call Center S.A.
Oi Internet S.A
Oi Paraguay Multimedia Comunicaciones SRL
Rio Alto Gestão de Créditos e Participações S.A.
Copart 5 Participações S.A.
Telemar Norte Leste S.A.
Paggo Empreendimentos S.A.
Paggo Acquirer Gestão de Meios de Pagamentos Ltda.
Paggo Administradora de Crédito Ltda.
Oi Serviços Financeiros S.A.
Copart 4 Participações S.A.
Dommo Empreendimentos Imobiliários S.A.
SEREDE – Serviços de Rede S.A.
Pointer Networks S.A.
VEX Venezuela C.A
VEX Wifi S.A.
VEX Ukraine LLC
VEX USA Inc.
Pointer Networks S.A. – SUC Argentina
VEX Wifi Canadá Ltd.
VEX Colombia Ltda.
VEX Paraguay S.A.
Pointer Peru S.A.C
Oi Brasil Holdings Cooperatief UA
Bryophyta SP Participações S.A.
Portugal Telecom Internacional Finance B.V
Carrigans Finance S.à.r.l.
CVTEL, BV
Directel - Listas Telefónicas Internacionais, Lda.
PT Investimentos S.A.
PT Participações, SGPS, S.A.
PT Ventures, SGPS, S.A.
TPT - Telecomunicações Publicas de Timor, S.A.
CST – Companhia Santomense de Telecomunicações, S.A. R.L.
Directel Cabo Verde – Serviços de Comunicação, Lda.
Directel Uganda – Telephone Directories, Limited
Elta - Empresa de Listas Telefónicas de Angola, Lda.
Kenya Postel Directories, Ltd.
LTM - Listas Telefónicas de Moçambique, Lda.
Mobile Telecommunications Limited
Africatel GmbH
Africatel Holdings, BV
Timor Telecom, S.A.
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Exhibit 8.01
Jurisdiction of Incorporation
Brazil
Brazil
Brazil
Brazil
Brazil
Paraguay
Brazil
Brazil
Brazil
Brazil
Brazil
Brazil
Brazil
Brazil
Brazil
Brazil
Brazil
Venezuela
Uruguay
Ukraine
United States of America
Argentina
Canada
Colombia
Paraguay
Peru
The Netherlands
Brazil
The Netherlands
Luxembourg
The Netherlands
Portugal
Portugal
Portugal
Portugal
Portugal
São Tomé
Cape Verde
Uganda
Angola
Kenya
Mozambique
Namibia
Germany
The Netherlands
Timor
OI S.A.
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CERTIFICATION PURSUANT TO
SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
Exhibit 12.01
I, Bayard De Paoli Gontijo, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 20-F of Oi S.A. (the “Report”);
Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this Report;
Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in all
material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods
presented in this Report;
The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this Report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this Report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
Report based on such evaluation; and
(d) Disclosed in this Report any change in the company’s internal control over financial reporting that occurred during the
period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s
internal control over financial reporting; and
5.
The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
company’s internal control over financial reporting.
Date: May 19, 2016
/s/ Bayard De Paoli Gontijo
Bayard De Paoli Gontijo
Chief Executive Officer
OI S.A.
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CERTIFICATION PURSUANT TO
SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
Exhibit 12.02
I, Flavio Nicolay Guimarães, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 20-F of Oi S.A. (the “Report”);
Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this Report;
Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in all
material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods
presented in this Report;
The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this Report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this Report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
Report based on such evaluation; and
(d) Disclosed in this Report any change in the company’s internal control over financial reporting that occurred during the
period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s
internal control over financial reporting; and
5.
The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
company’s internal control over financial reporting.
Date: May 20, 2016
/s/ Flavio Nicolay Guimarães
Flavio Nicolay Guimarães
Chief Financial Officer
OI S.A.
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CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 13.01
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of Title 18,
United States Code), each of the undersigned officers of Oi S.A. (the “Company”), do hereby certify, to such officer’s knowledge,
that:
The annual report on Form 20-F for the fiscal year ended December 31, 2015 of the Company (the “Report”) fully complies
with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Report fairly
presents, in all material respects, the financial condition and results of operations of the Company.
Dated: May 20, 2016
/s/ Bayard De Paoli Gontijo
Name: Bayard De Paoli Gontijo
Title: Chief Executive Officer
/s/ Flavio Nicolay Guimarães
Name: Flavio Nicolay Guimarães
Title: Chief Financial Officer