OI S A
OI SA FORM 20-F
Donnelley Financial
VDI-W7-PFD-0058
12.10.7.0
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26-Apr-2019 13:22 EST
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As filed with the Securities and Exchange Commission on April 26, 2019
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
☐ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES
EXCHANGE ACT OF 1934
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2018
OR
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
☐ 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. – In Judicial Reorganization
(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)
Carlos Augusto Machado Pereira de Almeida Brandão
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
(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
Name of Each Exchange on which Registered
New York Stock Exchange
Securities registered or to be registered pursuant to Section 12(g) of the Act: Preferred Shares, without par value, each
represented by American Depositary Shares
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. – In Judicial Reorganization as of
December 31, 2018 was:
2,266,216,024 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 ☐ 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 ☐ 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 ☐
OI S A
OI SA FORM 20-F
Donnelley Financial
VDI-W7-PFD-0058
12.10.7.0
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RIO
26-Apr-2019 13:22 EST
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Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted
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 such files). Yes ☒ No ☐
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 ☐ Accelerated filer ☒ Non-accelerated filer ☐
Emerging growth company ☐
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if
the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards† provided pursuant to Section 13(a) of the Exchange Act. ☐
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 ☐
Other ☐
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. ☐ Item 17 ☐ 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 ☐ No ☒
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d)
of the Securities Exchange Act of 1934 subsequent to distribution of securities under a plan confirmed by a court. Yes ☒ No ☐
OI S A
OI SA FORM 20-F
Donnelley Financial
FWPAXE-EGVRS03
12.10.7.0
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25-Apr-2019 21:53 EST
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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. Identity of Directors, Senior Management and Advisers
Item 2. Offer Statistics and Expected Timetable
Item 3. Key Information
Item 4. Information on the Company
Item 4A. Unresolved Staff Comments
Item 5. Operating and Financial Review and Prospects
Item 6. Directors, Senior Management and Employees
Item 7. Major Shareholders and Related Party Transactions
Item 8. Financial Information
Item 9. The Offer and Listing
Item 10. Additional Information
Item 11. Quantitative and Qualitative Disclosures about Market Risk
Item 12. Description of Securities Other Than Equity Securities
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
Item 15. Controls and Procedures
Item 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. Financial Statements
Item 18. Financial Statements
Item 19. Exhibits
SIGNATURES
i
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OI S A
OI SA FORM 20-F
Donnelley Financial
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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 April 23, 2019, the exchange rate for reais into U.S. dollars was R$$3.9436 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$3.8748 to US$1.00 on
December 31, 2018, R$3.3080 to US$1.00 on December 31, 2017 and R$3.2591 to US$1.00 on December 31, 2016, in each case, as
reported by the Brazilian Central Bank. The real/U.S. dollar exchange rate fluctuates widely, and the selling rate on April 23, 2019 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, 2014.
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, 2018 of R$3.8748 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, 2018 and 2017 and for the
years ended December 31, 2018, 2017 and 2016, and the related notes thereto, which we refer to as our audited consolidated financial
statements, are included in this annual report.
We have prepared our audited consolidated financial statements in accordance with United States generally accepted accounting
principles, or U.S. GAAP, under the assumption that we will continue as a going concern. Our audited consolidated financial statements
have been audited in accordance with Public Company Accounting Oversight Board, or PCAOB, standards.
Under U.S. GAAP, our management is required to assess whether there are conditions or events, considered in the aggregate, that
raise substantial doubt about our ability to continue as a going concern within one year after our financial statements are issued. Our
management’s assessment of our ability to continue as a going concern is discussed in note 2 to our audited consolidated financial
statements. As of December 31, 2018, we have fulfilled the obligations established in the RJ Plan within the established time limits. As
a result the completion on January 25, 2019 of the capital increase that was mandated by the RJ Plan through the issuance of
3,225,806,451 Common Shares for an aggregate subscription price of R$4,000 million in our preemptive offering, our management
believes that as of the date of this annual report, we have sufficient resources to continue to operate for the 12 months following the date
of this annual report.
We intend to prepare our consolidated financial statements as of December 31, 2019 in accordance with International Financial
Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). For our fiscal year ended December 31,
2010, we included financial statements prepared under IFRS as part of our annual report on Form 20-F, applying IFRS 1, “First-time
Adoption of International Reporting Standards,” considering that our previous primary GAAP was Brazilian GAAP and that January 1,
2009 was the date of transition to IFRS. Consequently, as we are not a IFRS first-time adopter, we intend to include in our annual report
on Form 20-F for the fiscal year ended December 31, 2019, a reconciliation from U.S. GAAP to IFRS for the comparative balance sheet
(i.e., as of December 31, 2018) and comparative income statement periods preceding the most recent fiscal year (i.e., for the year ended
December 31, 2018) to present the changes in the basis of presentation. However, we are already including in our December 31, 2018
financial statements a reconciliation from U.S. GAAP to IFRS of our equity and income statement for the year ended December 31,
2018, as described in note 1 to our audited consolidated financial statements.
1
OI S A
OI SA FORM 20-F
Donnelley Financial
VDI-W7-PFD-0514
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As a result of the RJ Proceedings (which are considered to be similar in all substantive respects to proceedings under Chapter 11
of the U.S. Bankruptcy Code of 1986, as amended, which we refer to as the U.S. Bankruptcy Code), we have applied Financial
Accounting Standards Board Accounting Standards Codification 852 “Reorganizations”, or ASC 852, in preparing our audited
consolidated financial statements. ASC 852 requires that financial statements separately disclose and distinguish transactions and events
that are directly associated with our reorganization from transactions and events that are associated with the ongoing operations of our
business. Accordingly, certain expenses, realized gains and losses, and provisions for losses that are realized or incurred in the RJ
Proceedings have been recorded under the classification “Reorganization items, net” in our consolidated statements of operations. In
addition, our prepetition obligations that may be impacted by the RJ Proceedings based on our assessment of these obligations
following the guidance of ASC 852 have been classified on our consolidated statement of financial position as “Liabilities subject to
compromise.” Prepetition liabilities subject to compromise are required to be reported as the amount allowed as a claim by the RJ
Court, regardless of whether they may be settled for lesser amounts. Certain amounts initially recorded as liabilities subject to
compromise were adjusted and reclassified to reflect new legal terms and conditions established by the RJ Court. As a result of the
effectiveness of the RJ Plan on February 5, 2018, the contingencies included as “Liabilities subject to compromise” on our consolidated
statement of financial position will be paid according to terms of the RJ Plan and were reclassified as current and non-current
“Provisions for contingencies” on our consolidated statement of financial position.
As a result of the completion on January 25, 2019 of the capital increase that was mandated by the RJ Plan, for purposes of the
preparation of our financial statements under U.S. GAAP, we are deemed to have emerged from the RJ Proceedings. Upon emergence
on January 25, 2019, we would be required to adopt fresh-start accounting, as required by ASC 852. The adoption of fresh start
accounting would require our company to assign the reorganization value to our assets and liabilities, in conformity with the guidance
of ASC 805 applicable to business combinations. Under this guidance, our assets and liabilities would be adjusted to fair market values,
with any excess recorded as goodwill. However, as we intend to report our consolidated financial statements as of dates and for the
periods ending after January 1, 2019 in accordance with IFRS as issued by the IASB, we will not adopt fresh start accounting as there
are no requirements under IFRS to do so.
We are also required to prepare financial statements in accordance with accounting practices adopted in Brazil, or Brazilian
GAAP, which are based on:
•
•
•
the Brazilian Corporate Law (as defined below);
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).
Certain Defined Terms
General
Unless otherwise indicated or the context otherwise requires, all references to:
•
•
•
•
•
•
•
•
•
•
•
“our company,” “we,” “our,” “ours,” “us” or similar terms are to Oi and its consolidated subsidiaries;
“ADSs” are to Common ADSs and Preferred ADSs;
“ANATEL” are to the Brazilian National Telecommunications Agency (Agência Nacional de Telecomunicações);
“Bratel” are to Bratel S.à r.l.;
“Brazil” are to the Federative Republic of Brazil;
“Brazilian Corporate Law” are to, collectively, 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;
“Brazilian government” are to the federal government of the Federative Republic of Brazil;
“Brazilian Ministry of Communication” are to the Brazilian Ministry of Science, Technology and Communication
(Ministério da Ciência, Tecnologia, Inovações e Comunicações);
“Common ADSs” are to American Depositary Shares, each representing five Common Shares;
“Common Shares” are to common shares of Oi;
“Copart 4” are to Copart 4 Participações S.A. – In Judicial Reorganization, an indirect wholly-owned subsidiary of Oi prior
to its merger with and into Telemar in January 2019;
2
OI S A
OI SA FORM 20-F
Donnelley Financial
VDI-W7-PFD-0514
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25-Apr-2019 04:55 EST
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•
•
•
•
•
•
•
•
•
•
•
•
“Copart 5” are to Copart 5 Participações S.A. – In Judicial Reorganization, a direct wholly-owned subsidiary of Oi prior to
its merger with and into Oi in March 2019;
“Oi” are to Oi S.A. – In Judicial Reorganization;
“Oi Coop” are to Oi Brasil Holdings Coöperatief U.A. – In Judicial Reorganization, a direct wholly-owned subsidiary of Oi;
“Oi Mobile” are to Oi Móvel S.A. – In Judicial Reorganization, an indirect wholly-owned subsidiary of Oi;
“Pharol” are to Pharol, SGPS, S.A. (formerly known as Portugal Telecom, SGPS, S.A.);
“Preferred ADSs” are to American Depositary Shares, each representing one Preferred Share;
“Preferred Shares” are to preferred shares of Oi;
“PTIF” are to Portugal Telecom International Finance B.V. – In Judicial Reorganization, a direct wholly-owned subsidiary
of Oi, which PT Portugal transferred to us in anticipation of our sale of PT Portugal in 2015;
“PT Portugal” are to PT Portugal, SGPS, S.A., which we acquired on May 5, 2014 and sold on June 2, 2015;
“Telemar” are to Telemar Norte Leste S.A. – In Judicial Reorganization, a direct wholly-owned subsidiary of Oi;
“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; and
“TNL” are to Tele Norte Leste Participações S.A., a company that was directly controlled by TmarPart prior to its merger
with and into Oi on February 27, 2012.
Judicial Reorganization
The following defined terms relate to our global judicial reorganization. For more information, see “Presentation of Financial and
Other Information—Financial Restructuring,” and “Item 4. Information on the Company—Our Recent History and Development—Our
Judicial Reorganization Proceedings.” Unless otherwise indicated or the context otherwise requires, all references to:
•
•
•
•
•
•
•
•
•
•
•
•
•
“Ad Hoc Group” are to a diverse ad hoc group of holders of the bonds issued by Oi, Oi Coop and PTIF;
“ADWs” are to American Depositary Warrants;
“Backstop Investors” are to the members of the Ad Hoc Group, the IBC and certain other unaffiliated bondholders party to
the Commitment Agreement;
“Bondholder” are each holder of beneficial interests in the bonds issued by Oi, Oi Coop and PTIF;
“Bondholder Credits” are to unsecured a claim held by a creditor pursuant to the RJ Plan evidenced by bonds issued by Oi,
Oi Coop and PTIF;
“Brazilian Bankruptcy Law” are to Brazilian Law No. 11,101 of June 9, 2005;
“Brazilian Confirmation Date” are to February 5, 2018, the date in which the Brazilian Confirmation Order was published in
the Official Gazette of the State of Rio de Janeiro (Diário Oficial do Estado do Rio de Janeiro);
“Brazilian Confirmation Order” are to the order entered by the RJ Court on January 8, 2018, ratifying and confirming the RJ
Plan, but modifying certain provisions of the RJ Plan;
“Capitalization of Credits Capital Increase” are to the capital increase of between R$$11,765,562,892.10 and
R$12,292,379,141.00 through the issuance of up to 1,756,054,163 New Shares, paid for by conversion of claims of Qualified
Bondholders into New Shares, pursuant to Section 4.3.3.5 of the RJ Plan;
“Cash Capital Increase” are to the cash capital increase of R$4 billion provided for under Section 6 of the RJ Plan;
“Chapter 15 Debtors” are to Oi, Telemar, Oi Coop and Oi Mobile;
“Commitment Agreement” are to that certain commitment agreement, which we negotiated with members of the Ad Hoc
Group, the IBC and certain other unaffiliated bondholders as part of the RJ Plan, under which such bondholders agreed to
backstop an eventual cash capital increase by our company, which will be commenced following the full implementation of
the RJ Plan;
“Default Recovery” are to the general treatment provided for unsecured credits under the RJ Plan. Under the RJ Plan,
Bondholders that were not Eligible Bondholders, did not make a valid election of the form of recovery for their Bondholder
Credits, or do not participate in the settlement procedures will only be entitled to the Default Recovery with respect to the
Bondholder Credits represented by their Bonds.
3
OI S A
OI SA FORM 20-F
Donnelley Financial
VDI-W7-PF10-029
12.10.7.0
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RIO
25-Apr-2019 07:52 EST
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•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
“Defaulted Bonds” are to the bonds issued by Oi, Oi Coop and PTIF;
“Dutch District Court” are to the District Court of Amsterdam;
“Eligible Bondholders” are to every Bondholder that individualized its Bondholder Credits in accordance with the
procedures established in the RJ Plan and by the RJ Court;
“GCM” are to a General Creditors’ Meeting of creditors of our company recognized by the RJ Court. A GMC was held on
December 19 and 20, 2017 to consider and vote on the RJ Plan;
“IBC” means the International Bondholder Committee, a group of creditors in the Netherlands;
“Judicial Ratification of the RJ Plan” are to the confirmation of the RJ Plan by the RJ Court. As used in this annual report,
the date of the Judicial Ratification of the RJ Plan means February 5, 2018 (i.e., the Brazilian Confirmation Date); provided
that (1) in the event that any appeal of the Brazilian Confirmation Order is filed and a stay on the effectiveness of the
Brazilian Confirmation Order is granted, the Brazilian Confirmation Date shall be deemed to occur the date on which such
appeal is resolved; and (2) in the event that any appeal of the Brazilian Confirmation Order results in an appellate court
overturning or modifying the Brazilian Confirmation Order, the Brazilian Confirmation Date shall be deemed to occur on the
date on which the eventual appellate court’s decision, or that of a higher court (if further appeals of the appellate court’s
decision are made), is published in such court’s official gazette. For more information about the appeals and motions for
clarification filed with respect to the Brazilian Confirmation Order, see “Item 4. Information on the Company—Our Recent
History and Development—Our Judicial Reorganization Proceedings—Approval of Judicial Reorganization Plan at GCM
and Confirmation of Judicial Reorganization Plan by RJ Court;”
“New Notes” are to senior unsecured notes of Oi to be issued in accordance with the terms of Section 4.3.3.3 of the RJ Plan
and Exhibit 4.3.3.3(f) thereto, in connection with the Capitalization of Credits Capital Increase;
“New Shares” are to newly issued common shares of Oi, which are expected to be issued in the form of ADSs, in connection
with the Capitalization of Credits Capital Increase;
“Non-Qualified Bondholders” are to Eligible Bondholders with Bondholder Credits equal to or less than USD $750,000.00
(or the equivalent in other currencies);
“Non-Qualified Credit Agreement” are to a credit agreement to be entered into between the RJ Debtors and an administrative
agent, in accordance with the terms of Section 4.3.3.1 of the RJ Plan and Exhibit 4.3.3.1(f) thereto;
“Non-Qualified Recovery” are to the entitlement of certain Non-Qualified Bondholders to elect to have their Bondholder
Credits Satisfied through the distribution to such Non-Qualified Bondholders of a participation interest in the Non-Qualified
Credit Agreement;
“Oi Coop Composition Plan” are to the composition plan for Oi Coop providing for the restructuring of the claims against Oi
Coop in the Netherlands in substantially the same terms and conditions as the RJ Plan;
“PTIF Composition Plan” are to the composition plan for PTIF providing for the restructuring of the claims against PTIF in
the Netherlands in substantially the same terms and conditions as the RJ Plan;
“PTIF Shares” are to common shares of Oi currently held by PTIF, which may be issued in the form of American Depositary
Receipts;
“Qualified Bondholders” are to Eligible Bondholders with Bondholder Credits greater than US$750,000.00 (or the
equivalent in other currencies);
4
OI S A
OI SA FORM 20-F
Donnelley Financial
VDI-W7-PF10-029
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•
•
•
•
•
•
•
•
•
“Qualified Recovery” are to the entitlement of certain Qualified Bondholders to elect to have their Bondholder Credits
satisfied through the distribution to such Qualified Bondholders of a combination of New Notes, New Shares, PTIF Shares
and Warrants in amounts determined based on the Bondholder Credits evidenced by the Bonds of each series held by a
Bondholder, in accordance with Section 4.3.3.2 of the RJ Plan;
“RJ Court” are to the 7th Commercial Court of the Judicial District of the State Capital of Rio de Janeiro. The RJ Court is
adjudicating the judicial reorganization proceedings in Brazil involving the RJ Debtors.
“RJ Debtors” are to Oi, Telemar, Oi Mobile, Oi Coop, PTIF, Copart 4 and Copart 5;
“RJ Plan” are to the judicial reorganization plan, as amended, of the RJ Debtors that was filed with the RJ Court and, on
December 20, 2017, approved by a significant majority of creditors of each class present at the GCM held on December 19
and 20, 2017;
“RJ Proceedings” are to the Brazilian proceedings for judicial reorganization (recuperação judicial) involving the RJ
Debtors that are being adjudicated by the RJ Court, pursuant to a joint voluntary petition for judicial reorganization pursuant
to the Brazilian Bankruptcy Law filed by the RJ Debtors with the RJ Court initially on June 20, 2016. On June 29, 2016, the
RJ Court granted the processing of the RJ Proceedings of the RJ Debtors;
“U.K. Recognition Orders” are to the orders granted by the High Court of Justice of England and Wales on Jun 23, 2016
recognizing the RJ Proceedings as a foreign main proceedings under the Cross-Border Insolvency Regulations 2006, which
implements the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross-Border
Insolvency in Great Britain, in relation to Oi, Telemar and Oi Mobile;
“U.S. Bankruptcy Court” are to the United States Bankruptcy Court for the Southern District of New York;
“U.S. Recognition Order” are to the order granted by the U.S. Bankruptcy Court on July 22, 2016 recognizing the RJ
Proceedings as the foreign main proceedings in respect of each of the Chapter 15 Debtors; and
“Warrants” are to warrants (bonus de subscrição) to acquire newly issued common shares of Oi, which Warrants may
distributed in the form of American Depository Warrants, as further described in Section 4.3.3.6 of the RJ Plan.
Financial Restructuring
In June 2016, after considering the challenges arising from our economic and financial situation in connection with the maturity
schedule of our financial debts, the threats to our cash flows represented by imminent attachments or freezing of assets in judicial
lawsuits, and the urgent need to adopt measures that protect our company, we concluded that filing of a request for judicial
reorganization (recuperação judicial) in Brazil would be the most appropriate course of action (1) to preserve the continuity of our
offering of quality services to our customers, within the rules and commitments undertaken with ANATEL, (2) to preserve the value of
our company, (3) to maintain the continuity of our operations and corporate activities in an organized manner that protects the interests
of our company, customers, shareholders and other stakeholders, and (4) to protect our cash and cash equivalents.
On June 20, 2016, Oi, together with the other RJ Debtors, filed a joint voluntary petition for judicial reorganization pursuant to the
Brazilian Bankruptcy Law with the RJ Court, pursuant to an urgent measure approved by our board of directors.
5
OI S A
OI SA FORM 20-F
Donnelley Financial
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On December 19 and 20, 2017, the GCM was held to consider approval of the RJ Plan. The GCM concluded on December 20,
2017 following the approval of the RJ Plan reflecting amendments to the RJ Plan presented at the GCM as negotiated during the course
of the GCM.
On January 8, 2018, the RJ Court entered the Brazilian Confirmation Order, ratifying and confirming the RJ Plan, according to its
terms, but modifying certain provisions of the RJ Plan. The Brazilian Confirmation Order was published in the Official Gazette of the
State of Rio de Janeiro on February 5, 2018, the Brazilian Confirmation Date.
The Brazilian Confirmation Order, according to its terms, is binding on all parties as long as its effects are not stayed. By
operation of the RJ Plan and the Brazilian Confirmation Order, the unsecured claims against the RJ Debtors have been novated and
discharged under Brazilian law and holders of such claims have received the recoveries set forth in the RJ Plan in exchange for their
claims in accordance with the terms and conditions of the RJ Plan. For more information regarding the RJ Proceedings and the financial
terms of the RJ Plan, see “Item 4. Information on the Company—Our Recent History and Development—Our Judicial Reorganization
Proceedings.”
Share Splits
On November 18, 2014, Oi’s shareholders acting in an extraordinary general shareholders meeting authorized (1) the reverse split
of all of Oi’s issued common shares into one common share for each 10 issued common shares, and (2) the reverse split of all of Oi’s
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 Common ADSs or Preferred ADSs in connection with this reverse share split;
each Common ADS continued to represent one Common Share and each Preferred ADS continues to represent one Preferred Share. All
references to numbers of shares of Oi, dividend amounts of Oi and earnings per share of Oi 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 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.
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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:
•
•
•
•
•
•
•
•
•
•
•
•
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;
any judicial action that overturns or modifies the Brazilian Confirmation Order or declares the RJ Debtors bankrupt under
Brazilian law and requires their liquidation;
the effects of intense competition in Brazil and the other countries in which we have operations and investments;
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, notably with respect to inflation, exchange rate fluctuation of the
real, interest rates fluctuation and the political environment in Brazil;
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;
the disposal of our international investments; 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.
We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future
events or otherwise.
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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, 2018 and 2017 and for the years ended December 31, 2018, 2017 and 2016 have been derived from our audited
consolidated financial statements included in this annual report. The selected financial data as of December 31, 2016, 2015 and 2014
and for the years ended December 31, 2015 and 2014 have been derived from our consolidated financial statements that are not
included in this annual report.
Oi has not paid any dividends and/or interest attributable to shareholders’ equity since January 1, 2014.
Income Statement Data:
Net operating revenue
Cost of sales and services
Gross profit
Selling expenses
General and administrative expenses
Other operating income (expenses), net
Reorganization items, net
Operating income (loss) before financial
expenses, net, and taxes
Financial 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)
Net income (loss) attributable to
controlling shareholders
2018(1)
2018
2017
2016
For the Year Ended December 31,
2015
(restated)
2014
(restated)
(in millions
of US$, except
per share
amounts)
(in millions of reais, except per share amounts and as otherwise indicated)
US$ 5,693
R$ 22,060
R$ 23,790
R$ 25,996
R$ 27,354
R$ 28,247
(4,083)
1,610
(1,156)
(696)
108
8,150
8,016
(1,035)
6,980
90
7,070
(15,823)
6,237
(4,478)
(2,698)
417
31,581
31,059
(4,012)
27,047
347
(15,676)
8,114
(4,400)
(3,064)
(1,044)
(2,372)
(2,766)
(1,612)
(4,378)
351
(16,742)
9,254
(4,383)
(3,688)
(1,237)
(9,006)
(9,060)
(4,375)
(13,435)
(2,245)
(16,250)
11,104
(4,720)
(3,912)
(2,295)
—
178
(6,724)
(6,546)
(3,380)
(16,257)
11,990
(5,566)
(3,835)
1,758
—
4,347
(4,688)
(342)
(758)
27,394
(4,027)
(15,680)
(9,926)
(1,100)
—
US$ 7,070
—
R$ 27,394
—
—
R$ (4,027)
R$(15,680)
(867)
R$(10,793)
(4,086)
R$ (5,186)
US$ 7,063
R$ 27,369
R$ (3,736)
R$(15,502)
R$(10,380)
R$ (5,187)
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Net income (loss) attributable to non-controlling shareholders
Net income (loss) applicable to each class of shares(2):
Common shares basic and diluted
Preferred shares and ADSs basic and diluted
Net income (loss) per share:
Common shares – basic and diluted
Common ADSs – basic and diluted
Preferred shares and ADSs – basic and diluted
Net income (loss) per share from continuing operations:
Common shares – basic and diluted
Common ADSs – basic and diluted
Preferred shares and ADSs – basic and diluted
Net income (loss) per share from discontinued operations:
Common shares – basic and diluted
Common ADSs – 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
2018(1)
2018
2017
2016
For the Year Ended December 31,
2015
(restated)
2014
(restated)
(in millions
of US$, except
per share
amounts)
(in millions of reais, except per share amounts and as
otherwise indicated)
6
24
(291)
(178)
(413)
1
6,330
734
4.71
23.54
4.71
4.71
23.54
4.71
—
—
—
24,526
2,844
(2,874)
(862)
(11,925)
(3,577)
(4,473)
(5,907)
(1,702)
(3,485)
18.24
91.19
18.24
18.24
91.19
18.24
—
—
—
(5.53)
(27.65)
(5.53)
(22.94)
(114.72)
(22.94)
(5.53)
(27.65)
(5.53)
(22.94)
(114.72)
(22.94)
(14.22)
(71.11)
(14.22)
(14.22)
(71.11)
(14.22)
(8.41)
(42.06)
(8.41)
(8.41)
(42.06)
(8.41)
—
—
—
—
—
—
(1.19)
(5.94)
(1.19)
6.63
33.14
6.63
1,344,686
1,344,686
155,915
155,915
519,752
519,752
155,915
155,915
519,752
519,752
155,915
155,915
314,518
314,518
415,321
415,321
202,312
202,312
414,200
414,200
(1) Translated for convenience only using the selling rate as reported by the Brazilian Central Bank on December 31, 2018 for reais into U.S. dollars of
(2)
R$3.8748=US$1.00.
In accordance with ASC 260, basic and diluted earnings per share have been calculated using the “two class method.” See note 22 to our audited consolidated
financial statements included in this annual report.
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Balance Sheet Data:
Cash and cash equivalents
Short-term investments
Trade accounts receivable, less allowance
for doubtful accounts
Assets held for sale
Total current assets
Property, plant and equipment, net
Non-current judicial deposits
Intangible assets, net
Total assets
Short-term loans and financings
(including current portion of long-term
debt)
Short-term trade payables
Liabilities of assets held for sale(2)
Total current liabilities
Long-term loans and financings
Liabilities subject to compromise
Total liabilities
Share capital
Shareholders’ equity
2018(1)
2018
2017
2016
As of December 31,
(in millions
of US$)
(in millions of reais)
2015(2)
(restated)
2014(2)
(restated)
US$ 1,132
52
R$ 4,385
202
R$ 6,863
21
R$ 7,563
117
R$14,898
1,802
R$
2,449
171
1,682
1,271
5,501
7,347
1,811
2,071
17,355
174
1,347
136
2,643
4,072
—
9,819
8,268
7,536
6,517
4,923
21,313
28,469
7,019
8,025
67,248
673
5,226
527
10,240
15,777
—
38,048
32,038
29,199
7,367
4,675
23,498
27,083
8,290
9,255
70,987
54
5,171
354
9,831
—
65,139
80,671
21,438
(9,684)
7,891
5,404
26,212
26,080
8,388
10,511
74,047
55
4,116
545
9,444
—
63,746
79,396
21,438
(5,349)
8,010
7,686
37,645
25,818
8,953
11,780
94,545
11,810
5,253
745
26,142
48,048
—
83,528
21,438
11,017
7,092
34,255
50,797
26,244
9,127
13,554
106,999
4,464
4,359
27,178
42,752
31,386
—
84,253
21,438
22,746
(1) Translated for convenience only using the selling rate as reported by the Brazilian Central Bank on December 31, 2018 for reais into U.S. dollars of
R$3.8748=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.
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Exchange Rates
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—Fluctuations in exchange rates may lead to substantial losses on our liabilities
denominated in or linked to foreign currencies.”
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
2014
2015
2016
2017
2018
Month
October 2018
November 2018
December 2018
January 2019
February 2019
March 2019
April 2019(1)
(1) Through April 23, 2019.
Source: Brazilian Central Bank
High
R$2.740
4.195
4.156
3.381
4.188
Reais per U.S. Dollar
Average
Low
R$2.354
R$2.197
3.339
2.575
3.483
3.119
3.193
3.051
3.656
3.139
Period End
R$ 2.656
3.905
3.259
3.308
3.875
Reais per U.S. Dollar
High
Low
R$3.637
R$4.027
3.697
3.893
3.829
3.933
3.652
3.860
3.669
3.776
3.776
3.968
3.835
3.944
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Risk Factors
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, the market price of the
Common Shares, Preferred Shares and ADSs could be adversely affected.
Risks Relating to the Brazilian Telecommunications Industry and Regulatory Environment
The Brazilian telecommunications industry is highly regulated. Changes to these regulations have and may continue to 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 more information, see “Item 4.
Information on the Company—Regulation of the Brazilian Telecommunications Industry.”
We cannot predict whether ANATEL, or the Brazilian government will adopt these or other telecommunications sector policies in
the future or the consequences of such policies on our business or the business of our competitors. In the event that any modification of
the regulatory scheme or new regulations applicable to our company are adopted that increase the costs of compliance to our company,
whether through capital expenditure requirements, increased service requirements, increased costs for renewal of our authorizations and
licenses, increased exposure to regulatory penalties or otherwise, these modifications and regulations could have a material adverse
effect on our business, financial condition and results of operations.
Our concession agreements and authorizations 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 of
Universal Service Goals (Plano Geral de Metas de Universalização), or the PGMU, the General Plan of Quality Goals (Plano Geral de
Metas de Qualidade), or the PGMQ, 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—Our
Services—Fixed-Line Telephone Services.”
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. See “Item 4. Information on the
Company—Regulation of the Brazilian Telecommunications Industry—Our Services—Mobile Telephone 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 commencement of administrative proceedings from ANATEL, mostly due
to our inability to achieve certain targets established in the PGMU and the PGMQ. For more information, see “Item 8. Financial
Information—Legal Proceedings—Civil Claims Relating to Oi S.A. and Our Brazilian Operations—Administrative Proceedings.”
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Our 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 concession agreements were last amended in 2011. In 2014, ANATEL held a public comment period for the 2015 revision of
the terms of our concession agreements and met regularly with us throughout 2015 to discuss possible amendments, and in 2016 the
Brazilian Ministry of Communication issued an ordinance addressing guidelines for the establishment of a new regulatory framework
for telecommunications, in line with the provisions of legislation that was introduced in the Brazilian Congress, which we refer to as
PLC 79, to substantially amend certain features of the current regulatory framework of the Brazilian telecommunications industry. For
more information about PLC 79, see “Item 4. Information on the Company—Regulation of the Brazilian Telecommunications
Industry—Our Services—Fixed-Line Telephone Services—Our Concessions and Authorizations.” Despite these efforts, our concession
agreements have not yet been amended, as a result of the Brazilian Congress’s failure to date to pass PLC 79, passage of which is
required to provide the necessary legal authority for ANATEL to implement the proposed changes to our concession agreements.
Further discussions regarding amendments to our concession agreements have halted pending resolution of PLC 79. Under their
existing terms, our concession agreements may be amended by December 2020 at the latest. If PLC 79 is not passed, our concession
agreements will expire in 2025 without the possibility of renewal. For more information about our concession agreements, see “Item 4.
Information on the Company—Regulation of the Brazilian Telecommunications Industry—Our Services—Fixed-Line Telephone
Services—Our Concessions and Authorizations.”
In connection with the consideration of revisions to the concession agreements under the public regime, in January 2017,
ANATEL proposed revisions to the terms of the General Plan of Grants (Plano Geral de Outorgas), or the PGO, in line with the
provisions of PLC 79. However, as a result of the legislative gridlock faced by PLC 79, ANATEL has halted implementation of the
PGO. For more information about PLC 79 and ANATEL’s proposed revisions to the terms of the PGO, see “Item 4. Information on the
Company—Regulation of the Brazilian Telecommunications Industry—Our Services—Fixed-Line Telephone Services—Our
Concessions and Authorizations.”
We cannot assure you that any future amendments to our concession agreements 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.
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.
We expect the Brazilian government to offer new concessions in competitive auctions prior to the expiration of our existing
concession agreements on December 31, 2025. 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 the terms of these concessions will be extended, investors
may be unwilling to make investments in our company on terms that are attractive to our 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.
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The mobile telecommunications industry and participants in this industry, including us, may be required to adopt an extensive program
of field measurements of radio frequency emissions and be subject to further regulation and/or claims based on concerns regarding
potential 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. In May 2009, Law No. 11,934 was enacted, which established the need for field measurements by telecommunications service
providers of all radio-communication transmitting stations every five years with respect to emission and exposure to these fields. In
September 2018, ANATEL published Resolution No. 700/2018, a regulation pursuant to Law No. 11,934 that will make field
measurements mandatory by telecommunication service providers of all radio-communication transmission stations every five years
beginning in 2019. We are still evaluating the scope of the technical and financial impact of these new regulations on our company.
Companies in the Brazilian telecommunication industry, including us, may be harmed by restrictions regarding the installation of new
antennas for mobile services.
Currently, there are approximately 250 municipal laws in Brazil that limit the installation of new antennas for mobile service,
which has been a barrier to the expansion of mobile networks. Those laws are meant to regulate issues related to zoning and the alleged
effects of the radiation and radiofrequencies of the antennas. The federal law, that establishes new guidelines to create a consolidated
plan for the installation of antennas was approved in 2015, however, it is still pending specific regulation. Despite the federal initiative,
as long as the municipal laws remain unchanged, the risk of noncompliance with regulations and of having services of limited quality in
certain areas continues to exist, which could materially and adversely affect our business, results of operations and financial condition.
Additional antenna installation is also limited as a result of concerns that radio frequency emissions from base stations may cause
health problems. See “—The mobile telecommunications industry and participants in this industry, including us, may be required to
adopt an extensive program of field measurements of radio frequency emissions and be subject to further regulation and/or claims based
on concerns regarding potential health problems and interfere with medical devices.”
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. We expect that new products and technologies will emerge
and that existing products and technologies will be further developed. For example, in 2020, ANATEL will conduct auctions for
radiofrequencies in the 5G spectrum. The advent of new products and technologies could have a variety of consequences. Our future
success depends on our ability to anticipate and adapt in a timely manner to technological changes. 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. These new products and technologies may reduce the price of our
services by providing lower-cost alternatives and the creation of new digital services.
For example, personal mobility service providers in Brazil are experiencing 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 are becoming 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. In addition,
as providers of fixed and mobile telecommunications services, we face more legal, regulatory and tax barriers than providers of OTT
services, increasing our costs in relation to these provides and preventing us from being able to fully compete with them.
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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.
Our success largely depends on the continued and uninterrupted performance of our controls, network technology systems and of
certain hardware. Our technical infrastructure (including our network infrastructure for mobile telecommunications services) is
vulnerable to damage or interruption from information and telecommunication technology failures, power loss, floods, windstorms,
fires, terrorism, intentional wrongdoing, human error and similar events. Our controls are dependent, not exclusively, on these
technological systems and are also subject to the interruptions and failures. Unanticipated problems with our controls, or at our
facilities, system failures, hardware or software failures, computer viruses or hacker attacks could affect the quality of our services and
cause service interruptions. Any of these occurrences could result in reduced user traffic and reduced revenue and could harm our levels
of customer satisfaction, our reputation and compliance with certain of our regulatory obligations.
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.
We face various cyber-security risks that, if not adequately addressed, could have an adverse effect on our business.
We face various cyber-security risks that could result in business losses, including but not limited to contamination (whether
intentional or accidental) of our networks and systems by third parties with whom we exchange data, equipment failures, unauthorized
access to and loss of confidential customer, employee and/or proprietary data by persons inside or outside of our organization. We are
also exposed to cyber attacks causing systems degradation or service unavailability, the penetration of our information technology
systems and platforms by ill-intentioned third parties, and infiltration of malware (such as computer viruses) into our systems.
Cyber attacks against companies have increased in frequency, scope and potential harm in recent years. Further, the perpetrators of
cyber attacks are not restricted to particular groups or persons. These attacks may be committed by company employees or third parties
operating in any region, including jurisdictions where law enforcement measures to address such attacks are unavailable or ineffective.
We may not be able to successfully protect our operational and information technology systems and platforms against such threats.
Further, as cyber attacks continue to evolve, we may incur significant costs in the attempt to modify or enhance our protective measures
or investigate or remediate any vulnerability.
The inability to operate our networks and systems as a result of cyber attacks, even for a limited period of time, may result in
significant expenses to us and/or a loss of market share to other telecommunications providers. The costs associated with a major cyber
attack could include expensive incentives offered to existing customers and business partners to retain their business, increased
expenditures on cyber-security measures and the use of alternate resources, lost revenues from business interruption and litigation. If we
are unable to adequately address these cyber-security risks, or operating network and information systems could be compromised,
which would have an adverse effect on our business, financial condition and results of operations.
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Risks Relating to Our Company
Our debt instruments contain covenants that could restrict our financing and operating flexibility and have other adverse
consequences.
As of December 31, 2018, we had total outstanding loans and financings of R$30,379 million, excluding the fair value adjustment
to our loans and financings, and R$16,450 million, after giving effect to the fair value adjustment. We are subject to certain financial
covenants under the instruments that govern 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;
sell or dispose of assets; and
make certain acquisitions, mergers and consolidations.
As of December 31, 2018, we were in full compliance with our financial covenants under our financial instruments.
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 cash flows and profitability.
Under the RJ Plan, until February 5, 2023, we are required to apply an amount equivalent to 100% of the net revenue from our
sale of assets in excess of US$200 million to investments in our activities. Beginning on February 5, 2024, we are required to allocate to
the repayment of debt instruments representing recoveries under the RJ Plan on an annual basis an amount equivalent to 70% of the
amount by which (1) our cash and cash equivalents and financial investments at the end of each fiscal year exceeds (2) the greater of (a)
25% of our operating expenses and capital expenses for that fiscal year, and (b) R$5,000 million, subject to adjustment in the event that
we conclude any capital increases. The cash required to make these repayments will reduce the amount available to us to make capital
expenditures.
The RJ Plan permits us to seek to raise up to R$2.5 billion in the capital markets and seek to borrow up to R$2 billion under new
export credit facilities, as described under “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources.”
This debt may be denominated in reais or in foreign currencies. Accordingly, we may incur interest expenses and foreign exchange
gains and losses in connection with this new debt. A significant increase in any of these interest rates could adversely affect our
financial expenses and negatively affect our overall financial performance.
If the Brazilian Confirmation Order is overturned or modified, the RJ Debtors may be declared bankrupt under Brazilian law and
liquidated.
On June 20, 2016, Oi, together with the other RJ Debtors, filed a joint voluntary petition for judicial reorganization pursuant to the
Brazilian Bankruptcy Law with the RJ Court, pursuant to an urgent measure approved by our board of directors. On December 19 and
20, 2017, the GCM was held to consider approval of the most recently filed judicial reorganization plan. The GCM concluded on
December 20, 2017 following the approval of the RJ Plan reflecting amendments to the judicial reorganization plan presented at the
GCM as negotiated during the course of the GCM. On January 8, 2018, the RJ Court entered the Brazilian Confirmation Order,
ratifying and confirming the RJ Plan. The Brazilian Confirmation Order was published in the Official Gazette of the State of Rio de
Janeiro on February 5, 2018, the Brazilian Confirmation Date. For more information with respect to the RJ Proceedings, see “Item 4.
Information on the Company—Our Recent History and Development—Our Judicial Reorganization Proceedings.”
The Brazilian Confirmation Order, according to its terms, is currently binding on all parties, although it is subject to pending
appeals with no suspensive effect attributed to it. By operation of the RJ Plan and the Brazilian Confirmation Order, provided that the
Brazilian Confirmation Order is not overturned or altered as a result of the pending appeals filed against it by certain creditors, the
unsecured claims against the RJ Debtors have been novated and discharged under Brazilian law and holders of such claims are entitled
only to receive the recoveries set forth in the RJ Plan in exchange for their claims in accordance with the terms and conditions of the RJ
Plan. As of the date of this annual report, there are several appeals of the Brazilian Confirmation Order pending.
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If the Brazilian Confirmation Order is overturned or modified and, as a result, the RJ Debtors are declared bankrupt, which under
Brazilian law is generally followed by a liquidation of the debtors’ assets, the rights and guarantees of the creditors recognized by the
RJ Court will be restored under the original terms as if the RJ Plan had never been approved, net of amounts validly received pursuant
to the RJ Plan, in accordance with Brazilian Bankruptcy Law. A modification of the Brazilian Confirmation Order may lead to a breach
of the RJ Plan by the debtors. In case of breach of the RJ Plan by the RJ Debtors, creditors will be entitled to (1) approve a modification
to the RJ Plan at a meeting of creditors complying with the quorum requirements established in the Brazilian Bankruptcy Law, or
(2) seek to have the RJ Debtors adjudicated as bankrupt by the RJ Court.
We have identified a material weakness in our internal control over financial reporting which has materially adversely affected our
ability to timely and accurately report our results of operations and financial condition. This material weaknesses may not have been
fully remediated as of the filing date of this annual report and we cannot assure you that other material weaknesses will not be
identified in the future.
Under the supervision and with the participation of our chief executive officer and our chief financial officer, our management
conducted an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2018 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, 2018, our internal control over
financial reporting was not effective because a material weakness 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. For more information about this
material weakness, see “Item 15. Controls and Procedures.”
Although we have implemented and continue to implement measures designed to remediate this material weakness and, in the
short term, to mitigate the potential adverse effects of this material weakness, our assessment of the impact of these measures has not
been completed as of the filing date of this annual report and we cannot assure you that these measures are adequate. Moreover, we
cannot assure you that additional material weaknesses in our internal control over financial reporting will not arise or be identified in
the future.
As a result, we must continue our remediation activities and must also continue to improve our operational, information
technology, and financial systems, infrastructure, procedures, and controls, as well as continue to expand, train, retain, and manage our
employee base. Any failure to do so, or any difficulties we encounter during implementation, could result in additional material
weaknesses or in material misstatements in our financial statements. These misstatements could result in a future restatement of our
financial statements, could cause us to fail to meet our reporting obligations, or could cause investors to lose confidence in our reported
financial information, which could materially adversely affect our business, financial condition and results of operations and may
generate negative market reactions, potentially leading to a decline in the price of our Common Shares, Preferred Shares or ADSs.
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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, 2018, we had provisioned R$5,039 million for probable losses relating to various tax, labor and civil legal and
administrative proceedings against us. As of December 31, 2018, we had claims against us of R$27,586 million in tax proceedings,
R$771 million in labor proceedings and R$1,723 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.”
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, or the PT Exchange Agreement, that we entered into with Pharol under which we transferred defaulted
commercial paper of Rio Forte Investments S.A., or Rio Forte, to Pharol in exchange for the delivery to our company of Common
Shares and Preferred Shares as described under “Item 7. Major Shareholders and Related Party Transactions—Major Shareholders—PT
Option Agreement,” we agreed to indemnify Pharol against any loss arising from (1) Pharol’s contingent or absolute tax or anti-trust
obligations in relation to the assets contributed to our company in the Oi capital increase in connection with which we acquired PT
Portugal from Pharol in May 2014 and (2) 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 PT Exchange Agreement.
In the PTP 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 PTP 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
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claims under these indemnification provisions, we could be required to pay significant amounts, which would have an adverse effect on
our financial condition.
We are subject to credit risks with respect to our customers. 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
2018, we recorded provisions for doubtful accounts in the amount of R$1,070 million, or 4.9% of our net operating revenue, primarily
due to subscribers’ delinquencies. As of December 31, 2018, our provision for doubtful accounts was R$1,870 million.
ANATEL regulations allow us to implement certain policies to reduce customer defaults, 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.
We are dependent on key personnel and the ability to hire and retain additional personnel.
We believe that our success will depend on the continued services of our senior management team and other key personnel. Our
management team is comprised of highly qualified professionals, with extensive experience in the telecommunications industry. The
loss of the services of any of our senior management team or other key employees could adversely affect our business, financial
condition and results of operations. We also depend on the ability of our senior management and key personnel to work effectively as a
team.
Our future success also depends on our ability to identify, attract, hire, train, retain and motivate highly skilled technical,
managerial, sales and marketing personnel. Competition for such personnel is intense, and we cannot guarantee that we will
successfully attract, assimilate or retain a sufficient number of qualified personnel. Failure to retain and attract the necessary technical,
managerial, sales and marketing and administrative personnel could adversely affect our business, financial condition and results of
operations.
Certain members of our management are subject to administrative proceedings in Brazil, which could lead to their removal from office.
In December 2018, we became aware that the Enforcement Office (Superintendência de Processos Sancionadores) and the Office
of the Chief Counselor (Procuradoria Federal Especializada) of the CVM issued Reports in Punitive Administrative Proceedings
proposing liability for certain persons, including Eurico de Jesus Teles Neto, our chief executive officer, and José Mauro Mettrau
Carneiro da Cunha, a member of our board of directors, and other of our former directors, executive officers and former or current
shareholders, for alleged violations of the Brazilian Corporate Law in connection with facts related to the corporate reorganization
between Oi and Pharol, which was announced in October 2013, and our subsequent capital increase, in which Pharol increased its
holdings in our share capital, which was completed in May 2014.
If any such persons are found liable in these Punitive Administrative Proceedings, they will be subject to a penalty, which may
vary from a warning to disqualification from acting as a member of the board of directors or board of executive officers of any publicly-
held company in Brazil for a period of up to 20 years. We cannot predict when these Punitive Administrative Proceedings will be
concluded.
The loss of the services of any of our senior management team could adversely affect our business, financial condition and results
of operations.
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We could be adversely affected by violations of anti-corruption laws and regulations.
We are required to comply with Brazilian anti-corruption laws and regulations, including Brazilian Law No. 12,846/2013, or the
Brazilian Anti-Corruption Law, as well as anti-corruption laws and regulations in other jurisdictions, including the U.S. Foreign Corrupt
Practices Act of 1977, or the FCPA.
The Brazilian Anti-Corruption Law, the FCPA and similar anti-corruption 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-corruption 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-corruption 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.
Risks Relating to Our Operations
We face significant competition in the Brazilian market and increasing competition from other services, which may adversely affect our
results of operations.
We face increasing competition throughout Brazil from other telecommunications service providers in each of our core service
businesses. In our Residential Services business, we compete with other fixed-line voice service providers, primarily Claro S.A., a
subsidiary of América Móvil S.A.B. de C.V., or Claro, and Telefônica Brasil S.A., a subsidiary of Telefónica S.A., or Telefônica Brasil.
In addition to Claro and Telefônica Brasil, our Residential Services business competes for broadband subscribers with a myriad smaller
local and regional broadband services providers. Finally, our Residential Services business competes for Pay-TV broadband subscribers
with Claro and SKY Brasil Serviços Ltda., or SKY, and Telefônica Brasil. In our Personal Mobility Services business, we compete with
Telefônica Brasil, Claro, and TIM Participações S.A., a subsidiary of Telecom Italia S.p.A., or TIM. In our B2B Services business, we
compete with all of these competitors for small- and medium-sized enterprise, or SME, and corporate subscribers (including
governmental entities) for our fixed-line and mobile services.
Our primary competitors, 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.
As a result of competition from mobile services, we expect (1) the number of our fixed lines in service to continue to 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 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.
The primary drivers of competition in the broadband industry are stability and quality of the service, speed and price, with
discounts typically offered in the form of bundled services. Claro and Telefônica Brasil each offer broadband services at higher speeds
than ours and both offer integrated voice, broadband and Pay-TV services, typically as bundles, to the residential services market
through a single network infrastructure. In addition, an increasing number of small local and regional providers are competing in the
broadband space offering fiber to the home (FTTH) at competitive prices. 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.
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We offer Pay-TV 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. In addition, as is happening
mature markets, the growth of OTT services in Brazil may further diminish the attractiveness of DTH services, which provide less user
interaction. We and each of our principal competitors in the mobile telecommunications market offer UMTS (Universal Mobile
Telecommunications System), or 3G, and our LTE (Long Term Evolution), or 4G, mobile telecommunications network technology.
The cost of maintaining our revenue share in this market may increase and in the future we may incur higher advertising and other costs
as we attempt to maintain or expand our market presence. As mobile interconnection, or MTR, tariffs have declined in recent years, a
trend towards SIM card consolidation has developed, reversing the trend of customers using multiple SIM cards to participate in on-net
calling plans offered by multiple service providers; this trend has resulted, and may continue to result in, a decline in the size 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, 2018, the average
monthly churn rate of 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
4.0% per month. Our inability to compete effectively to maintain and increase our market share in this market could adversely affect
our net operating revenue and profitability.
Our mobile subscribers are demanding higher quality and more data availability, which require higher investments in
development, modernization, expansion and continuous improvement in service quality and customers’ experience. As discussed above,
some of our competitors may have greater access to cheaper capital and the ability to invest in new technologies, including 4.5G.
As a result of the increased availability of 4G mobile network technology, there has been an increase in the use of over-the-top, or
OTT, services in Brazil, including instant internet messaging and Voice over Internet Protocol, or VoIP, services on smartphone
applications such as Facebook Messenger and WhatsApp. OTT applications are often free of charge, other than for data usage,
accessible by smartphones, tablets and computers and allow their users to have access to potentially unlimited messaging and voice
services over the Internet, bypassing more expensive traditional voice and messaging services such as two-way short (or text) message
services known as SMS, which have historically been, but are no longer a source of significant revenues. With the growing use of
smartphones in Brazil, an increasing number of customers are using OTT application services as a substitute for traditional voice or
SMS communications. As a result of this scenario, we see the migration of traffic from voice to data and consequently the introduction
of offers from almost all competitors of unlimited voice plans in their portfolio, accelerating the process of commoditization of voice
service. These trends could have an adverse effect on the average revenue per unit, or ARPU, generated by our mobile customer base
and our profitability.
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 business as a telecommunications services provider depends on our ability to maintain and expand our telecommunications
services network. 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. We believe that our expected growth will require, among
other things:
•
•
•
•
•
•
continuous development of our operational and administrative systems;
efficiently allocating our capital;
increasing marketing activities;
improving our understanding of customer wants and needs;
continuous attention to service quality; and
attracting, training and retaining qualified management, technical, customer relations, and sales personnel.
We believe that these requirements will place significant demand on our managerial, operational and financial resources. Factors
that could affect our implementation of our growth strategy include:
•
•
our ability to generate cash flow or to obtain future financing necessary to implement our projects;
delays in the delivery of telecommunications equipment by our vendors;
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•
•
•
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. Failure to manage successfully our expected growth could reduce the quality of our services, with
adverse effects on our business, financial condition and results of operations.
We make investments based on demand forecasts that may become inaccurate due to economic volatility and may result in revenues
that lower than expected.
We make certain investments, such as the procurement of materials and the development of our network infrastructure, based on
our forecasts of the amount of demand that customers will have for our services at a later date. However, any major changes in the
Brazilian economic scenario may affect this demand and therefore our forecasts may turn out to be inaccurate. For example, economic
crises may restrict credit to the population, and uncertainties relating to employment may result in a delay in the decision to acquire new
products or services (such as broadband or Pay-TV). As a result, it is possible that we may make larger investments based on demand
forecasts than were necessary given actual demand at the relevant time, which may directly affect our cash flow.
Furthermore, improvements in economic conditions may have the opposite effect. For example, an increase in demand not
accompanied by our investment in improved infrastructure may result in a possible loss of opportunity to increase our revenue or result
in the degradation of the quality of our services.
We rely on strategic suppliers of equipment, materials and certain 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 are in processes of vendor consolidation by using only on a few strategic and most representative technology suppliers around
the world to provide us with equipment and materials that we need in order to expand and to operate our business in Brazil. In addition,
we rely on a third-party provider of network maintenance services in certain regions were we operate. 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 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, 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 services 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.
Certain key inputs are subject to risks related to importation, and we acquire other key inputs from a limited number of domestic
suppliers, which may further limit our ability to acquire such inputs in a timely and cost effective manner.
The high growth in data markets in general and broadband in particular may result in a limited supply of equipment essential for
the provision of such services, such as data transmission equipment and modems. The restrictions on the number of manufacturers
imposed by the Brazilian government for certain inputs, mainly data transmission equipment and modems, and the geographical
locations of non-Brazilian manufacturers of these inputs, pose certain risks, including:
•
•
•
vulnerability to currency fluctuations in cases where inputs are imported and paid for with U.S. dollars, Euros or other
foreign currencies;
difficulties in managing inventory due to an inability to accurately forecast the domestic availability of certain inputs; and
the imposition of customs or other duties on key inputs that are imported.
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If any of these risks materialize, they may result in our inability to provide services to our customers in a timely manner or may
affect the prices of our services, which may have an adverse effect on our business, financial condition and results of operations.
We may be unable to respond to the trend towards consolidation in the Brazilian telecommunications market.
The Brazilian telecommunications market has been subject to consolidation. Mergers and acquisitions may change market
dynamics, create competitive pressures and force small competitors to find partners, and may require us to adjust our operations,
marketing strategies, and product portfolio. For example, in March 2015, Telefónica S.A. acquired from Vivendi S.A., all of the shares
of GVT Participações S.A., the controlling shareholder of Global Village Telecom S.A. This acquisition increased Telefónica’s share of
the Brazilian telecommunications market, and we believe such trend is likely to continue in the industry as participants continue to
pursue economies of scale. The entry of a new market participant with significant financial resources or potential changes in strategy by
existing telecommunications service providers can change the competitive environment in the Brazilian market. We may be unable to
keep pace with these changes, which could affect our ability to compete effectively and have a material adverse effect on our business,
financial condition and results of operations.
Additional joint ventures, mergers and acquisitions among telecommunications service providers are possible in the future. If such
consolidation occurs, it may result in increased competition within our market. We may be unable to adequately respond to pricing
pressures resulting from consolidation in our market, adversely affecting our business, financial condition and results of operations. We
may also consider engaging in merger or acquisition activity in response to changes in the competitive environment, which could divert
resources away from other aspects of our business.
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, 2018, our Brazilian pension benefit plans had an aggregate deficit of R$579 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.”
As a result of the RJ Proceedings, certain of our unfunded obligations under our post-retirement plans were novated. As of
December 31, 2018, we had recorded R$575 million on our balance sheet as “liability for pension benefits,” net of provision for
unfunded status on our balance sheet, represented by the commitment under the terms of the RJ Plan related to the financial obligations
agreement, entered into by Oi and FATL intended for the payment of the mathematical provision without coverage by the plan’s assets.
For more information, see “Item 6. Directors, Senior Management and Employees—Employees—Employee Benefits—Pension Benefit
Plans—Fundação Atlântico de Seguridade Social—TCSPREV Plan” and note 23 to our consolidated financial statements included in
this annual report.
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Any impairment of the fair 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.
As of December 31, 2018, we recorded assets held for sale of R$4,923 million in our consolidated financial statements, mainly
relating to our interest in Unitel, including R$2,567 million of accrued dividends owed to our company by Unitel and R$1,760 million
representing the fair value of Africatel’s 25% interest in Unitel, and recorded as liabilities directly associated with assets held for sale of
R$527 million, mainly relating to our interest in Unitel. The fair value of Africatel’s 25% interest in Unitel is estimated based on the
internal valuation made, including cash flows forecasts for a five-year period, the choice of a growth rate to extrapolate the cash flows
projections, and definition of appropriate discount rates and foreign exchange rates. In addition to the financial and business
assumptions referred to above, we also take into consideration the fair value measurement of cash investments, qualitative assumptions,
including the impacts of developments in our litigation against Unitel and the other Unitel shareholders, including the recently
concluded international arbitration, and the opinion of the legal counsel on the outcome of this litigation.
For many years, the other shareholders of Unitel have breached several provisions of the Unitel shareholders’ agreement.
Although PT Ventures is entitled to appoint three of the five members of Unitel’s board of directors, the other shareholders of Unitel
failed to vote for nominees to Unitel’s board of directors nominated by PT Ventures. Although PT Ventures is entitled to appoint
Unitel’s managing director, subject to the approval of the holders of 75% of Unitel’s shares, the other shareholders of Unitel failed to
appoint PT Ventures’ nominee as Unitel’s managing director.
In October 2015, PT Ventures initiated an arbitration proceeding against the other shareholders of Unitel before the International
Chamber of Commerce 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 managing director. On February 20, 2019, the arbitral tribunal issued a final award finding that repeated breaches of the Unitel
shareholders’ agreement by the other shareholders of Unitel resulted in a significant decrease of value of PT Ventures’ stake in Unitel
and ordered the other shareholders of Unitel to pay PT Ventures US$339.4 million, corresponding to the loss of value of PT Ventures’
stake in Unitel, plus interest at 12-month US dollar LIBOR +2%, compounded annually from the date of the award.
On March 19, 2019, Unitel held a general shareholders meeting during which a new board of directors was elected, including,
among its five members, two members nominated by PT Ventures, including one member who will also serve as the managing director
of Unitel. We cannot assure you that PT Ventures will be successful in its efforts to enforce the award of the arbitral tribunal or that the
other shareholders of Unitel will not breach the provisions of the Unitel shareholders’ agreement in the future.
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 value at which we carry this
investment. For the year ended December 31, 2018, we recorded impairment charges of R$491 million as a result of our review of the
fair value of our investment in Unitel and R$187 million related to impairment dividends. Any further impairment of our indirect
investment in Unitel may result in a material adverse effect on our financial condition and results of operations.
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 have been declared or that may be declared
by Unitel in the future.
Since November 2012, PT Ventures has not received payments for outstanding amounts owed to it by Unitel with respect to
dividends declared by Unitel for several fiscal years. Based on the dividends declared by Unitel of which PT Ventures has not received
its share of payment, PT Ventures has an estimated recoverable amount of US$662 million (R$2,567 million) as of December 31, 2018.
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, on
October 20, 2015, PT Ventures filed a suit in the Provincial Courts of Luanda seeking payment of outstanding dividends declared in
2010 as well as the dividends for the fiscal years 2011 through 2013, together with interest thereon. PT Ventures has also filed a claim
against the other Unitel shareholders in its arbitration proceeding against the other shareholders of Unitel before the International
Chamber of Commerce for the payment of the outstanding dividends.
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As part of its February 20, 2019 final award, the arbitral tribunal found that the other shareholders of Unitel failed, after November
2012, to ensure that PT Ventures received the same amount of dividends in foreign currency as the other non-Angolan shareholder of
Unitel and ordered the other shareholders of Unitel to pay PT Ventures the amount of US$307 million, corresponding to the resulting
damages, plus simple interest on this amount accruing from the dates on which PT Ventures should have received those dividends, at a
7% annual rate. In addition, the arbitral award recognized PT Ventures’ entitlement to the payment from Unitel for all of the owed and
unpaid dividends, reduced by the amount, if any, that PT Ventures collects from the other Unitel shareholders in the enforcement of the
award.
We cannot assure you that PT Ventures will be successful in its pending suit in the Angolan courts or in its efforts to enforce the
award of the arbitral tribunal, 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 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.
Risks Relating to Brazil
The Brazilian government has exercised, and continues to exercise, significant influence over the Brazilian economy. This influence, as
well as Brazilian political and economic conditions, could adversely impact our business, results of operations and financial condition
and on the market prices of our common shares, preferred shares and ADSs.
Oi is a Brazilian corporation, and substantially all 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 federal government frequently
exercises significant influence over 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, among other measures,
changes in interest rates, changes in tax policies, wage and price controls, foreign exchange controls, currency devaluations, blocking
access to bank accounts, imposing capital controls and limits on imports. 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 and the market price of our common shares, preferred shares and ADSs may be adversely affected by changes in government
policies or regulations, especially those related to the telecommunications sector, such as changes in rates and competitive conditions,
as well as general economic factors, including:
•
•
•
•
•
•
•
•
•
•
•
•
•
the rate of growth of the Brazilian economy;
economic, political or social instability;
fluctuating exchange rates;
inflation;
interest rates and monetary policies;
reductions in salaries or income levels and unemployment rates;
liquidity of domestic capital and lending markets;
energy policy;
exchange controls and restrictions on remittances abroad;
changes to the regulatory framework governing our industry;
fiscal policies and changes in tax laws;
labor and social security policies, laws and regulations; and
other political, diplomatic, social and economic developments in or affecting Brazil.
Uncertainty over whether the Brazilian federal government will implement changes to the policies, regulations or standards
affecting these or other factors in the future may affect economic performance and contribute to economic uncertainty in Brazil and to
heightened volatility in the Brazilian securities markets and securities issued abroad by Brazilian issuers, which may have an adverse
effect on us and the trading price of our common shares, preferred shares and ADSs.
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The ongoing economic uncertainty and political instability in Brazil may adversely affect the Brazilian economy, our business, and the
market price of our common shares, preferred shares and ADSs.
Brazil’s political environment has historically influenced, and continues to influence, the performance of the country’s economy.
Political crises have affected and continue to affect the confidence of investors and the general public, which have historically resulted
in economic deceleration and heightened volatility in the securities issued by Brazilian companies.
The recent economic instability in Brazil has contributed to a decline in market confidence in the Brazilian economy as well as to
a deteriorating political environment. In addition, various ongoing investigations into allegations of money laundering and corruption
being conducted by the Office of the Brazilian Federal Prosecutor, including the largest such investigation known as “Lava Jato,” have
negatively impacted the Brazilian economy and political environment.
In recent years, there has been significant political turmoil in connection with the impeachment of President Dilma Rousseff (who
was removed from office in August 2016) and investigations of her successor, President Michel Temer (who left office on January 1,
2019) as part of the ongoing “Lava Jato” investigations. President Jair Bolsonaro was elected in presidential elections that were held in
Brazil in October 2018. 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 cannot
predict which policies President Bolsonaro, who assumed office on January 1, 2019, may adopt or change during his mandate or the
effect that any such policies might have on our business and on the Brazilian economy. Any such new policies or changes to current
policies may have a material adverse effect on our business, results of operations and financial condition.
Furthermore, Brazil’s federal budget has been in deficit since 2014. Similarly, the governments of Brazil’s constituent states are
also facing fiscal concerns due to their high debt burdens, declining revenues and inflexible expenditures. While the Brazilian Congress
has approved a ceiling on government spending that will limit primary public expenditure growth to the prior year’s inflation for a
period of at least 10 years, local and foreign investors believe that fiscal reforms, and in particular a reform of Brazil’s pension system,
will be critical for Brazil to comply with the spending limit. As of the date of this annual report, discussions in the Brazilian Congress
relating to such reforms remain ongoing. Diminished confidence in the Brazilian government’s budgetary condition and fiscal stance
could result in downgrades of Brazil’s sovereign debt by credit rating agencies, negatively impact Brazil’s economy, lead to
depreciation of the real and increases in inflation and interest rates, thus adversely affecting our business, results of operations and
financial condition.
Uncertainty about the Brazilian government’s implementation of changes in policies or regulations that affect such
implementation may contribute to economic instability in Brazil and increase the volatility of securities issued abroad by Brazilian
companies, including our securities. Any of the above factors may create additional political uncertainty, adversely affect the Brazilian
economy, our business, financial condition, results of operations and the market price of our common shares, preferred shares and
ADSs.
Fluctuations in exchange rates may lead to substantial losses on our liabilities denominated in or linked to foreign currencies.
Since 1999, exchange rates for the real have been set by the market, i.e., a floating exchange rate system. Although long-term
depreciation of the real is generally linked to the rate of inflation in Brazil, depreciation of the real occurring over shorter periods of
time has resulted in significant variations in the exchange rate between the real, the U.S. dollar and other currencies. The exchange rate
between the U.S. dollar and the Brazilian real has experienced significant fluctuations in recent years. The real depreciated by 13.4%
during 2014 and by 47.1% during 2015. In 2016, the real appreciated 16.5% against the U.S. dollar and in 2017, the real depreciated
1.5%, followed by another depreciation of 17.1% in 2018.
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As of December 31, 2018, R$17,873 million, or 58.8%, of our total consolidated loans and financings was denominated in
currencies other than the real, excluding the fair value adjustment to our loans and financings, and R$8,827 million, or 53.7%, of our
total consolidated loans and financings was denominated in currencies other than the real, after giving effect to the fair value
adjustment to our loans and financing. When the real depreciates against foreign currencies, we incur losses on our liabilities
denominated in foreign currencies, such as our U.S. dollar-denominated New Notes and export credit facilities, and we incur gains on
our monetary assets denominated in or indexed to foreign currencies, as the liabilities and assets are translated into reais. On the other
hand, when the real depreciates against foreign currencies, we incur gains on the balance of our fair value adjustment as a consequence
of the gross debt balance. 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.
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. We generally do not hedge exposures relating to our capital expenditures or operating expenses 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, it
becomes more costly for us to purchase these assets or services, which could adversely affect our business and financial performance.
Despite the 17.1% devaluation of the real in 2018, the slow recovery of the Brazilian economy contributed to maintain inflation at
controlled standards and allow the Brazilian Central Bank to reduce the SELIC rate (the Brazilian Central Bank’s overnight right) by
0.50%, ending the year at 6.5%.
Appreciation of the real against the U.S. dollar may lead to a deterioration of the country’s current account and the balance of
payments, as well as to a dampening of export-driven growth. Any such appreciation could reduce the competitiveness of Brazilian
exports and adversely affect net sales and cash flows from exports. Depreciation of the real relative to the U.S. dollar could create
additional inflationary pressures in Brazil by increasing the price of imported products, which may result in the adoption of deflationary
government policies. The sharp depreciation of the real in relation to the U.S. dollar may generate inflation and governmental measures
to fight possible inflationary outbreaks, including the increase in interest rates, which reduces the purchasing power of consumers and
raises the cost in the credit market. Any such macroeconomic effects could adversely affect our net operating revenues and our overall
financial performance.
If Brazil experiences substantial inflation in the future, our margins and our ability to access foreign financial markets may be reduced.
Inflation and government measures to curb inflation may have adverse effects on the Brazilian economy, the Brazilian securities market
and our business and results of operations.
In the past, Brazil has experienced extremely high rates of inflation. Inflation, policies adopted to curb inflationary pressures and
uncertainties regarding possible future governmental intervention have had and are expected to continue to have significant negative
effects on the Brazilian economy generally, and have contributed to economic uncertainty and heightened volatility in the Brazilian
capital markets.
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), the Brazilian consumer price inflation
rates were 6.4% in 2014, 10.7% in 2015, 6.3% in 2016, 2.9% in 2017 and 3.7% in 2018. Brazil may experience high levels of inflation
in the future and inflationary pressures may lead to the Brazilian government’s intervening in the economy and introducing policies that
could harm our business and the price of our common shares, preferred shares and ADSs.
Currently, fixed broadband and mobile service providers use the General Market Price Index — Internal Availability (Índice
Geral de Preços — Disponibilidade Interna), or IGP-DI, to adjust their prices. The IGP-DI is an inflation index developed by the
Fundação Getúlio Vargas, or FGV, a private organization. The IGP-DI index was 3.8% in 2014, 10.7% in 2015, 7.2% in 2016, (0.42)%
in 2017 and 7.1% in 2018.
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Since 2006, rates for fixed-line services have been indexed to the telecommunication services index (Índice de Serviços de
Telecomunicações), or IST, adjusted by a productivity factor, which is defined by ANATEL Resolution 507/2008. The IST is an index
composed of other domestic price indexes (including the IPCA, the IGP-DI and the General Market Price Index (Índice Geral de
Preços ao Mercado), or IGP-M, published by FGV, among others) that is intended to reflect the telecommunications industry’s
operating costs. As a result, this index serves to reduce potential discrepancies between our industry’s revenue and costs, and thus
reduce the apparent adverse effects of inflation on our operations. The productivity factor, pursuant to which ANATEL is authorized to
adjust fee rates, is calculated based on a compensation index established by ANATEL to incentivize operational efficiency and to share
related gains in earnings from fixed line services with customers through fee rate adjustments. The IST is calculated based on a
12-month period average. This may cause increases in our revenues above or below our costs (including salaries), with potentially
adverse impacts on our profitability.
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, 2018,
we had, among other consolidated debt obligations, excluding the fair value adjustment to our loans and financings, R$12,256 million
of loans and financings that were subject to variable interest rates, including R$8,640 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, and
R$3,616 million of loans and financings that were subject to the Long-Term Interest Rate (Taxa de Juros de Longo Prazo), or TJLP, a
long-term interest rate. As of December 31, 2018, we had, among other consolidated debt obligations, after giving effect to the fair
value adjustment to our loans and financing, R$7,566 million of loans and financings that were subject to variable interest rates,
including R$3,950 million of loans and financings and debentures that were subject to the CDI rate, and R$3,616 million of loans and
financings that were subject to the TJLP rate.
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 11.57% per
annum as of December 31, 2014 to 14.13% per annum as of December 31, 2015, and decreased to 13.63% per annum as of
December 31, 2016, 6.89% per annum as of December 31, 2017 and 6.40% per annum as of December 31, 2018.
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 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.
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Risks Relating to the Common Shares, Preferred Shares and ADSs
Holders of Common Shares, Preferred Shares or ADSs may not receive any dividends or interest on shareholders’ equity.
According to Oi’s by-laws and the Brazilian Corporate Law, Oi must pay its shareholders at least 25% of Oi’s consolidated annual
net income as dividends or interest on shareholders’ equity, as calculated and adjusted in accordance with the Brazilian Corporate Law.
This adjusted net income may be capitalized, used to absorb losses or otherwise retained as allowed under the Brazilian Corporate Law
and Oi’s by-laws and may not be available to be paid as dividends or interest on shareholders’ equity. Holders of 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
Preferred Shares. Additionally, the Brazilian Corporate Law allows a publicly traded company like Oi to suspend the mandatory
distribution of dividends in any particular year if Oi’s board of directors informs Oi’s shareholders at the ordinary general shareholders’
meeting that such distributions would be inadvisable in view of Oi’s financial condition or cash availability and subject to approval of
the general shareholders’ meeting. In addition, the members of Oi’s fiscal council must issue an opinion with respect to the suspension
of the mandatory distribution of dividends and Oi’s board of directors must submit to the CVM the justification for such suspension.
Moreover, under the RJ Plan, Oi and the other RJ Debtors are prohibited from declaring or paying dividends, interest on
shareholders’ equity or other forms of return on capital or making any other payment or distribution on or related to their shares
(including any payment related to a merger or consolidation) until the sixth anniversary of the date of the Judicial Ratification of the RJ
Plan. After the sixth anniversary of the date of the Judicial Ratification of the RJ Plan, Oi and the other RJ Debtors will be permitted to
declare or pay dividends, interest on shareholders’ equity or other forms of return on capital or make any other payment or distribution
on or related to their shares (including any payment related to a merger or consolidation) if Oi meets a certain financial ratio, as
described under “Item 8. Financial Information—Dividends and Dividend Policy.” There shall not be any restriction to the distribution
of dividends under the RJ Plan after the full payment of the Financial Credits (as defined in the RJ Plan). The restrictions of the
payment of dividends and other distributions described in this paragraph are subject to certain exceptions, as described under “Item 8.
Financial Information—Dividends and Dividend Policy.”
Holders of ADSs are not entitled to attend shareholders’ meetings and may only vote through the depositary.
Under Brazilian law, only shareholders registered as such in Oi’s corporate books may attend Oi’s shareholders’ meetings. All
Common Shares and Preferred Shares underlying our ADSs are registered in the name of the depositary. Consequently, a holder of
ADSs is not entitled to attend Oi’s shareholders’ meetings. Holders of ADSs may exercise the voting rights with respect to Common
Shares and the limited voting rights with respect to Preferred Shares represented by our ADSs only in accordance with the applicable
deposit agreement relating to the ADSs. There are practical limitations upon the ability of holders of ADSs to exercise their voting
rights due to the additional steps involved in communicating with holders of ADSs. For example, Oi is required to publish a notice of
Oi’s shareholders’ meetings in certain newspapers in Brazil. To the extent that holders of 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 ADSs will receive notice of a shareholders’ meeting by mail from the depositary following Oi’s
notification to the depositary of the shareholders’ meeting and Oi’s request that the depositary inform holders of ADSs of the
shareholders’ meeting. To exercise their voting rights, holders of ADSs must instruct the depositary on a timely basis. This voting
process will take longer for holders of ADSs than for holders of Common Shares or Preferred Shares. If the depositary fails to receive
timely voting instructions for all or part of 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.
We cannot assure you that holders of ADSs will receive the voting materials in time to ensure that such holders can instruct the
depositary to vote 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 ADSs or for the manner of carrying out those voting
instructions. Accordingly, holders of 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.
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Holders of Common Shares, Preferred Shares or ADSs in the United States may not be entitled to participate in future preemptive
rights offerings of Common Shares or Preferred Shares.
Under Brazilian law, if Oi offers to issue new shares in exchange for cash or assets as part of a capital increase, Oi generally must
grant its shareholders the right to purchase a sufficient number of the offered shares to maintain their existing ownership percentage.
Rights to purchase shares in these circumstances are known as preemptive rights. Oi may not legally be permitted to allow holders of
Common Shares, Preferred Shares or ADSs in the United States to exercise any preemptive rights in any future capital increase unless
either (1) Oi files a registration statement with the U.S. Securities and Exchange Commission, or SEC, with respect to that offering of
shares, as Oi did for its most recent capital increase, or (2) that offering of shares qualifies for an exemption from the registration
requirements of the Securities Act. At the time of any future capital increase, Oi will evaluate the costs and potential liabilities
associated with filing a registration statement with the SEC and any other factors that Oi considers important in determining whether to
file such a registration statement. Oi is not obligated to file a registration statement in connection with any future capital increase, and
Oi cannot assure the holders of Common Shares, Preferred Shares or ADSs in the United States that it will file a registration statement
with the SEC to allow them to participate in a preemptive rights offering. As a result, the equity interest of such holders in Oi may be
diluted.
If holders of 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 has obtained 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 be required to appoint a Brazilian financial institution to act as their legal representative who shall be responsible,
among other things, for keeping and updating the investors’ certificates of registrations with the Central Bank, as provided in CMN
Resolution No. 4,373. Investors will only be able to remit U.S. dollars abroad if the relevant new electronic certificate of foreign capital
registration in connection with the common shares or preferred shares is previously obtained. If such Investors fail to obtain or update
the relevant certificates of registration, it may result in additional expenses and may cause delays in receiving distributions. See
“Item 10. Additional Information—Exchange Controls.”
Also, if holders of our ADSs exchange our ADSs for Common Shares or Preferred Shares, generally they may be subject to a less
favorable tax treatment on the proceeds from any sale of, our common shares or preferred shares. See “Item 10. Additional
Information—Taxation—Brazilian Tax Considerations.”
Holders of ADSs may face difficulties in serving process on or enforcing judgments against us and other persons.
Oi is organized under the laws of Brazil, and all of the members of Oi’s board of directors, Oi’s executive officers and Oi’s
independent registered public accountants reside or are based in Brazil. The vast majority of Oi’s assets and those of these other persons
are located in Brazil. As a result, it may not be possible for holders of ADSs to effect service of process upon us or these other persons
within the United States or other jurisdictions outside Brazil or to enforce any judgments obtained in the United States or other
jurisdictions outside Brazil against Oi or these other persons. In addition, because substantially all of Oi’s assets and all of Oi’s directors
and executive officers reside outside the United States, any judgment obtained in the United States against Oi or any of Oi’s directors or
executive 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 Oi, Oi’s directors or executive officers than would shareholders of a U.S. corporation.
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Holders of Common Shares and Preferred Shares will be subject to, and holders of ADSs could be subject to, Brazilian income tax on
capital gains from sales of Common Shares, Preferred Shares or ADSs.
According to Article 26 of Brazilian Law No. 10,833/2003, if a holder not deemed to be domiciled in Brazil for Brazilian tax and
regulatory purposes, or a Non-Brazilian Holder, 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 Non-Brazilian Holder. Accordingly, on the
disposition of common shares or preferred shares, which are considered assets located in Brazil, the Non-Brazilian Holder will be
subject to income tax on the gains assessed, following the rules described under ““Item 10. Additional
Information—Taxation—Brazilian Tax Considerations—Taxation of Gains,” regardless of whether the transactions are conducted in
Brazil or abroad and with a Brazilian resident or not. A disposition of our ADSs, however, involves the disposal of a non-Brazilian
asset, which in principle should not be subject to taxation in Brazil. Nevertheless, in the event that the concept of “assets located in
Brazil” is interpreted to include our ADSs, this tax law could result in the imposition of withholding taxes on the disposition of our
ADSs made by Non-Brazilian Holders. Due to the fact that, as of the date of this annual report, Article 26 of Brazilian Law
No. 10,833/2003 has no judicial guidance as to its application to ADSs, we are unable to predict which interpretation would ultimately
prevail in Brazilian courts. See “Item 10. Additional Information—Taxation—Brazilian Tax Considerations —Taxation of Gains.”
We believe Oi was a passive foreign investment company for our taxable year ended December 31, 2018, which could result in adverse
U.S. federal income tax consequences to U.S. Holders of our Common Shares, Preferred Shares or ADSs.
Oi 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, Oi intends 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 the Common Shares and the Preferred Shares and the composition of our assets, we believe Oi was a PFIC for U.S.
federal income tax purposes for our taxable year ended December 31, 2018. Furthermore, unless the value of the Common Shares and
the 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 risk Oi will be a PFIC for our taxable year ending December 31, 2019. 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 Oi was a
PFIC for such year. Because we believe Oi was a PFIC for our taxable year ended December 31, 2018, certain adverse U.S. federal
income tax consequences could apply to a U.S. investor who holds Common Shares or Preferred Shares or ADSs with respect to any
“excess distribution” received from Oi and any gain from a sale or other disposition of Common Shares or Preferred Shares or ADSs,
and U.S. investors also may be subject to additional reporting obligations with respect to Common Shares or Preferred Shares or ADSs.
We do not intend to provide the information necessary for a U.S. investor to make a qualified electing fund election with respect to the
Common Shares or Preferred Shares or ADSs. See “Item 10. Additional Information—Taxation – U.S. Federal Income Tax
Considerations – Passive Foreign Investment Company Rules.”
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If a United States person is treated as owning at least 10% of Oi’s shares, such holder may be subject to adverse U.S. federal income
tax consequences.
If a United States person is treated as owning (directly, indirectly or constructively) at least 10% of the value or voting power of
Oi’s shares, such person may be treated as a “United States shareholder” with respect to each “controlled foreign corporation” in our
group (if any). If United States shareholders own (or are treated as owning) more than 50% of the value or voting power of Oi’s shares,
Oi would (and our non-U.S. subsidiaries could) be treated as controlled foreign corporations. In addition, if our group includes one or
more U.S. subsidiaries, certain of our non-U.S. subsidiaries could be treated as controlled foreign corporations (regardless of whether
we are treated as a controlled foreign corporation). A United States shareholder of a controlled foreign corporation may be required to
report annually and include in its U.S. taxable income its pro rata share of “Subpart F income,” “global intangible low-taxed income”
and investments in U.S. property by controlled foreign corporations, regardless of whether we make any distributions. An individual
that is a United States shareholder with respect to a controlled foreign corporation generally would not be allowed certain tax
deductions or foreign tax credits that would be allowed to a United States shareholder that is a U.S. corporation. Failure to comply with
these reporting obligations may subject you to significant monetary penalties and may prevent the statute of limitations with respect to
your U.S. federal income tax return for the year for which reporting was due from starting. We cannot provide any assurances that we
will assist investors in determining whether any of our non-U.S. subsidiaries are treated as a controlled foreign corporation or whether
such investor is treated as a United States shareholder with respect to any of such controlled foreign corporations or furnish to any
United States shareholders information that may be necessary to comply with the aforementioned reporting and tax paying
obligations. Certain of our shareholders may be United States shareholders. The determination of controlled foreign corporation status
is complex and includes attribution rules, the application of which is not entirely certain. A United States investor should consult its
advisors regarding the potential application of these rules to an investment in Oi’s common shares, preferred shares or ADSs.
Trading on over-the-counter markets may be volatile and sporadic, which could depress the market price of the Preferred ADS and
make it difficult for holders to resell Oi’s Preferred ADSs.
On June 21, 2016, the Preferred ADSs were delisted from the NYSE. On June 23, 2016, the OTC Markets Group, Inc. began
publishing quotations for the Preferred ADS in the “pink sheets” under the trading symbol OIBRQ. Trading in stock quoted on over the
counter markets is often thin, volatile, and characterized by wide fluctuations in trading prices due to many factors that may have little
to do with our operations or business prospects. This volatility could depress the market price of the Preferred ADSs for reasons
unrelated to operating performance. Moreover, the over the counter markets are not a stock exchange, and trading of securities on the
over the counter markets is often more sporadic than the trading of securities listed on other stock exchanges such as the NYSE, the
NASDAQ Stock Market or the American Stock Exchange. Accordingly, holders of Preferred ADSs may have difficulty reselling such
securities.
ITEM 4.
INFORMATION ON THE COMPANY
Overview
We are one of the principal integrated telecommunications service providers in Brazil with approximately 57.1 million revenue
generating units, or RGUs, as of December 31, 2018. We operate throughout Brazil and offer a range of integrated telecommunications
services that include Residential Services, Personal Mobility Services and B2B Services.
Our Residential Services business includes local and long-distance fixed-line voice services, broadband services and Pay-TV
services provided to residential customers in our fixed-line concession service areas, comprising the entire territory of Brazil other than
the State of São Paulo. We are the largest fixed-line telecommunications company in Brazil in terms of total number of lines in service
as of December 31, 2018 based on our 11.8 million fixed lines in service as of December 31, 2018, with a market share of 51.1% of the
total fixed lines in service in our service areas as of that date. We own the largest fiber optic network in Brazil, with more than 360,000
kilometers of installed fiber optic cable, distributed throughout Brazil. We focus on increasing the revenue generated by this customer
base by aggressively promoting convergent services (double-play, triple-play and quadruple-play packages) including our mobile,
broadband and Pay-TV services. We offer a variety of high-speed broadband services. As of December 31, 2018, we had 4.9 million
ADSL subscribers, representing 59.0% of our residential fixed line customers 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. As of December 31,
2018, we had 1.6 million residential Pay-TV subscribers, representing 19.2% of our residential fixed line customers as of that date.
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Our Personal Mobility Services business offers mobile telecommunications services throughout Brazil. Our mobile network
covers areas in which approximately 94.0% of the Brazilian population lives and works. In addition, we provide network usage
(interconnection) services. Based on our 37.7 million mobile subscribers as of December 31, 2018, we had a 16.4% market share of the
Brazilian mobile telecommunications market as of that date.
Our B2B Services business provides voice, broadband, Pay-TV, data transmission and other telecommunications services to small
and medium sized enterprises, or SMEs, corporation and governmental agencies throughout Brazil. We also provide wholesale
interconnection, network usage (interconnection) services and traffic transportation services to other telecommunications providers.
Our principal executive office is located at Rua Humberto de Campos No. 425, 8th 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
Our Judicial Reorganization Proceedings
In June 2016, after considering the challenges arising from our economic and financial situation in connection with the maturity
schedule of our financial debts, the threats to our cash flows represented by imminent attachments or freezing of assets in judicial
lawsuits, and the urgent need to adopt measures that protect our company, we concluded that filing of a request for judicial
reorganization (recuperação judicial) in Brazil would be the most appropriate course of action (1) to preserve the continuity of our
offering of quality services to our customers, within the rules and commitments undertaken with ANATEL, (2) to preserve the value of
our company, (3) to maintain the continuity of our operations and corporate activities in an organized manner that protects the interests
of our company, customers, shareholders and other stakeholders, and (4) to protect our cash and cash equivalents.
On June 20, 2016, Oi, together with the other RJ Debtors, filed a joint voluntary petition for judicial reorganization pursuant to the
Brazilian Bankruptcy Law with the RJ Court, pursuant to an urgent measure approved by our board of directors. Following a protracted
period of negotiation with various creditor constituencies, on December 12, 2017, the RJ Debtors filed the RJ Plan with the RJ Court.
Approval of RJ Plan at GCM and Confirmation of Judicial Reorganization Plan by RJ Court
On December 19 and 20, 2017, the GCM to consider approving the RJ Plan was held following the confirmation that the required
quorum of creditors of each of classes I, II, III, and IV was in attendance. As part of the RJ Plan, we negotiated the terms of the
Commitment Agreement with members of the Ad Hoc Group, the IBC and certain other unaffiliated bondholders under which such
bondholders agreed to backstop the Rights Offer, subject to the terms and conditions of the Commitment Agreement. The GCM
concluded on December 20, 2017 following the approval of the RJ Plan by a significant majority of creditors of each class present at the
GCM, reflecting amendments to the RJ Plan presented at the GCM as negotiated during the course of the GCM.
On January 8, 2018, the RJ Court entered the Brazilian Confirmation Order, ratifying and confirming the RJ Plan, according to its
terms, but modifying certain provisions of the RJ Plan. The Brazilian Confirmation Order was published in the Official Gazette of the
State of Rio de Janeiro on February 5, 2018, the Brazilian Confirmation Date.
The Brazilian Confirmation Order, according to its terms, is currently binding on all parties. By operation of the RJ Plan and the
Brazilian Confirmation Order the unsecured claims against the RJ Debtors have been novated and discharged under Brazilian law and
holders of such claims have received the recoveries set forth in the RJ Plan in exchange for their claims in accordance with the terms
and conditions of the RJ Plan.
As of the deadline to file interlocutory appeals, 27 interlocutory appeals had been filed against the Brazilian Confirmation Order.
Although subject to these pending interlocutory appeals, the Brazilian Confirmation Order has not been stayed, fully or partially, and
therefore remains in full force and effect, according to its terms. As of the date of this annual report, the term to file an appeal against
the Brazilian Confirmation Order has ended for all parties. Following the resolution of these interlocutory appeals, including eventual
appeals to the Brazilian Superior and Supreme Courts, the Brazilian Confirmation Order will become final and binding on all parties
under Brazilian law.
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Recognition Proceedings in the United States
On June 22, 2016, the U.S. Bankruptcy Court entered an order granting the provisional relief requested by the Chapter 15 Debtors
in their cases that were filed on June 21, 2016 under Chapter 15 of the United States Bankruptcy Code. On July 21, 2016, the U.S.
Bankruptcy Court held a hearing with respect to the Chapter 15 Debtors petition for recognition of the RJ Proceedings as a main foreign
proceedings with regard to each of the Chapter 15 Debtors and did not receive any objections to such petition. On July 22, 2016, the
U.S. Bankruptcy Court granted the U.S. Recognition Order.
On April 17, 2018, the foreign representative for the Chapter 15 Debtors filed a motion with the U.S. Bankruptcy Court seeking an
order of that court granting, among other things, full force and effect to the RJ Plan and the Brazilian Confirmation Order in the United
States. On June 14, 2018, the U.S. Bankruptcy Court granted the requested order. As a result, the claims with respect to the Defaulted
Bonds that were governed by New York law have been novated and discharged under New York law and the holders of these Defaulted
Bonds were entitled only to receive the recovery set forth in the RJ Plan in exchange for the claims represented by these Defaulted
Bonds.
For more information regarding the proceedings in the United States relating to the RJ Proceedings, see “Item 8. Financial
Information—Legal Proceedings—Legal Proceedings Relating to Our Financial Restructuring—Recognition Proceedings in the United
States.”
Recognition of the RJ Plan in the United Kingdom
On June 23, 2016, the High Court of Justice of England and Wales granted the U.K. Recognition Orders.
As a result of the homologation of the PTIF Composition Plan described below under “—Restructuring of Our Dutch Finance
Subsidiaries” on June 20, 2018, the PTIF Composition Plan is automatically recognized by each EU member state of the, including the
UK, under the European Insolvency Regulation (2015/848). As a result, the claims against PTIF with respect to the Defaulted Bonds
that were governed by English law have been novated and discharged as a matter of English law and the holders of these Defaulted
Bonds are entitled only to receive the recovery set forth in the RJ Plan in exchange for the claims represented by these Defaulted Bonds.
For more information regarding the proceedings in the United Kingdom relating to the RJ Proceedings, see “Item 8. Financial
Information—Legal Proceedings—Legal Proceedings Relating to Our Financial Restructuring—Recognition Proceedings in the United
Kingdom.”
Restructuring of Dutch Finance Subsidiaries
Although the RJ Proceedings have been recognized in the United States, England and Wales and Portugal, the laws of The
Netherlands do not provide for the recognition of the RJ Proceedings. Two of the RJ Debtors, Oi Coop and PTIF, are organized under
the laws of The Netherlands. As a result, a group of holders of some of the Defaulted Bonds issued by Oi Coop and PTIF brought
proceedings against these RJ Debtors in The Netherlands.
On April 10, 2018, PTIF deposited a draft of the PTIF Composition Plan with the Dutch District Court and Oi Coop deposited a
draft of the Oi Coop Composition Plan with the Dutch District Court. The PTIF Composition Plan and the Oi Coop Composition Plan
each provide for the restructuring of the claims against PTIF and Oi Coop on substantially the same terms and conditions as the RJ Plan.
On May 17, 2018, meetings of each series of bonds issued by PTIF were held at which the bondholders voted in favor of
extraordinary resolutions providing for: (1) the release Oi’s guarantee for each of the relevant series of Defaulted Bonds, (2) the
authorization of the trustee of each outstanding series of Defaulted Bonds issued by PTIF to act as a sole creditor of such Defaulted
Bonds, submit a claim on behalf of the holders of such Defaulted Bonds to the PTIF Trustee in relation to the PTIF bankruptcy and vote
in favor of the PTIF Composition Plan, and (3) authorize the trustee of each outstanding series of Defaulted Bonds issued by PTIF to
request the PTIF Trustee in respect of its vote on behalf of PTIF, to vote in favor of the Oi Coop Composition Plan.
On June 1, 2018, at a meeting of the creditors of PTIF in the Netherlands, the creditors of PTIF approved the PTIF Composition
Plan and directed the PTIF Trustee to vote PTIF’s claims in Oi Coop in favor of the Oi Coop Composition Plan. Also on June 1, 2018,
at a meeting of the creditors of Oi Coop, the creditors of Oi Coop approved the Oi Coop Composition Plan.
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On June 11, 2018, the Dutch District Court confirmed the PTIF Composition Plan and the Oi Coop Composition Plan at a
homologation hearing. The homologation was subject to an eight day appeal period, which expired on June 19, 2018. As of that date, no
appeals had been filed. As a result, the PTIF Composition Plan and the Oi Coop Composition Plan are effective as a matter of Dutch
law, the bankruptcies of PTIF and Oi Coop have terminated and the PTIF Composition Plan and the Oi Coop Composition Plan have
full force and effect in each member state of the European Union.
Recognition Orders in Portugal
On November 14, 2016, Oi and Telemar requested the Third Lisbon Commercial Court, or the Portuguese Court, to recognize the
RJ Proceedings in relation to Oi and Telemar in Portugal under the Portuguese Insolvency and Corporate Recovery Code. On July 11,
2017, Oi Mobile requested the Portuguese Court to recognize the RJ Proceedings in relation to Oi Mobile in Portugal under the
Portuguese Insolvency and Corporate Recovery Code. The Portuguese Court granted recognition of the RJ Proceedings in Portugal in
relation to Oi and Telemar on March 1, 2017 and Oi Mobile on August 4, 2017.
On May 9, 2018, Oi, Telemar and Oi Mobile, along with Copart 4 and Copart 5, filed a request for recognition of the RJ Plan in
Portugal with respect to these entities. On August 1, 2018, the Portuguese Court rejected this decision on the grounds that the RJ Plan
was still subject to appeal in Brazil. Oi appealed this decision, and on October 26, 2018, the Lisbon Court of Appeal reversed the
decision of the Portuguese Court, recognized in Portugal the decision rendered by the RJ Court on January 8, 2018 and published on
February 5, 2018, which confirmed the RJ Plan, and ordered the publication of the Brazilian decision in Portugal.
Implementation of the Financial Settlement of the Judicial Reorganization Plan
Settlement of Class I Claims
As a result of the commencement of the RJ Proceedings on June 20, 2016, (1) all outstanding labor claims against the RJ Debtors
as of that date and (2) our obligations to fund certain of our post-retirement defined benefit plans as of that date became subject to
compromise under our RJ Proceedings. As of December 31, 2017, the aggregate amount of the contingencies for labor claims
recognized by the RJ Court was R$899 million, and the aggregate amount of our unfunded obligations under our post-retirement
defined benefit plans recognized by the RJ Court was R$560 million, all of which related to claims of FATL. For more information
regarding these labor contingencies, see notes 19 and 29 to our audited consolidated financial statements. For more information
regarding our unfunded obligations under our post-retirement defined benefit plans, see note 23 to our audited consolidated financial
statements.
Under the RJ Plan, labor claims were classified as Class I claims. Under the RJ Plan, generally all labor claims were paid in five
equal monthly installments, beginning on August 5, 2018, the six-month anniversary of the Brazilian Confirmation Date. Labor claims
not yet adjudicated will be paid in five equal monthly installments, beginning six months after a final, non-appealable ruling of the
relevant court hearing a labor claim.
Labor claims for which a judicial deposit was posted by any of the RJ Debtors was paid through the immediate disbursement of
the amount deposited in court and, in the event that the related judicial deposit was lower than the labor claim recognized by the RJ
Court, the judicial deposit was used to pay part of the labor claim and the outstanding balance of the labor claim was paid in five equal
monthly installments, beginning on August 5, 2018, the six-month anniversary of the Brazilian Confirmation Date. In the event that the
related judicial deposit was greater than the amount of the labor claim recognized by the RJ Court, the RJ Debtors were entitled to
withdraw the difference from the judicial deposit.
Labor claims for which no judicial deposit was posted by any of the RJ Debtors will be paid through judicial deposits that have
been attached to the court records of the related case.
Under the RJ Plan, our obligations to fund our post-retirement defined benefit plans were classified as Class I claims. Claims due
to FATL are payable in six annual, equal installments, beginning on February 5, 2023, the fifth anniversary of the Brazilian
Confirmation Date and the amount due bears interest at the rate of the National Consumer Price Index (INPC) plus 5.5% per annum
from February 5, 2018. Interest will be capitalized to increase the principal balance of these claims on an annual basis until February 5,
2018, and will be paid annually in cash thereafter through the final maturity.
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Settlement of Class II Claims
Under the RJ Plan, the claim of BNDES under our credit facilities with BNDES was classified as a Class II claim. As of
December 31, 2017, the aggregate amount of the claims recognized by the RJ Court under our credit facilities with BNDES was
R$3,326 million. Under the RJ Plan, BNDES is entitled to receive payment of 100% of the principal amount of its recognized claims in
reais, adjusted by the interest/inflation adjustment rate. The principal amount of these claims will be paid in 108 monthly installments
beginning in March 2024, in the amount of 0.33% of the outstanding principal for the first 60 monthly installments, 1.67% of the
outstanding principal for the next 47 monthly installments and the remainder at maturity on February 15, 2033. The principal amount of
these claims will accrue interest at the TJLP rate plus 2.946372%per annum from February 5, 2018. Interest will be capitalized to
increase the principal balance under these claims on an annual basis until February 5, 2022, and will be paid monthly in cash thereafter
through the final maturity.
Settlement of Class III Claims – Defaulted Bonds
Under the RJ Plan, the claims of holders of the Defaulted Bonds were classified as Class III claims. As of December 31, 2017, the
aggregate amount of the claims recognized by the RJ Court of holders of our Defaulted Bonds was R$32,314 million. Under the RJ
Plan, each holder of Defaulted Bonds was entitled to receive the Qualified Recovery (as described below), the Non-Qualified Recovery
(as described below) or the Default Recovery (as described under “—Settlement of Class III and Class IV Claims – Default Recovery”)
in respect of the claims evidenced by the Defaulted Bonds such holder beneficially held. We refer to the amount of these claims as
Bondholder Credits.
Under the RJ Plan, holders of Defaulted Bonds were entitled to make an election with respect to the form of the recovery that they
were entitled to receive based on whether such holder had individualized its claim before the RJ Court and the aggregate amount of
Bondholder Credits (consisting of the U.S. dollar equivalent of the principal amount of such Defaulted Bonds and the accrued interest
until June 20, 2016, the date of the commencement of the RJ Proceedings) represented by such holder’s Defaulted Bonds. Holders that
had individualized their claims were entitled to elect (1) the Qualified Recovery if the aggregate amount of their Bondholder Credits
was US$750,000 or more, or (2) the Non-Qualified Recovery if the aggregate amount of their Bondholder Credits was less than
US$750,000. Holders that had not individualized their claims or did not elect the Qualified Recovery or Non-Qualified Recovery were
entitled to the Default Recovery. The period to make these elections commenced on February 6, 2018 and expired on March 8, 2018.
Qualified Recovery
Under the RJ Plan, the Qualified Recovery consisted of New Notes, newly issued Common ADSs, Common ADSs previously
held by PTIF and ADWs to subscribe to newly issued Common ADSs in amounts determined based on the amount of Bondholder
Credits evidenced by the Defaulted Bonds of each series of Defaulted Bonds held by a holder.
Under Brazilian law, prior to issuing the Common Shares underlying the newly issued Common ADSs or the Warrants underlying
the newly issued ADWs to holders of Defaulted Bonds, Oi was required to conduct a preemptive offer of those Common Shares and
Warrants to all holders of its Common Shares and Preferred Shares. Holders of Common ADSs and Preferred ADSs were not entitled to
participate in that preemptive offer.
Holders of preemptive rights were entitled to subscribe to Common Shares and the associated Warrants during a subscription
period commencing on June 15, 2018 and ending on July 16, 2018 at a subscription price of R$7.00 per Common Share. Holders of
Common Shares and Preferred Shares subscribed for 68,263 Common Shares and 5,197 Warrants in the preemptive offer. The cash
proceeds of the preemptive offer were required to be made available to holders of Defaulted Bonds in lieu of the subscribed Common
Shares and Warrants.
Under the RJ Plan, the Qualified Recovery with respect to each US$1,000 of Bondholder Credits consisted of approximately:
•
•
•
•
US$195.61 aggregate principal amount of New Notes;
38.57 Common ADSs representing 192.83 Common Shares;
2.75 ADWs; and
US$0.01 in cash.
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The New Notes are senior unsecured obligations of Oi denominated in U.S. dollars that mature in July 2025, with the principal
amount to be paid in full at maturity. The New Notes are guaranteed, jointly and severally, by each of Telemar, Oi Mobile, Oi Coop,
and PTIF. The New Notes accrue interest from the Brazilian Confirmation Date. Interest on the New Notes will accrue:
•
from the Brazilian Confirmation Date until February 2019, which is the first interest payment date, until August 2021, the
applicable rate will be defined at the sole discretion of Oi to be either (i) a fixed rate of 10.0% per annum payable in cash on
a semi-annual basis, or (ii) a fixed rate of 12.0% per annum, of which 8.0% shall be payable in cash and 4.0% shall be
payable by either increasing the principal amount of the outstanding New Notes or by issuing paid-in-kind notes, at the sole
discretion of Oi, in each case, on a semi-annual basis; and
•
thereafter, at a fixed rate of 10.0% per annum payable in cash on a semi-annual basis.
Each ADW represented five Warrants. Each Warrant entitled its holder to subscribe for one Common Share at an exercise price of
the equivalent in reais of US$0.01 per Common Share. Each ADW was exercisable only for Common ADSs. Each ADW and each
Warrant became exercisable, subject to the terms and conditions thereof, for a period of 92 days commencing on October 3, 2018.
Non-Qualified Recovery
Under the RJ Plan, the Non-Qualified Recovery with respect to each US$1,000 of Bondholder Credits consisted of a participation
interest in a principal amount of US$500 under a credit agreement that was entered into between Oi as borrower, the other RJ Debtors
as guarantors, and an administrative agent, which we refer to as the Non-Qualified Credit Agreement.
Obligations under the Non-Qualified Credit Agreement are senior unsecured obligations of Oi. Obligations under the
Non-Qualified Credit Agreement are guaranteed, jointly and severally, by each Telemar, Oi Mobile, Oi Coop, and PTIF. Principal
under the Non-Qualified Credit Agreement will be paid in 12 semi-annual installments beginning in August 2024 in the amount of 4%
of the outstanding principal for the first six semi-annual installments, 12.66% of the outstanding principal for the next five semi-annual
installments and the remainder at maturity on February 15, 2030. The Non-Qualified Credit Agreement will accrue interest at the rate of
6% per annum from February 5, 2018. Interest will be capitalized to increase the principal balance under the Non-Qualified Credit
Agreement on an annual basis until February 2023, and will be paid together with principal beginning in August 2024.
Settlement Procedures
Following the entry of the order of the U.S. Bankruptcy Court granting full force and effect to the RJ Plan, we commenced
settlement procedures in order to permit holders of Defaulted Bonds that had validly elected to receive the Qualified Recovery and the
Non-Qualified Recovery to surrender their Defaulted Bonds and receive these recoveries. The settlement of the Qualified Recovery and
the Non-Qualified Recovery took place on July 27, 2018. In connection with the settlement of the Qualified Recovery, we issued
(1) US$1,653.6 million principal amount of New Notes, (2) 302,846,268 new Common ADSs (representing 1,514,231,340 newly
issued Common Shares), (3) 23,250,281 Common ADSs previously held by PTIF (representing 116,251,405 Common Shares), and (4)
23,295,054 ADWs representing the right to subscribe for 23,295,054 newly issued Common ADSs (representing 116,475,270 Common
Shares). In connection with the settlement of the Non-Qualified Recovery, holders of Defaulted Bonds received participation interests
in the Non-Qualified Credit Agreement in an aggregate amount of US$79.6 million.
Settlement of Class III Claims – Export Credit Agreements
Under the RJ Plan, the claims of lenders under our export credit facility agreements were classified as Class III claims. As of
December 31, 2017, the aggregate amount of the claims recognized by the RJ Court of lenders under our export credit facility
agreements was R$5,460 million.
Under the RJ Plan, each of the lenders under these export credit facility agreements will receive payment of the amount of their
recognized claims under the terms of four new export credit facilities that we entered into with these lenders during June and July 2018.
Telemar is the borrower under three facility agreements dated June 21, 2018, July 17, 2018 and July 26, 2018, and Oi and Oi Mobile
have guaranteed Telemar’s obligations thereunder. Oi is the borrower under one facility agreement dated July 17, 2018, and Oi Mobile
and Telemar have guaranteed Oi’s obligations thereunder.
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Under these new export credit facilities, the principal amount of the loans will be paid in U.S. dollars in 24 semi-annual
installments beginning in August 2023, in the amount of 2.0% of the outstanding principal for the first 10 semi-annual installments,
5.7% of the outstanding principal for the next 13 semi-annual installments and the remainder at maturity on February 25, 2035. The
outstanding principal amount under these new export credit facilities will accrue interest at the rate of 1.75% per annum from
February 5, 2018. Interest will be capitalized to increase the outstanding principal on an annual basis until February 2023, and will be
paid semi-annually in cash from August 2023 through the final maturity.
Settlement of Class III Claims – Debentures
Under the RJ Plan, the claims of holders of our debentures were classified as Class III claims. As of December 31, 2017, the
aggregate amount of the claims recognized by the RJ Court of holders of our debentures was R$4,119 million.
Under the RJ Plan, each holder of beneficial interests in our debentures received new debentures, in the form of either the 12th
issuance of simple, unsecured, non-convertible debentures of Oi or the 6th issuance, simple, unsecured, non-convertible debentures of
Telemar, both denominated in reais in an aggregate principal amount equal to the principal of the recognized claims surrendered by the
holders of beneficial interests in our debentures. These new debentures were issued on February 5, 2018 and subscribed on July 30,
2018. Oi’s obligations under the 12th issuance of simple, unsecured, non-convertible debentures are guaranteed, jointly and severally, by
each of Telemar, Oi Mobile, Oi Coop and PTIF. Telemar’s obligations under 6th issuance, simple, unsecured, non-convertible
debentures are guaranteed, jointly and severally, by each of Oi, Telemar, Oi Mobile, Oi Coop and PTIF.
The principal amount of the new debentures will be paid in reais in 24 semi-annual installments beginning in August 2023, in the
amount of 2.0% of the outstanding principal for the first 10 semi-annual installments, 5.7% of the outstanding principal for the next 13
semi-annual installments and the remainder at maturity on February 25, 2035. The principal amount of these debentures will accrue
interest at the rate of 80% of the CDI rate from February 5, 2018. Interest will be capitalized to increase the principal balance under
these debentures on an annual basis until February 2023, and will be paid semi-annually in cash from August 2023 through the final
maturity.
Settlement of Class III Claims – Unsecured Lines of Credit and Real Estate Securitization Transactions
Under the RJ Plan, the claims (1) of the lender under our unsecured line of credit, and (2) under our obligations to make the
payments under leases of certain property by Oi and Telemar from Copart 4 and Copart 5 that had been assigned to support CRIs
backed by these receivables, were classified as Class III claims. As of December 31, 2017, the aggregate amount of the claims
recognized by the RJ Court of the lender under our unsecured line of credit was R$2,525 million, and the claims recognized by the RJ
Court under the CRIs was R$1,519 million.
Under the RJ Plan, the lender under our unsecured line of credit and each of the creditors under the CRIs will receive payment
from Oi of 100% of the amount of its recognized claims, which will be paid in reais in 24 semi-annual installments beginning in August
2023, in the amount of 2.0% of the principal amount for the first 10 semi-annual installments, 5.7% of the principal amount for the next
13 semi-annual installments and the remainder at maturity on February 25, 2035. The principal amount will accrue interest at the rate of
80% of the CDI rate from February 5, 2018. Interest will be capitalized to increase the principal amount on an annual basis until
February 2023, and will be paid semi-annually in cash from August 2023 through the final maturity. These obligations of Oi are
guaranteed, jointly and severally, by each of Telemar, Oi Mobile, Oi Coop and PTIF.
Settlement of Class III Claims – ANATEL
As a result of the commencement of the RJ Proceedings on June 20, 2016, all outstanding non-tax claims of ANATEL against the
RJ Debtors as of that date became subject to compromise under our RJ Proceedings. As of December 31, 2017, the aggregate amount of
the contingencies for claims of ANATEL recognized by the RJ Court was R$9,334 million. For more information regarding these
claims, see note 29 to our audited consolidated financial statements.
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Under the RJ Plan, claims of ANATEL were classified as Class III claims. Under the RJ Plan, liquidated claims of ANATEL
outstanding as of June 20, 2016 have been novated and in calculating the recovery of ANATEL under these claims the amounts of all
accrued interest included in these claims was reduced by 50% and the amounts of all late charges included in these claims was reduced
by 25%. The remaining amount of these claims will be settled in 240 monthly installments, beginning on June 30, 2018, in the amount
of 0.160% of the outstanding claims for the first 60 monthly installments, 0.330% of the outstanding claims for the next 60 monthly
installments, 0.500% of the outstanding claims for the next 60 monthly installments, 0.660% of the outstanding claims for the next 59
monthly installments, and the remainder at maturity on June 30, 2038. Beginning on July 31, 2018, the amounts of each monthly
installment have been be adjusted by the SELIC variation. Payments of monthly installments will be made through the application of
judicial deposits related to these claims until the balance of these judicial deposits has been exhausted and thereafter will be payable in
cash in reais.
Under the RJ Plan, non-liquidated claims of ANATEL outstanding as of June 20, 2016 have been novated and ANATEL is
entitled to the Default Recovery with respect to these claims.
In the event that a legal rule is adopted in Brazil that regulates an alternative manner for the settlement of the claims of ANATEL
outstanding as of June 20, 2016, the RJ Debtors may adopt the new regime, observing the terms and conditions set forth in Oi’s
by-laws.
Notwithstanding the above, ANATEL has challenged the treatment of its outstanding claims for fines, interest and penalties in the
RJ Proceedings. For more information, see “Item 8. Financial Information—Legal Proceedings—Legal Proceedings Relating to Our
Financial Restructuring—ANATEL Proceedings.”
Settlement of Class III and Class IV Claims – Trade Creditors
As a result of the commencement of the RJ Proceedings on June 20, 2016, all outstanding trade payables of the RJ Debtors as of
that date became subject to compromise under our RJ Proceedings. As of December 31, 2017, the aggregate amount of the claims of our
trade creditors recognized by the RJ Court was R$2,139 million.
Under the RJ Plan, the claims of our trade creditors were classified as Class III or Class IV claims. Under the RJ Plan, each of
these trade creditors were entitled to make an election of the form of their recovery during an election period that commenced on
February 6, 2018 and ended on February 26, 2018.
Trade creditors that, under the RJ Plan, continued to supply goods and/or services to the RJ Debtors without any unreasonable
change in the terms and conditions and that did not have any on-going litigation against any of the RJ Debtors, other than litigation
related to the RJ Proceedings, were deemed to be “Strategic Supplier Creditors” under the RJ Plan. Strategic Supplier Creditors with
claims of R$150,000 or less (or the equivalent in other currencies), other than claims arising from loans or other funding provided to Oi
Coop, were entitled to elect to receive 100% of their claims in cash within 20 business days after the end of the election period.
Strategic Supplier Creditors with claims of more than R$150,000 (or the equivalent in other currencies), other than claims arising from
loans or other funding provided to Oi Coop, were entitled to elect to receive R$150,000 (or the equivalent in other currencies) in cash
within 20 business days after the end of the election period and 90% of their remaining claims in cash in four equal annual installments,
plus interest on the amount of their claims at the rate of TR plus 0.5% per annum for claims denominated in reais, and at the rate of
0.5% per annum for claims denominated in U.S. dollars or euros.
Trade creditors that were not deemed to be “Strategic Supplier Creditors” under the RJ Plan were entitled to elect to:
•
•
•
receive the entire amount of their claim in cash in a single installment if the aggregate amount of their claims was less than
or equal to R$1,000;
receive R$1,000 in cash in a single installment with respect to the entire amount of their claim if the aggregate amount of
their claims was more than R$1,000; or
receive the entire amount of their claim under terms similar to (1) those described under “—Settlement of Class III Claims –
Unsecured Lines of Credit and Real Estate Securitization Transactions—Unsecured Lines of Credit” if their claims were
denominated in reais, or (2) those described under “—Settlement of Class III Claims – Export Credit Agreements” if their
claims were denominated in a currency other than reais.
Trade creditors that did not elect one of these recovery options are entitled to the Default Recovery.
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Settlement of Class III and Class IV Claims – Civil Contingencies
As a result of the commencement of the RJ Proceedings on June 20, 2016, all outstanding unsecured civil claims against the RJ
Debtors as of that date became subject to compromise under our RJ Proceedings. As of December 31, 2017, the aggregate amount of
the contingencies for civil claims (other than claims of ANATEL and other regulatory agencies) recognized by the RJ Court was
R$2,929 million. For more information regarding these civil contingencies, see note 29 to our audited consolidated financial statements.
Under the RJ Plan, unsecured civil claims against the RJ Debtors were classified as Class III and IV claims. Under the RJ Plan, if
judicial deposits have been made with respect to adjudicated civil claims, holders of these civil claims that expressly agreed with the
amounts of the civil claims acknowledged by the RJ Debtors, including those recognized by the RJ Court, and waived the right to offer,
propose, or proceed with credit actions, qualifications, divergences, objections, or any other measure (including appeals) which aim at
increasing the amounts of their civil claims, were paid, subject to the reduction of the amount of any civil claim classified as a Class III
claim as described below, through the application of judicial deposits related to these civil claims until the balance of the relevant
judicial deposits was exhausted. Any amount of a civil claim remaining unpaid after the application of the related judicial deposit
entitled the holder to the Default Recovery with respect to the balance of that civil claim. In the event that the related judicial deposit
was greater than the amount that the holder of a civil claim was entitled to withdraw, the RJ Debtors were be entitled to withdraw the
difference from the judicial deposit.
The amount of the claim of a holder of civil claims (other than claims of ANATEL and other regulatory agencies) that have been
classified as Class III claims were reduced based on the amount of such civil claims as follows:
•
•
•
•
Civil claims of more than R$1,000 and equal to or less than R$5,000 were reduced by 15%;
Civil claims of more than R$5,000 and equal to or less than R$10,000 were reduced by 20%;
Civil claims of more than R$10,000 and equal to or less than R$150,000 were reduced by 30%; and
Civil claims of more than R$150,000 were reduced by 50%.
Under the RJ Plan, if judicial deposits have been made with respect to unadjudicated civil claims, following adjudication of their
claims, the holders of these civil claims that expressly agree with the amounts of the civil claims acknowledged by the RJ Debtors,
including those recognized by the RJ Court, and waive the right to offer, propose, or proceed with credit actions, qualifications,
divergences, objections, or any other measure (including appeals) which aim at increasing the amounts of their civil claims, will be
paid, subject to the reduction of the amount of any civil claim classified as a Class III claim as described above, through the application
of judicial deposits related to these civil claims until the balance of the relevant judicial deposits has been exhausted. Any amount of a
civil claim remaining unpaid after the application of the related judicial deposit will entitle the holder to the Default Recovery with
respect to the balance of that civil claim. In the event that the related judicial deposit is greater than the amount that the holder of a civil
claim is entitled to withdraw, the RJ Debtors will be entitled to withdraw the difference from the judicial deposit.
Settlement of Class III and Class IV Claims – Default Recovery
Under the RJ Plan, (1) creditors that were entitled to make recovery elections as described above and failed to make such elections
or elected the Default Recovery, (2) ANATEL, with respect to some of its claims as described above, and (3) holders of civil claims
(other than claims of ANATEL and other regulatory agencies) in amounts that exceed the related judicial deposit will be entitled to the
Default Recovery with respect some or all of their claims.
Under the RJ Plan, the Default Recovery will consist of an unsecured right to receive payment of 100% of the amount of a
recognized claims payable in five equal annual installments, commencing on the 20th anniversary of the Brazilian Confirmation Date
for creditors resident in Brazil or the 20th anniversary of the date on which the RJ Plan is recognized in the jurisdiction in which the
creditor is resident for creditors not resident in Brazil. If the recognized claim was derived from an obligation denominated in reais, the
payments will be made in reais and the claim will bear interest at the TR rate with all accrued interest payable at final maturity. If the
recognized claim was derived from an obligation denominated in U.S. dollars or euros, the payments will be made in U.S. dollars or
euros, respectively, and the claim will not bear interest.
Under the RJ Plan, Oi has the option of, at any time, to settle all amount payable under the Default Recovery prior to their
maturities by means of the payment of 15% of the aggregate amount of the related claims plus capitalized interest to the date of the
exercise of this option.
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Implementation of Management Changes Required by the Judicial Reorganization Plan
Pursuant to the RJ Plan, as from the date of the approval of the RJ Plan on December 20, 2017 until the election of a new board of
directors in accordance with the RJ Plan, Oi had a transitional board of directors composed of nine members set forth in the RJ Plan,
each of whom served without an alternate member.
However, the RJ Court suspended the voting rights of certain shareholders and ordered the removal of the members of the Oi’s
board of directors indicated by them until the occurrence of the capital increase provided for in the RJ Plan. As a result, as of March 7,
2018, three members of the transitional board of directors were removed from their positions.
Pursuant to the RJ Plan, Oi was required to engage a human resources consultant to assist with the selection of an operating
officer. This process was concluded on March 21, 2018 with the election by Oi’s board of directors of José Claudio Moreira Gonçalves
to serve on Oi’s board of executive officers as Oi’s Chief Operating Officer. In addition, on that date, Oi’s board of directors elected
Bernardo Kos Winik to Oi’s board of executive officers and the newly created position of Chief Commercial Officer.
Pursuant to the RJ Plan, Oi also engaged a human resources consultant to assist with the selection of the nominees for its new
board of directors. On September 17, 2018, the general shareholders’ meeting of Oi ratified the election of the members of the new
board of directors indicated by Oi’s management in accordance with the RJ Plan. The effectiveness of the installation of the members of
the new board of directors was conditioned on the prior approval of ANATEL, which ANATEL conditionally granted on September 13,
2018 and confirmed on September 19, 2018.
Exercise of Warrants and ADWs
On October 26, 2018, our board of directors confirmed the issuance of 112,598,610 Common Shares and the delivery of such
Common Shares to holders of its Warrants that exercised their Warrants on or prior to October 24, 2018, including Warrants
represented by 22,135,429 ADWs that were exercised on or prior to October 18, 2018.
On December 5, 2018, our board of directors confirmed the issuance of 3,314,745 Common Shares and the delivery of such
Common Shares to holders of its Warrants that exercised their Warrants from October 25, 2018 through December 3, 2018, including
Warrants represented by 662,949 ADWs that were exercised from October 19, 2018 through November 27, 2018.
On January 4, 2019, our board of directors confirmed the issuance of 275,985 Common Shares and the delivery of such Common
Shares to holders of its Warrants that exercised their Warrants from December 4, 2018 through January 2, 2019, including Warrants
represented by 55,197 ADWs that were exercised from November 28, 2018 through December 26, 2018.
All Warrants that were not exercised on or prior to January 2, 2019, including all ADWs that were not exercised on or prior to
December 26, 2018, have been cancelled.
Preemptive Offering and Closing Under Commitment Agreement
As contemplated by Section 6 of the RJ Plan, on November 13, 2018, we commenced a preemptive offering of Common Shares
that was registered with the SEC under the Securities Act under which holders of our Common Shares and Preferred Shares, including
the ADS Depositary and The Bank of New York Mellon, as depositary of the Preferred ADS program, received 1.333630 transferable
rights for each Common Share or Preferred Share held as of November 19, 2018. Each subscription right entitled its holder to subscribe
to one Common Share at a subscription price of R$1.24 per Common Share. In addition, each holder of a subscription right was entitled
to request the subscription for additional Common Shares, up to the total of 3,225,806,451 Common Shares that were offered in the
preemptive offering less the total number of initial Common Shares.
The subscription rights expired on January 4, 2019. On January 16, 2019, we issued 1,530,457,356 Common Shares to holders of
subscription rights that had exercised those subscription rights with respect to the initial Common Shares, including the depositaries
under the deposit agreements relating to our ADSs. On January 21, 2019, we issued 91,080,933 Common Shares to holders of
subscription rights that had requested subscriptions for excess Common Shares, including the depositaries under the deposit agreements
relating to our ADSs. The proceeds of these subscriptions was R$2,011 million.
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On January 25, 2019, we issued 1,604,268,162 Common Shares, representing the total number of Common Shares that were
offered in the preemptive offering less the total number of initial Common Shares and excess Common Shares, to the Backstop
Investors in a private placement under the terms of the RJ Plan and the Commitment Agreement for the aggregate amount of
R$1,989 million. In addition, under the terms of the RJ Plan and the Commitment Agreement, on that date we issued 272,148,705
Common Shares in a private placement to the Backstop Investors and paid US$13 million to the Backstop Investors as compensation
for their commitments under the Commitment Agreement.
Agreements for Network Equipment and Services
On July 20, 2018, we entered into an agreement with Huawei do Brasil Telecomunicações Ltda. and certain of its affiliates, or
Huawei, under which we agreed to make the necessary efforts to sign, within 90 days from the date of the agreement, the contracts to
acquire equipment and services from Huawei to support the modernization of our network technologies. We expect that the projects
supported by this agreement will result in the expansion of our mobile telephone coverage and our fiber optic broadband capacity.
These projects are designed to modernize and consolidate our mobile network technologies, permitting our gradual use of our 2G and
3G frequencies to provide 4.5G services in all municipalities currently served by our mobile network and prepare our network for the
implementation of 5G technology and Internet of Things (IoT) solutions. Under this agreement, we expect to acquire equipment and
services from Huawei over the next five years.
Pharol Settlement Agreement
On January 8, 2019, Oi, Bratel and Pharol entered into a settlement agreement, or the Pharol Settlement Agreement, which
provides, among other things, for the termination of all existing litigation involving Oi, Bratel and Pharol in Brazil and abroad. As a
result of the Pharol Settlement Agreement, Oi, Bratel and Pharol filed motions requesting the suspension of all pending proceedings,
suits and appeals in Brazil and Portugal involving Oi, Bratel and Pharol for 60 days or until the RJ Court confirms the Pharol Settlement
Agreement, whichever occurs first.
Under the Pharol Settlement Agreement Oi is required to: (1) pay Bratel an amount in U.S. dollars corresponding to €25 million,
which under the Pharol Settlement Agreement should be used by Pharol for the subscription of 85,721,774 common shares issued by Oi
in the Cash Capital Increase; and (2) upon confirmation of the Pharol Settlement Agreement by the RJ Court, (i) transfer to Bratel
32,000,000 common shares and 1,800,000 preferred shares of Oi held in treasury, (ii) pay Pharol the annual fees related to certain
obligations assumed by Oi with respect to proceedings of Pharol in Portugal, and (iii) in case of a sale of at least 50% of the shares of
Unitel indirectly held by Oi, deposit into an escrow account an amount necessary to guarantee the payment of any potential liabilities of
Pharol in tax proceedings whose chance of loss is assessed as possible or probable.
Under the Pharol Settlement Agreement, on February 8, 2019, the member designated by Oi was elected to Pharol’s Board of
Directors.
On February 28, 2019, the RJ Court confirmed the Pharol Settlement Agreement by a decision published in the Official Gazette of
the State of Rio de Janeiro on March 12, 2019. This decision became final on April 3, 2019. Since that date, in accordance with the
Pharol Settlement Agreement, Oi has paid Bratel an amount in U.S. dollars corresponding to €25 million and transferred to Bratel
32,000,000 common shares and 1,800,000 preferred shares of Oi held in treasury.
Unitel Arbitration
On October 13, 2015, PT Ventures initiated an arbitration proceeding against the other Unitel shareholders as a result of the
violation by those shareholders of a variety of provisions of the Unitel shareholders’ agreement and Angolan law, including the
provisions entitling PT Ventures to nominate the majority of the members of the board of directors of Unitel, including its managing
director, and the fact that the other Unitel shareholders caused Unitel not to pay dividends owed to PT Ventures, entered into self-
interested transactions, and withheld information and clarifications on such payment and transactions.
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 in May 2014 constituted a breach of the Unitel shareholders’ agreement.
PT Ventures disputed this interpretation of the relevant provisions of the Unitel shareholders’ agreement arguing that the relevant
provisions of the Unitel shareholders’ agreement apply only to a transfer of Unitel shares by PT Ventures itself.
The arbitral tribunal was constituted on April 14, 2016. On May 19, 2016, the arbitration proceeding against PT Ventures initiated
by the other Unitel shareholders was consolidated with the arbitration initiated by PT Ventures. The arbitral tribunal issued its final
award on February 20, 2019.
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In the final award, the arbitral tribunal decided that the other Unitel shareholders had repeatedly breached the shareholders’
agreement, and that these breaches had resulted in a significant decrease of value of PT Ventures’ stake in Unitel. The arbitral tribunal
ordered the other Unitel shareholders to jointly and severally pay PT Ventures the amount of US$339.4 million corresponding to the
loss of value of PT Ventures’ stake in Unitel, plus interest from February 20, 2019 at 12-month U.S. dollar LIBOR +2%, compounded
annually. The arbitral tribunal also ordered the other Unitel shareholders to jointly and severally pay PT Ventures the amount of
US$307 million corresponding to the damages arising from the other Unitel’s shareholders’ failure to ensure that PT Ventures received
the same amount of dividends in foreign currency as the other Unitel foreign shareholder. This amount is subject to interest at an annual
rate of 7%, starting at various dates in 2013. In addition, the arbitral tribunal ordered the respondents to pay a substantial portion of PT
Ventures’ legal fees and costs and the administrative and arbitrators’ fees and expenses, in the aggregate net amount of approximately
US$13 million. The arbitral tribunal also entirely dismissed the counterclaim and agreed with PT Ventures that the conditions for
exercising the right of first refusal to acquire PT Ventures’ 25% shareholding in Unitel had not been triggered. For more information,
see “Item 8. Financial Information—Legal Proceedings—Legal Proceedings Relating to Our Interest in Unitel.”
Merger of Copart 4 with and into Telemar and merger of Copart 5 with and into Oi
In January 2019, Copart 4 was merged with and into Telemar and in March 2019, Copart 5 was merged with and into Oi.
Repurchases of Preferred Shares over the B3
During February 2019, we repurchased a total of 1,800,000 Preferred Shares over the B3 at prices ranging between R$1.42 and
R$1.44 per Preferred Share, for an aggregate purchase price of R$2.6 million.
Corporate Structure
The following chart presents our corporate structure and principal operating subsidiaries as of April 23, 2019. For a complete list
of our subsidiaries, see Exhibit 8.01 to this annual report.
(1) Oi directly and indirectly owns 100% of equity stock of Serede Serviços de Rede S.A., as follows: 81.61% is held directly by Telemar, 17.51% is held directly by Oi
and 0.88% is held directly by Oi Mobile.
(2) Oi indirectly holds 100% of the equity stock of Brasil Telecom Comunicaçāo Multimedia Ltda., as follows: 99.99% is held directly by Oi Mobile and 0.01% is held
directly by Telemar.
(3) Oi indirectly holds 86% of the equity stock of Africatel Holdings B.V., through its wholly-owned subsidiary Africatel GmbH & Co KG. Samba Luxco S.à r.l. holds
the remaining 14% of the equity stock of Africatel Holdings B.V.
(4) Oi indirectly holds 100% of the equity stock of Paggo Acquirer Gestão de Meios de Pagamentos Ltda., as follows: 99.99% is held directly by Paggo
Empreendimentos S.A. and 0.01% is held directly by Oi Mobile.
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Our Services
We provide the following services:
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•
•
•
Residential Services throughout Brazil (other than in the State of São Paulo) consisting of local and long-distance fixed-line
voice services, broadband services and Pay-TV services under our Oi TV brand, primarily through direct to home (DTH) (a
satellite technology) which we offer throughout Brazil.
Personal Mobility Services throughout Brazil consisting of mobile voice and data telecommunications services as well as
value-added services;
B2B Services throughout Brazil consisting of our fixed-line and mobile voice and data telecommunications services,
broadband services and Pay-TV services, which are marketed and delivered to SME, corporate and governmental customers,
as well as interconnection services, wholesale network usage services and traffic transportation services, which are primarily
marketed and delivered to corporate customers (including other telecommunications providers).
Residential Services
We offer our residential services as bundles, including bundles with other services including our mobile voice and data
communications services, as well as on an a la carte basis. 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.
Fixed-Line Voice 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 we refer to as local calls. ANATEL has divided our fixed-line service areas into approximately
4,400 local areas.
Calls within Brazil that are not classified as local calls are classified as domestic long-distance calls. We provide domestic and
international long-distance services for calls originating from fixed-line devices in our fixed-line service 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), to which a
small percentage of our residential customers subscribe. A large majority of our residential customers subscribe to one of a variety of
alternative fixed-line plans that we offer, which are designed to meet our customers’ usage profiles, including our bundled services
plans. We continually monitor customer usage profiles and preferences and periodically revise our alternative fixed-line plans and
promotions in order to better service the needs of our residential customers.
Broadband Services
We offer fixed broadband services through xDSL technologies and fiber (FTTH – fiber-to-the-home), with speeds ranging from 1
megabit per second, or Mbps, to 200 Mbps. We offer broadband services to our residential customers as mostly part of bundled plans
with our traditional fixed-line services. Customers pay a fixed monthly subscription fee, irrespective of their actual connection time to
the internet.
As of December 31, 2018, our network we covered 85.3% of the municipalities in our fixed-line service areas, reaching a total of
more than 5.2 million fixed broadband customers, and our national fiber network reached approximately 1.2 million homes through
FTTH. As of December 31, 2018, we offered FTTH in 32 municipalities, an increase of 22 municipalities as compared to December 31,
2017. We continue to strategically invest in our broadband network in areas that we believe have the greatest potential for sales and
growth.
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As with our traditional fixed-line services, we continually monitor customer usage profiles and preferences and periodically revise
our broadband plans and promotions in order to better service the needs of our residential customers, to encourage our existing
broadband customers to migrate to plans offering higher speeds and to attract new customers to our broadband services.
Pay-TV Services
We deliver Pay-TV services throughout our fixed-line service areas using our DTH satellite network. We also deliver Pay-TV
services through our fiber optic network (internet protocol Pay-TV, or IPTV) in all of the cities where we have deployed FTTH.
We offer Pay-TV services to our residential customers as part of bundled plans with our traditional fixed-line services or on an a la
carte basis. We offer several packages of Pay-TV channels at different price points and offer subscribers to each of these packages the
option to customize the package through the purchase of additional channels featuring films offered by HBO/Cinemax and Telecine and
sports offered by Futebol.
As with our traditional fixed-line services, we continually monitor customer usage profiles and preferences and periodically revise
our Pay-TV plans and promotions in order to better service the needs of our residential customers and to attract new customers to our
Pay-TV services.
Bundled Services
As an integrated telecommunications service provider, we focus a significant part of our marketing efforts on promoting our
bundled services offerings, including through offers of free installation of fixed-line and broadband services, free modem and Wi-Fi and
access to certain smartphone applications free of charge. Our bundled services offerings for residential customers have focused on
increasing our profitability by providing a more comprehensive mix of higher-value services to our customers. Our market research has
shown that bundled offerings build customer loyalty and serve to reduce churn rates as compared to standalone services. In addition, we
believe that by developing unique, multi-product bundles with joint installation, integrated billing and unified customer service, we set
ourselves apart from other service providers.
We offer a variety of bundled services, including our Oi Total portfolio, consisting of:
•
•
•
•
•
Oi Total Solução Completa, our quadruple-play bundle that combines fixed-line voice, broadband data, Pay-TV and mobile
voice and data services;
Oi Total Conectado, our triple-pay bundle that combines fixed-line voice, broadband data and mobile voice and data
services;
Oi Total Residencial, our residential bundle that combines fixed-line voice, broadband data and Pay-TV;
Oi Total TV + Fixo, a bundle that combines fixed-line voice and Pay-TV; and
Oi Total Play, a bundle that combines fixed-line voice, broadband access and OTT content (Oi Play).
Customers who subscribe to bundles receive price discounts and double the data allowance that we offer on an a la carte basis.
In addition to Oi Total, we offer bundles for residential customers that subscribe to our IPTV service that include broadband
subscriptions at speeds of up to 200 Mbps. Subscriptions to our IPTV packages are only available in areas in which we have deployed
our FTTH network. Outside our FTTH network, we offer Pay-TV services throughout our fixed-line service areas using our DTH
satellite network.
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Personal Mobility Services
Our Personal Mobility Services business offers pre-paid and post-paid mobile voice and data communications plans: Oi Livre
plans for the pre-paid market; Oi Mais plans for the post-paid market; and Oi Mais Controle as a hybrid solution. Although we no
longer offer new subscriptions for voice-only mobile services, we continue to provide services to customers that have subscribed to
these legacy plans. Since our 3G and 4G networks offer greater capacity to meet the growing demand for data, we are focused on
accelerating 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.
Pre-Paid Plans
Pre-paid customers activate their cellular numbers through the purchase and installation of a SIM card in their mobile handsets.
We offer pre-paid voice and data bundles through our Oi Livre portfolio. Our Oi Livre portfolio includes a range of all-net voice
minutes for calls within Brazil (including unlimited minutes through the Oi Livre Ilimitado plans) and data allowances (ranging from
500 MB to 7.6 GB of 4G mobile data) for flat fees. Customers choose the amount of time they have to use their voice and data
allowances, ranging from one to 30 days. Using the Minha Oi application on their smartphones, customers can freely switch between
their data and voice allowances depending on their individual needs using a pre-determined exchange rate. 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.
Post-Paid Plans
Customers of our post-paid plans are billed on a monthly basis for contracted services used during the previous month, in addition
to surplus usage and special services contracted and used and monthly subscription fees. Our Oi Mais portfolio offers between 7 GB
and 50 GB of 4G mobile data with no usage restrictions, unlimited text messages and unlimited minutes to call fixed-line and mobile
customers of any operator in Brazil. In addition to mobile voice and mobile data communications services, our post-paid plans provide
voice mail, caller ID and other services, including access to our Oi Play platform and Wi-Fi access points.
We offer a variety of post-paid mobile internet plans (i.e., data only plans) that provide data allowances from 3 GB to 50 GB for
smartphones and from 2 GB to 10 GB for tablets and laptop computers and provide data transmission at speeds of 1 Mbps (3G network)
or 5 Mbps (4G network). Our post-paid mobile internet plans for smartphones are available to our Oi Mais customers who wish to
purchase additional data and to customers of our legacy post-paid stand-alone voice plans who wish to add mobile data services to their
smartphones. Our post-paid mobile internet plans for tablets and laptop computers are sold on a stand-alone basis or, in some cases, as
part of our voice and data plans. 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.
Hybrid Plans
Our hybrid plans present strategic value for our company because they combine the 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 and higher ARPUs. 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.
We offer 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 unlimited all-net voice minutes for calls within Brazil, combined with
the ability of Oi Livre customers to freely switch between their data and voice allowances depending on their individual needs using a
pre-determined exchange rate using the Minha Oi application on their smartphones.
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Value-Added Services
In 2018, we continued to accelerate our digital transformation process, which included restructuring our value-added services
under the following categories: (1) films and series; (2) education; (3) health; (4) written media; and (5) utilities. Within each category,
we highlight the following value-added services:
Films and Series
•
Premium streaming services including HBO GO, FOX +, Telecine Play, Watch ESPN, Discovery Kids On and Coleção Oi.
Education
•
•
•
Health
•
•
Busuu: a language learning application offering 11 languages and a social network for users;
Oi Para Aprender: a learning platform that 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; and
Oi Melhore sua Renda: a service that focuses on education and supplemental income generation and provides a variety of
courses, including photography, party decoration, carpentry and crafts.
BT FIT: an automated personal trainer service that provides a variety of courses and exercises and creates personalized
training program for the user; and
Saúde UP, a service that offers health content, as well as discounts in a wide network of pharmacies, medical exams and
medical consultations, as well as a nurse on call.
Written Media
•
•
Utilities
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•
•
Oi Revistas: a service that provides online and downloadable access to hundreds of magazines from renowned publishers
such as Globo, Abril, Editora Três and others; and
Oi Jornais: a service that provides online and downloadable access to various newspapers, as well as real time news
notifications.
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 Games Pro: a multiplatform gaming experience that offers unlimited games on mobile phones as well as a new computer
game per month;
Truecaller: a caller ID service with the ability to block undesired calls; and
Oi Segurança: a service that offers a variety of functionality, such as antivirus, backup, device locator and parental controls,
among others.
Our value-added services are developed by third-party application or content providers and offered to our customers.
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B2B Services
In our B2B Services business, we serve SME, corporate and governmental customers and other telecommunications providers. We
offer a variety of services to our SME, corporate and governmental 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, Storage, 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. We also provide specialized wholesale services, consisting
of data network services and facilities, interconnection, national and international voice traffic transit, A2P SMS termination and
roaming.
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 launched FTTH plans for SMEs. 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.
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;
Dedicated Line Services (Serviços de Linhas Dedicadas), or 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 100 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.
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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;
Security services, a centralized, anti-spam filtering solution for corporate email; and
Telepresence as a Service (TPaaS), a video-conferencing service that allows collaboration among people at remote locations.
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;
Interação Web, a digital marketing service, which allows us to implement on the website of our B2B Services customers an
intelligent interaction with their digital users in real time.
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.
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.
Wholesale Services
We are the largest wholesale service provider in Brazil. We are responsible for providing services over the local access network
and over the long distance network. More than 4,000 service providers use our network to deliver services ranging from telephony,
broadband and television for the home, to high-speed data connections for businesses of all sizes.
Our portfolio includes specialized services, consisting of data network services and facilities, interconnection, national and
international voice traffic transit, A2P SMS termination and roaming.
Data Network Services and Facilities
We provide services referred to as industrial exploration of dedicated line (Exploração Industrial de Linha Dedicada) or EILD,
pursuant to our concession agreement. The EILD consists of leased lines and clear channel protocols for the provision of services to
third parties.
In addition, we are able to offer a complete portfolio of wholesale products, including IP, Ethernet and MPLS. All of these
products are used to meet the demands of other network operators and regional internet providers. The circuits are requested with
different service level agreements, and we are required to provide the facilities with contingency routes, sites and equipment to improve
the service against points of failure.
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Interconnection
As part of our wholesale services, we provide interconnection services to users of other network providers. The interconnection is
a link between compatible telecommunications networks which permits that a fixed or mobile service user of one network can
adequately communicate with the users of a network from another provider. All providers of telecommunication services (fixed or
mobile) are required to provide interconnection upon request to any other telecommunication collective service provider. The
interconnection agreements are negotiated according to the General Rules on Interconnection (Regulamento Geral de Interconexão),
established by ANATEL.
Voice Traffic Transit
We offer national and international voice traffic transit that meet all our customers’ expectations and satisfy the dynamic needs of
the telecommunications market. Direct interconnections with the major national and international telecommunication carriers, as well as
most small carriers, ensure high-quality voice traffic transit in Brazil.
A2P SMS termination
The A2P SMS refers to a short message communication between a business solution and a mobile subscriber. Our A2P SMS
solution offers direct connectivity with Oi mobile subscribers and high quality delivery for enterprises and other transactional A2P
traffic.
Roaming
We provide GSM roaming in Brazil to national and international mobile operators. Our roaming agreements enables mobile users
to automatically make and receive voice calls, send and receive SMS as well as access internet service while traveling outside the
geographical coverage area of their own home network by using our mobile network.
Marketing and Distribution
We focus our marketing efforts on the upscaling of existing clients while strengthening the “Oi” brand through our convergent
services offerings and promotion of our Minha Oi smartphone application, which allows our pre-paid customers to freely switch
between their data and voice allowances. We also engage in digital marketing and multiple customer relationship management (CRM)
marketing programs to support our B2B Services business.
In 2018, we increased our investment in advertising, with a focus on digital advertising with the aim to drive traffic to our digital
channels. In addition to digital advertising, we employed traditional advertising strategies, such as television (free and cable),
billboards, exterior signage and radio, to increase our advertising coverage, and leveraged our owned media, such as telemarketing, text
messaging and other points of contact, to upscale our current base. We also developed a branded content strategy, combining
sponsorships of sporting events and individual athletes, as well as cultural events, to increase brand awareness and promote our
portfolio as a telecommunications provider capable of meeting all of the telecommunications needs of our customers. In 2019, we
expect to continue to increase our investment in advertising in line with the advertising strategies described above.
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.
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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 of December 31, 2018, the principal distribution channels that we used for sales to
residential customers were:
•
•
•
•
•
•
•
our own network of stores, which included 135 “Oi” branded stores;
573 “Oi” franchised service stores and kiosks located in the largest shopping malls and other high density areas throughout
Brazil;
approximately 6,730 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 1,877 sales
representatives that answer more than 559 thousand calls per month. This channel provides us with the ability to proactively
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 682 local sales agents that operate in specific regions and complement our
telemarketers;
door-to-door sales calls made by our sales force of 2,373 salespeople trained to sell our services throughout Brazil in places
where customers generally are not reachable by telemarketing; and
our e-commerce sites through which customers may purchase a variety of our services.
Personal Mobility 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 of December 31, 2018, the principal distribution channels that we used
for sales of our pre-paid personal mobility services were:
•
•
•
•
571 stores that are part of large national chains which sell our post-paid and pre-paid personal mobility services and SIM
cards;
approximately 15 multibrand distributors that distribute our SIM cards and pre-paid mobile cards to approximately 265,000
pharmacies, supermarkets, newsstands and similar outlets;
our telemarketing sales channel has of 1,137 sales representatives that answer more than 620 thousand calls per month
selling our post-paid personal mobility services; and
our website, through which our pre-paid customers may recharge their SIM cards.
B2B Services
We have established separate distribution channels to serve SME and corporate customers. As of December 31, 2018, the principal
distribution channels that we use to market our services to SMEs were:
•
•
“Oi” exclusive agents with 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 two agents that use 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 customer retention representatives; and
•
our website and the Oi Mais Empresas application.
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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, 2018, our corporate sales team, excluding post-sale service
personnel, was composed of approximately 365 employees operating in 11 regional offices.
Rates, Billing and Collection
Rates
Our rates for certain services, including basic local fixed-line and domestic long-distance plans, interconnection, EILD and SLD
services, are generally subject to regulation by ANATEL Under our current authorizations, we are allowed to set prices for our mobile
service plans, provided that such amounts do not exceed a specified inflation adjusted cap. The rates for other telecommunications
services, such as broadband services, IP services and frame relay services are market oriented but may still be subject to ANATEL
regulation. Furthermore, the rates for DTH and IP TV services are not subject to ANATEL regulation.
For more information about the regulations applicable to our rates, see “—Regulation of the Brazilian Telecommunications
Industry.”
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. 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. We have
agreements with several 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. As of December 31, 2018, 17.2% of all accounts receivable due from our Residential Services customers in Brazil were
outstanding for more than 30 days and 12.1% were outstanding for more than 90 days.
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.
ANATEL regulations permit us to restrict outgoing calls made by a Residential Services customer 15 days after we send the
customer a past due notice, restrict incoming calls received by a Residential Services customer 30 days after the restriction on outgoing
calls is imposed, and disconnect a Residential Services customer after 30 days after the restriction on incoming calls is imposed. 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.
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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. As of December 31, 2018, 17.7% of all accounts receivable due from our Personal Mobility Services customers
in Brazil were outstanding for more than 30 days and 15.7% were outstanding for more than 90 days.
ANATEL regulations permit us to restrict outgoing calls made and text messages sent by a post-paid Personal Mobility Services
customer 15 days after we send the customer a past due notice, restrict incoming calls and text messages received by a post-paid
Personal Mobility Services customer 30 days after the restriction on outgoing calls and text messages is imposed, and cancel services to
a post-paid Personal Mobility Services customer after 30 days after the restriction on incoming calls is imposed. 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.
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.
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.
Residential Services
We are the leading provider of residential services in our fixed-line service areas. Based on information available from ANATEL,
as of December 31, 2018, we had a market share of 51.1% of the total fixed lines in service in our service areas (including the number
fixed lines provided to our B2B Services customers). Our principal competitors for fixed-line services in our service areas are Claro and
Telefônica Brasil.
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.
In addition, we face competition from providers of cable television services, particularly Claro and Telefônica Brasil, which
provide local fixed-line services and broadband services (in many areas at higher speeds than our offerings) to residential customers
through their cable network in in municipalities in our service areas that have the highest concentration of purchasing power.
Telefônica Brasil has been increasing its competitive activities through traditional fixed-line networks in our fixed-line service
areas, expanding its fiber optic network in high-income residential areas and increasing its services to low- and medium-size businesses.
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 for fixed-line services, such as voice and broadband. Although regional broadband service
providers do not have the same national footprint as our company, they have established networks in the regions in which they operate
and often have a market share of approximately 15% of broadband customers.
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The primary providers of subscription television services in the regions in which we provide Residential Services are SKY, which
provides DTH services, and Claro, which provides DTH service under the “Claro TV” brand and Pay-TV services using coaxial cable
under the “Net” brand.
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, 2018, based on information available
from ANATEL (which includes B2B Services subscribers), we had a market share of 16.5% of the total number of mobile subscribers
in Brazil.
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.
B2B Services
The competitive landscape which we face relating to the fixed-line and mobile services we provide to our B2B customers are
similar to those relating to the fixed-line and mobile services we provide to our residential and personal mobility customers.
In recent years, there has been a shift among corporate and SME 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 Claro,
Telefônica Brasil and TIM, as well as smaller niche companies.
Technology
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 (MSANs), or
Subscriber Line Access Multiplexer (DSLAMs), to our aggregation and transportation networks. The analog voice signals are split from
the data signals which are transmitted using ADSL or VDSL technology. We are engaged in a long-term program to update our
DSLAM equipment as demand for data services increases. As of each of September 30, 2018 and December 31, 2017, approximately
93% of our fixed-line network was operating with support ADSL2+ or VDSL2 and we provided ADSL or VDSL2 services in
approximately 4,700 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. VDSL2 is a DSL technology providing faster data transmission, using technologies such as vectoring and bonding
it is possible to reach higher throughput up to 600 Mbps (downstream and upstream), permitting us to support applications such as HD
Video, VoIP and broadband internet access, over a single connection.
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We are engaged in a long-term program to upgrade portions of our fixed-line access networks with optical fiber to the home, or
FTTH, networks based on gigabit passive optical network, or GPON, technology to support our FTTH triple play services. The
implementation of this technology permits us to provide broadband with speeds up to 200 Mbps to residential customers and up to 1
Gbps to commercial customers. Our GPON FTTH network currently reaches more than 1.5 million homes, and we expect to reach more
than 500 thousand customers connected by the end of 2019.
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 1800 MHz/2600
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 and 4x4 Multiple Input Multiple Output, depending on the site
configuration, which allows speeds in the range of 75 Mbps (2x2 MIMO configuration sites) and 300 Mbps (4x4 MIMO and Carrier
Aggregation configuration sites), to send and receive data signals. Although currently the majority of voice signals are sent and received
through our 2G and 3G access points are routed to our aggregation networks, we are initiating VoLTE (Voice over LTE) that will
enable 4G routes voice signal over 4G access points, allowing offering new type of services based on IMS (IP Multimedia Subsystem)
platform. Our mobile networks have unique data core and are fully integrated with our fixed-line data networks.
In addition to these mobile access networks, we also operate Wi-Fi hotspots in indoor public and commercial 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 September 30, 2018 and December 31, 2017, our Wi-Fi network consisted
of more than 1.6 million and 1.5 million hotspots, respectively, with broadband access compatible with more than 1.6 and 1.5 million
access points, respectively, 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. For a small portion of our aggregation network, we
still 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 SDH protocol. In large metropolitan areas where
the density of access point results in increased demand, we have deployed Metro Ethernet networks. 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;
aggregation network services for ADSL2+ and VDSL2 platforms;
aggregation network services for GPON platforms; and
Dense Wavelength Division Multiplex, or DWDM, systems for services above 1Gbps to prevent overbooking our Metro
Ethernet network.
In the past, we used ATM protocol to transport digital signals through our access network from non-residential customers that
require dedicated bandwidth to our switching stations. 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 now 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.
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Transportation Networks
We have a nationwide long-distance backbone, consisting of an optical fiber network that covers more than 2,259 municipalities,
connecting the Federal District and all state capitals in Brazil. This fiber network supports high capacity DWDM systems that can
operate with up to 80 channels at 10, 100 and 200 Gbps. Our optical network is complemented by microwave links to reach smaller
cities and towns.
In 2015, we completed the implementation of a new Optical Transport Network/DWDM, or OTN/DWDM network, with 100
Gbps links, that connect 11 state 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. In the first half of 2018, we completed the extension of the
OTN/DWDM network, with 100 Gbps links, to an additional seven state capitals and spread over an additional 18,000 km of optical
cables. Between 2019 and 2021, we expect to further extend our OTN/DWDM network, with 100 Gbps links, to reach 26 state capitals
and spread over 65,400 km of optical cables.
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 failure.
We operate an internet backbone network and a fully IP-routed network, which provides a backbone for all internet dedicated
services and VPN offerings through access routers, for customer aggregation, configured as single edge routers (i.e., offering various
types of services aggregation over a single box), allowing us to reduce capital and operation expenses. Our internet backbone connects
to the public internet via national peerings links and international links that we maintain in the United States.
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.
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IPTV Network
Through our FTTH network, we offered IPTV services in 27 cities over10 states as of December 31, 2018. For subscribers of our
Oi TV services, through our DTH or FTTH networks, we also offer OTT services, which provide customers with access to different
content on different devices (mobile phones, tablets and computers).
Property, Plant and Equipment
As of December 31, 2018, the net book value of our property, plant and equipment was R$28,469 million. As of December 31,
2018, of the net book value of our property, plant and equipment, (1) transmission and other equipment, primarily data communication
equipment, network systems and infrastructure (including alternating and direct current supply equipment) and motor-generator groups,
represented 50.0%; (2) infrastructure, primarily consisting of metallic and fiber-optic cable networks and lines, underground ducts,
posts and towers, represented 25.5%; (3) work in progress represented 11.8%; (4) buildings represented 5.9%; (5) automatic switching
equipment, consisting of trunking and switching stations (including local, tandem and transit telephone exchanges), represented 4.1%;
and (6) other fixed assets represented 2.7%.
All Brazilian property, plant and equipment that are essential in providing the services described in our fixed-line concession
agreements are considered “reversible assets,” which means that, should our fixed-line 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 13 to our consolidated financial statements included in this
annual report.
Transmission and Other Equipment
We have a nationwide long-distance backbone, consisting of an optical fiber network that covers more than 2,259 municipalities,
connecting the Federal District and all state capitals in Brazil. This fiber network supports high capacity DWDM systems that can
operate with up to 80 channels at 10, 100 and 200 Gbps. We have implemented an Optical Transport Network/DWDM, or
OTN/DWDM network, with 100 Gbps links that connect 18 state capitals, including São Paulo, Rio de Janeiro, Brasília and Belo
Horizonte, which spreads over approximately 48,000 km of optical cables. Our optical network is complemented by microwave links to
reach smaller cities and towns.
Infrastructure
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 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. For a small portion of our aggregation network, we
still 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 SDH protocol. In large metropolitan areas where
the density of access point results in increased demand, we have deployed Metro Ethernet networks.
Automatic switching equipment
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. As of
December 31, 2018, approximately 93% of our fixed- line network supported ADSL2+ or VDSL2 and we provided ADSL or VDSL2
services in approximately 4,700 municipalities.
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Voice and data signals sent and received through our 2G, 3G and 4G 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, 2018:
•
•
•
our 4G mobile access networks consisted of 9,613 active radio base stations covering 902 municipalities, or 74% of the
urban population of Brazil;
our 3G mobile access networks consisted of 10,202 active radio base stations covering 1,644 municipalities, or 82% of the
urban population of Brazil; and
our 2G mobile access networks consisted of 13,804 active radio base stations covering 3,446 municipalities, or 93% of the
urban population of Brazil.
In addition to our mobile access networks, we also operate Wi-Fi hotspots in indoor public and commercial areas such as coffee
shops, airports and shopping centers. As of December 31, 2018, our Wi-Fi network consisted of more than two million hotspots, with
broadband access compatible with more than two million access points provided by Fon Wireless Ltd., or Fon, which allows our
customers to access Fon lines worldwide.
Buildings
In addition to our headquarters building and our centralized national network operations center in Rio de Janeiro, we own 7,965
buildings that are used to house switching equipment or to house regional and local sales and operations centers. Of these buildings,
7,767 are “reversible assets” under our fixed-line concession agreements.
Capital Expenditures and Work in Progress
During the year ended December 31, 2018, we modernized 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.
The following table sets forth our capital expenditures for the periods indicated.
Data transmission equipment
Installation services and devices
Mobile network and systems
Voice transmission
Information technology services
Telecommunication services infrastructure
Buildings, improvements and furniture
Network management system equipment
Backbone transmission
Internet services equipment
Other
Total capital expenditures
58
2016
2018
Year Ended December 31,
2017
(in millions of reais)
R$1,846
644
602
726
729
496
80
94
237
1
174
R$5,629
R$1,993
539
820
731
720
500
70
171
304
—
229
R$6,077
R$1,377
489
707
713
536
468
69
124
196
7
73
R$4,759
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Our principal capital expenditures relate to a variety of projects designed to expand and upgrade our transmission networks, our
broadband access networks (fixed and mobile), our service platforms (data, video and voice), our information technology systems and
our telecommunications services infrastructure.
Data Transmission Equipment Programs
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 (GPON). The implementation of this technology permits us to provide broadband with speeds up to 200
Mbps to residential customers and up to 1 Gbps to commercial customers.
In our access networks, we have been engaged in a program of deploying fiber-to-the-home, or FTTH, technology to support our
“triple play” services, using a GPON network engineered to support IPTV, high speed internet (currently speeds up to 200 Mbps), and
VoIP services.
We have acquired and installed data communications equipment to convert elements of our networks that used ATM and
Synchronous Digital Hierarchy, or 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.
We have been 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 corporate customer links 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 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.
Mobile Services Network Programs
4G Network
We offer 4G services using LTE network technology and have been deploying our 4G network since 2012. In compliance with our
obligations under our LTE authorizations, in 2016, we extended our LTE network to cities with over 100,000 inhabitants, adding 284
new cities to our LTE network, and in 2017, we extended our LTE network to cities with less than 100,000 inhabitants, adding 813
cities to our LTE network.
In 2018, we began deploying 4.5G services by using Carrier Aggregation with 1800 MHz spectrum refarming and MIMO 4x4 in
27 municipalities in the first phase of the project. It has allowed us to offer best user experience and aligning our network to main
operators in Brazil.
3G 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. We have deployed 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 Brazil to which we have not
historically provided 3G service.
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Voice Transmission Network Programs
We are engaged in a program of investing in new equipment for our switching stations to support next-generation networks which
we believe will permit us to offer 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 have deployed an IP Multimedia Subsystem, or IMS, core that will facilitate our convergent voice and
broadband offerings. The IMS core not only provides control for the VoIP resource but also integrated access control and authentication
for all services, significantly improving automation and speed for customer provisioning.
We have also undertaken a program of removing and replacing smaller switching stations and integrating these operations with
other switching stations to promote efficiency in our operations.
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 January 2017 we completed the transition
from a network centric monitoring system to a customer focused approach and thereby our network operations have migrated from
network operations centers to service operations centers which provide more efficient and customer-based support.
In December 2016, we completed a project to improve fulfillment by speeding up service creation and provisioning, reducing
costly human intervention and increasing overall customer quality of experience through automation of the fulfillment processes.
Intellectual Property
We hold several material intellectual property assets, including patents and trademarks registered with the Brazilian Patent and
Trademark Office (Instituto Nacional de Propriedade Industrial), or BPTO. Our main trademark used in Brazil, “Oi,” is registered with
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.
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Operating Agreements
Fixed-Line and Mobile Tower Leases
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We have entered into three operating lease agreements with owners of communications towers and rooftop antennae to lease space
to install equipment related to the delivery of our personal mobility services on an aggregate of approximately 4,850 communications
towers and rooftop antennae. We have also entered into three operating lease agreements with owners of fixed-line communications
towers to lease space to install equipment related to the delivery of our fixed-line services on an aggregate of approximately 6,400
fixed-line communications towers.
The monthly payments under two of our operating lease agreements for space on communications towers and rooftop antennae
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. The monthly payments under the
remainder of the operating lease agreements reflect a base rental amount specified in the agreement, adjusted annually by the positive
variation of IPCA.
The operating lease agreements for space on communications towers and rooftop antennae have 15-year terms expiring between
December 2027 and June 2019 and are automatically renewable for successive one-year periods. The operating lease agreements for
space on fixed-line communications towers have 20-year terms expiring between April 2033 and July 2033 and are renewable for
additional 20-year terms.
Infrastructure Sharing Agreements
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, 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.
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 Agreement with TIM to cities with over 200,000
inhabitants, 133 municipalities covered by 4G technology, and we began a RAN sharing arrangement with Telefônica Brasil. In 2016,
we expanded to cities with over 100,000 inhabitants, reaching 284 cities with 4G coverage. In 2017, we expanded to cities with less
than 100,000 inhabitants, reaching 813 cities with 4G coverage. In 2018, we and TIM amended the 2013 RAN Sharing Agreement to
update the technology covered by the agreement to permit infrastructure sharing in the 1800 MHz spectrum technology.
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 Telefônica Brasil agreed to invest proportionally (50% Telefônica
Brasil, 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 covered 31 cities in 2015,
171 cities in 2016 and 427 cities in 2017.
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Satellite Network and Leases
Residential Services
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We have deployed a 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.
The satellite network comprises satellite earth stations located in less-populated rural areas, as well as hub stations in the cities of
Brasília, Manaus, Belém, Rio de Janeiro, Porto Velho, Boa Vista, Macapá, Santarém, and Marabá. Our fiber optic backbone connects
all these hub stations. 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.
As of December 31, 2018, we leased transponders from our affiliate Hispamar with:
•
•
98.3 MHz of capacity on the Amazonas 3 satellite in Ku band and 540 MHz of capacity on the Amazonas 2 satellite in Ku
band to provide voice and data services to approximately 3,000 localities; and
754 MHz of capacity on the Amazonas 3 satellite in C band and 432 MHz of capacity on the Amazonas 2 satellite in C band
to provide voice and data services to approximately 390 municipalities.
DTH Network
We provide our DTH services through satellite uplinks that receive, encode and transmit the television signals to satellite
transponders (1) located in Lurin, Peru that we lease from a subsidiary of Telefónica S.A., and (2) through our own facilities in Barra da
Tijuca near Rio de Janeiro.
As of December 31, 2018, we leased transponders to provide DTH services from:
•
•
Telefónica S.A with 216 MHz of capacity on the Amazonas 3 satellite in Ku band and 36 MHz of capacity on the Amazonas
2 satellite in Ku band; and
SES New Skies with 1.5 GHz of capacity on the SES-6 satellite in Ku band.
Network Maintenance
Our external plant and equipment maintenance, installation and network servicing are performed by our wholly-owned subsidiary
Serede, as well as one third-party service provider, Telemont. We employ our own team of technicians for our internal plant and
equipment maintenance.
Insourced Network Maintenance
In May 2013 and June 2013, we insourced 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 Networks do Brasil Telecomunicações Ltda. and Alcatel-Lucent Brasil S.A.
We have entered into arms’-length services agreements with our wholly-owned subsidiary Serede to perform our external plant
and equipment maintenance, installation and network servicing in the States of São Paulo, Rio de Janeiro, Rio Grande do Sul, Santa
Catarina, Paraná, Maranhão, Piauí, Ceará, Rio Grande do Norte, Paraíba, Pernambuco, Alagoas, Sergipe, Bahia, Amazonas, Roraima,
Pará and Amapá.
In January 2012, we entered into a services agreement with Serede for installation, operation, and corrective and preventive
maintenance in connection with our external plants and associated equipment, public telephones, and fiber optic and data
communication networks (including broadband access services) in certain parts of the State of Rio de Janeiro. Over the years, we have
amended this agreement to expand its scope to the entirety of the State of Rio de Janeiro (following our acquisition of Telemont’s
operations in Rio de Janeiro), as well as the States of São Paulo, Rio Grande do Sul, Santa Catarina and Paraná (following our
acquisition of A.R.M Engenharia in June 2016). The total estimated payments under this contract, which expires in January 2022, are
approximately R$10.0 billion.
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In June 2016, we acquired 100% of the capital stock of A.R.M. Engenharia and changed its corporate name to Rede Conecta –
Serviços de Rede S.A. In November 2018, Rede Conecta merged into Serede. In July 2016, we entered into a services agreement with
Rede Conecta 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 and Amapá.
The total estimated payments under this contract, which expires in June 2021, are approximately R$3.2 billion.
Outsourced Network Maintenance
In October 2012, we entered into five-year services agreements 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 payments under this contract, which expired in
October 2017, amounted to R$3.7 billion.
In October 2017, we entered into new services agreements 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 under this contract, which expires in
October 2022, are approximately R$4.2 billion.
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. Our investments in innovation, research and development totaled R$17 million in
2018, R$16 million in 2017 and R$20 million in 2016.
Joint Venture, Associated Companies and Assets Held-For-Sale
Joint Venture
We own 19.04% of the share capital of Hispamar Satélite S.A., or Hispamar, a Spanish-Brazilian enterprise created in November
1999 by Hispasat (the leading satellite telecommunications provider in the Iberian Peninsula), and our company. Hispamar operates the
Amazonas 2 and Amazonas 3 satellites. 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. 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.
In 2013, the Amazonas 3 satellite was launched and commenced commercial operations. 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, which operates and leases
all of the transponder’s space segment on this satellite.
Associated Company
We own 50% of Companhia AIX de Participações S.A., or AIX. AIX provides infrastructure services to our company and is
engaged in the construction of ductwork for the installation of fiber optic cables along highways in the State of São Paulo.
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Assets Held-for-Sale
Our board of directors has authorized our management to take the necessary measures to market our shares in Africatel and
TPT—Telecomunicações Públicas de Timor, S.A., or TPT. As a result, we record 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.
Africatel
Africatel Holdings B.V., or Africatel, was formed in May 2006 and indirectly holds our equity interests in Unitel, Cabo Verde
Telecom, S.A., or CVTelecom, and CST – Companhia Santomense de Telecomunicações S.A.R.L., or CST, Directel—Listas
Telefónicas Internacionais, Lda., or Directel. We own 86% of the share capital of Africatel.
Unitel
Africatel indirectly owns 25% of the share capital of Unitel, a mobile service provider in Angola. Following our acquisition of PT
Portugal in 2014, which resulted in our acquisition of our interest in Africatel, we brought suits against Unitel in the courts of Angola
and instituted arbitral proceedings against the other shareholders of Unitel in the International Court of Arbitration of the International
Chamber of Commerce based on our inability to collect dividends owed to us by Unitel and breaches of the Unitel shareholders’
agreement. For more information about these proceedings, see “Item 8. Financial Information—Legal Proceedings—Legal Proceedings
Relating to Our Interest in Unitel.”
CVTelecom
Africatel indirectly owns 40% of the share capital of CVTelecom, a provider of fixed-line and mobile services in the Cabo Verde
Islands, that was established in 1995 and provides fixed-line and mobile telecommunications services under the terms of a 25-year
license granted in 1996.
Following our acquisition of PT Portugal in 2014, which resulted in our acquisition of our interest in Africatel, we instituted
arbitral proceedings against the Republic of Cape Verde in the International Court of Arbitration of the International Chamber of
Commerce, disputing its interpretation of the shareholders’ agreement governing CVTelecom which the Republic of Cape Verde
terminate this shareholders’ agreement. In March 2015, we also commenced an arbitration proceeding against the Republic of Cabo
Verde before the International Centre for Settlement of Investment Disputes, or ICSID, due to the violation of CVTelecom’s exclusivity
rights under the concession agreement by the Republic of Cabo Verde.
CST
Africatel indirectly owns 51% of the share capital of CST, a provider of fixed and mobile services in São Tomé and Principe, that
was established in 1989 and provides fixed-line and mobile telecommunications services under the terms of a 20-year license granted in
2007.
Directel
Africatel indirectly owns 100% of the share capital of Directel, a Portuguese entity with subsidiaries in Angola, Cabo Verde,
Mozambique, and Kenya, which publish telephone directories and operate related data bases in those countries.
TPT
We own 76.14% of the share capital of TPT, a Portuguese holding company that owns 54.01% of the share capital of Timor
Telecom, S.A., or Timor Telecom, which provides telecommunications, multimedia and IT services in Timor Leste in Asia. Our
wholly-owned subsidiary PT Participações also holds 3.05% of the share capital of Timor Telecom.
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Regulation of the Brazilian Telecommunications Industry
Overview
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Our business, including the nature of the services we provide and the rates we charge, is subject to comprehensive regulation
under the Brazilian General Telecommunications Law (Lei Geral das Telecomunicações), or 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, mobile telecommunications, data transmission and Pay-TV 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.
ANATEL is an administratively independent and financially autonomous regulatory agency that was established in July 1997
pursuant to the General Telecommunications Law and ANATEL Regulation (Regulamento da Agência Nacional de Telecomunicações).
ANATEL oversees our activities and enforces the General Telecommunications Law and the regulations promulgated thereunder.
ANATEL is required to report on its activities to the Brazilian Ministry of Communication, and 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. In addition, ANATEL is authorized to direct and control
the provision of services, the shareholding structure of service providers, to apply penalties and to declare the expiration of the
concession and authorizations and the return of assets from the concessionaire to the government authority upon termination of the
concession. 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.
The current regulatory framework for the Brazilian telecommunications industry was adopted in 1998. 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, Claro 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.
Public Regime
Overview
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. Under their concession agreements, public regime service providers are required to comply with
the provisions of the General Plan of Universal Service Goals (Plano Geral de Metas de Universalização), or PGMU, which was most
recently updated in December 2018. For more information about the PGMU and our obligations thereunder, see “—General Plan of
Universal Service Goals (PGMU).”
In addition, public regime service providers as well as private regime service providers, are required to comply with the provisions
of the General Plan of Quality Goals (Plano Geral de Metas de Qualidade), or PGMQ, which was adopted by ANATEL in June 2013,
and the General Plan on Competition Targets (Plano Geral de Metas de Competição), or PGMC, which was adopted by ANATEL in
November 2012 and updated in July 2018. For more information about the PGMQ and the PGMC see “—Our Services—Fixed-Line
Telephone Services—Quality Regulation” and “—Other Regulatory Matters—General Plan on Competition Targets (PGMC),”
respectively.
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 the concession agreements and was designed based on a price cap model. For more
information, see “Our Services—Fixed-Line Telephone Services—Rate Regulation.”
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Concessions are granted for a fixed period of time and are generally renewable only once. ANATEL may terminate the concession
of any public regime service provider upon the occurrence of certain events 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.
General Plan of Universal Service Goals (PGMU)
The PGMU sets forth the principal network expansion and modernization obligations of the public regime providers. The PGMU
was approved by Decree No. 9,619 and became effective on December 21, 2018, the date when it was published in the Official Gazette.
Public regime providers are subject to network expansion requirements under the PGMU, 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 PGMU 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 PGMU 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 install public telephones on demand in locations with more than 100 inhabitants;
local fixed-line service providers to install fixed lines in locations with more than 300 inhabitants (1) in regions where there
is no fixed line installed, within 120 days of a request and (2) in regions where fixed lines are already installed, within 7 days
of a request for 90% of requests and in up to 25 days of a request for the remaining 10% of requests; and
local fixed-line service providers to gradually provide voice access in the wireless local loop technology with capacity for 4G
services in 1,400 locations (of which 1,155 apply to Oi), according to the following schedule: 10% of such locations by
December 31, 2019; 25% by December 31, 2020; 45% by December 31, 2021; 70% by December 31, 2022; and 100% by
December 31, 2023.
Similarly to the 2008 amendments to the PGMU that eliminated the requirements to provide public telephone centers (postos de
serviço telefônico) in exchange building backhaul, the 2018 PGMU eliminated the requirements to provide multifacility service centers
(postos de serviço multifacilidade), which are public centers located in rural areas that offers various telecommunications services,
including voice, access to the internet and digital transmission of text and images, and to install and maintain public telephones within a
fixed-line service concession, in exchange for other obligations to be defined.
The value of the obligations currently imposed by the PGMU and, therefore, the cost of the additional investments or fees to be
paid to ANATEL in exchange for the elimination of such obligations, is subject to discussion between the parties, with ANATEL
having the ability to make the final valuation.
Termination of a Concession
ANATEL may terminate the concession of any public regime 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;
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•
•
•
•
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.
Service Restrictions
Public regime service providers are subject to certain restrictions on alliances, joint ventures and mergers and acquisitions with
other public regime providers, including:
•
•
a prohibition on members of the same economic group holding more than two licenses for the provision of
telecommunications services in the public regime, which would include holding more than 20% of the voting shares of or
controlling (as such term is defined under ANATEL’s regulations) more than two providers of public regime
telecommunications services; and
a restriction, as set forth in the PGO, on mergers between providers of public regime telecommunications services.
In September 2011, Law No. 12,485 became effective, which creates a new legal framework for subscription television services in
Brazil, and determines, among other provisions to:
•
•
•
•
allow fixed-line telephone concessionaires, such as us, to enter the cable television market in Brazil;
remove existing restrictions on foreign capital investments in cable television providers;
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.
Private Regime
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 and applicable regulation.
For example, private regime service providers are required to comply with the provisions of the PGMQ and the PGMC. For more
information about the PGMQ and the PGMC, see “—Our Services—Fixed-Line Telephone Services—Quality Regulation” and
“—Other Regulatory Matters—General Plan on Competition Targets (PGMC),” respectively.
Our Services
Fixed-Line Telephone Services
Regulatory Overview
We provide the majority of our fixed-line telephone services (Serviço Telefônico Fixo Comutado—STFC) in accordance with
concession agreements under the public regime. For more information about the regulations applicable to public regime telephone
service providers, see “—Public Regime.”
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Our Concessions and Authorizations
The following table sets forth certain details of our concessions and authorizations to provide local, domestic long-distance and
international long-distanced fixed-line telephone services:
Geographic Scope
Region I of the PGO – States of Rio De
Janeiro, Minas Gerais, Espírito Santo, Bahia,
Sergipe, Alagoas, Pernambuco, Paraiba, Rio
Grande do Norte, Ceará, Piauí, Maranhão,
Pará, Amapá, Amazonas e Roraima, except
Sector 3 of Region I of the PGO(1)
Region I of the PGO – Sector 3(1)
Region II of the PGO – States of Santa
Catarina, Paraná, Mato Grosso, Mato Grosso
do Sul, Goiás, Tocantins, Distrito Federal,
Rondônia, Acre and Rio Grande Do Sul,
cxcept for Sectors 20, 22 and 25(2)
Region II of the PGO – Sectors 20, 22 and 25(2)
Region III of the PGO – São Paulo
National
Type of Service
Termination Date
Regime
Local / Domestic Long-Distance
Local / Domestic Long-Distance
December 31, 2025
Indeterminate
Concession
Authorization
Local / Domestic Long-Distance
Local / Domestic Long-Distance
Local / Domestic Long-Distance
International Long Distance
December 31, 2025
Indeterminate
Indeterminate
Indeterminate
Concession
Authorization
Authorization
Authorization
(1) Sector 3 of Region II of the PGO corresponds to 57 municipalities in the State of Minas Gerais.
(2) Sectors 20, 22 and 25 of Region II of the PGO correspond to the following municipalities: Londrina, Paraná; Tamarana, Paraná; Paranaíba, Mato Grosso do Sul;
Buriti Alegre, Goiás; Cachoeira Dourada, Goiás; Inaciolândia, Goiás; Itumbiara, Goiás; Paranaiguara, Goiás; and São Simão, Goiás.
Each of our concession agreements:
•
•
•
sets forth the parameters that govern adjustments to our rates;
requires us to comply with the network expansion obligations set forth in the PGMU;
requires payment of biannual fees equal to 2.0% of our net operating revenue that is derived from the provision of our local
fixed-line and domestic long-distance services (excluding taxes and social contributions) during the immediately preceding
year;
In addition, each of our concession and authorization agreements:
•
•
•
sets forth the conditions under which ANATEL may access information from us;
requires us to comply with certain quality of service obligations as well as the quality of service obligations set forth in the
PGMQ;
requires us to pay fines for any non-compliance with the regulatory rules including systemic service interruptions.
In addition, the PGMU requires 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 are obligated to set up backhaul in 3,188 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. For more information about the PGMU, see “—Public Regime—General Plan of Universal Service Goals (PGMU).”
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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. Throughout 2015, ANATEL, the Brazilian Ministry of Communication 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 Brazilian
Ministry of Communication created a working group to evaluate the status of the concessions and propose guidelines for the
amendment of the concession agreements. In April 2016, the Brazilian Ministry of Communication issued an ordinance addressing
guidelines for the establishment of a new regulatory framework for telecommunications, which were expected to be implemented by
ANATEL through the conclusion of the concession amendments. In line with the provisions of PLC 79, these guidelines provided 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 terms of concessions, which in our case 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. The
implementation of these guidelines, however, depends on the passage of PLC 79 to provide the necessary legal authority and
framework. As a result of the Brazilian Congress’s failure to date to pass PLC 79, the review of our concession agreements, which was
scheduled to occur by June 2017, has not yet taken place, and further discussions regarding amendments to our concession agreements
have halted pending resolution of PLC 79. Under their existing terms, our concession agreements may be amended by December 2020
at the latest. If PLC 79 is not passed, our concession agreements will expire in 2025 without the possibility of renewal.
In connection with the consideration of revisions to the concession agreements under the public regime, in January 2017,
ANATEL proposed revisions to the terms of the PGO, in line with the provisions of PLC 79, which include the ability of companies
operating under a concession in the public regime to convert their concessions into authorizations to operate in the private regime and
thereby eliminate a number of substantial obligations currently imposed by the concession regime, in exchange for the assumption of
obligations to make additional investments in their networks, primarily related to the expansion of broadband services or through the
payment of fees to ANATEL. The value of the obligations currently imposed by the concession agreement and, therefore, the cost of the
additional investments or fees to be paid to ANATEL in exchange for the elimination of such obligations, would be subject to
discussion between the parties, with ANATEL having the ability to make the final valuation. However, as a result of the legislative
gridlock faced by PLC 79, ANATEL has halted implementation of the PGO.
We cannot assure you that any future amendments to our concession agreements or the PGO 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.
Rate Regulation
Under their concession agreements, public regime service providers are required to offer basic local fixed-line plans to users.
Rates for the basic long-distance services plan 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 service plans and basic domestic long-
distance plans 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.
Factor X is equal to (1) 50% of the increase in the 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.
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.
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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. 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
must be submitted for ANATEL approval prior to offering those plans to our customers. Historically, ANATEL has generally not raised
objections to the terms of these plans.
On an annual basis, ANATEL increases or decreases the maximum rates that we are permitted to charge for our basic service
plans. 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 Telecommunications Services Index (Índice de Serviços de Telecomunicações – IST), or 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 mobile termination, or MTR, 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.
Fixed Line-to-Fixed-Line Long Distance Rates
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. 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.
For more information about the rates applicable to our fixed-line services, see “—Rates, Billing and Collection—Rates.”
Quality Regulation
General Plan on Quality Goals (PGMQ)
The PGMQ for fixed-line voice services was approved by ANATEL in December 2012 and became effective in June 2013. Each
fixed-line service provider operating under the public regime or the private regime must comply with the provisions of the PGMQ. All
costs related to compliance with the quality goals established by the PGMQ must be borne exclusively by the service provider. The
PGMQ establishes minimum quality standards with regard to:
•
•
•
•
•
customer complaints;
responses to repair requests;
responses to change of address requests;
rate of call completion; and
quality of public telephones.
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These quality standards are measured according to the definitions and quality indicators established by ANATEL. The indicators,
as well as their respective methods of collection, calculation and other quality requirements, are defined in specific regulations
published by ANATEL.
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. For cases in which there are indications of performance or conduct other than
those established in the regulations, ANATEL establishes a noncompliance process called Procedure for Determination of
Non-Compliance to Obligations (Procedimento de Apuração de Descumprimento de Obrigações – PADO) in detriment to the provider.
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 area codes.
In November 2017, ANATEL submitted for public consultation the Quality of Telecommunications Services Regulation
(Regulamento de Qualidade dos Serviços de Telecomunicações), or RQUAL, a proposal to review the methods by which the quality
standards for fixed-line services, personal mobility services, multimedia communications services and subscription television services
are measured. For more information, see “—Other Regulatory Matters—Quality of Telecommunications Services Regulation
(RQUAL).”
Mobile Telephone Services
Regulatory Overview
In September 2000, ANATEL adopted regulations that established operating rules for providers under the personal mobile service
(Serviço Móvel Pessoal—SMP) 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 radiofrequency 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 450 MHz 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 State of 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).
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Network Sharing
In 2013, ANATEL and CADE approved the 2013 RAN Sharing Agreement between 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 4G commitments.
In 2014, TIM and Oi agreed to negotiate the joint construction, implementation and reciprocal assignment of elements of their
respective 2G and 3G network infrastructures, which was approved by ANATEL and CADE.
In 2015, ANATEL and CADE approved the 2015 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. With respect to the latter agreement,
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.
In 2018, ANATEL and CADE approved an amendment to the 2013 RAN Sharing Agreement between TIM and Oi to update the
technology covered by the agreement and to permit infrastructure sharing in the 1800 MHz spectrum technology.
Our Authorizations
We hold radiofrequency spectrum authorizations to provide 2G, 3G and 4G services in Regions I, II and III. The majority of these
authorizations 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 authorizations 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 one of our radio frequency spectrum authorizations expired in 2016 and was extended for
an additional 15 year term.
The following table sets forth certain information about our authorizations to provide mobile telephone services:
Geographic Scope
Rio de Janeiro, Espírito Santo,
Minas Gerais, Amazonas, Roraima,
Amapá, Pará, Maranhão, Bahia,
Sergipe, Piauí, Ceará, Rio Grande do
Norte, Paraíba, Pernambuco and
Alagoas
Rio de Janeiro, Bahia, Ceará,
Minas Gerais and Pernambuco(1)
Amazonas, Alagoas, Paraíba, Piauí e
Rio Grande do Norte, Pará, Maranhão,
Roraima, Espírito Santo, Bahia and
Sergipe
Acre, Goiás, Mato Grosso do Sul, Mato
Grosso, Rondônia, Tocantins, Federal
District, Paraná, Santa Catarina and Rio
Grande de Sul
Mato Grosso and Goiás(2)
Federal District Mato Grosso, Paraná,
Rio Grande do Sul, Tocantins, Acre,
Santa Catarina, Rondônia, Mato Grosso
do Sul, Goiás(3)
São Paulo
900 MHz
1,800 MHz
2,100 MHz (3G) 2,600 MHz (4G)(5)
March 2031*
April 2023
October 2027
March 2031*
March 2031*
December 2032*
December 2032*
April 2023
April 2023
December 2022(4)
April 2023
December 2022
April 2023
October 2027
October 2027
The expiration dates of these licenses have already been extended and are not eligible for additional extensions.
*
(1) Sector 1 of the State of Rio de Janeiro; sectors 2 and 3 of the State of Minas Gerais; sector 5 of the State of Bahia; sector 8 of the State of Pernambuco; and sector 11
of the State of Ceará.
(2) Band “H” Sector 22 (Paranaíba/MS) and Sector 25 (municipalities of Buriti Alegre, Cachoeira Dourada, Inaciolândia, Itumbiara, Paranaiguara and São Simão in the
State of Goiás).
(3) Sub-band F. except in the States of Paranaíba and Mato Grosso do Sul and the municipalities of Buriti Alegre, Cachoeira Dourada, Inaciolândia, Itumbiara,
Paranaiguara and São Simão in the State of Goiás.
(4) Except AR11 and sector 33.
(5) We have secondary use of sub-bands X and VI in the 2.5 GHz radiofrequencies under authorizations provided to Telefônica and TIM in all of Brazil, with the same
termination dates as the underlying authorizations.
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Our authorization agreements are also subject to network scope and contains service performance obligations set forth in these
authorization agreements, under which we are required to service all municipalities in Brazil with a population in excess of 100,000
habitants.
Under our 3G authorizations, we are also 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
50% of all of the municipalities with a population between 30,000 and 100,000, and (3) provide 3G service to 60% of the
municipalities, including 684 specified municipalities, covered by these licenses with a population less than 30,000.
Under our 4G authorizations, we are also currently required to provide 4G service in (1) all municipalities with a population of
30,000 or more and (2) 60% by December 31, 2018 and 100% by December 31, 2019 of the municipalities covered by these
licenses with a population less than 30,000; provided, however, that for the latter, we may comply with this obligation by providing
service with transmission rates equal to 1.9/2.1 GHz or above;
In 2012 we acquired 450 MHz license on the 4G services auction, which requires us to, in 964 municipalities in the States of
Goiás, Mato Grosso, Mato Grosso do Sul, Rio Grande do Sul and the Federal District: (1) provide voice services in the 450 MHz or
other spectrum granted to us and data services at minimum upload speeds of 256 kbps and download speeds of 1 Mbps and a minimum
monthly allowance of 500 MB; (2) provide unlimited data services at minimum upload speeds of 256 kbps and download speeds of 1
Mbps to rural schools in those municipalities; and (3) make our fixed-line network available to other telecommunications service
providers to allow them to comply with their obligations under the PGMU.
As of the date of this annual report, although we believe that we are in compliance with the network scope and service
performance obligations set forth in these licenses, ANATEL is currently debating our compliance with certain obligations to provide
services under the 450 MHz spectrums. Since we do not yet have all of the necessary systems in place to support the use of the 450
MHz spectrum using land frequencies, we have been meeting our coverage obligations in certain areas using satellites. If ANATEL
decides that we have not been meeting our obligations, our authorizations to use 450 MHz frequencies may be terminated.
For most obligations, 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 authorizations to use those radiofrequencies by ANATEL. As of the date of this
prospectus, although we believe that we are in compliance with the network scope and service performance obligations set forth in these
authorization agreements, ANATEL has not yet made its final determination with respect to our compliance with certain obligations to
provide services under the 450 MHz/900 MHz/1800 MHz/2100 and 2500 MHz spectrums. Furthermore, we have obtained judicial
protection under the RJ Proceedings to forego renewal of many of the performance guarantees we would have otherwise been required
to maintain with respect to the obligations under discussion.
Our 4G radio frequency authorizations also 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% by December 31, 2022.
Roaming
Under the PGMC, a mobile services provider with significant market power, such as our company, must offer roaming services to
other mobile services providers without significant market power at the maximum rate that the mobile services provider with significant
market power is permitting ANATEL to offer such services to its retail customers.
In March 2017, ANATEL began a pilot program with the four principal mobile services providers, including our company, to
share infrastructure costs to expand the existing voice roaming agreements to voice and data roaming services to 35 municipalities with
fewer than 30,000 residents. As a result of this program, which is ongoing and is in the process of expansion to include additional
mobile service providers and additional municipalities with fewer than 30,000 residents, the providers began or resumed discussions
about voice and data roaming tariffs and the timeline to implement the requirements of the program. As of the date of this prospectus,
certain providers, including our company, have entered into bilateral agreements regarding these matters, and new municipalities count
on roaming coverage, increasing satisfaction to our clients.
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Rate Regulation
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 and data packages 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 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.
Quality Regulation
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.
To restructure the process of assessing the quality of mobile service, with the inclusion of processes and measurement of
indicators to check the quality of mobile broadband and the quality perceived by the user, ANATEL published Resolution 575/2011,
approving 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.
In January 2018, ANATEL adopted a new model for measuring the quality of mobile broadband networks through the use of
smartphones, replacing the previous model that required data from volunteers and often led to statistically insignificant results. The new
model, which we have adopted by collecting user data directly from smartphones using the Minha Oi application, allows us to better
manage the quality of our network, allowing us to identify corrective actions and more efficiently direct investments in our network.
As a result, the performance of mobile telephony 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. For cases in which there are indications of
performance or conduct other than those established in the regulations, ANATEL establishes a noncompliance process called Procedure
for Determination of Non-Compliance to Obligations (Procedimento de Apuração de Descumprimento de Obrigações – PADO) in
detriment to the provider. Therefore, mobile telephony 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 area codes.
In November 2017, ANATEL submitted for public consultation the RQUAL, a proposal to review the methods by which the
quality standards for fixed-line services, personal mobility services, multimedia communications services and subscription television
services are measured. For more information, see “—Other Regulatory Matters—Quality of Telecommunications Services Regulation
(RQUAL).”
Multimedia Communication Services
Our Authorizations
We have national Multimedia Communication Services (Serviço de Comunicação Multimídia – SCM) 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 and personal communication service 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.
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Rate Regulation
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, 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.
ANATEL is expected to publishes new reference rates for these services in 2020 reflecting a methodology that takes into
consideration all long-run incremental costs, updated to current values, of providing a particular service and the unit costs of such
service based on an efficient network considering our existing regulatory obligations.
Broadband services, IP services and frame relay services are market oriented but may still be subject to ANATEL regulation.
Quality Regulation
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 Resolution 574/2011 approving the Multimedia Communications Service Quality Management Regulations
(Regulamentação de Gestão da Qualidade do Serviço de Comunicação Multimídia), 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 regulation, 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 be included in official calculations.
In January 2018, ANATEL adopted new models for measuring the quality of fixed broadband networks using automated
processes that collect data from multiple data points. To measure our fixed broadband network quality, we have implemented the HDM
platform. This new method allow us to better manage the quality of our network, allowing us to identify corrective actions and more
efficiently direct investments in our network.
Nevertheless, the performance of fixed broadband 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. For cases in which there are indications of
performance or conduct other than those established in the regulations, ANATEL establishes a noncompliance process called Procedure
for Determination of Non-Compliance to Obligations (Procedimento de Apuração de Descumprimento de Obrigações – PADO) in
detriment to the provider. Therefore, fixed broadband 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.
In November 2017, ANATEL submitted for public consultation the RQUAL, a proposal to review the methods by which the
quality standards for fixed-line services, personal mobility services, multimedia communications services and subscription television
services are measured. For more information, see “—Other Regulatory Matters—Quality of Telecommunications Services Regulation
(RQUAL).”
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Subscription Television Services
Regulatory Overview
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The framework established by Law No. 12,485 of 2011 increased the availability and lowered the price of subscription television
services in Brazil, through increased competition among providers, and improved 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
(Serviço de Acesso Condicionado – SeAC). 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.
Our Authorizations
In November 2008, we entered into a 15-year authorization agreement with ANATEL that governs our use of satellite technology
to provide DTH satellite television services throughout Brazil. 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
(SeAC) authorization allowing us to provide nationwide subscription television services through any technology, including satellite,
wireline, optical fiber and coaxial cable. The Conditional Access Service authorization agreement authorized us to offer the services to
be governed by such agreement, including IP TV, and has no termination date. In accordance with Law No. 12,485/11, which 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.
Rate Regulation
The rates and prices for DTH and IP TV services are not subject to ANATEL regulation and are market-driven.
Quality Regulation
The quality of service on Pay-TV (SeAC) is monitored by ANATEL through the operational and network performance indicators
for telecom operators.
These quality standards are measured according to the definitions and quality indicators established by Resolution 411/2005. The
indicators, as well as their respective methods of collection, calculation and other quality requirements, measures the performance of
Pay-TV service providers in each individual geographic area in which they operate. As a result, the performance of Pay-TV service
providers in any particular geographic area may not meet one or more quality performance targets even if such service provider’s
overall performance is satisfactory.
For cases in which there are indications of performance or conduct other than those established in the regulations, ANATEL
establishes a noncompliance process called Procedure for Determination of Non-Compliance to Obligations (Procedimento de
Apuração de Descumprimento de Obrigações – PADO) in detriment to the provider. Therefore, Pay-TV service providers, including us,
could be subject to fines or penalties as a result of the failure to meet the quality performance targets in in each geographic area in
which they operate.
In November 2017, ANATEL submitted for public consultation the RQUAL, a proposal to review the methods by which the
quality standards for fixed-line services, personal mobility services, multimedia communications services and subscription television
services are measured. For more information, see “—Other Regulatory Matters—Quality of Telecommunications Services Regulation
(RQUAL).”
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Other Regulatory Matters
Consumer Protection Regulation
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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. Our failure to comply with this regulation may result in various fines and penalties being imposed on us by
ANATEL.
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 Service Providers
Our revenues from the use of our local fixed-line networks by other telecommunications services providers consist primarily of
payments 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
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.
Our revenues from the use of our long-distance networks consist primarily of payments 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. Historically, our TU-RIU rates have been equal to 20% of our domestic fixed
line-to-fixed line long-distance rates for such calls.
TU-RL and TU-RIU rates vary depending on the time of the day and day of the week and are subject to price caps 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 and are adjusted annually by ANATEL at the same time that rates for local and long-distance calls are adjusted. Fixed-
line service providers must offer the same TU-RL and TU-RIU rates to all requesting providers on a nondiscriminatory basis.
The maximum TU-RL and TU-RIU rates that ANATEL has permitted us to charge have declined significantly since 2016. In
December 2018, ANATEL published the maximum fixed reference rates, including TU-RL and TU-RIU, for 2020 through 2023, using
a methodology that takes into consideration all long-run incremental costs, updated to current values, of providing a particular service
and the unit costs of such service based on an efficient network considering our existing regulatory obligations.
Interconnection Regulations Applicable to Personal Mobile Services Providers
Our revenues from the use of our mobile networks by other telecommunications services providers 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 MTR rates, the commercial conditions and technical terms and conditions, 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.
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Personal mobile services providers must offer the same MTR rate to all requesting providers on a nondiscriminatory basis.
Interconnection agreements must be approved by ANATEL before they become effective and 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 MTR rates when we began offering personal mobile services, ANATEL set the initial MTR rates.
The maximum MTR rates that ANATEL has permitted us to charge have declined significantly since 2016. In December 2018,
ANATEL published the maximum fixed reference rates, including TU-RL and TU-RIU, for 2020 through 2023, using a methodology
that takes into consideration all long-run incremental costs, updated to current values, of providing a particular service and the unit costs
of such service based on an efficient network considering our existing regulatory obligations.
Quality of Telecommunications Services Regulation (RQUAL)
In November 2017, ANATEL submitted for public consultation the RQUAL, a proposal to review the methods by which the
quality standards for fixed-line services, personal mobility services, multimedia communications services and subscription television
services are measured. Under the proposal, the quality indicators would be standardized and simplified for consumer use, with the goals
of assisting consumers to make informed decisions about quality and improving competition for quality among telecommunications
providers. The public consultation period ended in April 2018, and we expect that the RQUAL will be approved in 2019.
General Plan on Competition Targets (PGMC)
The PGMC, 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 PGMC 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 PGMC 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.
In December 2016, ANATEL launched a public consultation process to review proposed changes to the PGMC, including
establishing new criteria to determine significant market power and creating a new competition framework.
In July 2018, ANATEL updated the PGMC to revise the criteria to determine which telecommunications providers have
significant market power in the various wholesale markets that we serve. The revised evaluation framework also takes into account
providers’ market position in several retail markets in which we participate. Under this new framework, municipalities are categorized
according to degree of competition present: competitive, moderately competitive, potentially competitive and not competitive.
ANATEL then regulates companies based on the degree of competition present in each municipality. The 2018 amendments to the
PGMC also updated the price regulations applicable to wholesale products including EILD services, interconnection, full unbudling,
bitstream, national roaming, pipelines and subducts, high capacity data transport and fixed network infrastructure usage.
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Infrastructure Sharing
Prior to the adoption of the PGMC, 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 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 PGMC requires public regime service providers that have significant market power, such as our company, 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 share their fixed access network infrastructure for transmission of data through copper wires at
transmission rates of up to 12 Mbps. Providers with significant market power must also share their passive infrastructure with other
service providers at prices determined by bilateral negotiations between the providers.
Ownership and Corporate Governance Restrictions
Over the years, ANATEL has initiated several internal proceedings to monitor our financial situation and to evaluate our ability to
continue to perform our obligations under our concession agreements. In light of the approval of the RJ Plan by the creditors on
December 20, 2017, and its subsequent ratification and confirmation by the RJ Court, ANATEL began to monitor our operating and
financial positions based on the effectiveness of the RJ Plan.
In connection with the RJ Proceedings, ANATEL gained expanded powers regarding our ownership and corporate governance
decisions. Currently, we must: (1) notify ANATEL’s Superintendence of Competition of the dates of meetings of Oi’s board of
directors and executive officers so that it may send a representative to attend such meetings, as well as submit to ANATEL the minutes
of such meetings; (2) notify ANATEL’s Superintendence of Competition of the dates of meetings of Oi’s board committees so that it
may send a representative to attend such meetings; (3) obtain prior approval from ANATEL in order to, among other things, transfer
Oi’s corporate control, including the replacement of Oi’s board of directors; (4) notify ANATEL of the sale or lien over any moveable
asset of Oi or its controlling shareholders, affiliates and subsidiaries; and (5) so long as Oi is under judicial reorganization, request the
shareholders who have indicated members to Oi’s board of directors or executive officers to inform ANATEL of possible agreements or
instruments, including those that may interfere directly or indirectly in the exercise of their control.
Regulatory Agenda 2019-2020
On March 21, 2019, ANATEL approved its Regulatory Agenda for 2019-2020, including a study on the 700MHz, 2.3GHz,
3.3GHz – 3.4GHz, 3.5GHz and 26GHz radiofrequencies in preparation for the 5G spectrum auctions in 2020.
Environmental and Other Regulatory Matters
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 expected 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.
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We believe that we are in compliance with ANATEL standards as well as with all material environmental legislation and
regulations.
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 2018, we recorded revenues of R$958 and expenses of R$1,035 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.
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. In 2018, we
recorded gross revenues of R$21,166 from these services. 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.
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, 2018 and 2017 and for the three years ended December 31, 2018, which were prepared in
accordance with U.S. GAAP, and the related notes, and 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
“Cautionary Statement with Respect to 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 57.1 million RGUs as of
December 31, 2018. We operate throughout Brazil and offer a range of integrated telecommunications services that include Residential
Services, Personal Mobility Services and B2B Services. We are the largest fixed-line telecommunications company in Brazil in terms of
total number of lines in service as of December 31, 2018 based on our 11.8 million fixed lines in service as of December 31, 2018, with
a market share of 51.1% of the total fixed lines in service in our service areas as of that date. We own the largest fiber optic network in
Brazil, with more than 360,000 kilometers of installed fiber optic cable, distributed throughout Brazil. Our Personal Mobility Services
business offers mobile telecommunications services throughout Brazil. As of December 31, 2018, our mobile network covers areas in
which approximately 94.0% of the Brazilian population lives and works. Based on our 37.7 million mobile subscribers as of
December 31, 2018, we had a 16.4% market share of the Brazilian mobile telecommunications market as of that date. During 2018, we
recorded net operating revenue of R$22,060 million and net income of R$27,394 million.
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Our results of operations and financial condition have been and will be significantly influenced in future periods by the RJ
Proceedings and our investment in Africatel. In addition, our results of operations for the years ended December 31, 2018, 2017 and
2016 and our financial condition as of December 31, 2018 and 2017 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 grew by 1.1% during 2018 and 1.0% during 2017 and declined by 3.5% during 2016,
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 11.8 million as of December 31, 2018 from 12.9 million as of
December 31, 2017 and 13.7 million as of December 31, 2016, and the percentage of our fixed-line customers that subscribe
to our alternative plans which increased to 85.8% as of December 31, 2018 from 85.4% as of December 31, 2017 and 85.5%
as of December 31, 2016;
the number of our mobile customers, which declined to 37.7 million as of December 31, 2018 from 39.0 million as of
December 31, 2017 and 42.2 million as of December 31, 2016;
the number of our fixed-line customers that subscribe to our broadband services, which declined to 5.4 million as of
December 31, 2018 from 5.6 million as of December 31, 2017 and 5.7 million as of December 31, 2016;
the number of our Pay-TV customers, which remained stable at 1.6 million as of December 31, 2018 and December 31, 2017
after growing from 1.3 million as of December 31, 2016;
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;
our compliance with our quality of service obligations under the PGMQ and our network expansion and modernization
obligations under the PGMU 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;
inflation rates in Brazil, which were 3.7% during 2018, 2.9% during 2017 and 6.3% during 2016, as measured by the IST,
and the resulting adjustments to our regulated rates in Brazil;
changes in the exchange rates of the real against the U.S. dollar, including the 16.9% depreciation of the real against the
U.S. dollar during 2018, the 1.5% depreciation of the real against the U.S. dollar during 2017, and the 16.5% appreciation of
the real against the U.S. dollar during 2016, which affects 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 which affects our financial expenses as a result of exchange variations on our indebtedness denominated in U.S.
dollars.
We expect that our financial condition and liquidity will be influenced by a variety of factors, including:
•
•
•
•
our ability to generate cash flows from our operations;
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;
our ability to borrow funds from Brazilian and international financial institutions and to sell our debt and equity securities in
the Brazilian and international securities markets; and
prevailing Brazilian and international interest rates, which affect our debt service requirements.
Financial Presentation and Accounting Policies
Presentation of Financial Statements
We have prepared our consolidated financial statements as of December 31, 2018 and 2017 and for the years ended December 31,
2018, 2017 and 2016 in accordance with U.S. GAAP, under the assumption that we will continue as a going concern. Our consolidated
financial statements have been audited in accordance with Public Company Accounting Oversight Board, or PCAOB, standards.
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Under U.S. GAAP, our management is required to assess whether there are conditions or events, considered in the aggregate, that
raise substantial doubt about our ability to continue as a going concern within one year after our financial statements are issued. Our
management’s assessment of our ability to continue as a going concern is discussed in note 2 to our audited consolidated financial
statements. As of December 31, 2018, we have fulfilled the obligations established in the RJ Plan within the established time limits. As
a result of the completion on January 25, 2019 of the capital increase that was mandated by the RJ Plan through the issuance of
3,225,806,451 Common Shares for an aggregate subscription price of R$4,000 million in our preemptive offering, our management
believes that as of the date of this annual report, it has sufficient resources to continue to operate for the 12 months following the date of
this annual report.
We intend to prepare our consolidated financial statements as of December 31, 2019 in accordance with International Financial
Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). For our fiscal year ended December 31,
2010, we included financial statements prepared under IFRS as part of our annual report on Form 20-F, applying IFRS 1, “First-time
Adoption of International Reporting Standards,” considering that our previous primary GAAP was Brazilian GAAP and that January 1,
2009 was the date of transition to IFRS. Consequently, as we are not a IFRS first-time adopter, we intend to include in our annual report
on Form 20-F for the fiscal year ended December 31, 2019, a reconciliation from U.S. GAAP to IFRS for the comparative balance sheet
(i.e., as of December 31, 2018) and comparative income statement periods preceding the most recent fiscal year (i.e., for the year ended
December 31, 2018) to present the changes in the basis of presentation. However, we are already including in our December 31, 2018
financial statements a reconciliation from U.S. GAAP to IFRS of our equity and income statement for the year ended December 31,
2018, as described in note 1 to our audited consolidated financial statements.
Accounting for RJ Proceedings
As a result of the RJ Proceedings, we have applied ASC 852 in preparing our consolidated financial statements. ASC 852 requires
that financial statements separately disclose and distinguish transactions and events that are directly associated with our reorganization
from transactions and events that are associated with the ongoing operations of our business. Accordingly, certain expenses, realized
gains and losses, and provisions for losses that are realized or incurred in the RJ Proceedings have been recorded under the
classification “Reorganization items, net” in our consolidated statements of operations. In addition, our prepetition obligations that may
be impacted by the RJ Proceedings based on our assessment of these obligations following the guidance of ASC 852 have been
classified on our consolidated statement of financial position as “Liabilities subject to compromise.” Prepetition liabilities subject to
compromise are required to be reported as the amount allowed as a claim by the RJ Court, regardless of whether they may be settled for
lesser amounts. Certain amounts initially recorded as liabilities subject to compromise were adjusted and reclassified to reflect new
legal terms and conditions established by the RJ Court. As a result of the effectiveness of the RJ Plan on February 5, 2018, the
contingencies included as “Liabilities subject to compromise” on our consolidated statement of financial position will be paid according
to terms of the RJ Plan and were reclassified as current and non-current “Provisions for contingencies” on our consolidated statement of
financial position.
As a result of the completion on January 25, 2019 of the capital increase that was mandated by the RJ Plan, for purposes of the
preparation of our financial statements under U.S. GAAP, we are deemed to have emerged from the RJ Proceedings. Upon emergence
on January 25, 2019, we would be required to adopt fresh-start accounting, as required by ASC 852. The adoption of fresh start
accounting would require our company to assign the reorganization value to our assets and liabilities, in conformity with the guidance
of ASC 805 applicable to business combinations. Under this guidance, our assets and liabilities would be adjusted to fair market values,
with any excess recorded as goodwill. However, as we intend to report our consolidated financial statements as of dates and for the
periods ending after January 1, 2019 in accordance with IFRS as issued by the IASB, we will not adopt fresh start accounting as there
are no requirements under IFRS to do so.
Business Segments and Presentation of Segment Financial Data
We use operating segment information for decision-making. We have identified only one operating segment that corresponds to
the telecommunications business in Brazil.
The Telecommunications in Brazil segment includes our telecommunications business in Brazil, In addition to our
telecommunications business in Brazil, 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 are conducted primarily by 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 in Africa and Asia, and which
have been consolidated in our financial statements since May 2014.
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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, data communication services
(broadband), and Pay-TV;
Personal Mobility Services, focused on the sale of mobile telephony services to postpaid (subscription) and prepaid
customers that include voice services and data communication services; and
B2B Services, which includes corporate solutions offered to our small, medium-sized, and large corporate customers,
including voice services and corporate data solutions and wholesale interconnection and traffic transportation services to
other telecommunications providers.
Critical Accounting Policies and Estimates
Our critical accounting policies and estimates are described in note 2 to our audited consolidated financial statements. In preparing
our consolidated financial statements in conformity with U.S. GAAP, our management uses estimates and assumptions based on
historical experience and other factors, including expected future events, which we consider 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 frequently requires judgments made by management regarding the effects of matters that are inherently uncertain with respect
to the outcomes of transactions and the carrying value of our assets and liabilities. Our actual 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:
•
•
•
•
•
•
•
•
•
•
fair value of financial liabilities;
revenue recognition and trade receivables;
depreciation of property, plant and equipment;
allowances for doubtful accounts;
fair value of available-for-sale investments;
deferred income taxes and social contribution;
impairment of long-lived assets;
defined postretirement benefit plans;
contingencies; and
estimate of expected amount of the allowed claims in the RJ Proceedings.
Fair Value of Financial Liabilities
We have adopted the fair value option under Financial Accounting Standards Board Accounting Standards Codification 820 “Fair
Value Measurement”, or ASC 820, with respect to the recording of our financial liabilities. These financial liabilities have been valued
at fair value according to the criteria of ASC 820 as of the time at which we reclassified each of our financial liabilities that were legally
affected by the RJ Plan from liabilities subject to compromise to loans and financings or trade payables. We estimated the fair value of
each of these financial liabilities based on an internal valuation made of these financial liabilities, which takes into consideration the
cash flows under these financial instruments provided for in the RJ Plan, and assumptions regarding appropriate discount rates and
foreign exchange rates consistent with the tenor and currency of each of these financial liabilities.
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The fair value adjustment recognized on our balance sheet with respect to each financial liability at the time that we reclassified
that financial liability is amortized on a straight-line basis over the term of that financial liability and on a monthly basis we record a
financial expense in the amount of the amortization in our statement of operations and a corresponding reduction in the fair value
adjustment on our balance sheet.
During 2018, we recorded gains on adjustments to fair value of our loans and financings of R$13,929 million and gains on
adjustments to present value of our trade payables (including trade payables to ANATEL-AGU) of R$5,577 million. We do not expect
to record additional significant fair value adjustments in our statements of operations.
Our assumptions regarding appropriate discount rates and foreign exchange rates used in our calculation of the fair value of our
financial liabilities are subject to significant fluctuations due to different external and internal factors, including economic trends and
the financial performance of our company. The use of different assumptions to measure the fair value of our financial liabilities could
have a material effect on the estimated fair value of these financial instruments and the amounts recorded as loans and financings and
trade payables in our balance sheet, as well as the amounts recorded as reorganization items, net in our statement of operations.
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.
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 13 to our audited consolidated financial
statements. The useful lives of assets in certain categories may vary based on 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.
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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.
Allowance for Doubtful Accounts
Our allowance 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. 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.
During 2018, we reassessed the methodology used to evaluate the assumption of allowance for doubtful accounts that 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. For additional information regarding our allowance for doubtful accounts, see note 8 to our
audited 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 allowance may be required.
Fair Value of Available-for-Sale Investments
Our investments in Unitel, including our investment in its declared and unpaid dividends, and CVT are classified as
available-for-sale investments and have been valued at fair value according to the operating assets used as basis in the valuation of these
investments at the time of our May 2014 capital increase. Unrealized holding gains and losses, net of the related tax effect, on
available-for-sale investments are excluded from earnings and are reported as a separate component of accumulated other
comprehensive income until realized.
The fair value of the available-for-sale investments is estimated based on the internal valuation made, including cash flows
forecasts for a five-year period, the choice of a growth rate to extrapolate the cash flows projections, and definition of appropriate
discount rates and foreign exchange rates consistent with the reality of each country where the businesses are located. In addition to the
financial and business assumptions referred to above, we also take into consideration the fair value measurement of cash investments,
qualitative assumptions, including the impacts of developments in the lawsuits filed against third parties, and the opinion of the legal
counsel on the outcome of these lawsuits. With regard to the impairment test of dividends, we use financial assumptions on the discount
rate in time and the foreign exchange rate, and use qualitative assumptions based on the opinion of the legal counsel on the outcome of
the lawsuits filed against Unitel for the nonpayment of dividends and interest. We monitor and periodically update the key assumptions
and critical estimates used to calculate fair value.
During 2017 and 2016, we recorded losses on available-for-sale financial assets of R$267 million and R$1,090 million,
respectively, resulting from the revision of the recoverable amount of dividends receivable from Unitel, the fair value of the cash
investment in Unitel and exchange rate losses related to the depreciation of the Angolan Kwanza against the U.S. dollar and the real.
During 2018, we recorded a gain on available-for-sale financial assets of R$293 million, primarily as a result of a R$829 million
exchange rate gain due to the 17.1% depreciation of the real against the U.S. dollar during 2018 and R$142 million recorded with
respect to our portion of dividends approved by Unitel related to Unitel’s 2017 fiscal year, the effects of which were partially offset by a
R$678 million loss recorded based on our revision of the fair value of the cash investment in Unitel.
Our estimates of future cash flows from our available-for-sale investments 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 of available-for-sale investments
could have a material effect on the amounts obtained and not necessarily be indicative of the cash amounts that we would receive on the
disposal of an available-for-sale investment.
Deferred Income Taxes and Social Contribution
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.
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We recognize and settle taxes on income based on the results of operations determined in accordance with the Brazilian Corporate
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 for temporary differences between the carrying
amounts and the taxable bases of the assets and liabilities, and tax loss carryforwards are recorded in assets or liabilities, as applicable.
We recognize 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.
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.
Impairment of Long-Lived Assets
Long-lived assets include assets that do not have indefinite lives, such as property, plant, and equipment, and purchased intangible
assets subject to amortization. These assets 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, 2018.
Defined Postretirement Benefit Plans
We sponsor certain defined postretirement benefit plans for our employees. We record liabilities for defined postretirement
benefits plan 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 postretirement
benefit liabilities. The accuracy of these assumptions and estimates will determine whether we have created sufficient reserves for the
costs of accumulated defined postretirement benefits plans, and the amount we are required to disburse each year to fund postretirement
benefits plans. 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 defined postretirement benefits, which could materially impact our results of operations.
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 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 19 to our audited
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 19 to our audited consolidated financial
statements.
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Estimate of Expected Amount of the Allowed Claims in the RJ Proceedings
Our estimate of the expected amount of the allowed claims in the RJ Proceedings is a significant estimate. Future actions and
decisions by the RJ Court may differ significantly from our own estimate, potentially having material future effects on our financial
statements. Furthermore, these liabilities are reported as the amounts expected to be allowed by the RJ Court, even if they may be
settled for lesser amounts. There may be significant differences between the settled amount and the expected amount of the
allowed claim.
Principal Factors Affecting Our Financial Condition and Results of Operations
Effects of the RJ Proceedings and Our Financial Restructuring
In June 2016, as a result of several factors affecting our liquidity, we anticipated that we would no longer be able to comply with
our payment obligations under our loans and financing transactions and we concluded that filing of a request for judicial reorganization
in Brazil would be the most appropriate course of action (1) to preserve the continuity of our offering of quality services to our
customers, within the rules and commitments undertaken with ANATEL, (2) to preserve the value of our company, (3) to maintain the
continuity of our operations and corporate activities in an organized manner that protects the interests of our company, customers,
shareholders and other stakeholders, and (4) to protect our cash and cash equivalents.
Our liquidity crisis resulted principally from:
•
•
•
•
•
•
the deterioration of the Brazilian economy, which suffered low or negative GDP growth for several years and increased
levels of unemployment, with negative effects on (1) our ability to retract and retain customers, and corresponding negative
effects on our net operating revenue, and (2) due to increases in Brazilian interest rates and the depreciation of the real,
increases in our financing expenses;
the increasingly marginal (or in some instances, negative) returns that we achieved through network expansion designed to
meet the universalization requirements imposed on our company as a fixed line concessionaire under the PGMU, which
require us to make large capital expenditures in certain areas of Brazil that are remote, have low demographic density and
have a low-income population, without the corresponding ability to recoup these capital expenditures through the rates that
we charge customers in these areas or elsewhere;
the change in consumption patterns of Brazilian consumers of telecommunication services as a result of the increasing
attractiveness of mobile telecommunications, particularly following the global introduction of the “smart phone,” which has
led to continuous sequential declines in the number of subscribers to our fixed-line services, with corresponding negative
effects on our net operating revenue;
the requirement under Brazilian law that we make judicial deposits in connection with our defense of labor, tax, and civil
lawsuits and regulatory claims brought against our company, which resulted in a significant amount of our liquid assets
being diverted into judicial deposits, with the result that these assets were not available for us to use for our capital
expenditure and debt service requirements;
the imposition of large administrative fines and penalties, including interest on unpaid charges and late fees, by ANATEL,
which resulted in a significant amount of our liquid assets being diverted to pay these charges or into judicial deposits as we
defend against these regulatory claims, with the result that these assets were not available for us to use for our capital
expenditure and debt service requirements; and
the increases in our debt service requirements as we relied on funds obtained from financing transactions in the Brazilian and
international markets to expand our data communications network and to implement projects to meet ANATEL’s regulatory
requirements market.
On June 20, 2016, Oi, together with the other RJ debtors, filed a joint voluntary petition for judicial reorganization pursuant to the
Brazilian Bankruptcy Law with the RJ Court, pursuant an urgent measure approved by our board of directors. For more information
regarding the RJ Proceedings, see “Item 4. Information on the Company—Our Recent History and Development—Our Judicial
Reorganization Proceedings.”
Effects of RJ Proceedings on Our Statement of Operations and Balance Sheet
Our net operating revenue was negatively affected by the RJ Proceedings primarily as a result of the impact of these proceedings
on our ability to attract new corporate customers for our B2B business as these potential customers have been wary of entering into
long-term service contracts with us during the pendency of these proceedings. We do not believe that the RJ Proceedings had a direct
impact on our net revenue from other services. However, the factors affecting our net operating revenue that led to our liquidity
crisis persist.
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As a result of the RJ Proceedings, we have realized gains and losses and made provisions for losses that are realized or incurred in
the RJ Proceedings which have been recorded in as reorganization items, net in our consolidated statements of operations.
Reorganization items, net was an expense of R$2,372 during 2017 and R$9,006 million during 2016.
As a result of the commencement of the RJ Proceedings, our loans and financings were classified as liabilities subject to
compromise and as of the date of the commencement of the RJ Proceedings, we ceased recording interest expenses and foreign
exchange gains and losses on these loans and financings as part of our financial expenses, net. In addition, in connection with our
deteriorating financial condition and the commencement of the RJ Proceedings, we reversed our derivative financial instruments during
the second and third quarters of 2016.
We also reclassified our trade payables, provisions for civil contingencies, provisions for labor contingencies and provision for
pension plans as of the date of the commencement of the RJ Proceedings as liabilities subject to compromise.
Effects of Confirmation of the RJ Plan on Our Statement of Operations and Balance Sheet
On December 19 and 20, 2017, the GCM was held to consider approval of the most recently filed judicial reorganization plan. The
GCM concluded on December 20, 2017 following the approval of the RJ Plan reflecting amendments to the judicial reorganization plan
presented at the GCM as negotiated during the course of the GCM.
On January 8, 2018, the RJ Court entered the Brazilian Confirmation Order, ratifying and confirming the RJ Plan, according to its
terms, but modifying certain provisions of the RJ Plan. The Brazilian Confirmation Order was published in the Official Gazette of the
State of Rio de Janeiro on February 5, 2018, the Brazilian Confirmation Date.
The Brazilian Confirmation Order, according to its terms, is binding on all parties, although still subject to appeals with no
suspensive effect attributed to it. For more information regarding the recoveries which the creditors were entitled to receive under the
RJ Plan, see “Item 4. Information on the Company—Our Recent History and Development—Our Judicial Reorganization
Proceedings—Implementation of the Financial Settlement of the Judicial Reorganization Plan.”
As a result of the approval and confirmation of the RJ Plan:
•
•
•
•
we have begun to attract new corporate customers for our B2B business as the concerns of these potential customers
regarding the long-term sustainability of our business have receded;
we recorded gain on reorganization items, net of R$31,581 million during 2018;
all of our obligations recorded as liabilities subject to compromise as of December 31, 2017 have been reclassified to other
line items on our balance sheet and statement of operations to reflect the recoveries of the creditors with respect to those
obligations, our payment of R$161 million to settle some of our debt instruments and trade payables as part of the Small
Creditors Program (a program under which creditors could engage in mediation of their claims with us under which we
would settle claims of R$50,000 or less without extinguishing those claims), and the settlement of some of our other
liabilities through mediation.
we recorded interest expenses and foreign exchange gains and losses on our restructured loans and financing as part of our
financial expenses, net in the aggregate amount of R$4,045 million during 2018.
For more information regarding our reorganization items, net, see note 28 to our audited consolidated financial statements; for more
information regarding our liabilities subject to compromise, see note 29 to our audited consolidated financial statements.
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. 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 a valuation report of Pharol’s
operating assets prepared by Banco Santander in connection with our acquisition of PT Portugal.
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, 2018, 2017 and 2016, we have recorded the assets and liabilities of Africatel, including its
investment in Unitel and the accounts receivable relating to declared and unpaid dividends of Unitel, 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.
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During 2018, we recorded a gain on available-for-sale financial assets of R$293 million, primarily as a result of a R$829 million
exchange rate gain due to the 17.1% depreciation of the real against the U.S. dollar during 2018 and R$142 million recorded with
respect to our portion of dividends approved by Unitel related to Unitel’s 2017 fiscal year, the effects of which were partially offset by a
R$678 million loss recorded based on our revision of the fair value of the cash investment in Unitel. During 2017 and 2016, we
recorded losses on available-for-sale financial assets of R$267 million and R$1,090 million, respectively, resulting from the revision of
the recoverable amount of dividends receivable from Unitel, the fair value of the cash investment in Unitel and exchange rate losses
related to the depreciation of the Angolan Kwanza against the U.S. dollar and the real.
Rate of Growth of Brazil’s Gross Domestic Product and Demand for Telecommunications Services
As a Brazilian company with substantially all of our operations in Brazil, we are affected by economic conditions in Brazil.
Brazilian GDP grew by an estimated 1.1% during 2018 and by 1.0% during 2017, following a decline of 3.5% in 2016. The substantial
and prolonged deterioration of economic conditions in Brazil since the second quarter of 2014 have had 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. During the three-year period ended December 31, 2018, the number of mobile subscribers in Brazil has declined at an average
rate of 3.8% per year, while the number of fixed lines in service in Brazil during the three-year period ended December 31, 2018 has
declined at an average rate of 4.2% per year.
Demand for Our Residential Services
The number of our residential fixed lines in service declined by 21.3% to 8.3 million as of December 31, 2018 from 10.5 million
as of December 31, 2015. We have focused 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.
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. In addition, we have been focusing on structural network investments, including the
introduction of VDSL technology, in order to offer service plans that include higher broadband speeds.
Demand for our residential services was negatively affected by a decision of the Brazilian Supreme Court that we must pay ICMS
tax on customer subscriptions that do not include allowances and our subsequent inclusion of this tax in customers’ bills in the first half
of 2017.
Demand for Our Personal Mobility Services
Our customer base for mobility services (including customers in our Personal Mobility Services and B2B Services) has declined
by 21.6% to 37.7 million as of December 31, 2018 from 48.1 million as of December 31, 2015. 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, reflecting the trend
to consolidate mobile use into a single SIM card, following the launch of all-net plans in response to the successive reductions of the
MTR tariffs, and the structural market migration from voice to data in response to the offering of more robust data packages.
Additionally, we have implemented an intensive policy of disconnecting inactive users to reduce regulatory fees that we must make for
each active account. Finally, we believe that the number of our prepaid accounts has been significantly reduced as a result of the
increase in Brazil’s unemployment rate as our net additions of prepaid subscribers is closely correlated to movements in the
unemployment rate.
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. Competitive pressures have required us to introduce service plans under which we offer
unlimited voice calls tied to service offerings priced in relation to the amount of data usage offered.
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Demand for Our B2B Services
The number of RGUs of our B2B Services has declined by 6.9% to 6.7 million as of December 31, 2018 from 7.2 million as of
December 31, 2015. We believe that the primary reasons for the decline in our B2B Services customer base has been (1) the declining
macroeconomic conditions in Brazil, which has caused many of our SME customers to downsize or cease operations, (2) contractions in
the fiscal strength of many of our governmental customers, which has caused them to reduce the scope of their telecommunications
expenditures, and (3) market perceptions of our company during our RJ proceedings which has made it difficult for us to enter into new
agreements with corporate customers, although following the approval and confirmation of the RJ Plan, we have begun to attract new
corporate customers for our B2B business as the concerns of these potential customers regarding the long-term sustainability of our
business have receded.
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 B2B Services customers also
purchase the core fixed-line and mobile services offered to our Residential and Personal Mobility Services customers, demand for our
B2B 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 Our Absorption of Network Maintenance Service Operations and Adoption of New Customer Care Model
We have introduced programs beginning in 2015 to control costs related to network maintenance services and third-party services
by (1) absorbing operation of several network maintenance service operations and providing these services ourselves, and
(2) implementing a new customer care quality model through which we have improved our method of allocation of call center traffic to
promote a greater level of customer service and digitized some of our customer interactions with respect to processing order for new
services, troubleshooting service issues and dispatching maintenance personnel.
Through our subsidiary Serede Serviços de Rede S.A., or Serede, we absorbed operations of our network maintenance service
operations of our contractor in Rio de Janeiro in October 2015, our network maintenance service operations of our contractor in the
South region of Brazil in May 2016 and our network maintenance service operations of our contractor in the North and Northeast
regions of Brazil in June 2016. As a result, 75% of the members of our technical field staff are our employees and are directly managed
by our company compared to 20% prior to the absorption of these operations. We have revised the focus of our network maintenance
service operations to concentrate on preventive network maintenance the reduce the number of repairs, in turn reducing the volume of
network interventions and increasing field force productivity, thus freeing capacity to increase our focus on preventive maintenance.
This virtuous cycle improves field operations efficiency and reduces costs in terms of both the number of technicians and the volume of
materials applied.
As a result, our network maintenance services expense has declined to R$1,104 million during 2018 from R$1,252 million during
2017 and R$1,540 million during 2016, the effects of which have been partially offset by increased personnel expenses relating to these
services. In addition to reducing costs, we believe that this initiative has been principally responsible for (1) a reduction of the number
of repairs by 17.2% during 2018, 12.5% during 2017 and 6.9% during 2016, and (2) an increase in productivity of our field staff (as
measured by the number of field activities carried out divided by the total number of technicians involved) by 6.9% during 2018, 16.5%
during 2017 and 6.3% during 2016. Finally, we believe that this initiative has been principally responsible for (1) the reduction in the
average time for installation of new service by 18.9% during 2018, 30.4% during 2017 and 30.0% during 2016, (2) the reduction in the
average waiting time for resolution of a customer service issue by 3.2% during 2018, 25.8% during 2017 and 20.1% during 2016, and
(3) a reduction of complaints to ANATEL by 19.6% during 2018, 23.0% during 2017 and 10.0% during 2016.
During 2016, we implemented a new customer care quality model in which we allocated call traffic among our call center service
providers based on service quality. In addition, in 2018, we began to promote electronic channels that allow self-service, increasing
digital interactions and consequently reducing calls requiring interactions with call center personnel. These initiatives have stimulated
better quality in the provision of services, resulting in a 17.3% and 22.8% decline in the volume of repeated calls during 2018 and 2017,
respectively, and a 22.5% and 8.9% decline in call center costs during 2018 and 2017, respectively.
Effects of Adjustments to Our Interconnection Rates
Telecommunications services rates are subject to comprehensive regulation by ANATEL. In particular, interconnection rates for
fixed-line and mobile services in the Brazilian telecommunications industry have been subject to comprehensive reductions in
recent years.
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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. The MTR tariffs that we charged to terminate calls on our mobile networks were reduced by 83% from December 31,
2015 to December 31, 2018 and were reduced by 47% in February 2019. In addition, the TU-RL and TU-RIU tariffs that we charged to
terminate calls on our fixed-line networks were reduced by 82% from December 31, 2015 to December 31, 2018 and were reduced by
an average of 40% in February 2019.
These rate reductions have been a primary reason for the decline in our mobile interconnection revenue to R$448 million during
2018 from R$500 million during 2017 and from R$627 million during 2016, and the decline in our fixed-line interconnection revenue
to R$53 million during 2018 from R$71 million during 2017 and from R$113 million during 2016. However, these rate reductions have
also led to a substantial reduction of our interconnection costs, which have declined to R$658 million during 2018 from R$778 million
during 2017 and R$1,173 million during 2016.
As a result of the substantial reductions in our interconnection costs, and in keeping with our strategy of simplifying our portfolios
to enhance our customers’ experience, since 2015 we have been offering fixed-line and mobile plans that allow all-net calls for a flat
fee.
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 PGMQ. As a public regime service provider, we must
comply with the network expansion and modernization obligations under the PGMU 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 PGMQ, fail to meet the network expansion and modernization
targets established by ANATEL under the PGMU 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 PGMQ and the PGMU.
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, 2018, 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$580 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.
Effect of Level of Indebtedness and Interest Rates
As of December 31, 2018, we had loans and financings of R$30,379 million, excluding the fair value adjustment to our loans and
financings, and R$16,450 million, after giving effect to the fair value adjustment.
Borrowing and financing costs consist of interest on borrowings payable to third parties, inflation and exchange losses on third-
party borrowings and gains and losses on derivative financial instruments as set forth in note 6 to our audited consolidated financial
statements included in this prospectus. As a result of the commencement of the RJ Proceedings, we ceased recording borrowing and
financing costs of our continuing operations with respect to our loans and financings. As a result of the confirmation of the RJ Plan, our
obligations under the our restructured indebtedness began to accrue interest as of the Brazilian Confirmation Date and we recorded
interest expenses and foreign exchange gains and losses on our restructured loans and financing as part of our financial expenses, net in
the aggregate amount of R$4,046 million during 2018.
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As a result of the implementation of the RJ Plan, most of our obligations under our restructured indebtedness accrues interest at
fixed-rates in U.S. dollars. However, our obligations under our debentures and our restructured Brazilian credit agreements and CRIs
accrue interest based on the CDI rate and our obligations under our restructured credit agreements with BNDES accrue interest based on
the TJLP rate. As a result, increases in the CDI rate or the TJLP rate will increase our interest expenses and debt service obligations.
In addition, the RJ Plan permits us to seek to raise up to R$2.5 billion in the capital markets and seek to borrow up to R$2 billion
under new export credit facilities. This debt may accrue interest at floating rates and/or be denominated in foreign currencies.
Accordingly, we may incur interest expenses and foreign exchange gains and losses in connection with this debt, if incurred.
Effects of Fluctuations in Exchange Rates between the Real and the U.S. Dollar
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. 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.
As a result of the confirmation of the RJ Plan, our obligations under the our restructured Export Credit Agreements, our PIK
Toggle Notes and our Non-Qualified Credit Agreement are denominated in U.S. dollars and will accrue interest in U.S. dollars.
As a result, when the real appreciates against the U.S. dollar:
•
•
•
the interest costs on our indebtedness denominated in U.S. dollars will decline in reais, which will positively affect our
results of operations in reais;
the amount of our indebtedness denominated in U.S. dollars will decline in reais, and our total liabilities and debt service
obligations in reais will decline; and
our financial expense, net will decline as a result of foreign exchange gains that we record.
A depreciation of the real against the U.S. dollar will have the converse effects.
Effects of Inflation
Because substantially all of our cost of services and operating expenses are incurred in reais in Brazil, an 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 the past three years, the benefits of these measures were reduced as a result of the countervailing
impact of Brazilian inflation during that time. 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.
As a result of the confirmation of the RJ Plan, our obligations under our debentures and restructured Brazilian credit agreements
and CRIs have accrued interest based on the CDI rate, which is partially adjusted for inflation, since the Brazilian Confirmation Date.
As a result, inflation could increase our interest expenses and debt service obligations.
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.
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Recent Developments
Issuance of New Shares on Exercise of Warrants
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On January 4, 2019, our board of directors confirmed the issuance of 275,985 Common Shares and the delivery of such Common
Shares to holders of its Warrants that exercised their Warrants from December 4, 2018 through January 2, 2019, including Warrants
represented by 55,197 ADWs that were exercised from November 28, 2018 through December 26, 2018.
All Warrants that were not exercised on or prior to January 2, 2019, including all ADWs that were not exercised on or prior to
December 26, 2018, have been canceled.
Preemptive Offering and Closing Under Commitment Agreement
As contemplated by Section 6 of the RJ Plan, on November 13, 2018, we commenced a preemptive offering of Common Shares
that was registered with the SEC under the Securities Act under which holders of our Common Shares and Preferred Shares, including
the ADS Depositary and The Bank of New York Mellon, as depositary of the Preferred ADS program, received 1.333630 transferable
rights for each Common Share or Preferred Share held as of November 19, 2018. Each subscription right entitled its holder to subscribe
to one Common Share at a subscription price of R$1.24 per Common Share. In addition, each holder of a subscription right was entitled
to request the subscription for additional Common Shares.
The subscription rights expired on January 4, 2019. On January 16, 2019, we issued 1,530,457,356 Common Shares to holders of
subscription rights that had exercised those subscription rights with respect to the Common Shares, including the depositaries under our
ADS Deposit Agreements. On January 21, 2019, we issued 91,080,933 Common Shares to holders of subscription rights that had
requested subscriptions for excess Common Shares, including the depositaries under our ADS Deposit Agreements. The proceeds of
these subscriptions was R$2,011 million.
On January 25, 2019, we issued 1,604,268,162 Common Shares, representing the total number of Common Shares that were
offered in the preemptive offering less the total number of initial Common Shares and excess Common Shares, to the Backstop
Investors in a private placement under the terms of the Commitment Agreement for the aggregate amount of R$1,989 million. In
addition, under the terms of the Commitment Agreement, on that date we issued 272,148,705 Common Shares in a private placement to
the Backstop Investors and paid US$13 million to the Backstop Investors as compensation for their commitments under the
Commitment Agreement.
Pharol Settlement Agreement
On January 8, 2019, Oi, Bratel and Pharol entered into the Pharol Settlement Agreement, which provides, among other things, for
the termination of all existing litigation involving Oi, Bratel and Pharol in Brazil and abroad.
As a result of the Pharol Settlement Agreement, Oi, Bratel and Pharol filed motions requesting the suspension of all pending
proceedings, suits and appeals in Brazil and Portugal involving Oi, Bratel and Pharol for 60 days or until the RJ Court confirms the
Pharol Settlement Agreement, whichever occurs first.
Under the Pharol Settlement Agreement Oi is required to: (1) pay Bratel an amount in U.S. dollars corresponding to €25 million,
which under the Pharol Settlement Agreement was used by Pharol for the subscription of 85,721,774 common shares issued by Oi in
the preemptive offering; and (2) upon confirmation of the Pharol Settlement Agreement by the RJ Court, (a) transfer to Bratel
32,000,000 Common Shares and 1,800,000 Preferred Shares held in treasury, (b) pay Pharol the annual fees related to certain
obligations assumed by Oi with respect to proceedings of Pharol in Portugal, and (c) in case of a sale of at least 50% of the shares of
Unitel indirectly held by Oi, deposit into an escrow account an amount necessary to guarantee the payment of any potential liabilities of
Pharol in tax proceedings whose chance of loss is assessed as possible or probable.
On February 28, 2019, the RJ Court confirmed the Pharol Settlement Agreement by a decision published in the Official Gazette of
the State of Rio de Janeiro on March 12, 2019. This decision became final on April 3, 2019.
On February 28, 2019, the RJ Court confirmed the Pharol Settlement Agreement by a decision published in the Official Gazette of
the State of Rio de Janeiro on March 12, 2019. This decision became final on April 3, 2019. Since that date, in accordance with the
Pharol Settlement Agreement, Oi has paid Bratel an amount in U.S. dollars corresponding to €25 million and transferred to Bratel
32,000,000 common shares and 1,800,000 preferred shares of Oi held in treasury.
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ICC Award in Arbitration Against Unitel Shareholders
On February 27, 2019, we were notified of the final decision issued by the arbitral tribunal under the arbitration proceeding filed
by our subsidiary PT Ventures against the other Unitel shareholders. The arbitral tribunal ruled that the other Unitel shareholders had
violated several provisions of Unitel’s Shareholders’ Agreement, among other matters.
The arbitral tribunal ordered the other Unitel shareholders to jointly and severally pay PT Ventures the amount of
US$339.4 million corresponding to the loss of value of PT Ventures’ stake in Unitel, plus interest from February 20, 2019 at 12-month
U.S. dollar LIBOR +2%, compounded annually. The arbitral tribunal also ordered the other Unitel shareholders to jointly and severally
pay PT Ventures the amount of US$307 million corresponding to the damages arising from the other Unitel’s shareholders’ failure to
ensure that PT Ventures received the same amount of dividends in foreign currency as the other Unitel foreign shareholder. This
amount is subject to interest at an annual rate of 7%, starting at various dates in 2013. In addition, the arbitral tribunal ordered the other
Unitel shareholders to pay a substantial portion of PT Ventures’ legal fees and costs and the administrative and arbitrators’ fees and
expenses, in the aggregate net amount of approximately US$13 million. The arbitral tribunal also entirely dismissed the counterclaim
and agreed with PT Ventures that the conditions for exercising the right of first refusal to acquire PT Ventures’ 25% shareholding in
Unitel had not been triggered. For more information, see “Item 8. Financial Information—Legal Proceedings—Legal Proceedings
Relating to Our Interest in Unitel.”
Repurchases of Preferred Shares over the B3
During the month of February 2019, we repurchased a total of 1,800,000 Preferred Shares over the B3 at prices ranging between
R$1.42 and R$1.44 per Preferred Share, for an aggregate purchase price of R$2.6 million.
Results of Operations
The following discussion of our results of operations is based on our consolidated financial statements prepared in accordance
with US GAAP. In the following discussion, references to increases or decreases in any period are made by comparison with the
corresponding prior period, except as the context otherwise indicates.
Year Ended December 31, 2018 Compared with Year Ended December 31, 2017
The following table sets forth the components of our consolidated income statement, as well as the percentage change from the
prior year, for the years ended December 31, 2018 and 2017.
Net operating revenue
Cost of sales and services
Gross profit
Operating income (expenses)
Selling expenses
General and administrative expenses
Other operating income (expenses), net
Reorganization items, net Other operating income (expenses), net
Operating loss before financial expenses, net, and taxes
Financial expenses, net
Profit (loss) before taxes
Income tax and social contribution
Profit (loss)
n.m. Not meaningful.
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Year ended December 31,
2018
2017
(in millions of reais, except percentages)
R$ 23,790
R$ 22,060
% Change
(15,823)
6,237
(15,676)
8,114
(4,478)
(2,698)
417
31,581
31,059
(4,012)
27,047
347
R$ 27,394
(4,400)
(3,064)
(1,043)
(2,732)
(2,767)
(1,612)
(4,379)
351
R$ (4,027)
(7.3)
0.9
(23.1)
1.8
(12.0)
n.m.
n.m.
n.m.
148.9
n.m.
(1.1)
n.m.
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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, 2018 and 2017.
Telecommunications in Brazil Segment:
Residential
Personal mobility
B2B
Other services
Other operations(1)
Net operating revenue
(1) Other operations includes the net operating revenue of Africatel.
Year ended December 31,
2017
2018
(in millions of reais, except percentages)
% Change
R$ 8,402
7,250
5,981
227
21,860
200
R$ 22,060
R$ 9,171
7,645
6,486
256
23,557
233
R$ 23,790
(8.4)
(5.2)
(7.8)
(11.2)
(7.2)
(14.0)
(7.3)
Net operating revenue of our Telecommunications in Brazil segment declined by 7.2% during 2018, principally due to an 8.4%
decline in net operating revenue from residential services, a 7.8% decline in net operating revenue from B2B services, and a 5.2%
decline in net operating revenue from personal mobility services.
Net Operating Revenue from Residential Customer Services
Net operating revenue from residential customer services represented 38.1% of our net operating revenue during 2018. Residential
customer services include fixed telephony services, including voice services, data communication services (broadband), and Pay-TV.
Net operating revenue from residential services declined by 8.4%, primarily due to (1) the 7.2% decline in the average number of
residential RGUs, (2) the decline in voice traffic, and (3) the reduction in TU-RL and TU-RIU fixed line interconnection tariffs and VC
fixed-to-mobile tariffs in February 2017 and February 2018. These effects were partially offset by the 0.6% 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$80.0 during 2018 from R$79.6 during 2017, primarily due to an 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 14.7%, primarily due to a 10.4% decline in the average number of residential fixed lines in service to 8.3 million during 2018 from
9.2 million during 2017, as a result of the general trend in the Brazilian telecommunications industry to substitute mobile services in
place of local fixed-line services and the corresponding reduction in voice service traffic. The effects of these factors were partially
offset by the migration of our fixed-line customer base to convergent service offerings and other plans offering unlimited minutes of
usage, which generate greater revenue per user.
Net Operating Revenue from Broadband Services. Net operating revenue from residential broadband services declined by 8.3%,
primarily as a result of (1) a 6.8% decline in the average number of our residential ADSL subscribers to 4.8 million during 2018 from
5.2 million during 2017, and (2) a 5.4% decline in the average net operating revenue per subscriber from broadband services. As of
December 31, 2018, our xDSL subscribers represented 58.4% of our total residential fixed lines in service and subscribed to plans with
an average speed of 9.8 Mbps as compared to 55.8% of our total residential fixed lines in service at an average speed of 8.3 Mbps as of
December 31, 2017.
Net Operating Revenue from Pay-TV Services. Net operating revenue from residential Pay-TV services increased by 11.2%,
primarily as a result of a 6.1% increase in the average number of our residential Pay-TV subscribers to 1.6 million during 2018 from
1.5 million during 2017, and a 1.5% increase in the average net operating revenue per subscriber, principally as a result of the shift in
the our sales mix towards more comprehensive packages of channels. As of December 31, 2018, our Pay-TV subscribers represented
19.2% of our total residential fixed lines in service as compared to 16.2% of our total residential fixed lines in service as of
December 31, 2017.
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Net Operating Revenue from Personal Mobility Services
Net operating revenue from personal mobility services represented 32.9% of our net operating revenue during 2018. 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 5.2%, primarily due to a 4.4% decline in
revenue from mobile telephony services.
Net Operating Revenue from Mobile Telephony Services. Net operating revenue from mobile telephony services declined by 4.4%,
primarily due to an 8.8% decline in the number of mobile customers that subscribe to our prepaid plans to 27.3 million during 2018
from 29.9 million during 2017, principally as a result of (1) Brazil’s high unemployment rate as our sales net additions of prepaid
subscribers is closely correlated to movements in the unemployment rate, (2) the migration of prepaid customers in Brazil to the use of
a single SIM card as operators have increased the offer of “all-net” plans following the successive reductions of the MTR tariffs, and
(3) our strict disconnection policy for inactive customers, which is designed to reduce fee payments that we must make for each active
account.
The effects of these declines were partially offset by (1) a 1.7% increase in average monthly net revenue per user, primarily as a
result of an improvement in the profile of our customer base, and (2) a 15.0% increase in the number of mobile customers that subscribe
to our postpaid plans to 7.7 million during 2018 from 6.7 million during 2017. During 2018, data revenue represented 67.2% of net
operating revenue from mobile telephony services compared to 53.9% during 2017.
Net Operating Revenue from Interconnection to Our Mobile Network. Mobile interconnection revenue declined by 10.4% during
2018, primarily as a result of the reduction in MTR tariffs in February 2017 and February 2018, the effects of which were partially
offset by an increase in interconnection traffic.
Net Operating Revenue from Sales of Handsets, SIM Cards and Other Accessories. Revenue from handsets, SIM cards and other
accessories declined by 15.1% during 2018, primarily as a result of the reduction in sales volume of handsets due to our policy of not
subsidizing the sale of this product.
Net Operating Revenue from B2B Services
Net operating revenue from B2B services represented 27.1% of our net operating revenue during 2018. B2B services include
corporate solutions offered to our small, medium-sized, large corporate customers, including voice services and corporate data
solutions, and wholesale customers. Net operating revenue from B2B services declined by 7.8%, primarily as a result of (1) lower voice
traffic, following the natural market trend, (2) the reduction in MTR tariffs and VC fixed-to-mobile tariffs in February 2017 and
February 2018, (3) the slowdown in Brazilian economic activity, which has led to efforts by corporate and government customers to
reduce costs, including telecommunications services costs, and has led to the downsizing or closing of many of our SME customers, and
(4) market perceptions of our company during our RJ Proceedings which made it difficult for us to enter into new agreements with
corporate customers.
The total number of our B2B customers increased to 6.7 million during 2018 from 6.5 million during 2017, as the 15.3% increase
in B2B mobile customers more than offset the 3.5% decline in B2B fixed-line customers.
Operating Expenses
Under the Brazilian Corporate 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 audited
consolidated 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 audited consolidated financial statements.
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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, 2018 and 2017.
Third-party services
Depreciation and amortization
Rental and insurance
Personnel
Network maintenance services
Interconnection
Provision for contingencies
Allowance for doubtful accounts
Advertising and publicity
Handsets and other costs
Impairment losses
Taxes and other expenses
Other operating income (expenses), net
Total cost of sales and services
% Change
Year Ended December 31,
2018
2017
(in millions of reais, except percentages)
R$ 6,221
5,881
4,163
2,791
1,252
778
144
692
414
223
47
345
1,233
R$ 24,184
R$ 5,925
5,953
4,342
2,594
1,104
658
90
1,070
382
196
—
135
133
R$ 22,582
(4.8)
1.2
4.3
(7.1)
(11.8)
(15.4)
(37.4)
54.7
(7.6)
(12.1)
(100.0)
(61.0)
(89.2)
(6.6)
Operating expenses declined by 6.6% during 2018, principally due to:
•
•
•
•
a 89.2%, or R$1,102 million, decline in other operating expenses, net;
a 4.8%, or R$297 million, decline in third-party service costs;
a 61.0%, or R$211 million, decline in taxes and other expenses; and
a 7.1%, or R$197 million, decline in personnel expenses.
The effects of these factors was partially offset by a 54.7%, or R$378 million, increase in allowance for doubtful accounts.
Third-Party Services
Third-party service costs declined by 4.8% during 2018, primarily as a result of lower selling expenses, information technology
expenses and call center expenses as a result of our adoption of our new customer care model and, to a lesser extent the deferral of a
portion of our selling expenses as a result of our implementation of ASC 606 for periods ending after January 1, 2018. The effects of
these factors was partially offset by higher TV content costs as a result of the growth of our Pay-TV customer base and adjustments in
contractual terms by some of our content providers, and by increased electricity costs as a result of the applicable electricity tariffs.
Depreciation and Amortization
Depreciation and amortization costs increased by 1.2% during 2018, 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 4.3% during 2018, primarily as a result of an increase in reais of certain rental expenses
denominated in U.S. dollars as a result of the depreciation of the real against the U.S. dollar during 2018, particularly expenses relating
to our agreements with GlobeNet and our lease of capacity on the SES-6 satellite.
Personnel
Personnel expenses (including employee benefits and social charges and employee and management profit sharing) declined by
7.1% during 2018, primarily as a result of initiatives that that we have implemented to promote greater efficiency and productivity as
well as stricter cost controls related in personnel expenses.
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Network Maintenance Services
Network maintenance services costs declined by 11.8% during 2018, primarily as a result of a lower number of maintenance
incidents as a result of our initiatives focused on preventive actions and productivity improvements, which have been increasing the
efficiency of field operations, as well as efficiency gains arising from the digitalization of processes and customer service.
Interconnection
Interconnection costs declined by 15.4% during 2018, primarily as a result of the declines in MTR tariffs and the TU-RL and
TU-RIU interconnection tariffs that were implemented in February 2018 and February 2017, the effects of which were partially offset
by an increase in interconnection traffic.
Contingencies
Provision for contingencies declined by 37.4% during 2018, primarily as a result of our reversal of a portion of our provision for
contingencies and the related inflation adjustment due to the reprocessing of the provision estimation model taking into account the new
profile and history of discontinuation of lawsuits in the context of the approval and ratification of the RJ Plan.
Allowance for Doubtful Accounts
Allowance for doubtful accounts increased by 54.7% during 2018, primarily as a result of our revision of the assumptions that we
use in determining our provision for bad debt. During 2018, allowance for doubtful accounts represented 4.9% of our net operating
revenue compared to 2.9% during 2017.
Advertising and Publicity
Advertising and publicity expenses declined by 7.6% during 2018, primarily as a result of a decline in the volume of our
advertising campaigns.
Handsets and Other Costs
Handsets and other costs declined by 12.1% during 2018, primarily due to the lower volume of handset sales.
Impairment Losses
We did not record an impairment losses during 2018 while we recorded impairment losses of R$47 million during 2017.
Impairment losses in 2017 consisted of losses on goodwill relating to Africatel, which is reported as a held-for-sale asset, as a result of
our annual impairment testing.
Taxes and Other Expenses
Taxes and other expenses declined by 61.0% during 2018, primarily due to a decrease in other tax expenses, as a result of a
decline in other revenues to which other taxes are associated, and a decrease in expenses for fines.
Other Operating Expenses, Net
Other operating expenses, net was R$132 million during 2018 and R$1,235 million during 2017, primarily as a result of the effects
of non-recurring expenses, which occurred during 2017, related to unrecoverable tax, write-off of other assets and other expenses due to
reconcile accounting balances as part of the RJ Proceedings.
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Reorganization Items, Net
As a result of the RJ Proceedings, we have applied ASC 852 in preparing our consolidated financial statements. ASC 852 requires
that financial statements distinguish transactions and events that are directly associated with the reorganization from the ongoing
operations of the business. Accordingly, certain expenses, realized gains and losses and provisions for losses that are realized or
incurred in the RJ Proceedings have been recorded in as reorganization items, net in our consolidated statements of operations.
Reorganization items, net was a gain of R$31,581 million during 2018, primarily consisting of:
•
•
•
a R$13,929 million adjustment to fair value of loans and financings;
a R$12,881 million gain on our restructuring of our loans and financings, trade payables owing to ANATEL-AGU and other
trade payables; and
a R$5,577 million adjustment to present value of our trade payables (including trade payables owing to ANATEL-AGU).
Reorganization items, net was an expense of R$2,372 million during 2017, primarily consisting of (1) a R$1,569 million increase
of the amount recorded relating to our contingent liabilities owed to ANATEL to the amount allowed for these claims in the RJ
Proceedings, which was greater than their carrying amount prior to the commencement of the RJ Proceedings, (2) a R$736 million
increase of the amount recorded relating to our contingent liabilities to the amount allowed for these claims in the RJ Proceedings,
which was greater than their carrying amount prior to the commencement of the RJ Proceedings, (3) inflation adjustment of
contingencies of R$410 million, and (4) fees and expenses of R$370 million of professional advisors who are assisting us with the RJ
Proceedings. The effects of these expenses were partially offset by our recognition of income from short-term investments of
R$713 million, which were recognized as reorganization items.
Operating Income (Loss) before Financial Expenses, Net, and Taxes
As a result of the foregoing, the operating income before financial expenses, net, and taxes of our Telecommunications in Brazil
segment was R$31,142 million during 2018 compared to a consolidated operating loss before financial expenses, net, and taxes of
R$2,697 million during 2017. As a percentage of net operating revenue, the operating income before financial expenses, net, and taxes
of our Telecommunications in Brazil segment was 142.5% during 2018 compared to operating loss before financial expenses, net, and
taxes of 11.4% during 2017.
Operating expenses of our other operations declined by 6.5% to R$283 million during 2018 from R$303 million during 2017,
principally as a result of our disposition of our interest in MTC in January 2017. The operating loss before financial expenses, net, and
taxes of our other operations increased by R$13 million to R$83 million during 2018 from R$70 million during 2017. As a percentage
of net operating revenue, the operating loss before financial expenses, net, and taxes of our other operations was 41.4% during 2018
compared to 30.0% during 2017.
Our consolidated operating income before financial expenses, net, and taxes was R$31,059 million during 2018 compared to a
consolidated operating loss before financial expenses, net, and taxes of R$2,767 million during 2017. As a percentage of net operating
revenue, operating income before financial expenses, net, and taxes was 140.8% during 2018 compared to operating loss before
financial expenses, net, and taxes of 11.6% during 2017.
Financial Expenses, Net
Financial Income
Financial income declined by 1.7% to R$1,525 million during 2018 from R$1,550 million during 2017, primarily due to a 23.0%
decline in interest on other assets to R$809 million during 2018 from R$1,050 million during 2017, principally as a result of a decline in
interest and monetary variation on judicial deposits due to a decline in average amount of these assets. The effects of this factor was
partially offset by (1) our recording R$143 million of income on short-term investments during 2018 compared to nil during 2017, and
(2) a 14.3% increase in other income to R$572 million during 2018 from R$500 million during 2017.
Financial Expenses
Financial expenses increased by 75.1% to R$5,537 million during 2018 from R$3,162 million during 2017, primarily as a result of
our incurrence of R$5,046 million of borrowing and finance costs during 2018 as a result of the settlement of many of the claims in our
RJ Proceedings related to our debt instruments compared to no borrowing and finance costs during 2017 due to the elimination of our
borrowing and financing costs as a result of the commencement of the RJ Proceedings in June 2016, the effects of which were partially
offset by a 52.9% decline in other charges to R$1,491 million during 2018 from R$3,162 million during 2017.
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Borrowing and finance costs during 2018 consisted of (1) inflation and exchange losses on third-party borrowings of
R$2,646 million, and (2) interest on borrowings payable to third parties of R$1,400 million, primarily as a result of our recording
R$16,450 million of current and non-current loans and financings on our balance sheet as of December 31, 2018 that had been
classified as liabilities subject to compromise as of December 31, 2017 and the 19.8% depreciation of the real against the U.S. dollar
during the period between the Brazilian Confirmation Date and December 31, 2018.
Other charges declined primarily as a result of:
•
•
•
a 51.2% decline in interest on other liabilities to R$800 million during 2018 from R$1,641 million during 2017, principally
due to the commencement of our participation in the Tax Recovery Program (REFIS) in May 2017;
our recording a gain on available-for-sale financial assets of R$293 million during 2018, primarily as a result of (i) the
R$829 million exchange gain rate due to the 17.1% depreciation of the real against the U.S. dollar during 2018, and
(ii) R$142 million recorded with respect to our portion of dividends approved by Unitel related to Unitel’s 2017 fiscal year,
the effects of which were partially offset by a R$678 million loss recorded based on our revision of the fair value of the cash
investment and the revision of the recoverable amount of dividends receivable from Unitel, compared to a loss on
available-for-sale financial assets of R$267 million during 2017, primarily as a result of the loss recorded based on our
revision of the recoverable amount of dividends receivable from Unitel, the fair value of the cash investment in Unitel and
exchange losses rate related to the depreciation of the Angolan Kwanza against the U.S. dollar and the real during 2017; and
our recording a gain on inflation adjustment of provisions for contingencies of R$8 million during 2018 compared to a loss
on inflation adjustment of provisions for contingencies of R$265 million during 2017, primarily as a result of our reversal of
a portion of our provision for contingencies and the related inflation adjustment due to the reprocessing of the provision
estimation model taking into account the new profile and history of discontinuation of lawsuits in the context of the approval
and ratification of the RJ Plan.
Income Tax and Social Contribution
The composite corporate statutory income tax and social contribution rate was 34% in each of 2018 and 2017. We recorded an
income tax and social contribution benefits of R$347 million in 2017 and R$351 million during 2017. The effective tax rate applicable
to our income loss before taxes was (1.3)% during 2018 and the effective tax rate applicable to our loss before taxes was 8.0% during
2017. 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
Valuation allowance
Effects of foreign rate differential
Tax effects of non-deductible expenses
Tax effects of tax-exempt income
Tax incentives
Tax amnesty program
Other
Effective rate
Year Ended December 31,
2017
2018
34.0%
34.0%
(25.9)
16.1
(0.5)
0.0
(2.1)
2.4
8.5
(53.8)
0.3
0.0
(6.3)
0.0
0.0
0.0
8.0%
(1.3)%
The effective tax rate applicable to our income before taxes was (1.3) % in 2018, resulting in a tax benefit despite our generating
income before taxes, primarily as a result of tax effects of tax-exempt income, mostly as a result of the effects of the novation of our
debt obligations due to the confirmation of the RJ Plan, which reduced our effective tax rate by 53.8%. The effects of this factor was
partially offset by, the tax effects of valuation allowance, which resulted in a decline in our tax assets by R$4,367 million, that were
recognized for the companies that as at December 31, 2018, do not expect to generate sufficient future taxable profits against which
these tax assets could be offset, which increased our effective tax rate by 16.1%.
The effective tax rate applicable to our loss before taxes was 8.0% in 2017, resulting in a tax benefit, primarily as a result of
(1) the tax effects of valuation allowance and valuation allowance, which resulted in a decline in our tax assets by R$1,135 million, that
were recognized for the companies that as at December 31, 2017, 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 25.9%, (effectively
reducing our tax benefit) and (2) the tax effects of amnesty program which reduced the effective tax rate applicable to our loss before
taxes by 6.3% (effectively reducing our tax benefit). The effects which were partially offset by the tax effects of tax exempt income,
which increased the effective tax rate applicable to our loss before taxes by 8.5% (effectively increasing our tax benefit).
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Net Income (Loss)
As a result of the foregoing, we recorded consolidated net income of R$27,394 million during 2018 compared to consolidated net
loss of R$4,028 million during 2017. As a percentage of net operating revenue, our net income was 124.2% during 2018 compared to
net loss of 16.7% during 2017.
Year Ended December 31, 2017 Compared with Year Ended December 31, 2016
The following table sets forth the components of our consolidated income statement, as well as the percentage change from the
prior year, for the years ended December 31, 2017 and 2016.
Net operating revenue
Cost of sales and services
Gross profit
Operating income (expenses)
Selling expenses
General and administrative expenses
Other operating income (expenses), net
Reorganization items, net Other operating income (expenses), net
Operating loss before financial expenses, net, and taxes
Financial expenses, net
Loss before taxes
Income tax and social contribution
Net loss
n.m. Not meaningful.
Net Operating Revenue
2017
Year ended December 31,
2016
(in millions of reais, except percentages)
R$ 25,996
R$ 23,790
% Change
(15,676)
8,114
(16,742)
9,255
(4,400)
(3,064)
(1,043)
(2,732)
(2,767)
(1,612)
(4,379)
351
R$ (4,027)
(4,383)
(3,688)
(1,237)
(9,006)
(9,059)
(4,375)
(13,434)
(2,245)
R$(15,680)
(8.5)
(6.4)
(12.2)
0.4
(16.9)
(15.7)
(69.7)
(69.5)
(63.2)
(67.4)
n.m.
(74.3)
The following table sets forth the components of our net operating revenue, as well as the percentage change from the prior year,
for the years ended December 31, 2017 and 2016.
2017
Year ended December 31,
2016
(in millions of reais, except percentages)
% Change
Telecommunications in Brazil Segment:
Residential
Personal mobility
B2B
Other services
Other operations(1)
Net operating revenue
(1) Other operations includes the net operating revenue of Africatel.
R$ 9,171
7,645
6,486
256
23,557
233
R$ 23,790
R$ 9,376
7,849
7,607
332
25,164
833
R$ 25,996
(2.2)
(2.6)
(14.7)
(23.0)
(6.4)
(72.1)
(8.5)
Net operating revenue of our Telecommunications in Brazil segment declined by 6.4% during 2017, principally due to a 14.7%
decline in net operating revenue from B2B services, and to a lesser extent, a 2.2% decline in net operating revenue from residential
services, and a 2.6% decline in net operating revenue from personal mobility services. In addition, net operating revenue of our other
operations declined by 72.1%, principally as a result of our disposition of our interest in MTC in January 2017.
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Net Operating Revenue from Residential Customer Services
Net operating revenue from residential customer services represented 38.5% of our net operating revenue during 2017. Net
operating revenue from residential services declined by 2.2%, primarily due to (1) the 3.3% decline in the average number of residential
revenue generating units, or RGUs; (2) the decline in voice traffic, and (3) the reduction in TU-RL and TU-RIU fixed line
interconnection tariffs and VC fixed-to-mobile tariffs in February 2017. These effects were partially offset by the 3.9% increase in the
average monthly net residential revenue per user to R$79.6 in 2017 from R$76.6 in 2016, primarily due to an 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 9.5%, primarily due to a 7.2% decline in the average number of residential fixed lines in service to 9.2 million during 2017 from
9.9 million during 2016, as a result of (1) the general trend in the Brazilian telecommunications industry to substitute mobile services in
place of local fixed-line services, and (2) the impact of two rate increases during 2017. The effects of these factors were partially offset
by the migration of our fixed-line customer base to convergent service offerings, such as Oi Total, and other plans offering unlimited
minutes of usage, which generate greater revenue per user.
Net Operating Revenue from Broadband Services. Net operating revenue from residential broadband services increased by 0.9%,
primarily as a result of a 1.5% increase in the average net operating revenue per subscriber, primarily as a result of the migration of our
broadband base to service offerings with higher speed, which generate greater revenue per user. The effects of this migration were
partially offset by a 0.6% decline in the average number of our residential ADSL subscribers. As of December 31, 2017, our ADSL
subscribers represented 55.8% of our total residential fixed lines in service and subscribed to plans with an average speed of 8.3 Mbps
as compared to 52.2% of our total residential fixed lines in service at an average speed of 6.8 Mbps as of December 31, 2016.
Net Operating Revenue from Pay-TV Services. Net operating revenue from residential Pay-TV services increased by 22.9%,
primarily as a result of a 16.0% increase in the average number of our residential Pay-TV subscribers increased to 1.5 million during
2017 from 1.3 million during 2016, and a 5.9% increase in the average net operating revenue per subscriber, principally as a result of
the shift in the our sales mix towards more comprehensive packages of channels. As of December 31, 2017, our Pay-TV subscribers
represented 16.2% of our total residential fixed lines in service as compared to 13.0% of our total residential fixed lines in service as of
December 31, 2016.
Net Operating Revenue from Personal Mobility Services
Net operating revenue from personal mobility services represented 32.1% of our net operating revenue during 2017. Net operating
revenue from personal mobility services declined by 2.6%, primarily due to (1) a 20.2% decline in mobile interconnection revenue, and
(2) a 1.2% decline in revenue from mobile telephony services.
Net Operating Revenue from Mobile Telephony Services. Net operating revenue from mobile telephony services declined by 1.2%,
primarily due to:
•
•
a 9.3% decline in the number of mobile customers that subscribe to our prepaid plans to 29.9 million during 2017 from
33.0 million during 2016, principally as a result of (1) an increase in Brazil’s unemployment rate as our sales net additions of
prepaid subscribers is closely correlated to movements in the unemployment rate, (2) the migration of prepaid customers in
Brazil to the use of a single SIM card as operators have increased the offer of “all-net” plans following the successive
reductions of the MTR tariffs, and (3) our strict disconnection policy for inactive customers, which is designed to reduce fee
payments that we must make for each active account; and
a 2.1% decline in the number of mobile customers that subscribe to our postpaid plans to 6.7 million during 2017 from
6.9 million during 2016.
The effects of these declines were partially offset by a 7.5% increase in average monthly net revenue per user, primarily as a result of an
improvement in the profile of our customer base. During 2017, data revenue represented 53.9% of net operating revenue from mobile
telephony services as compared to 47.2% during 2016.
Net Operating Revenue from Interconnection to Our Mobile Network. Mobile interconnection revenue declined by 20.2% in 2017,
primarily as a result of the reduction in MTR tariffs in February 2017.
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Net Operating Revenue from B2B Services
Net operating revenue from B2B services represented 27.3% of our net operating revenue during 2017. Net operating revenue
from B2B services declined by 14.7%, primarily as a result of (1) lower voice traffic, following the natural market trend, (2) the
reduction in MTR tariffs and VC fixed-to-mobile tariffs in February 2017, (3) the slowdown in Brazilian economic activity, which has
led to efforts by corporate and government customers to reduce costs, including telecommunications services costs, and has led to the
downsizing or closing of many of our SME customers, and (4) market perceptions of our company during our RJ proceedings which
has made it difficult for us to enter into new agreements with corporate customers.
As a result of these factors, we experienced a 1.6% decline in the total number of B2B customers to 6.5 million during 2017 from
6.6 million during 2016, principally as a result of a 3.2% decline in fixed line customers, partially offset by a 1.1% increase in mobile
customers.
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, 2017 and 2016.
Third-party services
Depreciation and amortization
Rental and insurance
Personnel
Network maintenance services
Interconnection
Contingencies
Allowance for doubtful accounts
Advertising and publicity
Handsets and other costs
Impairment losses
Taxes and other expenses
Other operating income (expenses), net
Total cost of sales and services
n.m. Not meaningful.
% Change
2017
Year Ended December 31,
2016
(in millions of reais, except percentages)
R$ 6,399
6,311
4,330
2,852
1,540
1,173
1,056
643
449
284
226
559
227
R$ 26,049
R$ 6,221
5,881
4,163
2,791
1,252
778
144
692
414
223
47
345
1,233
R$ 24,184
(2.8)
(6.8)
(3.9)
(2.1)
(18.7)
(33.7)
(86.4)
7.5
(7.9)
(21.4)
(79.4)
(38.3)
n.m
(7.2)
Operating expenses declined by 7.2% in 2017, principally due to:
•
•
•
•
•
a 86.4%, or R$912 million, decline in contingencies;
a 6.8%, or R$429 million, decline in depreciation and amortization costs;
a 33.7%, or R$395 million, decline in interconnection costs;
a 18.7%, or R$289 million, decline in network maintenance services; and
a 38.3%, or R$214 million, decline in taxes and other expenses.
The effects of these factors were partially offset by our incurrence of R$1,233 million in other operating expenses, net during 2017
compared to R$227 million during 2016.
Third-Party Services
Third-party service costs declined by 2.8% in 2017, primarily as a result of lower call center expenses as a result of our adoption
of our new customer care model and lower legal advisory and consulting services expenses as a result of a reduction of judicial
processes. The effects of these factors were partially offset by higher content acquisition costs for our Pay-TV services as a result of the
16.0% increase in the average number of our residential Pay-TV subscribers, an increase in sales commission expenses as a result of an
increase in sales of higher value services, and a reduction in energy costs.
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Depreciation and Amortization
Depreciation and amortization costs declined by 6.8% in 2017, primarily as a result of the growth of increase in the amount of the
property, plant and equipment that has been fully depreciated.
Rental and Insurance
Rental and insurance costs declined by 3.9% in 2017, primarily as a result of (1) an decline in reais of certain rental expenses
denominated in U.S. dollars as a result of the appreciation of real against U.S. dollar during 2017, particularly expenses relating to our
agreements with GlobeNet and our lease of capacity on the SES-6 satellite, and (2) the absence of expenses during 2017 relating to
settlement agreements with other operators we entered into in 2016 related to the leasing of towers and equipment. The effects of these
factors was partially offset by (1) increased tower and equipment leasing costs, and (2) increased vehicles leasing costs as a result of our
absorption of network maintenance operations.
Personnel
Personnel expenses (including employee benefits and social charges and employee and management profit sharing) declined by
2.1% in 2017, primarily as a result of (1) headcount reductions that we implemented in May 2016 and in the fourth quarter of 2016, and
(2) initiatives that that we have implemented to promote greater efficiency and productivity as well as stricter cost controls related in
personnel expenses. The effects of these factors were partially offset by (1) the increase in the number of our employees as a result of
our absorption of network service operations in the state of Rio de Janeiro and in the South, North and Northeast regions in 2016, (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 2016, (3) increased provisions for variable compensation related to the fulfillment of operational, financial and quality
goals established for 2017 under some of our collective bargaining agreements, and (4) our implementation of certain strategic projects
that have resulted in the insourcing of services that used to be provided by third parties in order to improve quality and productivity in
some of our critical processes.
Network Maintenance Services
Network maintenance services costs declined by 18.7% in 2017, primarily as a result of (1) our absorption of network service
operations in the state of Rio de Janeiro and in the South, North and Northeast regions in 2016, as a result of which we no longer incur
costs to third parties for these services, and our focus on conducting more efficient field operations focused on increased productivity
and preventive actions. The effects of this factor were partially offset by our insourcing of technical support call center operations in
2017 and annual readjustments of costs under our contracts.
Interconnection
Interconnection costs declined by 33.7% in 2017, primarily as a result of the declines in MTR tariffs and the TU-RL and TU-RIU
interconnection tariffs that were implemented in February 2017 and February 2016. The effects of these factors were partially offset by
an increase in off-net mobile traffic volume as a result of our introduction of new mobile plans based on the “all-net” model.
Contingencies
In 2016, contingencies included R$858 million related to labor contingencies of Rede Conecta – Serviços de Rede S.A., or Rede
Conecta (which merged into Serede in November 2018).
Allowance for Doubtful Accounts
Allowance for doubtful accounts increased by 7.5% in 2017, primarily as a result of an increase in consumer default rates as a
result of the deterioration Brazilian macroeconomic conditions. During the year ended December 31, 2017, allowance for doubtful
accounts represented 2.9% of our net operating revenue compared to 2.5% in 2016.
Advertising and Publicity
Advertising and publicity expenses declined by 7.9% in 2017, primarily as a result of a decline in the volume of our advertising
campaigns.
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Handsets and Other Costs
Handsets and other costs declined by 21.4% in 2017, primarily due to the lower volume of handset sales.
Impairment Losses
Impairment losses declined by 79.4% in 2017. Impairment losses in 2017 and 2016 consisted of losses on goodwill relating to
Africatel, which is reported as a held-for-sale asset, as a result of our annual impairment testing.
Taxes and Other Expenses
Taxes and other expenses declined by 38.3% in 2017, primarily due to a decrease in other tax expenses, due to a decrease in other
revenues in which other taxes are associated and a decrease in expenses for fines.
Other Operating Expenses, Net
Other operating expenses, net increased to R$1,233 million in 2017 from R$227 million in 2016, primarily as a result of the
effects of non-recurring expenses related to unrecoverable tax, write-off of other assets and other expenses due to the reconciliation of
accounting balances as part of the RJ Proceedings.
Reorganization Items, Net
Reorganization items, net declined by 69.7% to R$2,732 million during 2017 from R$9,006 million during 2016. Reorganization
items, net during 2017 consisted of (1) a R$1,569 million increase of the amount recorded relating to our contingent liabilities owed to
ANATEL to the amount allowed for these claims in the RJ Proceedings, which was greater than their carrying amount prior to the
commencement of the RJ Proceedings, (2) a R$736 million increase of the amount recorded relating to our contingent liabilities to the
amount allowed for these claims in the RJ Proceedings, which was greater than their carrying amount prior to the commencement of the
RJ Proceedings, (3) inflation adjustment of contingencies of R$410 million, and (4) fees and expenses of R$370 million of professional
advisors who are assisting us with the RJ Proceedings. The effects of these expenses were partially offset by our recognition of income
from short-term investments of R$713 million, which were recognized as reorganization items.
Reorganization items, net during 2016 consisted of (1) a R$6,604 million increase of the amount recorded relating to our
contingent liabilities owed to ANATEL to the amount allowed for these claims in the RJ Proceedings, which was greater than their
carrying amount prior to the commencement of the RJ Proceedings, (2) a R$2,350 million increase of the amount recorded relating to
our other contingent liabilities to the amount allowed for these claims in the RJ Proceedings, which was greater than their carrying
amount prior to the commencement of the RJ Proceedings, and (3) fees and expenses of R$253 million of professional advisors who are
assisting us with the RJ Proceedings. The effects of these expenses were partially offset by our recognition of income from short-term
investments of R$202 million, which were recognized as reorganization items.
Operating Loss before Financial Expenses, Net, and Taxes
As a result of the foregoing, the operating loss before financial expenses, net, and taxes of our Telecommunications in Brazil
segment declined by 70.1%, to R$2,697 million during 2017 from R$9,008 million during 2016. As a percentage of net operating
revenue, the operating loss before financial expenses, net, and taxes of our Telecommunications in Brazil segment declined to 11.4%
during 2017 from 35.8% during 2016.
Operating expenses of our other operations declined by 68.5% to R$303 million during 2017 from R$884 million during 2016,
principally as a result of our disposition of our interest in MTC in January 2017. The operating loss before financial expenses, net, and
taxes of our other operations increased by 37.5%, to R$70 million during 2017 from R$51 million during 2016. As a percentage of net
operating revenue, the operating loss before financial expenses, net, and taxes of our other operations increased to 30.0% during 2017
from 6.1% during 2016.
Our consolidated operating loss before financial expenses, net, and taxes declined by 69.5%, to R$2,767 million during 2017 from
R$9,059 million during 2016. As a percentage of net operating revenue, operating loss before financial expenses, net, and taxes
declined to 11.6% during 2017 from 34.8% during 2016.
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Financial income increased by 32.4% to R$1,550 million during 2017 from R$1,171 million during 2016, primarily due to (1) a
70.7% increase in interest on other assets to R$1,050 million during 2017 from R$615 million during 2016, principally as a result of
interest on judicial deposits and monetary variation on others assets and (2) our recording no gain on exchange rate differences on
translating foreign short-term investments during 2017, as part of the recognition as reorganization items, net compared to a
R$135 million loss during 2016. The effects of these factors was partially offset by (1) our recording no income from short-term
investments during 2017, as part of the recognition as reorganization items, net compared to income of R$112 million during 2016, and
(2) a 13.5% decline in other income to R$500 million during 2017 from R$578 million during 2016.
Financial Expenses
Financial expenses declined by 43.0% to R$3,162 million during 2017 from R$5,546 million during 2016, primarily due to the
elimination of our borrowing and financing costs in 2017 as a result of the commencement of the RJ Proceedings in June 2016,
compared to our borrowing and financing costs of R$2,746 million during 2016, the effects of which were partially offset by a 12.9%
increase in other charges to R$3,162 million during 2017 from R$2,800 million during 2016.
Other charges increased primarily as a result of (1) a 174.3% increase in interest on other liabilities to R$1,641 million during
2017 from R$598 million during 2016, principally due to the commencement of our participation in the Tax Recovery Program
(REFIS) in May 2017, and (2) a 158.6% increase in other expenses to R$450 million during 2017 from R$174 million during 2016. The
effects of these factors was partially offset by (1) a 75.5% decline in loss on available for sale financial assets to R$267 million during
2017 from R$1,090 million during 2016, principally as a result of the reduction of the loss recorded based on our revision of the
recoverable amount of dividends receivable from Unitel, the fair value of the cash investment in Unitel and exchange losses rate related
to the depreciation of the Angolan Kwanza against the U.S. dollar and the real to US$39 million during 2017 from US$242 million
during 2016, and (2) a 24.6% decline in tax on financial transactions and bank fees to R$512 million during 2017 from R$679 million
during 2016, principally due to a reduction in these types of expenses as a result of the RJ Proceedings.
Income Tax and Social Contribution
The composite corporate statutory income tax and social contribution rate was 34% in each of 2017 and 2016. We recorded an
income tax and social contribution benefits of R$351 million during 2017 and an income tax and social contribution expenses of
R$2,245 million during 2016. The effective tax rate applicable to our loss before taxes was 8.0% during 2017 and (16.7)% during 2016.
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.
Year Ended
December 31,
Composite corporate statutory income tax and social contribution rate
Valuation allowance
Effects of foreign rate differential
Tax effects of non-deductible expenses
Tax effects of tax-exempt income
Tax incentives
Tax amnesty program
Other
Effective rate
2017
34.0%
2016
34.0%
(30.1)
(0.1)
(21.5)
0.9
0.2
—
0.0
8.0% (16.7)%
(25.9)
(0.5)
(2.1)
8.5
0.3
(6.3)
0.0
The effective tax rate applicable to our loss before taxes was 8.0% in 2017, resulting in a tax benefit, primarily as a result of
(1) the tax effects of valuation allowance and valuation allowance, which resulted in a decline in our tax assets by R$1,135 million, that
were recognized for the companies that as at December 31, 2017, 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 25.9%, (effectively
reducing our tax benefit) and (2) the tax effects of amnesty program which reduced the effective tax rate applicable to our loss before
taxes by 6.3% (effectively reducing our tax benefit). The effects which were partially offset by the tax effects of tax exempt income,
which increased the effective tax rate applicable to our loss before taxes by 8.5% (effectively increasing our tax benefit).
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The effective tax rate applicable to our loss before taxes was (16.7)% in 2016, resulting in a tax expense despite our incurring a
loss before taxes, primarily as a result of (1) the tax effects of valuation allowance, which resulted in a decline in our tax assets by
R$4,050 million that were recognized for the companies that, as at December 31, 2016, 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
30.1% (effectively increasing our tax expense), and (2) the tax effects of non-deductible expenses, primarily as a result of the effects of
the adjustments of debt obligations due to the filing of the judicial reorganization petitions and based on the RJ Plan, which reduced the
effective tax rate applicable to our loss before taxes by 21.5% (effectively increasing our tax expense).
Net Loss
As a result of the foregoing, our consolidated net loss declined by 74.3% to R$4,027 million during 2017 from R$15,680 million
during 2016. As a percentage of net operating revenue, our net loss declined to 16.9% during 2017 from 60.3% during 2016.
Liquidity and Capital Resources
Our principal cash requirements have historically consisted of the following:
•
•
•
•
working capital requirements;
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.
As a result of the commencement of the RJ Proceedings in June 2016, we ceased to pay principal and interest on our loans and
financings subsequent to the date of the commencement of the RJ Proceedings. By operation of the RJ Plan and the Brazilian
Confirmation Order, provided that the Brazilian Confirmation Order is not overturned or altered as a result of the pending appeals filed
against it, our loans and financings were novated and discharged under Brazilian law and creditors under our loans and financings are
entitled only to receive the recoveries set forth in the RJ Plan as recoveries for their claims in accordance with the terms and conditions
of the RJ Plan.
Under our by-laws, unless our board of directors deems it inconsistent with our financial position, payment of dividends is
mandatory. Notwithstanding the requirements of our by-laws, under the RJ Plan, we are prohibited from declaring or paying dividends,
interest on shareholders’ equity or other forms of return on capital or making any other payment or distribution on or related to their
shares (including any payment related to a merger or consolidation) until the sixth anniversary of the date of the Judicial Ratification of
the RJ Plan. After the sixth anniversary of the date of the Judicial Ratification of the RJ Plan, Oi and the other RJ Debtors will be
permitted to declare or pay dividends, interest on shareholders’ equity or other forms of return on capital or make any other payment or
distribution on or related to their shares (including any payment related to a merger or consolidation) if Oi meets a certain financial
ratio, as described under “Item 8. Financial Information—Dividends and Dividend Policy.” There shall not be any restriction to the
distribution of dividends under the RJ Plan after the full payment of the Financial Credits (as defined in the RJ Plan). The restrictions of
the payment of dividends and other distributions described in this paragraph are subject to certain exceptions, as described under “Item
8. Financial Information—Dividends and Dividend Policy.”
Our principal sources of liquidity have traditionally consisted of the following:
•
•
•
cash flows from operating activities;
short-term and long-term loans; and
sales of debt securities in domestic and international capital markets.
As a result of the commencement of our RJ Proceedings in June 2016, our access to short-term and long-term loans and our ability
to sell debt securities in domestic and international capital markets has been substantially curtailed.
During the years ended December 31, 2018, 2017 and 2016, our operations generated cash flows of R$2,863 million,
R$4,402 million and R$3,100 million, respectively. We used R$6,224 million of our cash to repay loans and financings in 2016 prior to
the commencement of the RJ Proceedings. In addition, our capital expenditures during the years ended December 31, 2018, 2017 and
2016 were R$5,246 million, R$4,344 million and R$3,264 million, respectively. We believe that our continued program of capital
expenditures is necessary in order for us to operate in the competitive environment for telecommunications services in Brazil. As our
cash flow generated from our operations has not been sufficient to meet the demands of our investing and financing activities, our
balances of cash and cash equivalents have declined as of December 31, 2018, 2017 and 2016.
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As of December 31, 2018, our consolidated cash and cash equivalents and cash investments amounted to R$4,624 million. As of
December 31, 2018, we had working capital (consisting of current assets less current liabilities, excluding assets held-for-sale and
liabilities of assets-held-for-sale) of R$6,677 million.
We anticipate that we will be required to spend approximately R$4,461 million to meet our long-term contractual obligations and
commitments in 2020 and 2021. We expect to use our cash flows from operating activities and our cash and cash equivalents and short-
term cash investments to fund our capital expenditures and debt service obligations.
The RJ Plan permits us to seek to raise up to R$2.5 billion in the capital markets and seek to borrow up to R$2 billion under new
export credit facilities. In the absence of funds obtained in the capital markets or under new credit export facilities, we may have
insufficient funds to implement our capital expenditure program and modernize our infrastructure, which could result in a significant
deterioration of our ability to generate cash flows from operating activities.
Our audited consolidated financial statements have been prepared assuming that we will continue as a going concern. Our
management’s assessment of our ability to continue as a going concern is discussed in note 2 to our audited consolidated financial
statements. As a result the completion on January 25, 2019 of the capital increase that was mandated by the RJ Plan through the
issuance of 3,225,806,451 Common Shares for an aggregate subscription price of R$4,000 million in our preemptive offering, our
management believes that as of the date of this annual report, we have sufficient resources to continue to operate for the 12 months
following the date of this annual report.
Cash Flow
The following table sets forth certain information about our consolidated cash flows for the years ended December 31, 2018, 2017
and 2016.
Net cash generated (used) in operating activities
Net cash (used) generated in investing activities
Net cash (used) generated in financing activities
Foreign exchange differences on cash equivalents
Net decrease in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
Cash and cash equivalents at the end of the year
2018
R$ 2,863
Year ended December 31,
2017
(in millions of reais)
R$ 4,402
(4,917)
(424)
1
(2,477)
6,863
R$ 4,385
(4,422)
(692)
11
(701)
7,563
R$ 6,863
2016
R$ 3,100
(3,917)
(6,119)
(398)
(7,335)
14,898
R$ 7,563
Our primary source of operating funds has historically been cash flow generated from our operations and 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. Our access to new funds to finance our investments in property, plant and equipment in the form of bank loans, vendor
financing, capital markets and other forms of financing has been substantially eliminated following the commencement of our RJ
proceedings in June 2016. During 2016, we used a substantial portion of our cash and cash equivalents to pay indebtedness as it
matured prior to the commencement of our RJ proceedings. As our cash flow generated from our operations has not been sufficient to
meet the demands of our investing and financing activities, our balances of cash and cash equivalents have declined as of December 31,
2016, 2017 and 2018.
2018 Cash Flows
Cash Flows from Operating Activities
Net cash provided by operating activities was R$2,863 million during 2018 compared to net income of R$27,394 million during
2018, primarily as a result of the effects of our incurrence of non-cash gains from reorganization items, net of R$31,581 million during
2018, primarily consisting of (1) adjustment to fair value of our loans and financings of R$13,929 million, (2) a gain on our
restructuring of our loans and financings, trade payables owing to ANATEL-AGU and other trade payables of R$12,881, and (3) the
adjustment to present value of our trade payables (including trade payables owing to ANATEL-AGU) of R$5,577 million.
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The effects of this factor were partially offset by (1) the effects of our incurrence of non-cash depreciation and amortization
expenses of R$5,953 million during 2018, (2) our incurrence of non-cash losses on financial instruments of R$3,415 million during
2018, primarily as a result of our recording R$16,450 million of current and non-current loans and financings on our balance sheet as of
the Brazilian Confirmation Date that had been classified as liabilities subject to compromise as of December 31, 2017 and the 19.8%
depreciation of the real against the U.S. dollar during the period between the Brazilian Confirmation Date and December 31, 2018, and
(3) the effects of our incurrence of non-cash provisions for bad debt of R$1,224 million during 2018, primarily as a result of our
revision of the assumptions that we use in determining our provision for bad debt.
Cash Flows from Investing Activities
Net cash used by investing activities was R$4,917 million during 2018, primarily consisting of investments of R$5,246 million in
purchases of property, plant and equipment and intangible assets, primarily related to the expansion of our data communications
network and IT capacity to increase the quality and capacity of our network in order to promote more efficient operational performance
and improvements in service quality and customer experience.
Cash Flows from Financing Activities
Financing activities used net cash of R$424 million during 2018, primarily consisting of cash used (1) to repay principal of
R$162 million related to the mediation of payments of our borrowings and financing as a result of the RJ Proceedings, and (2) to make
installment payments under our tax refinancing plan in the aggregate amount of R$265 million.
2017 Cash Flows
Cash Flows from Operating Activities
Net cash provided by operating activities was R$4,402 million during 2017 compared to net loss of R$4,028 million during 2017,
primarily as a result of:
•
•
the effects of our incurrence of non-cash depreciation and amortization expenses of R$5,881 million during 2017; and
the effects of our incurrence of non-cash provision for reorganization items, net of R$2,371 million during 2017, primarily as
a result of (1) a R$1,569 million increase of the amount recorded relating to our contingent liabilities owed to ANATEL to
the amount allowed for these claims in the RJ Proceedings, which was greater than their carrying amount prior to the
commencement of the RJ Proceedings (2) a R$1,146 million increase of the amount recorded relating to our contingent
liabilities to the amount allowed for these claims in the RJ Proceedings, which was greater than their carrying amount prior
to the commencement of the RJ Proceedings, and (3) fees and expenses of R$370 million of professional advisors who are
assisting us with the RJ Proceedings.
Cash Flows from Investing Activities
Net cash used by investing activities was R$4,422 million during 2017. During 2017, investing activities which used cash
primarily consisted of investments of R$4,344 million in purchases of property, plant and equipment and intangible assets, primarily
related to the expansion of our data communications network and IT capacity to increase the quality and capacity of our network in
order to promote more efficient operational performance and improvements in service quality and customer experience.
Cash Flows from Financing Activities
Financing activities used net cash of R$692 million during 2017. During 2017, we used cash principally (1) to purchase shares the
50% of the shares of Rio Alto that we did not own for R$300 million, (2) to make installment payments under the tax refinancing plan
in the aggregate amount of R$227 million, and (3) to make installment payments relating to our permits and concessions in the
aggregate amount of R$104 million.
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Net cash provided by operating activities was R$3,100 million during 2016 compared to net loss of R$15,680 million during 2016,
primarily as a result of:
•
•
•
•
•
the effects of our incurrence of non-cash provision for reorganization items, net of R$9,006 million during 2016, primarily as
a result of (1) a R$6,600 million increase of the amount recorded relating to our contingent liabilities owed to ANATEL to
the amount allowed for these claims in the RJ Proceedings, which was greater than their carrying amount prior to the
commencement of the RJ Proceedings, (2) a R$2,350 million increase of the amount recorded relating to our contingent
liabilities to the amount allowed for these claims in the RJ Proceedings, which was greater than their carrying amount prior
to the commencement of the RJ Proceedings, and (2) fees and expenses of R$253 million of professional advisors who are
assisting us with the RJ Proceedings;
the effects of our incurrence of non-cash provision for contingencies of R$1,056 million, primarily as a result of an increase
of the amount recorded relating to our other contingent liabilities;
the effects of our incurrence of non-cash depreciation and amortization expenses of R$6,311 million during 2016;
the effects of our incurrence of non-cash deferred income tax expenses of R$1,532 million during 2016, primarily as a result
of valuation allowance of deferred taxes, net of the increase in deferred tax recognized; and
the effects of our incurrence of non-cash losses on derivative financial instruments of R$5,150 million during 2016 prior to
our reversal of our derivative financial instruments during the second and third quarters of 2016, primarily as a result of the
17.8% appreciation of the real against the U.S. dollar and the 16.7% appreciation of the real against the Euro during the first
half of 2016.
The effects of these factors were partially offset by the effects of our incurrence of non-cash gains on financial instruments of
R$5,343 million during 2016, primarily as a result of the 17.8% appreciation of the real against the U.S. dollar and the 16.7%
appreciation of the real against the Euro during the first half of 2016.
Cash Flows from Investing Activities
During 2016, investing activities of our continuing operations which used cash primarily consisted of (1) investments of
R$3,264 million in purchases of property, plant and equipment and intangible assets, primarily related to the expansion of our data
communications network and IT capacity to increase the quality and capacity of our network in order to promote more efficient
operational performance and improvements in service quality and customer experience, and (2) net judicial deposits (consisting of
deposits less redemptions) of R$660 million, primarily related to provisions for labor, taxes and civil contingencies.
Cash Flows from Financing Activities
During 2016, we used cash principally (1) to repay R$5,845 million principal amount of our outstanding loans and financings, net
of derivatives financial instruments, consisting primarily of (i) a revolving credit facility in the aggregate amount of US$700 million,
(ii) the PTIF 5.625% Notes due 2016 in the aggregate amount of €532 million, (iii) an export credit facility guaranteed by EKN in the
aggregate amount of US$62 million (iv) an export credit facility with China Development Bank in the aggregate amount of
US$27 million, (v) the 1st and 2nd Series of the 9th Issuance of Debentures and the 2nd Series of the 5th Issuance of Debentures in an
aggregate amount of R$59 million (vi) an aggregate of R$290 million under credit facilities with BNDES, (2) to make installment
payments relating to our permits and concessions in the aggregate amount of R$205 million, and (3) to make installment payments
under the tax refinancing plan in the aggregate amount of R$94 million.
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Contractual Commitments
The following table summarizes our significant contractual obligations and commitments as of December 31, 2018:
Loans and financings(1)
Pension plan payables(2)
Other payables(3)
Unconditional purchase obligations(4)
Concession fees(5)
Usage rights(6)
Payments Due by Period
One to
Three
Years
R$2,340
—
1,591
343
187
—
R$4,461
Three to
Five
Years
(in millions of reais)
R$4,405
402
8
—
210
—
R$5,025
More than
Five Years
R$39,631
803
20,052
—
496
—
R$60,982
Less than
One Year
R$ 961
—
582
1,634
172
86
R$3,435
Total
R$47,337
1,205
21,927
1,977
1,065
—
R$73,903
(1)
Includes estimated future payments of interest on our loans and financings, calculated based on interest rates and foreign exchange rates applicable at December 31,
2018 and assuming that all amortization payments and payments at maturity on our loans and financings will be made on their scheduled payment dates and that we
elect to pay cash interest for all applicable periods under the PIK Toggle Notes.
(2) Cash flow estimated in connection with the RJ Plan.
(3) Cash flow estimated in connection with the RJ Plan. Includes the reimbursement to us of judicial deposit amounts in excess of the amount paid to the prepetition
creditors.
(4) 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.
(5) 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, 2018.
(6) Consists of payments due to ANATEL for radio frequency licenses. Includes accrued and unpaid interest as of December 31, 2018.
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$5,039 million as of December 31, 2018. See “Item
8. Financial Information—Legal Proceedings” and note 19 to our consolidated financial statements included in this annual report.
Indebtedness
On a consolidated basis as of December 31, 2018, our U.S. dollar-denominated indebtedness was R$8,618 million, our
real-denominated indebtedness was R$7,633 million, and our Euro-denominated indebtedness was R$199 million, in each case after
giving effect to the fair value adjustment of our indebtedness. As of December 31, 2018, our U.S. dollar-denominated indebtedness bore
interest at an average rate of 5.5% per annum, our real-denominated indebtedness bore interest at an average rate of 6.3% per annum,
and our Euro-denominated indebtedness does not bear interest. As of December 31, 2018, 46.0% of our indebtedness, after giving effect
to the fair value adjustment of our indebtedness, debt bore interest at floating rates.
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Short-Term Indebtedness
As of December 31, 2018, our short-term debt, consisting of the current portion of long-term borrowings and financings, was
R$673 million, after giving effect to the fair value adjustment of our indebtedness. 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 long-term borrowings and financings are:
•
•
•
•
•
•
fixed-rate notes issued in the international market;
debentures issued in the Brazilian market;
credit facilities with international export credit agencies;
credit facilities with BNDES; and
unsecured lines of credit with Brazilian and international financial institutions;
default recoveries owed to holders of some of our novated debt obligations.
Some of our debt instruments require that Oi or Telemar comply with financial covenants on a quarterly basis. As of
December 31, 2018, we were in compliance with these financial covenants.
The table below sets forth our long-term loans and financings as of December 31, 2018.
PIK Toggle Notes
Oi 12th issuance of debentures
Telemar 6th issuance of debentures
Restructured Export Credit Agreements(1)
Restructured BNDES credit agreements
Restructured Brazilian credit agreements and CRIs
Non-Qualified Credit Agreement
Local currency financial institution
Default Recovery in Reais
Default Recovery in Foreign Currency
Total gross loans and financing
Incurred debt issuance costs
Fair value adjustment
Short-term portion
Long-term indebtedness
(1) Represents four Restructured Export Credit Agreements.
112
Final
Maturity
July 2025
February 2035
February 2035
February 2035
February 2033
February 2035
February 2030
December 2033
February 2042
February 2042
Outstanding
Amount
(in millions
of reais)
R$7,068
4,358
2,430
6,353
3,616
1,852
326
54
207
4,125
30,391
(12)
(13,929)
(673)
R$15,777
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The following discussion briefly describes certain of our significant outstanding indebtedness.
PIK Toggle Notes
The PIK Toggle Notes are senior unsecured obligations of Oi denominated in U.S. dollars that mature in July 2025, with principal
amount to be fully paid at maturity. The PIK Toggle Notes are guaranteed, jointly and severally, by each of Telemar, Oi Mobile, Oi
Coop and PTIF. The PIK Toggle Notes accrued interests from February 5, 2018 until February 5, 2019, the first interest payment date,
at a fixed rate of 10.0% per annum payable in cash. Interest on the New Notes will accrue:
•
•
from February 5, 2019 until August 2021, at either (at the sole discretion of Oi): (1) a fixed rate of 10.0% per annum payable
in cash on a semi-annual basis, or (2) a fixed rate of 12.0% per annum, of which 8.0% shall be payable in cash and 4.0%
shall be payable by either increasing the principal amount of the outstanding New Notes or by issuing paid-in-kind notes, at
the sole discretion of Oi, in each case, on a semi-annual basis; and
thereafter, at a fixed rate of 10.0% per annum payable in cash on a semi-annual basis.
Oi 12th Issuance of Debentures
Oi has issued its 12th issuance of simple, unsecured, non-convertible debentures. These debentures are denominated in reais. The
principal amount of these debentures will be paid in 24 semi-annual installments beginning in August 2023, in the amount of 2.0% of
the outstanding principal for the first 10 semi-annual installments, 5.7% of the outstanding principal for the next 13 semi-annual
installments and the remainder at maturity in February 2035. The principal amount of these debentures will accrue interest at the rate of
80% of the CDI rate. Interest will be capitalized to increase the principal balance under these debentures on an annual basis until
February 2023, and will be paid semi-annually in cash from August 2023 through the final maturity. Oi’s obligations under these
debentures are guaranteed, jointly and severally, by each of Telemar, Oi Mobile, Oi Coop and PTIF.
Telemar 6th Issuance of Debentures
Telemar has issued its 6th issuance, simple, unsecured, non-convertible debentures. These debentures are denominated in reais.
The principal amount of these debentures will be paid in 24 semi-annual installments beginning in August 2023, in the amount of 2.0%
of the outstanding principal for the first 10 semi-annual installments, 5.7% of the outstanding principal for the next 13 semi-annual
installments and the remainder at maturity in February 2035. The principal amount of these debentures will accrue interest at the rate of
80% of the CDI rate. Interest will be capitalized to increase the principal balance under these debentures on an annual basis until
February 2023, and will be paid semi-annually in cash from August 2023 through the final maturity. Telemar’s obligations under these
debentures are guaranteed, jointly and severally, by each of Oi, Telemar, Oi Mobile, Oi Coop and PTIF.
Restructured Export Credit Agreements
Oi has entered into one export credit agreement and Telemar has entered into three separate export credit agreements, which we
refer to collectively as the Restructured Export Credit Agreements, documenting the recoveries due to the lenders under our novated
export credit agreements. The obligations under the Restructured Export Credit Agreements are senior unsecured obligations of Oi and
Telemar, respectively, denominated in U.S. dollars that mature in February 2035. Principal under each of the Restructured Export
Credit Agreements is payable in 24 semi-annual installments beginning in the August 2023, in the amount of 2.0% of the principal
amount for the first 10 semi-annual installments, 5.7% of the principal amount for the next 13 semi-annual installments and the
remainder at maturity. Principal under each of the Restructured Export Credit Agreements accrues interest at the rate of 1.75% per
annum. Interest will be capitalized on an annual basis until February 2023, and will be paid semi-annually in cash from August 2023
through the final maturity. Oi’s obligations under its Restructured Export Credit Agreement are guaranteed, jointly and severally, by
each of Telemar and Oi Mobile, and Telemar’s obligations under its Restructured Export Credit Agreements are guaranteed, jointly and
severally, by each of Oi and Oi Mobile.
Restructured BNDES Credit Agreements
By operation of the RJ Plan and the Brazilian Confirmation Order, the credit agreements between BNDES and each of Oi,
Telemar and Oi Mobile were novated and BNDES is entitled to receive as recovery for its claims under these credit facilities payment
of 100% of the principal amount of the recognized claims in reais, adjusted by the interest/inflation adjustment rate. The principal
amount of these claims will be paid in 108 monthly installments beginning in March 2024, in the amount of 0.33% of the outstanding
principal for the first 60 monthly installments, 1.67% of the outstanding principal for the next 47 monthly installments and the
remainder at maturity in February 2033. The principal amount of these claims accrue interest at the TJLP rate plus 2.946372%per
annum. Interest will be capitalized to increase the principal balance under these claims on an annual basis until February 2022, and will
be paid monthly in cash thereafter through the final maturity.
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Restructured Brazilian Credit Agreements and CRIs
By operation of the RJ Plan and the Brazilian Confirmation Order, provided that Telemar’s unsecured line of credit and our
obligations under CRIs backed by receivables representing all payments under leases entered into by Oi and Telemar of real estate
owned by Copart 4 and Copart 5 were novated and the creditors under this unsecured line of credit and the holders of the CRIs are
entitled to receive as recovery for their claims under these instruments payment of 100% of the principal amount of the recognized
claims in reais, payable in 24 semi-annual installments beginning in August 2023, in the amount of 2.0% of the recognized claims for
the first 10 semi-annual installments, 5.7% of the recognized claims for the next 13 semi-annual installments and the remainder at
maturity in February 2035. The recognized amount of these claims accrue interest at the rate of 80% of the CDI rate. Interest will be
capitalized to increase the recognized amount of these claims on an annual basis until February 2023, and will be paid semi-annually in
cash from August 2023 through the final maturity.
Non-Qualified Credit Agreement
The Non-Qualified Credit Agreement is a senior unsecured obligation of Oi. The obligations of Oi under the Non-Qualified Credit
Agreement are guaranteed, jointly and severally, by each of Telemar, Oi Mobile, Oi Coop, and PTIF. Principal under the Non-Qualified
Credit Agreement will be paid in 12 semiannual installments beginning in August 2024 in the amount of 4% of the outstanding
principal for the first six semi-annual installments, 12.66% of the outstanding principal for the next five semi-annual installments and
the remainder at maturity in February 2030. The Non-Qualified Credit Agreement accrues interest at the rate of 6% per annum. Interest
will be capitalized to increase the principal balance under the Non-Qualified Credit Agreement on an annual basis until February 2023,
and will be paid together with principal beginning in August 2024.
Default Recovery
Under the RJ Plan, certain of our creditors were entitled to elect forms of recovery other than the Default Recovery between
February 5, 2018 and February 26, 2018. Creditors entitled to make these elections that elected the Default Recovery or failed to make
the election are entitled to the Default Recovery with respect to their recognized claims. Holders of Defaulted Bonds that were not
eligible to make an election with respect to the form of recovery on their claims are entitled to the Default Recovery with respect to
their recognized claims.
Under the RJ Plan, the Default Recovery consists of an unsecured right to receive payment of 100% of the principal amount of the
recognized claims represented by:
• Defaulted Bonds issued by Oi or Oi Coop in five annual, equal installments, commencing on July 22, 2038;
• Defaulted Bonds issued by PTIF in five annual, equal installments, commencing on June 19, 2038; and
• Credits the holders of which were entitled to make recovery elections (other than the Defaulted Bonds), in five annual, equal
installments, commencing on February 5, 2038, which, in each case, we refer to as the Default Recovery Entitlement.
A holder’s Default Recovery Entitlement is denominated in the currency of the recognized claim with respect to which the Default
Recovery Entitlement relates. The Default Recovery Entitlement with respect to Defaulted Bonds denominated in U.S. dollars or euros,
as well as the Default Recovery Entitlement for other credits denominated in U.S. dollars, will not bear any interest. The Default
Recovery Entitlement with respect to Oi’s 9.75% senior notes due 2016 and other credits denominated in reais will bear interest at the
Brazilian TR rate (payable together with the last installment of principal), which will accrue as additional principal amount of the
Default Recovery Entitlement until July 22, 2038 (in the case of Oi’s 9.75% senior notes due 2016) or February 5, 2038 (with respect to
other credits denominated in reais) and thereafter be payable together with payments of principal amount of the Default Recovery
Entitlement. The principal and accrued interest with respect to the Default Recovery Entitlement may be redeemed at any time and from
time to time, in whole or in part, by the RJ Debtors at a redemption price of 15% of the aggregate principal amount of the Default
Recovery Entitlement.
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
Oi’s board of directors (conselho de administração) and Oi’s board of executive officers (diretoria) are responsible for operating
our business.
Board of Directors
General
Oi’s board of directors is a decision-making body responsible for, among other things, determining policies and guidelines for our
business and Oi’s wholly-owned subsidiaries and controlled companies. Oi’s board of directors also supervises Oi’s 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 Corporate Law, Oi’s board of directors is also responsible for hiring independent accountants.
Oi’s by-laws provide for a board of directors of up to 11 members with no alternate members. Members who are absent at
meetings will be entitled to appoint a substitute among the present members to vote in their stead. Pursuant to Oi’s by-laws, at least
20% of the members of the Oi’s board of directors must be independent as defined in the listing regulations of the Novo Mercado
segment of the B3 and must be expressly declared as independent in the shareholders’ meeting that elects them, being also considered
as independent the members elected as per article 141, paragraphs 4 and 5 of the Brazilian Corporate Law. All of the members of Oi’s
board of directors are independent.
Directors are elected at general meetings of shareholders for two-year terms and are eligible for reelection. Generally, members of
Oi’s board of directors are subject to removal at any time with or without cause at a general meeting of shareholders. The RJ Plan,
however, provides certain corporate governance rules that apply to Oi’s board of directors during the effectiveness of the RJ Plan,
superseding the provisions of Oi’s by-laws. As provided in the RJ Plan, until the expiration of the term of Oi’s current board of
directors, which will occur on September 17, 2020, the members of Oi’s board of directors may not be removed from office, except due
to gross mistake, willful misconduct, gross negligence, abuse of term of office or violation of fiduciary duties in accordance with
applicable law. Following the expiration of the term of Oi’s current board of directors, the election of subsequent boards of directors
will follow the rules established by Oi’s by-laws and the Brazilian Corporate Law. Oi’s by-laws do not contain any citizenship or
residency requirements for members of Oi’s board of directors. However, a member’s tenure is conditioned on 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 term of at least three years after the end of such member’s term of
office.
Oi’s board of directors is presided over by the chairman of the board of directors and, in his or her absence, on an interim basis, by
the vice-chairman of the board of directors and, in his or her absence, on an interim basis, by another member appointed by the
chairman or, if no such member has been appointed, by another member appointed by the other members in attendance. Pursuant to
Oi’s by-laws, the chairman and vice-chairman of Oi’s board of directors are elected by the members of the Oi’s board of directors
during their first meeting following their election. Oi’s by-laws provide that the positions of chairman of Oi’s board of directors and
Oi’s chief executive officer or principal executive may not be held by the same person.
The following table sets forth certain information with respect to the current members of Oi’s board of directors.
Name
Eleazar de Carvalho Filho
Marcos Grodetzky
Henrique José Fernandes Luz
José Mauro Mettrau Carneiro da Cunha
Marcos Bastos Rocha
Maria Helena dos Santos Fernandes de Santana
Paulino do Rego Barros Jr.
Ricardo Reisen de Pinho
Rodrigo Modesto de Abreu
Wallim Cruz de Vasconcellos Junior
Roger Solé Rafols
Position
Chairman
Vice-Chairman
Director
Director
Director
Director
Director
Director
Director
Director
Director
Member Since
January 2018
January 2018
September 2018
February 2009
January 2018
September 2018
September 2018
August 2016
September 2018
September 2018
December 2018 (1)
Age
61
62
63
69
54
59
62
58
49
61
44
(1) Mr. Roger Solé Rafols was nominated to serve on Oi’s board of directors at a meeting of Oi’s board of directors held on October 4, 2018, in accordance with
Article 150 of the Brazilian Corporate Law and pursuant to Clauses 9.3 and 9.6 of the RJ Plan. Mr. Solé’s nominated became effective on December 5, 2019, upon
ANATEL’s approval. Mr. Solé’s election was ratified by the extraordinary shareholders’ meeting held on March 19, 2019.
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We summarize below the business experience, areas of expertise and principal outside business interests of Oi’s directors.
Directors
Eleazar de Carvalho Filho. Mr. Carvalho has served as the chairman of Oi’s board of directors since September 2018 and a
member of Oi’s board of directors since January 2018. He currently works at Virtus BR Partners, where he is a founding partner.
Mr. Carvalho also has served as a member of the board of directors at Brookfield Partners Renewables L.P., TechnipFMC and
Companhia Brasileira de Distribuição (Grupo Pão de Açucar) / Cnova N.V.). He is also chairman of the board of trustees of the
Brazilian Symphony Orchestra Foundation. Previously, Mr. Carvalho was CEO of Unibanco Banco de Investimento, BNDES and UBS
Brasil. He was head of the corporate finance division of Banco Garantia in Rio de Janeiro, director and treasurer of Alcoa Alumínio and
director of the international area of Crefisul (Citigroup). Mr. Carvalho has extensive experience as a director of large companies listed
in Brazil and abroad. He was a member of the boards of directors of Tele Norte Leste Participações S.A, Petrobras, Companhia Vale do
Rio Doce, Eletrobrás, Alpargatas, among others and also President of BHP Billiton Brasil. He holds a bachelor’s degree in economics
from New York University and a master’s degree in international relations from Johns Hopkins University.
Marcos Grodetzky. Mr. Grodetzky has served as the vice-chairman of Oi’s board of directors since September 2018 and a member
of Oi’s board of directors since January 2018. Previously, he served as an alternate member of Oi’s board of directors from September
2015 until July 2016 and as a member of Oi’s board of directors from July 2016 until September 2016. Currently, he is an independent
member of the board of directors of Constellation Oil Services, Burger King Brasil, Vicunha Aços and Elizabeth S.A. Indústria Textil.
He is the founding partner of Mediator Assessoria Empresarial, engaged in financial advisory and mediation. 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 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.
Henrique José Fernandes Luz. Mr. Fernandes Luz has served as a member of Oi’s board of directors since September 2018. He
has been a member of the board of directors of the Maringá Group and the consulting board of Racional Engenharia since April 2018.
He currently serves as chairman of the board of the Brazilian Institute of Corporate Governance (Instituto Brasileiro de Governança
Corporativa – IBGC). He was a partner of PricewaterhouseCooper Auditores Independentes from 1988 to 2018, having previously
worked various positions in that firm since 1975. He holds a degree in Accounting from Universidade Candido Mendes in Rio de
Janeiro and attended various executive programs at Harvard, University of Virginia, London Business School, University of Buenos
Aires and Singularity University. He also serves as a vice chairman of the board of IBEF – Instituto Brasileiro de Executivos de
Finanças and of The Dorina Nowill Foundation for the Blind, and as board member of The National Children and Youth Book
Foundation and of The São Paulo and Rio de Janeiro Museums of Modern Art.
José Mauro Mettrau Carneiro da Cunha. Mr. Cunha has served as a member of Oi’s board of directors since February 2009,
having served as its chairman until September 2018. From January 2013 until June 2013, Mr. Cunha served as Oi’s interim chief
executive officer, during which time he resigned as chairman and member of Oi’s board of directors. He resumed his position as Oi’s
chairman and a member of Oi’s board of directors in June 2013. Mr. Cunha has also served as chairman of the board of directors of
Dommo Empreendimentos Imobiliários S.A. from 2007 until December 2016. He previously served as chairman of the board of
directors of (1) TNL from April 1999 until March 2003 and from April 2007 until February 2012, where he also served as an alternate
director in 2006; (2) Telemar from April 2007 until April 2012, where he served as a member of the board of directors from April 1999
until May 2012; (3) TNL PCS from April 2007 until April 2012; (4) Tele Norte Celular Participações S.A. from April 2008 until
February 2012; and (5) 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 the 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 S.A. from April 2007 to March 2011, Braskem S.A. from July 2007 to April 2010, Banco do Estado do Espírito
Santo S.A. 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, 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 Alberto Luiz Coimbra de Pós-Graduação (COPPE) at the 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.
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Marcos Bastos Rocha. Mr. Rocha has served as a member of Oi’s board of directors since January 2018. He has been a member of
the board of directors of IRB Brasil RE since March 2019, a member of the board of directors of BC2 Construtora since April 2016, a
member of the board of directors of Brazil Fast Food Corporation since 2009, a senior partner at DealMaker since July 2015 and a
non-executive senior advisor at Roland Berger Strategy Consultants since September 2015. Between 2010 and 2015, Mr. Rocha was the
vice president of finance and administration at Invepar – Investimentos e Participações em Infraestrutura and a member of the boards of
directors of the companies in its portfolio. He was a member of the fiscal council of Abril Educação from 2012 to 2015. Between 2008
and 2009, Mr. Rocha was the CFO, investor relations officer, CIO, shared services officer and human resources officer at Globex
Utilidades. Previously, he held the following positions: general executive officer at Banco Investcred Unibanco S.A. – Pontocred from
2005 until 2008; CFO and investor relations officer at Sendas S.A. from 2003 until 2005; CFO at the following companies: Horizon
Telecom International from 2001 until 2002, GVT – Global Village Telecom in 2001, Global Telecom S.A. from 2000 until 2001 and
Brazil Fast Food Corp (Bob’s) from 1996 until 1998; administrative officer at Sony Music Entertainment, from 1998 until 1999; and
controller at Cyanamid Química do Brasil from 1991 until 1996. Mr. Rocha holds bachelor’s degree in electronic engineering from the
Military Institute of Engineering (IME), an MBA in finance from PUC-RJ and an Executive MBA in management from PDG/EXEC –
SDE/IBMEC.
Maria Helena dos Santos Fernandes de Santana. Ms. Fernandes de Santana has served as a member of Oi’s board of directors
since September 2018. She has been a member of the board of directors of the Spanish Stock Exchange since April 2016; a member of
the audit committee of Itaú Unibanco Holding S.A. since June 2014 and a trustee of the International Financial Reporting Standards
Foundation since January 2014. She was a member of the board of directors of Companhia Brasileira de Distribuição, a retail company,
between February 2013 and June 2017, Totvs S.A., an information technology company, between April 2013 and March 2017 and
CPFL Energia S.A., an energy company, between April 2013 and April 2015. She previously worked at the CVM, where she served as
president, between July 2007 and July 2012, and director, between July 2006 and July 2007. She was chairwoman of the executive
committee of the IOSCO – International Organization of Securities Commission between 2011 and 2012. She worked at the São Paulo
Stock Exchange – BOVESPA between July 1994 and May 2006, where she was responsible for listed company oversight, attracting
new companies and implementing the Novo Mercado. She holds a degree in Economics from the University of São Paulo.
Paulino do Rego Barros Jr. Mr. Barros has served as a member of Oi’s board of directors since September 2018. He was the
Interim CEO of Equifax, INC, from September 2017 to April 2018, having previously led the company’s business in the Asia-Pacific
region from July to September 2017, the company’s US Information Solutions business from October 2015 to June 2017 and its
international business unit, covering Latin America, Europe, Asia Pacific and Canada, from April 2010 to October 2015. Prior to
joining Equifax, he founded PB&C – Global Investments (LLC), an international investment and consulting firm, and has been its
President since November 2008. From January 2007 until November 2008, he was the President of AT&T Global Operations. He held
various executive positions at BellSouth Corporation from December 2000 to January 2007 before BellSouth was acquired by AT&T,
including Corporate Product Officer, President of BellSouth Latin America, Corporate Regional Vice-President of Latin America, and
Chief Planning and Operations Officer for BellSouth International. From February 1996 to December 2000, he worked for Motorola,
Inc., having served as Corporate Vice President and General Manager – Latin America Group and as Corporate Vice President and
General Manager of Market Operations – Americas, for the Cellular Business Unit. He also held various positions at The NutraSweet
Company, as well as at the US and Latin American divisions of Monsanto Company. He served on the advisory board of Cingular
Wireless, Converged Services Group and on the board of Alianza – the BellSouth Corporation Latino Association. Between 2012 and
2015, Paulino served on the board of NII Holdings, and he is currently a member of the recently created McKinsey & Company, Inc. –
Crisis Response Advisory Board. He holds a degree in mechanical and electrical engineering from the School of Industrial Engineering
and the College of Engineering of São José dos Campos, in São Paulo, and holds a master’s degree in business administration from
Washington University in St. Louis.
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Ricardo Reisen de Pinho. Mr. Reisen has served as a member of Oi’s board of directors since August 2016 having served as its
vice-chairman until September 2018. He is also an independent member of the board of directors of Light S.A. and Brado Logística
S.A., a member of the advisory board of Editora do Brasil S.A. and a member of Bradespar’s fiscal council, all with terms ending in
April 2019. Previously, Mr. Reisen served as an independent member of the board of directors of EMGEA from 2018 until 2019, BR
Insurance S.A. from 2016 until 2018, Tupy S.A. and Itacaré Capital Investments Ltd. From 2009 until 2015, Saraiva S.A. Livreiros
Editores from 2013 until 2015 and 2009 until 2012, Metalfrio Solutions S.A. from 2007 until 2011, and Banco Nossa Caixa S.A. from
2008 until 2009. He was also a member of the fiscal council of Embratel Participações S.A. from 2009 to 2010), chairman of the
advisory board of LAB SSJ S.A. from 2009 until 2013, and a voluntary board member of AACD from 2006 until 2014. As a board
member, he has participated in advisory committees in the areas of finance, audit, risk and compliance, people and strategy in the
above-mentioned companies. He served as an executive in areas of corporate finance, corporate and investment banking and strategic
planning in ABNAmro Bank Brasil, Banco Garantia and Banco Itaú between 1989 and 2001. From 2002 until 2014, Mr. Reisen was a
senior researcher at Harvard Business School. He holds a bachelor’s degree in mechanical engineering and a master’s degree in
production engineering/finance from Pontifícia Universidade Católica do Rio de Janeiro and a doctorate in business
administration/strategy from Fundação Getúlio Vargas – EAESP. Mr. Reisen also holds a degree in business administration through the
Advanced Management Program of the Wharton School of the University of Pennsylvania and the Program for Management
Development of Harvard Business School. He has been a Certified Accredited Board Member by the Brazilian Institute of Corporate
Governance (Instituto Brasileiro de Governança Corporativa – IBGC) since 2010 and earned a specialization in corporate governance
from Harvard Business School.
Rodrigo Modesto de Abreu. Mr. Abreu has served as a member of Oi’s board of directors since September 2018. He has been the
Chief Executive Officer of Quod, a big data company focused on credit risk analysis, since June 2017. He was Managing Partner of
Giau Consultoria Empresarial Ltda, a boutique management consulting firm, from November 2016 to November 2017, and was at the
same time member of the board of directors of Vogel Soluções em Telecomunicações e Informática S.A., which operates fiber optic
telecommunication services. From March 2013 to May 2016, he was the Chief Executive Officer and Board Member of TIM
Participações S.A. and Chief Executive Officer of TIM Celular S.A. From December 2008 to March 2013 he served as President of the
Brazilian operations of Cisco Systems, one of the largest information technology companies globally. Prior to that, Mr. Abreu was also
Managing Director of Cisco Systems for the North of Latin America and the Caribbean from May 2006 to December 2008, President of
Nortel Networks Brazil, a telecommunications equipment company, from June 2004 to April 2006, and Chief Executive Officer of
Promon Tecnologia Ltda., a technology services company, from July 2000 to June 2004. Mr. Abreu holds a degree in Electrical
Engineering from the State University of Campinas and an MBA from the Stanford Graduate School of Business.
Wallim Cruz de Vasconcellos Junior. Mr. Vasconcellos has served as a member of Oi’s board of directors since September 2018.
He has approximately 30 years of experience in the financial sector, specifically in mergers and acquisitions, debt restructuring, private
equity investments and public share issuances and has participated in various boards of directors in both Brazil and abroad. In 2004, he
founded Iposeira Capital Ltda., an independent company specializing in corporate advisory in Brazil. He was a partner at Lakeshore
Partners from March 2013 to December 2014 and a founding partner of the STK Capital from 2010 to 2013. From June 2003 to June
2008, he served as Senior Representative in Brazil of the Special Operations Area of the International Finance Corporation – IFC,
where he worked on credit recovery and equity investments in Brazil and managed a portfolio of approximately US$300 million. From
September 2002 to January 2003, he was Director of the BNDES Industry Segment, responsible for the bank’s projects with companies
in the industry, commerce and services sectors, and from October 2001 to August 2002 he served as Superintendent of the BNDES
Fixed Income Segment, where he oversaw the department’s restructuring. He served as director of BNDESPAR, a subsidiary of
BNDES, from April 1998 to September 2001, where he was responsible for the areas of investments and divestitures, including
corporate restructuring, asset portfolio management, development of structured operations in the domestic and international markets,
structuring of private equity funds and governance. He is currently an independent member of the board of directors, audit committee,
and nominating committee of Pilgrim’s Pride Corporation and has served as a member of the boards of directors of Cremer, Sendas,
Aracruz Celulose (currently Fibria), Vale, Marlim Participações, Companhia Distribuidora de Gas do Rio de Janeiro – CEG and Santos
Brasil Participações. He holds a degree in Economics and a post-graduate degree in Finance from the Pontifical Catholic University of
Rio de Janeiro. He also holds a masters in Sports Management from the Cruyff Institute.
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Roger Solé Rafols. Mr. Solé has more than 20 years of experience in telecommunications, in the areas of marketing, product
development, innovation, strategy and P&L management. He has been Vice-President of Marketing at Sprint Corporation since 2015.
Prior to that time, he held the following positions: Vice-President of Marketing from 2009 to 2015, and Manager of Consumer
Marketing from 2009 to 2011 at TIM Brasil; and Marketing Manager – Residential Segment from 2006 to 2008, and Manager of Value
Adding Products and Services from 2001 to 2006 at Vivo. He also worked at DiamondCluster, known today as Oliver Wyman, from
1996 to 2001. Mr. Solé holds a bachelor’s degree in Business and a Masters in Business Administration from ESADE – Escuela
Superior de Administración y Dirección de Empresas, Barcelona, and a Masters in Management of Audiovisual Companies from UPF –
Universitat Pompeu Fabra, Instituto Desarrollo Continuo (IDEC), Barcelona. He also completed an exchange MBA program at UCLA –
University of California, Los Angeles; an Advanced Management Program at IESE Business School, Universidad de Navarra, São
Paulo – Barcelona; and a short executive education program in Finance and Strategy for Value Creation at The Wharton School at the
University of Pennsylvania, Philadelphia.
Executive Officers
The board of executive officers is Oi’s executive management body. Oi’s executive officers are Oi’s legal representatives and are
responsible for Oi’s internal organization and day-to-day operations and the implementation of the general policies and guidelines
established from time to time by Oi’s board of directors.
Oi’s 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. Oi’s by-laws provide that Oi’s chief executive officer
may not serve as chairman of Oi’s board of directors. Each officer is responsible for business areas that Oi’s board of directors assigns
to them and, other than Oi’s chief executive officer and Oi’s chief financial officer, need not have formal titles (other than the title of
executive officer or “Diretor”).
Generally, the members of Oi’s board of executive officers are elected by Oi’s board of directors for two-year terms and are
eligible for reelection. Oi’s board of directors may remove any executive officer from office at any time with or without cause.
According to the Brazilian Corporate Law, executive officers must be residents of Brazil but need not be shareholders of Oi. Oi’s board
of executive officers holds meetings when called by Oi’s chief executive officer or any two other members of Oi’s board of executive
officers.
The RJ Plan, however, provides certain corporate governance rules that apply to Oi’s board of executive officers during the
effectiveness of the RJ Plan, superseding the provisions of Oi’s by-laws. For example, Oi’s board of directors may appoint a new board
of executive officers, provided that Eurico de Jesus Teles Neto and Carlos Augusto Machado Pereira de Almeida Brandão must remain
on the board of executive officers as chief executive officer and chief financial officer/investor relations officer, respectively, until Oi
ceases to be supervised by the RJ Court, which will occur on the second anniversary of the Judicial Ratification of the RJ Plan; provided
that, if Mr. Teles and Mr. Brandão are removed from their positions as chief executive officer and chief financial officer/investor
relations officer, respectively, prior to the closing of the RJ Plan, then they receive the compensation packages to which they are
currently entitled.
The following table sets forth certain information with respect to the current members of Oi’s board of executive officers.
Name
Eurico de Jesus Teles Neto
Carlos Augusto Machado Pereira de Almeida Brandão Chief Financial Officer and Investor Relations Officer March 2018
March 2018
José Claudio Moreira Gonçalves
March 2018
Bernardo Kos Winik
Position
Chief Executive Officer and Chief Legal Officer
Executive Officer without specific designation
Executive Officer without specific designation
Date Elected/
Appointed
November 2017
Age
62
44
52
51
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Summarized below is information regarding the business experience, areas of expertise and principal outside business interests of
Oi’s current executive officers.
Eurico de Jesus Teles Neto. Mr. Teles has served as Oi’s chief executive officer since November 2017 and as Oi’s chief legal
officer since May 2016, having previously served as one of Oi’s executive officers from April 2012 until May 2016. He was a member
of Oi’s board of directors from 2009 to 2011 and an alternate member of Oi’s board of directors until April 2012. He previously served
as a member of the board of directors of Coari Participações S.A. 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.
Carlos Augusto Machado Pereira de Almeida Brandão. Mr. Brandão has served as Oi’s chief financial officer and investor
relations officer since March 2018. He served as Oi’s interim chief financial officer and interim investor relations officer since October
2017. Previously, he was an analyst at Energisa S.A., from 2000 to 2001, an analyst at Furnas S.A. from 2002 to 2003 and specialist in
planning and control at Sendas S.A. from 2003 to 2004. He has held various positions within Oi and Telemar Norte Leste S.A. since
2004, including Market Specialist, Revenue Planning Coordinator, Business Valuation Manager, Senior Manager of New Business and
M&A, Senior Manager of Planning and Budget, Director of Strategy and Fronts of Transformation and Director of International
Operations. He holds a degree in management from UFJF (Federal University of Juiz de Fora) and a degree in statistics from UFJF as
well as a master’s degree in finance from IBMEC.
José Claudio Moreira Gonçalves. Mr. Gonçalves has served as Oi’s chief operating officer since March 2018. He built his career
in the telecommunications industry and has expertise in the operation, maintenance and technological development of Oi’s networks.
Mr. Gonçalves previously served as Oi’s executive director of operations since June 2011. He joined Oi in March 2000, having served
as operations manager, director of network deployment and director of engineering. Mr. Gonçalves holds a bachelor’s degree in
mechanical production engineering from Pontifícia Universidade Católica (PUC-Rio), a master’s degree in business administration
from Fundação Getúlio Vargas (FGV-RJ), an executive MBA from Fundação Dom Cabral (FDC) and a post-executive MBA from
Kellogg School of Management.
Bernardo Kos Winik. Mr. Winik has served as Oi’s chief commercial officer since March 2018. He previously served as Oi’s
director of retail since December 2014 and director of retail sales from September 2011 to December 2014. He has experience in the
technology, consulting and telecommunications markets, having worked in companies such as Claro, BS Consulting, NCR and EDS do
Brasil. Mr. Winik holds a bachelor’s degree in information technology form Universidade Mackenzie and a post-graduate degree in
business from Escola de Administração de Empresas de São Paulo (EAESP/FGV).
Fiscal Council
The Brazilian Corporate Law requires Oi to establish a permanent or non-permanent fiscal council (conselho fiscal). Oi’s 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 Oi’s board of directors, Oi’s board of executive officers and Oi’s independent
accountants. The primary responsibility of the fiscal council is to review Oi’s management’s activities and Oi’s financial statements and
to report their findings to Oi’s shareholders.
The members of Oi’s fiscal council are elected by Oi’s shareholders at the annual shareholders’ meeting for one-year terms and
are eligible for reelection. The terms of the members of Oi’s fiscal council expire at the annual shareholders’ meeting in 2020. Under
the Brazilian Corporate Law, the fiscal council may not contain members who are members of Oi’s board of directors or Oi’s board of
executive officers, spouses or relatives of any member of Oi’s board of directors or Oi’s board of executive officers, or our employees.
To be eligible to serve on Oi’s 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 Oi’s fiscal council.
Holders of Preferred Shares without voting rights and non-controlling common shareholders that together hold at least 10.0% of Oi’s
voting share capital are each entitled to elect one member and his or her respective alternate to the fiscal council.
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The following table sets forth certain information with respect to the current members of Oi’s fiscal council and their alternates.
Name
Pedro Wagner Pereira Coelho
Patricia Valente Stierli
Álvaro Bandeira
Wiliam da Cruz Leal
Daniela Maluf Pfeiffer
Luiz Fernando Nogueira
Raphael Manhães Martins(1)
Domenica Eisenstein Noronha(1)
(1) Elected by Oi’s preferred shareholders.
Position Member Since
Chairman
Alternate
Member
Alternate
Member
Alternate
Member
Alternate
April 2016
April 2019
April 2016
April 2018
April 2018
April 2019
April 2019
April 2018
Age
70
62
68
62
48
52
36
41
We summarize below the business experience, areas of expertise and principal outside business interests of the current members of
Oi’s fiscal council and their alternates.
Fiscal Council Members
Pedro Wagner Pereira Coelho. Mr. Coelho has served as chairman of Oi’s fiscal council since April 2017 and member since April
2016. He has also served as chairman of the fiscal council of Magnesita Refratários S.A. since April 2008, as member of the fiscal
council of Parnaiba Gas Natural S.A. since October 2015 and as member of the supervisory board of Estácio Participações S.A. since
April 2012. Mr. Coelho was also a partner of Carpe Diem – Consultoria, Planejamento e Assessoria Empresarial Ltda. From 2011 until
2016. He worked as controller at Banco de Investimentos Garantia S/A., investment bank, from May 1982 until July 1997 and as an
auditor at Pricewaterhouse Coopers Auditores Independentes from October 1978 to April 1981. Previously, he was chairman of the
fiscal council of Lojas Americanas S.A., Tele Norte Leste Participações S.A., Telemar Participações S.A., TAM S.A. and Empresa
Energética de Mato Grosso do Sul S.A. (Enersul). Mr. Coelho holds a bachelor’s degree in business administration from the Sociedade
Universitária Augusto Motta – SUAM and in accounting from Sociedade Madeira de Ley – SOMLEY.
Álvaro Bandeira. Mr. Bandeira has served as a member of Oi’s fiscal council since April 2017 and as an alternate member of Oi’s
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 to 2015 and held various positions at Ágora Corretora
from April 2001 until December 2010. He was president of the Brazilian Futures Exchange, 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.
Daniela Maluf Pfeiffer. Mrs. Pfeiffer has served as a member of Oi’s fiscal council since April 2018. She has worked as a senior
analyst at DXA Investments, an investment firm, since January 2018. She was a partner at Canepa Asset Brasil, a funds management
company, and was responsible for investors’ relations from January 2014 to October 2017. She previously worked as a partner at Nova
Gestão de Recursos, an investment firm, from October 2011 to June 2013. Currently, Mrs. Pfeiffer is not a member of any management
body of a publicly-held company. She was previously a member of the fiscal council of Banco Sofisa S.A. from April 2014 to April
2017; a member of the fiscal council of Viver Incorporadora e Construtora S.A. from April 2011 to April 2017; a member of the fiscal
council of Banco Panamericano S.A. from September 2010 to April 2014; a member of the fiscal council of Santos Brasil S.A. from
2003 to 2005; a member of the Board of Directors of Brasil Telecom S.A. from 2003 to 2005; a member of the Board of Directors of
Telemig Celular S.A. from 2003 to 2005; a member of the Board of Directors of Amazônia Celular S.A. from 2003 to 2005; a member
of the Fiscal Council of Amazônia Celular S.A. from 1998 to 2002 and a member of the fiscal council of Telemig Celular S.A. from
1998 to 200. She is an IBGC-certified fiscal council member. Mrs. Pfeiffer holds a degree in administration by UFRJ from 1992 and is
currently enrolled in an MBA program in corporate management at FGV, which she is expected to complete in March 2019.
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Raphael Manhães Martins. Mr. Martins has served as a member of Oi’s fiscal council since April 2019. He has been a partner at
the law firm Faoro & Fucci since 2010. In 2010, he was a professor at Universidade Federal do Rio de Janeiro (UFRJ). From 2007 to
2009, he was a professor at Universidade do Estado do Rio de Janeiro (UERJ). Mr. Martins has served as a member of the board of
directors of Eternit S.A. since 2015, Light S.A. since 2018 and Condor S.A. – Indústria Quĺmica since 2017. He has also served as a
member of the fiscal council of Vale S.A. since 2015. Previously, Mr. Martins served as a member of the fiscal council of Light S.A.
from 2014 to 2018 and Embratel Participações S.A. in 2014. Mr. Martins is a member of the Brazilian Bar Association, Rio de Janeiro
Section (OAB-RJ).
Alternate Fiscal Council Members
Patricia Valente Stierli. Mrs. Valente has served as an alternate member of Oi’s fiscal council since April 2019. She is currently a
member of the fiscal council of Eletrobras – Centrais Elétricas S.A., as a financial specialist (since 2017), a member of the board of
directors of PPE Fios Esmaltados S.A. (since 2018), a member of the fiscal council of Sociedade Beneficiente de Senhoras – Hospital
Sírio Libanês (tenured from 2018 to 2021) and an alternate member of the fiscal council of Centro de Integração Empresa Escola CIEE
(since 2018). Mrs. Valente previously served as a member of the fiscal council of Bardella S.A. Indústrias Mecânicas, (from 2015 to
October 2018, a member of the board of directors of Pettenati S.A. Indústria Têxtil (during 2015), an alternate member of the fiscal
council of Dohler S.A. (from 2017 to 2018) and a member of the board of directors and fiscal council of publicly-held companies, as a
minority shareholders’ representative. In addition, Mrs. Valente has experience managing third-party resources, after having been a
statutory officer at Banco Fator S.A and Sadefem Equipamentos for six years, working in management and being in charge of
institutional and retail clients. She also worked as a financial officer at Montagens S.A., where she was in charge of accounting, fiscal,
budget, treasury and human resources. Mrs. Valente holds a bachelor degree in business administration from the Fundação Getúlio
Vargas Foundation (FGV) and completed a Management for Graduates specialization course at CEAG (MBA) –EAESP / FGV and her
specialization in controllership course at GVPEC.
Wiliam da Cruz Leal. Mr. Leal has served as an alternate member of Oi’s fiscal council since April 2018. He has extensive
experience in corporate governance, corporate sustainability, enterprise risk management, internal controls, technology and information
security. Since 2011 he has been a managing partner at Cruz Leal Gestão Empresarial Ltda., a consulting firm specialized in motivation,
leadership, technology, corporate governance and sustainability. He has been certified by the Brazilian Institute of Corporate
Governance (Instituto Brasileiro de Governança Corporativa – IBGC) since 2009. Previously, Mr. Leal worked at Tele Norte Leste
Participações S.A., from 2000 to 2009, having served as executive manager of corporate governance, internal controls manager, budget
and special projects manager and systems audit manager. He also worked at Banco do Brasil S.A., from 1975 to 2000, having served as
executive manager of changes and analyst information technology consultant. Mr. Leal holds a bachelor’s degree in mechanical
engineering from Fundação de Ensino Superior de Itaúna, Minas Gerais.
Luiz Fernando Nogueira. Mr. Nogueira has served as an alternate member of Oi’s fiscal council since April 2019. Since May
2016, Mr. Nogueira has served as chief financial officer of Neogas, having previously served as chief financial officer of Brookfield
Renewable Energy, Ferroport, Concremat, Bematech and Timnet (a TIM group company). In addition, he also served as executive
manager investor relations at Petrobras and planning and control manager for Latin America at IBM. Mr. Nogueira holds a bachelor’s
degree in economics from Pontifícia Universidade Católica, a post-graduate degree in financial management from Fundação Getúlio
Vargas and an MBA in finance from IBMEC, and he completed a training course in conflict mediation at Mediare.
Domenica Eisenstein Noronha. Ms. Noronha has served on Oi’s fiscal council since April 2018 (as a member since April 2018
and as an alternate member since April 2019). Mrs. Noronha has more than 19 years of experience in the financial industry. Since 2010,
she has been a member of Tempo Capital Gestão de Recursos Ltda., an independent fund manager focused on the Brazilian equity
market. Her responsibilities include economic and financial analysis of investments, investor relations, supervision of compliance and
regulatory review. Previously, Mrs. Noronha worked for 11 years at Morgan Stanley in New York, where she was involved in M&A for
Latin American companies, and São Paulo, where she was executive director responsible for equity and debt capital markets
transactions. She served as a member of the fiscal council of the following publicly-held companies in Brazil: Fibria Celulose S.A.,
from February 2017 to April 2018; Usinas Siderúrgica de Minas Gerais S.A. – Usiminas, from April 2015 to April 2016 and from April
2017 to April 2018; and Embratel Participações S.A., from April 2012 to August 2014). Mr. Noronha holds a bachelor’s degree in
business administration from Georgetown University, majoring in finance, international business and economics.
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Compensation
According to Oi’s by-laws, Oi’s shareholders are responsible for establishing the aggregate compensation we pay to the members
of Oi’s board of directors, board of executive officers and fiscal council. Oi’s shareholders determine this compensation at Oi’s annual
shareholders’ meeting. Once aggregate compensation is established, Oi’s board of directors is responsible for distributing such
aggregate compensation individually to the members of Oi’s board of directors and Oi’s board of executive officers in compliance with
Oi’s by-laws.
The aggregate compensation paid by us to all members of Oi’s board of directors, board of executive officers and fiscal council
for services in all capacities in 2018 was R$81.9 million. This amount includes pension, retirement or similar benefits for Oi’s officers
and directors. At Oi’s 2019 annual shareholders’ meeting, Oi’s shareholders established the following compensation for the year 2019:
•
•
•
board of directors: an aggregate limit of approximately R$14.7 million;
board of executive officers: an aggregate limit of approximately R$44.0 million; and
fiscal council: the minimum amount established under Paragraph 3 of Article 162 of the Brazilian Corporate Law.
Oi compensates alternate members of its fiscal council for each meeting of the fiscal council that they attend.
Oi’s 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, Oi’s 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 Oi’s board of directors and fiscal council are not entitled to these benefits.
Members of Oi’s 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, Oi’s board of directors approved a long-term incentive plan for certain of Oi’s executives. 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 ran from 2015 until 2017. Compensation under the
long-term incentive plan, calculated based on Oi’s share price, and was paid in three annual installments in 2016, 2017 and 2018. In
2016, 2017 and 2018, we paid aggregate amounts of R$15.7 million, R$13.6 million and R$21.8 million respectively, pursuant to the
long-term incentive plan.
On April 26, 2019, Oi’s shareholders approved share-based long-term incentive plans for the members of Oi’s board of directors
and certain executives for the period from 2019 to 2021. The purpose of these long-term incentive plans 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
maximum number of shares to be granted to beneficiaries of these long-term incentive plans cannot exceed 1.5% of the total capital
stock of Oi as of April 26, 2019.
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Committees
Audit, Risks and Controls Committee
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The Audit, Risks and Controls Committee (Comitê de Auditoria, Riscos e Controle), or the CARC, is a non-statutory advisory
committee to Oi’s board of directors. According to its internal regulations, the CARC is responsible for:
•
•
•
advising Oi’s board of directors in connection with business risk assessment, internal control mechanisms and supervising
internal audits;
promoting communications between the company’s administrative and supervisory bodies, independent auditors and the
internal audit bodies; and
supervising the management and control of contingencies.
The CARC must be composed of three to five members, the majority of whom must be members of Oi’s board of directors.
Executive officers and other employees of Oi cannot serve on the CARC. According to article 32 of Oi’s by-laws, the members of the
CARC are appointed by Oi’s board of directors. The current members of the CARC are: Henrique José Fernandes Luz (chairman of the
committee and member of Oi’s board of directors); Marcos Bastos Rocha (member of Oi’s board of directors); Marcos Grodetzky
(member of Oi’s board of directors); Wallim Cruz de Vasconcelos Junior (member of Oi’s board of directors); and Maria Helena dos
Santos Fernandes de Santana (member of Oi’s board of directors).
On April 26, 2019, Oi’s shareholders approved management’s proposal to transform the CARC into a statutory audit committee.
As a statutory audit committee the CARC will satisfy the audit committee requirements of Rule 10A-3 under the Exchange Act,
including its independence requirements.
The CARC is expected to begin to function as a statutory audit committee on May 26, 2019.
People, Nomination and Corporate Governance Committee
The People, Nomination and Corporate Governance Committee (Comitê de Gente, Nomeações e Governança Corporativa) is an
advisory committee to Oi’s board of directors. According to its internal regulations, the People, Nomination and Corporate Governance
Committee is responsible for:
•
•
•
•
•
•
•
•
reviewing, recommending and monitoring strategies for developing and managing the talents and human capital of Oi 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 Oi and its subsidiaries;
giving opinions on the profiles of candidates for members of Oi’s board of directors, Oi’s board of executive officers and
members of Oi’s advisory committees, in the processes of presenting candidates by Oi’s 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 committee;
coordinating the process of selection and appointment of Oi’s chief executive officer and giving opinions on the selection
process of Oi’s statutory executive officers;
taking part in discussions regarding major changes to the organizational structure of Oi and its subsidiaries (first and second
levels below the chief executive officer);
monitoring the succession program for the principal executives of Oi and its subsidiaries, recommending actions at the first
management level and establishing directives for the succession program for other levels of Oi and its 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;
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•
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•
•
•
•
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•
analyzing and recommending to Oi’s board of directors the policy for compensating members of bodies and employees of Oi
and its subsidiaries, including fixed and variable remuneration, any type of incentive, benefits programs and stock options;
analyzing and recommending to Oi’s board of directors parameters for the bonus program for Oi and its subsidiaries;
analyzing and recommending to Oi’s 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 the Brazilian
Corporate Law and subsequent changes;
analyzing and recommending defining goals for Oi 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;
analyzing and recommending compliance of annual performance based on the defined goals;
analyzing and recommending a system of evaluation of performance, including its timing and methods;
preparing the annual evaluation of performance of the members of Oi’s board of directors and Oi’s executive officers in
relation to the goals approved by the board of directors, reviewing the evaluations of the high executives of Oi and its
subsidiaries and submitting the evaluation to Oi’s board of directors;
analyzing and recommending to Oi’s board of directors distribution of individual compensation by the members of Oi’s
board of directors and officers;
analyzing and recommending strategy to Oi’s board of directors regarding pension plans of Oi and its subsidiaries,
particularly regarding extraordinary contributions to complementary retirement funds;
analyzing and recommending to Oi’s board of directors the corporate governance policies to be adopted by Oi, always
observing the provisions of the standards applicable to Oi, in particular with regard to the corporate governance model,
principles and practices to be adopted; and
analyzing and recommending to Oi’s board of directors, in accordance with applicable rules, adjustments and improvements
to Oi’s corporate governance policies whenever deemed necessary and ensure compliance with applicable standards, in
particular Oi’s listings on Level 1 of the B3 and the NYSE.
The People, Nomination and Corporate Governance Committee must be composed of three to five members, the majority of
whom must be members of Oi’s board of directors. Executive officers and other employees of Oi cannot serve on the People,
Nomination and Corporate Governance Committee. According to article 32 of Oi’s by-laws, the members of the People, Nomination
and Corporate Governance Committee are appointed by Oi’s board of directors. The current members of the People, Nomination and
Corporate Governance Committee are: Maria Helena dos Santos F. Santana (chairman of the committee and member of Oi’s board of
directors); Marcos Grodetzky (member of Oi’s board of directors); Henrique Jose Fernandes Luz (member of Oi’s board of directors);
and Sergio Luiz de Toledo Piza (external expert).
Share Ownership
As of April 23, 2019, the number of Common Shares and Preferred Shares held by the members of Oi’s board of directors and
board of executive officers, supervisory or management bodies, including outstanding stock options, do not exceed 1% of either class of
Oi’s outstanding shares.
Employees
As of December 31, 2018, we had a total of 56,875 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.
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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:
Plant operation, maintenance, expansion and modernization
Sales and marketing
Call center operations
Support areas
Authorized agents
Total
Number of employees by geographic location:
Rio de Janeiro
Goiás
Paraná
Mato Gross do Sul
São Paulo
Minas Gerais
Rio Grande do Sul
Bahia
Federal District
Santa Catarina
Pernambuco
Ceará
Pará
Mato Grosso
Maranhão
Amazonas
Espírito Santo
Paraiba
Piauí
Rondônia
Rio Grande do Norte
Sergipe
Alagoas
Tocantins
Amapá
Acre
Roraima
Total
December 31,
2017
2018
2016
34,620
5,131
14,993
2,131
—
56,875
15,406
7,666
6,996
3,818
1,630
1,544
3,730
3,345
715
2,195
2,108
1,941
1,367
192
806
730
148
462
522
89
458
328
290
61
154
40
134
56,875
33,019
5,069
13,202
4,002
154
55,446
16,657
6,795
6,040
3,077
1,612
1,506
3,555
3,439
588
2,503
1,756
1,746
1,536
195
963
624
143
503
572
86
495
345
326
55
153
40
136
55,446
32,066
4,945
12,700
3,912
143
53,766
16,235
7,036
5,654
2,383
1,626
1,475
3,318
3,658
541
2,337
1,763
1,810
1,465
191
960
613
147
485
447
87
452
362
341
59
142
41
138
53,766
We negotiate separate collective bargaining agreements with three union committees each representing the local unions in several
Brazilian states. New collective bargaining agreements are negotiated every year. We maintain good relations with each of the unions
representing our employees. As of December 31, 2018, approximately 41.0%, respectively, 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 with the Interstate Federation of Telecommunications Workers (Federação Interestadual dos
Trabalhadores em Telecomunicações). We have never experienced a strike that had a material effect on our operations.
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Employee Benefits
Pension Benefit Plans
Sistel
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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, 2018, the PBS-A plan had a surplus of R$1,683 million. We were not required to make contributions to the
PBS-A plan in 2018.
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.
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, 2018, the PAMA plan had a surplus of R$36 million. We were not required to make contributions to the
PAMA plan in 2018.
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.
PBS-TNC 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-TNC plan. The PBS-TNC plan has been closed to new members
since April 2004. Contributions to the PBS-TNC 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-TNC plan. Since January 2016, the PBS-TNC plan has been managed by FATL.
As of December 31, 2018, the PBS-TNC Plan had a surplus of R$8 million. The PBS-TNC Plan holds a portfolio of federal
government bonds (NTN-B) carried to maturity, which enables a pricing adjustment of around R$4 million. This position is recognized
by Resolution No. 16/2014 of the National Council of Supplementary Pensions (CNPC). We made contributions to the PBS-TNC Plan
of less than R$1 million in 2018.
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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. Since January 2016, the CELPREV plan has been managed by FATL.
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
participants in the PBS-TNCP plan migrated to the CELPREV plan. As of December 31, 2018, the CELPREV plan had a surpluses of
R$0.09 million. We made contributions to the CELPREV plan of less than R$1 million in 2018.
TCSPREV Plan
In December 1999, we and the other companies that participate in the plans managed by Sistel agreed to withdraw sponsorship of
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 variable contribution pension plan and settled benefit plan. Approximately 80% of
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 is closed to new entrants. We are liable for any deficits incurred by the TCSPREV plan according to
the existing proportion of the contributions we make to this plan.
In November 2018, the BrTPREV Benefit Plan was effectively incorporated by the TCSPREV Benefit Plan, according to
ordinance No.995 of the National Superintendency of Complementary Social Security (Superintendência Nacional de Previdência
Complementar), dated October 24, 2018. The BrTPREV Plan is a private defined contribution plan that we began sponsoring in October
2002. Approximately 96% of our active employees that were participants in the Fundador/Alternativo plan (for which we assumed
liability in 2000 as a result of our acquisition of CRT—Companhia Riograndense de Telecomunicações) migrated to the BrTPREV
plan. The BrTPREV Plan was offered to our new employees from March 2003 to February 2005, when it was closed to new
participants. In 2012, as sponsor of the BrTPREV Plan, Oi entered into a financial obligation agreement with FATL with respect to
deficits under the BrTPREV Plan. We remain bound to this financial obligation contract. This obligation is classified as a Class I claim
under the RJ Plan. As a result of the RJ Proceedings, certain of our unfunded obligations under our post-retirement plans were novated.
As of December 31, 2018, we had recorded R$575 million on our balance sheet as “liability for pension benefits, net of provision for
unfunded status on our balance sheet, represented by the commitment under the terms of the RJ Plan related to the financial obligations
agreement, entered into by Oi and FATL intended for the payment of the mathematical provision without coverage by the plan’s assets.
As of December 31, 2018, the TCSPREV Plan was balanced. The TCSPREV Plan has a portfolio of federal public securities
(NTN-B) until maturity, which enables a price adjustment of approximately R$78 million. This position is recognized by Resolution
16/2014 of the National Council of Supplementary Pensions (CNPC). We made contributions to the incorporated BrTPREV Plan of less
than R$3 million in 2018.
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, 2018, the PBS-Telemar Plan had a deficit of R$6 million. However, the PBS-Telemar Plan holds a portfolio
of federal government bonds (NTN-B) carried to maturity, which offsets the deficit. This position, which is recognized by Resolution
No. 16/2014 of the National Council of Supplementary Pensions (CNPC), is higher than the deficit recorded, resulting in a positive net
result in 2018 of R$30 million.
We made contributions to the PBS-Telemar Plan of less than R$1 million in of 2018.
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In September 2000, Telemar began sponsoring the TelemarPrev plan, a private variable contribution pension plan. Approximately
96% of 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, 2018, the TelemarPrev plan had a deficit of R$468 million. However, the TelemarPrev plan holds a large
portfolio of federal government bonds (NTN-B) carried to maturity, which significantly offsets the deficits. This position, which is
recognized by Resolution No. 16/2014 of the National Council of Supplementary Pensions (CNPC), is higher than the deficit recorded,
resulting in a positive net result in 2018 of R$105 million.
We made contributions to the TelemarPrev Plan of approximately R$24 million in 2018.
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 2018, we
contributed R$270 million to the medical and dental assistance plans, R$7 million to the occupational medicine plans, R$304 million
for the Worker’s Food Program (Programa de Alimentação do Trabalhador) and R$79 million to the other benefits programs.
Profit Sharing Plans
The operational targets are part of a profit sharing plan implemented by the Company as an incentive for employees to pursue our
goals and to align employees’ interests with those of our shareholders. Profit sharing occurs if financial and operational targets defined
annually by our board of directors are achieved. As of December 31, 2018, we had provisioned R$266 million to be distributed in
variable compensation with respect to 2018.
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 operational and financial 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 2018, we offered approximately 2,776,316 hours of training, and we invested approximately R$13 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 Common
Shares have voting rights. Preferred Shares have voting rights only in exceptional circumstances. Currently, Preferred Shares have full
voting rights pursuant to Oi’s by-laws as a result of Oi’s failure to make mandatory dividend payments since 2014. For more
information, see “Item 8. Financial Information—Dividends and Dividend Policy—Payment of Dividends” and “Item 10. Additional
Information—Description of Oi’s By-laws—Voting Rights—Voting Rights of Preferred Shares.”
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As of April 23, 2019, Oi had issued 5,954,205,001 total shares, consisting of 5,796,477,760 issued Common Shares and
157,727,241 issued Preferred Shares, including 30,595 Common Shares and 1,811,755 Preferred Shares held in treasury.
As of April 22, 2019, Oi had approximately 1,116,751 million shareholders, including 70 U.S. resident holders of Common Shares
(including the ADS Depositary) and approximately 43 U.S. resident holders of Preferred Shares (including the depositary of the
Preferred ADS program). As of January 28, 2019, there were 3,897,612,291 Common Shares (including Common Shares represented
by ADSs) and 39,060,683 Preferred Shares (including Preferred Shares represented by ADSs) held by U.S. resident holders.
The following table sets forth information concerning the ownership of Common Shares and Preferred Shares as of April 23,
2019, by each person whom we know to be the owner of more than 5% of the outstanding shares of any class of Oi’s share capital, and
by all of Oi’s directors and executive officers as a group. Except for the shareholders listed below, we are not aware of any other
shareholder holding more than 5% of any class of Oi’s share capital. Oi’s principal shareholders have the same voting rights with
respect to each class of Oi’s shares that they own as other holders of shares of that class.
We have not sought to verify any information provided to us by our principal shareholders. The principal shareholders may hold,
acquire, sell or otherwise dispose of our Common Shares or Preferred Shares at any time and may have acquired, sold or otherwise
disposed of Common Shares or Preferred Shares since the date of the information reflected herein. Other information about our
principal shareholders may also change over time.
Common Shares
Preferred Shares
Total
Name
GoldenTree Funds(2)
York Funds(3)
Brookfield Funds(4)
Solus Funds(5)
Bratel S.à r.l.(6)
All directors, fiscal council members, their
Number of
Shares
865,512,751
663,027,865
531,683,795
428,055,765
326,259,859
% of Shares
Outstanding
(1)
14.93
11.44
9.17
7.38
5.63
Number of
Shares
—
—
—
14,145,359
1,800,000
alternates and executive officers as a group
3,984
*
26
% of Shares
Outstanding
(1)
—
—
—
9.07
1.15
*
Number of
Shares
865,512,751
663,027,865
531,683,795
442,201,124
328,059,859
% of Shares
Outstanding
(1)
14.54
11.14
8.93
7.43
5.51
4,010
*
(1) Based on the number of total shares outstanding (5,952,362,651 shares) as of April 23, 2019, which is the sum of the total number of Common Shares outstanding
(5,796,447,165 Common Shares) and the total number of Preferred Shares outstanding (155,915,486 Preferred Shares) as of April 23, 2019.
(2) GoldenTree Asset Management LP, a Delaware limited partnership, serves as the investment manager or adviser to certain funds and/or accounts, or the GoldenTree
Funds, with respect to the Common Shares held by the GoldenTree Funds. GoldenTree Asset Management LLC, a Delaware limited liability company, serves as the
general partner to GoldenTree Asset Management LP, and Mr. Steven A. Tananbaum, a United States citizen, serves as the managing member to GoldenTree Asset
Management LLC.
(3) York Global Finance Fund, L.P., or York, is a Cayman limited partnership whose beneficial owners are certain investment funds and accounts, or the York Funds,
managed or advised by certain entities controlled by York Capital Management Global Advisors, LLC, a New York limited liability company, or YGA. YGA is the
sole senior managing member of the general partner or investment manager, as applicable, of each of the relevant York Funds.
(4) Collectively refers to certain funds managed by certain Brookfield Asset Management, Inc.
(5) Solus Alternative Asset Management LP serves as the investment manager or investment subadvisor to certain funds and/or accounts, or the Solus Funds, with
respect to the Common Shares and the Preferred Shares held by the Solus Funds. Solus GP LLC is the general partner of Solus Alternative Asset Management LP,
and Mr. Christopher Pucillo is the managing member of Solus GP LLC. Each of Solus Alternative Asset Management LP, Solus GP LLC and Mr. Christopher
Pucillo may be deemed to have shared voting power and/or shared investment power with respect to the Common Shares and Preferred Shares held by each Solus
Fund.
(6) Bratel S.à r.l., a Luxembourg private limited liability company, is a wholly-owned subsidiary of Pharol. Excludes 25,614,831 Common Shares and 51,229,662
Preferred Shares which Pharol has the option to acquire from PTIF in accordance with the PT Option Agreement. All shares subject to the call option are being held
in treasury by Oi until the earlier of the exercise or expiration of the call option. See “—PT Option Agreement.”
less than 1%
*
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Changes in Share Ownership
Transfer of Shares from Pharol to Bratel S.à r.l.
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In May 2016, Oi received a letter from Pharol informing it that Pharol had transferred its shareholding interests in Oi to its wholly-
owned subsidiary Bratel B.V.
In September 2017, Oi received letters from Bratel B.V. informing it that Bratel B.V. had transferred its shareholding interests in
Oi to its wholly-owned subsidiary Bratel S.à r.l.
Changes in Bratel Shareholding Interest
In accordance with the Pharol Settlement Agreement, which was confirmed by the RJ Court in a decision that became final on
April 3, 2019, Oi transferred to Bratel 32,000,000 Common Shares and 1,800,000 Preferred Shares held in treasury.
As of April 23, 2019, according to Oi’s shareholder records, Bratel owned 326,259,859 Common Shares, or 5.63% of Oi’s
outstanding common stock, and 1,800,000 Preferred Shares, or 1.15% of Oi’s outstanding preferred stock.
Changes in Solus Shareholding Interest
In February 2018, Solus Alternative Asset Management LP, a Delaware limited partnership that serves as the investment manager
to the Solus Funds with respect to the Preferred Shares held by the Solus Funds, Solus GP LLC, a Delaware limited liability company
that serves as the general partner to Solus Alternative Asset Management LP, and Mr. Christopher Pucillo, a United States citizen, who
serves as the managing member to Solus GP LLC, jointly filed a Schedule 13G with the SEC disclosing the Solus Funds’ ownership of
15,109,224 Preferred Shares as of December 31, 2017, which was equivalent to 9.69% of Oi’s outstanding preferred stock.
In August 2018, Solus Alternative Asset Management LP, Solus GP LLC and Mr. Christopher Pucillo jointly filed a Schedule
13D with the SEC disclosing the Solus Funds’ ownership of 171,284,560 Common Shares (in the form of 34,256,912 Common ADSs),
which was equivalent to 7.97% of Oi’s outstanding common stock, and 14,145,359 Preferred Shares (in the form of 14,145,359
Preferred ADSs), which was equivalent to 9.07% of Oi’s outstanding preferred stock, in each case as of July 31, 2018. Of these, the
Solus Funds acquired 171,284,560 Common Shares (in the form of 34,256,912 Common ADSs) through their participation in the
Capitalization of Credits Capital Increase. In addition, the Solus Funds received 2,447,203 ADWs in the Capitalization of Credits
Capital Increase, which they had the right to exercise to acquire 12,236,015 Common Shares ADSs (in the form of 2,447,203 ADSs).
In October 2018, Solus Alternative Asset Management LP, Solus GP LLC and Mr. Christopher Pucillo jointly filed a Schedule
13G/A with the SEC disclosing the Solus Funds’ ownership of 192,520,575 Common Shares (in the form of 36,056,912 Common
ADSs and 2,447,203 ADWs), which was equivalent to 8.90% of Oi’s outstanding common stock, and 14,145,359 Preferred Shares (in
the form of 14,145,359 Preferred ADSs), which was equivalent to 9.07% of Oi’s outstanding preferred stock, in each case as of October
4, 2018.
As of December 31, 2018, as reported in a Schedule 13G/A jointly filed with the SEC by Solus Alternative Asset Management
LP, Solus GP LLC and Mr. Christopher Pucillo, the Solus Funds owned 201,230,955 Common Shares (in the form of 40,246,191
Common ADSs), which was equivalent to 8.88% of Oi’s outstanding common stock as of December 31, 2018, and 14,145,359
Preferred Shares (in the form of 14,145,359 Preferred ADSs), which was equivalent to 9.07% of Oi’s outstanding preferred stock as of
December 31, 2018.
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In January 2019, the Solus Funds acquired Common Shares (in the form of Common ADSs) through their participation in the
preemptive rights offering and pursuant to their commitments under the Commitment Agreement.
As of April 23, 2019, according to Oi’s shareholder records, the Solus Funds owned 428,055,765 Common Shares (in the form of
Common ADSs), or 7.38% of Oi’s outstanding common stock, and 14,145,359 Preferred Shares (in the form of 14,145,359 Preferred
ADSs), or 9.07% of Oi’s outstanding preferred stock.
Changes in York Shareholding Interest
In July 2018, Oi received a letter from York, a limited partnership formed under the laws of the Cayman Islands with headquarters
in the United Kingdom, informing it that as a result of the conclusion of the Capitalization of Credits Capital Increase, York had
acquired 173,057,975 Common Shares, which was equivalent to 8.04% of Oi’s outstanding common stock. In addition, York received
2,472,553 ADWs in the Capitalization of Credits Capital Increase, which it had the right to exercise to acquire 12,362,765 Common
Shares ADSs (in the form of 2,472,553 ADSs).
In January 2019, the York Funds acquired Common Shares (in the form of Common ADSs) through their participation in the
preemptive rights offering and pursuant to their commitments under the Commitment Agreement.
In February 2019, YGA filed a Schedule 13G with the SEC disclosing the York Funds’ ownership of 683,894,340 Common
Shares (in the form of 136,778,868 Common ADSs) as of January 31, 2019, which was equivalent to 11.86% of Oi’s outstanding
common stock.
As of April 23, 2019, according to Oi’s shareholder records, the York Funds owned 663,027,865 Common Shares (in the form of
132,605,573 Common ADSs), or 11.44% of Oi’s outstanding common stock.
Changes in GoldenTree Shareholding Interest
In August 2018, GoldenTree Asset Management LP, a Delaware limited partnership that serves as the investment manager or
adviser to the GoldenTree Funds with respect to the Common Shares held by the GoldenTree Funds, GoldenTree Asset Management
LLC, a Delaware limited liability company that serves as the general partner to GoldenTree Asset Management LP, and Mr. Steven A.
Tananbaum, a United States citizen, who serves as the managing member to GoldenTree Asset Management LLC, jointly filed a
Schedule 13D with the SEC disclosing the GoldenTree Funds’ ownership of 201,823,190 Common Shares as of July 27, 2018, which
was equivalent to 9.39% of Oi’s outstanding common stock. Of these, the GoldenTree Funds acquired 187,339,290 Common Shares (in
the form of 37,467,858 Common ADSs) through their participation in the Capitalization of Credits Capital Increase. In addition, the
GoldenTree Funds received 2,645,333 ADWs in the Capitalization of Credits Capital Increase, which they had the right to exercise to
acquire 13,226,665 Common Shares (in the form of 2,645,333 ADSs).
In November 2018, GoldenTree Asset Management LP, a Delaware limited partnership that serves as the investment manager or
adviser to the GoldenTree Funds with respect to the Common Shares held by the GoldenTree Funds, GoldenTree Asset Management
LLC, a Delaware limited liability company that serves as the general partner to GoldenTree Asset Management LP, and Mr. Steven A.
Tananbaum, a United States citizen, who serves as the managing member to GoldenTree Asset Management LLC, jointly filed a
Schedule 13D/A with the SEC disclosing the GoldenTree Funds’ ownership of 258,592,500 Common Shares (including 218,569,400
Common Shares in the form of 43,713,880 Common ADSs) as of November 28, 2018, which was equivalent to 11.4% of Oi’s
outstanding common stock.
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In January 2019, GoldenTree Asset Management LP, a Delaware limited partnership that serves as the investment manager or
adviser to the GoldenTree Funds with respect to the Common Shares held by the GoldenTree Funds, GoldenTree Asset Management
LLC, a Delaware limited liability company that serves as the general partner to GoldenTree Asset Management LP, and Mr. Steven A.
Tananbaum, a United States citizen, who serves as the managing member to GoldenTree Asset Management LLC, jointly filed a
Schedule 13D/A with the SEC disclosing the GoldenTree Funds’ ownership of 593,920,753 Common Shares as of January 16, 2018,
which was equivalent to 15.4% of Oi’s outstanding common stock (including 486,258,185 Common Shares in the form of 97,251,637
Common ADSs, 54,859,380 Common Shares held directly, 47,239,197 excess Common Shares in the form of 9,447,839 Common ADS
to be issued in connection with the overallotment option under the preemptive rights offering and 5,563,991 Common Shares to be
issued in connection with overallotment option under the preemptive rights offering).
In January 2019, the GoldenTree Funds acquired Common Shares (directly and in the form of Common ADSs) through their
participation in the preemptive rights offering and pursuant to their commitments under the Commitment Agreement.
In April 2019, GoldenTree Asset Management LP, a Delaware limited partnership that serves as the investment manager or
adviser to the GoldenTree Funds with respect to the Common Shares held by the GoldenTree Funds, GoldenTree Asset Management
LLC, a Delaware limited liability company that serves as the general partner to GoldenTree Asset Management LP, and Mr. Steven A.
Tananbaum, a United States citizen, who serves as the managing member to GoldenTree Asset Management LLC, jointly filed a
Schedule 13D/A with the SEC disclosing the GoldenTree Funds’ ownership of 865,512,751 Common Shares (including 550,038,310
Common Shares in the form of 110,007,662 Common ADSs) as of April 9, 2018, which was equivalent to 15.0% of Oi’s outstanding
common stock.
As of April 23, 2019, according to Oi’s shareholder records, the GoldenTree Funds owned 865,512,751 Common Shares (directly
and in the form of Common ADSs), or 14.93% of Oi’s outstanding common stock.
Changes in Brookfield Shareholding Interest
In September 2018, Brookfield Asset Management, Inc. and certain funds managed by it, or the Brookfield Funds, jointly filed a
Schedule 13D with the SEC disclosing the Brookfield Funds’ ownership of 123,396,285 Common Shares as of August 16, 2018, which
was equivalent to 5.74% of Oi’s outstanding common stock, all of which were held in the form of 24,679,257 ADSs. Of these, certain
of the Brookfield Funds acquired 106,054,035 Common Shares (in the form of 21,210,807 Common ADSs) through their participation
in the Capitalization of Credits Capital Increase and 17,342,250 Common Shares (in the form of 3,468,450 Common ADSs) through
open market purchases. In addition, the Brookfield Funds received 1,515,232 ADWs in the Capitalization of Credits Capital Increase,
which they had the right to exercise to acquire 7,576,160 Common Shares ADSs (in the form of 1,515,232 ADSs).
In January 2019, Brookfield Asset Management, Inc. and the Brookfield Funds jointly filed a Schedule 13D/A with the SEC
disclosing the Brookfield Funds’ ownership of 343,410,230 Common Shares as of January 11, 2019, which was equivalent to 9.0% of
Oi’s outstanding common stock, all of which were held in the form of 68,682,046 ADSs.
In January 2019, the Brookfield Funds acquired Common Shares (in the form of Common ADSs) through their participation in the
preemptive rights offering and pursuant to their commitments under the Commitment Agreement.
As of April 23, 2019, according to Oi’s shareholder records, the Brookfield Funds owned 531,683,795 Common Shares (in the
form of Common ADSs), or 9.17% of Oi’s outstanding common stock.
Changes in Mare Finance Shareholding Interest
On March 6, 2019, Oi received a letter from Mare Finance Investment Holdings Designated Activity Company, or Mare Fianance,
a company formed under the laws of Ireland, informing Oi that Mare Finance had sold 1,264,500 Preferred Shares, reducing its
shareholding in Oi to below 5%.
As of April 23, 2019, according to Oi’s shareholder records, Mare Finance does not hold any Common Shares or Preferred Shares.
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Capitalization of Credits Capital Increase
Under the RJ Plan, Qualified Holders of the Defaulted Bonds were entitled to elect to receive the Qualified Recovery with respect
to their beneficial interests in the Defaulted Bonds. The Qualified Recovery included, among other things, (1) 302,846,268 new
Common ADSs (representing 1,514,231,340 newly issued Common Shares), (2) 23,250,281 Common ADSs previously held by PTIF
(representing 116,251,405 Common Shares), and (3) 23,295,054 ADWs representing the right to subscribe for 23,295,054 newly issued
Common ADSs (representing 116,475,270 Common Shares). The settlement of the Qualified Recovery took place on July 27, 2018.
Under Brazilian law, prior to issuing the Common Shares underlying the newly issued Common ADSs or the Warrants underlying
the newly issued ADWs to holders of Defaulted Bonds, Oi was required to conduct a preemptive offer of those Common Shares and
Warrants to all holders of its Common Share and Preferred Shares. Holders of Common ADSs and Preferred ADSs were not entitled to
participate in that preemptive offer. Holders of preemptive rights were entitled to subscribe to Common Shares and the associated
Warrants during a subscription period commencing on June 15, 2018 and ending on July 16, 2018 at a subscription price of R$7.00 per
Common Share. Holders of Common Shares and Preferred Shares subscribed for 68,263 Common Shares and 5,197 Warrants in the
preemptive offer. The cash proceeds of the preemptive offer were required to be made available to holders of Defaulted Bonds in lieu of
the subscribed Common Shares and Warrants.
For more information about the Qualified Recovery, see “Item 4. Information on the Company—Our Recent History and
Development—Our Judicial Reorganization Proceedings—Implementation of the Financial Settlement of the Judicial Reorganization
Plan —Settlement of Class III Claims – Defaulted Bonds—Qualified Recovery.”
As a result of the conclusion of the Capitalization of Credits Capital Increase, the ownership interest of our then-existing
shareholders who did not participate in the preemptive offer was diluted. For more information about the owners of more than 5% of the
outstanding shares of any class of Oi’s share capital as of April 23, 2019, see “—Major Shareholders.”
Exercise of Warrants and ADWs
On October 26, 2018, our board of directors confirmed the issuance of 112,598,610 Common Shares and the delivery of such
Common Shares to holders of its Warrants that exercised their Warrants on or prior to October 24, 2018, including Warrants
represented by 22,135,429 ADWs that were exercised on or prior to October 18, 2018.
On December 5, 2018, our board of directors confirmed the issuance of 3,314,745 Common Shares and the delivery of such
Common Shares to holders of its Warrants that exercised their Warrants from October 25, 2018 through December 3, 2018, including
Warrants represented by 662,949 ADWs that were exercised from October 19, 2018 through November 27, 2018.
On January 4, 2019, our board of directors confirmed the issuance of 275,985 Common Shares and the delivery of such Common
Shares to holders of its Warrants that exercised their Warrants from December 4, 2018 through January 2, 2019, including Warrants
represented by 55,197 ADWs that were exercised from November 28, 2018 through December 26, 2018.
All Warrants that were not exercised on or prior to January 2, 2019, including all ADWs that were not exercised on or prior to
December 26, 2018, have been cancelled.
Preemptive Offering and Commitment Agreement
As contemplated by Section 6 of the RJ Plan, on November 13, 2018, we commenced a preemptive offering of Common Shares
that was registered with the SEC under the Securities Act under which holders of our Common Shares and Preferred Shares, including
the ADS Depositary and The Bank of New York Mellon, as depositary of the Preferred ADS program, received 1.333630 transferable
rights for each Common Share or Preferred Share held as of November 19, 2018. Each subscription right entitled its holder to subscribe
to one Common Share at a subscription price of R$1.24 per Common Share. In addition, each holder of a subscription right was entitled
to request the subscription for additional Common Shares, up to the total of 3,225,806,451 Common Shares that were offered in the
preemptive offering less the total number of initial Common Shares.
The subscription rights expired on January 4, 2019. On January 16, 2019, we issued 1,530,457,356 Common Shares to holders of
subscription rights that had exercised those subscription rights with respect to the initial Common Shares, including the depositaries
under the deposit agreements relating to our ADSs. On January 21, 2019, we issued 91,080,933 Common Shares to holders of
subscription rights that had requested subscriptions for excess Common Shares, including the depositaries under the deposit agreements
relating to our ADSs. The proceeds of these subscriptions was R$2,011 million.
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On January 25, 2019, we issued 1,604,268,162 Common Shares, representing the total number of Common Shares that were
offered in the preemptive offering less the total number of initial Common Shares and excess Common Shares, to the Backstop
Investors in a private placement under the terms of the RJ Plan and the Commitment Agreement for the aggregate amount of
R$1,989 million. In addition, under the terms of the RJ Plan and the Commitment Agreement, on that date we issued 272,148,705
Common Shares in a private placement to the Backstop Investors and paid US$13 million to the Backstop Investors as compensation
for their commitments under the Commitment Agreement.
PT Option Agreement
In May 2014, Oi completed a capital increase in which it issued, among other things 104,580,393 Common Shares and
172,025,273 of Preferred Shares to Pharol in exchange for the contribution by Pharol to Oi of all of the outstanding shares of PT
Portugal. However, prior to this capital increase, Pharol’s then wholly-owned subsidiaries 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 a stock option agreement, or
the PT Option Agreement.
On March 24, 2015, PT Portugal assigned its rights and obligations under the PT Exchange Agreement and the PT Option
Agreement to PTIF. On March 27, 2015, PT Portugal assigned 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 Common Shares and 94,869,744 Preferred Shares, representing 16.9% of Oi’s outstanding share capital,
including 17.1% of Oi’s outstanding voting capital prior to giving effect to the PT Exchange. Under Brazilian law, these shares are
deemed to be held in treasury.
Under the PT Option Agreement, PTIF granted to Pharol an option, or the PT Option, to acquire 47,434,872 Common Shares and
94,869,744 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 is reduced on each March 31 such that:
•
•
•
•
•
•
100% was available until March 31, 2016;
90% was available between March 31, 2016 and March 31, 2017;
72% was 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 January 28, 2019, Pharol had not exercised the PT Option with respect to
any of Oi’s shares and, as a result, the option over 21,820,041 Common Shares and 43,640,082 of Preferred Shares has
lapsed. The exercise prices under the PT Option are 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.
Oi is 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 Oi’s 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 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 Oi or Oi’s subsidiaries in the countries in which we or they operate; or (3) Pharol violates certain obligations under the PT
Option Agreement.
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Prior to the earlier of the expiration or full exercise of the PT Option, Pharol may not purchase shares of Oi, 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 Oi. If Pharol
issues, directly or indirectly, any derivative instrument that is backed by or references Oi’s 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 Oi’s
shares subject to the PT Option, and (2) Pharol has granted Oi 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 Oi, 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 Oi’s shares to acquire shares
pursuant to the exercise of the PT Option.
The effectiveness of the amendment to the PT Option Agreement was 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 Oi’s shareholders at which holders
of the Common Shares and Preferred Shares will be entitled to vote. However, in December 2015, the CVM collegiate declined to
authorize the amended terms, as a result of which this amendment has no effect.
Related Party Transactions
The following summarizes the material transactions that we have engaged in with Oi’s principal shareholders and their affiliates
since January 1, 2018.
Under the Brazilian Corporate Law, Oi’s directors, their alternates and Oi’s 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 Oi’s directors is absent
from a meeting of Oi’s 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.
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. During 2018, our total consolidated expenses under the lease agreements amounted to
R$207 million. As of December 31, 2018, we had accounts payable to Hispamar of R$67 million.
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 our service areas. During 2018, our total
consolidated expenses for services rendered by AIX amounted to R$27 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
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.
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As a result of the RJ Proceedings (which are considered to be similar in all substantive respects to proceedings under the U.S.
Bankruptcy Code), we have applied ASC 852 in preparing our audited consolidated financial statements. ASC 852 requires that
financial statements separately disclose and distinguish transactions and events that are directly associated with our reorganization from
transactions and events that are associated with the ongoing operations of our business. Accordingly, certain expenses, realized gains
and losses, and provisions for losses that are realized or incurred in the RJ Proceedings have been recorded under the classification
“Reorganization items, net” in our consolidated statements of operations. In addition, our prepetition obligations that may be impacted
by the RJ Proceedings based on our assessment of these obligations following the guidance of ASC 852 have been classified on our
consolidated statement of financial position as “Liabilities subject to compromise.” Prepetition liabilities subject to compromise are
required to be reported as the amount allowed as a claim by the RJ Court, regardless of whether they may be settled for lesser amounts.
Certain amounts initially recorded as liabilities subject to compromise were adjusted and reclassified to reflect new legal terms and
conditions established by the RJ Court. As a result of the effectiveness of the RJ Plan on February 5, 2018, the contingencies included
as “Liabilities subject to compromise” on our consolidated statement of financial position will be paid according to the terms of the RJ
Plan and were reclassified as current and non-current “Provisions for contingencies” on our consolidated statement of financial position.
As of December 31, 2018, the total estimated amount in controversy for those proceedings in respect of which the risk of loss was
deemed probable or possible totaled R$35,119 million, and we had established provisions of R$5,039 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 19 to our audited 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, 2018, we had made judicial deposits in the aggregate amount of R$8,735 million, and obtained financial guarantees
from third parties in the aggregate amount of R$13,751 million. During 2018, we paid fees in the aggregate amount of R$313 million to
the financial institutions from which we had obtained these guarantees, and as of December 31, 2018, we had pledged 1,811,755
Preferred Shares, representing 1.15% of our outstanding share capital, as security for one of these financial guarantees.
Tax Proceedings
As of December 31, 2018, 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$28,236 million, and we had recorded provisions of R$650 million relating to
these proceedings. In accordance with Brazilian law, our tax contingencies are not subject to the RJ Plan.
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 19 to our consolidated financial statements included in this annual
report. 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 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.
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As of December 31, 2018, we deemed the risk of loss as possible with respect to approximately R$12,523 million of these
assessments and had not recorded any provisions in respect of these assessments. As of December 31, 2018, we had recorded provisions
in the amount of R$503 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, 2018, we deemed the risk of loss as possible with respect to approximately R$3,505 million of these
assessments and had not recorded any provisions in respect of these assessments. As of December 31, 2018, we had recorded provisions
in the amount of R$76 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, 2018, we deemed the risk of loss as possible with respect to approximately R$4,785 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.
As of December 31, 2018, we deemed the risk of loss as possible with respect to approximately R$695 million of these
assessments. As of December 31, 2018, we had recorded provisions of R$23 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, 2018, we deemed the risk of loss as possible with respect to approximately R$2,490 million of these assessments and had
not recorded any provisions in respect of this claim.
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, 2018, we deemed the risk of loss as possible with respect to approximately R$4,282 million of these
assessments. As December 31, 2018, we had recorded provisions in the amount of R$47 million for those assessments in respect of
which we deemed the risk of loss as probable.
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Civil Claims Relating to Oi S.A. and Our Brazilian Operations
As of December 31, 2018, the total estimated contingency in connection with civil claims against us in respect of which the risk of
loss was deemed probable or possible, totaled R$4,655 million, and we had recorded provisions of R$2,931 million relating to these
proceedings.
Administrative Proceedings
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 PGMQ and the PGMU.
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 a result of the commencement of the RJ Proceedings, our contingencies related to claims of ANATEL were reclassified
liabilities subject to compromise and were measure as required by ASC 852. As of December 31, 2017, our prepetition liabilities
subject to compromise included R$9,334 million related with claims of ANATEL. As a result of the effectiveness of the RJ Plan on
February 5, 2018, the contingencies related to these claims were provisions for contingencies.
As of December 31, 2018, we have reclassified R$8,754 million of civil contingencies related to claims of ANATEL that were
classified as liabilities subject to compromise of as of December 31, 2017 as trade payables owing to ANATEL-AGU of
R$2,063 million on our balance sheet and we recorded reorganization items in our statement of operations of (1) R$4,873 million as a
result of the adjustment to present value of our trade payables owing to ANATEL-AGU, (2) R$1,654 million as a gain on restructuring
as a result of the RJ Proceedings, and (3) financial charges on our statement of operations of R$164 million.
As of December 31, 2018, we had recorded provisions in the amount of R$580 million with respect to these claims.
By operation of the RJ Plan and the Brazilian Confirmation Order, the claim for these contingent obligations has been novated and
discharged under Brazilian law and ANATEL is entitled only to receive the recovery set forth in the RJ Plan in exchange for these
contingent claims in accordance with the terms and conditions of the RJ Plan. For more information regarding the recoveries to which
ANATEL is entitled under the RJ Plan, see “Item 4. Information on the Company—Our Recent History and Development—Our
Judicial Reorganization Proceedings—Implementation of the Financial Settlement of the Judicial Reorganization Plan—Settlement of
Class III Claims – ANATEL.”
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. During 2016,
2017 and 2018 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 Agreements (PEX and PCT)
Prior to the privatization of Telebrás, users of fixed-line telephony services in Brazil were required to purchase the right to use
fixed telephone lines. These purchases could be made through two types of financial interest agreements: (1) Plan of Expansion (Plano
de Expansão), or PEX, contracts; and (2) Community Telephone Programs (Planta Comunitária de Telefonia), or PCT, contracts.
Under PEX contracts, customers who purchased a telephone line acquired the right subscribe for a number of a telephone company’s
shares. Under the PCT program, users who purchased a telephone line acquired a participation in an association formed by a local
community that subcontracted the construction or expansion of necessary infrastructure, which was then sold to the telephone company,
in exchange for shares of the company. The number of shares to be issued to each user was determined based on a formula that divided
the contract value by the book value of the shares.
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We are 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 PEX contracts with its fixed-line subscribers. 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 various companies we acquired in the privatization of Telebrás and which were subsequently merged
into our company, we are subject to various civil claims filed by PCT participants who also disagree with the value of their shares in
those companies and who seek to recover the amounts they invested.
In 2009, two court decisions significantly changed the assumptions underlying our estimate of the potential losses relating to these
suits. In March 2009, the Brazilian Supreme Court published a decision ruling that the financial interest agreements are subject to the
twenty-year statute of limitations prescribed by the Brazilian Civil Code, as opposed to the three-year statute of limitations prescribed
by the Brazilian Corporate Law. This decision increased the likelihood of an unfavorable outcome in a greater number of these pending
cases than previously anticipated. Also in March 2009, the Superior Court of Justice ruled that the number of shares to be issued must
be calculated using the book value of the shares listed on company’s balance sheet at the end of the first month in which the shares were
issued.
As of December 31, 2018, we had recorded provisions in the amount of R$1,124 million for those claims in respect of which we
deemed the risk of loss as probable.
Customer Service Centers
We are a defendant in 44 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, 2018, we had
recorded provisions in the amount of R$10.2 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 a corporate reorganization in
2012, we have succeeded to TNL’s position as a defendant in this action. As of December 31, 2018, 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, 2018, we had recorded provisions in the
amount of R$192 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, 2018, we had recorded
provisions in the amount of R$1,035 million in respect of these claims.
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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, 2018, 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$2,228 million, and we had recorded provisions of R$1,457 million relating to these
proceedings.
Legal Proceedings Relating to Our Interest in Unitel
On October 13, 2015, PT Ventures initiated an arbitration proceeding against the other Unitel shareholders as a result of the
violation by those shareholders of a variety of provisions of the Unitel shareholders’ agreement and Angolan law, including the
provisions entitling PT Ventures to nominate the majority of the members of the board of directors of Unitel, including its managing
director, and the fact that the other Unitel shareholders caused Unitel not to pay dividends owed to PT Ventures, entered into self-
interested transactions, and withheld information and clarifications on such payment and transactions.
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 in May 2014 constituted a breach of the Unitel shareholders’ agreement.
PT Ventures disputed this interpretation of the relevant provisions of the Unitel shareholders’ agreement arguing that the relevant
provisions of the Unitel shareholders’ agreement apply only to a transfer of Unitel shares by PT Ventures itself.
The arbitral tribunal was constituted on April 14, 2016. On May 19, 2016, the arbitration proceeding against PT Ventures initiated
by the other Unitel shareholders was consolidated with the arbitration initiated by PT Ventures. On October 14, 2016, PT Ventures filed
its Statement of Claim in the arbitration and the Unitel shareholders presented their statement of defense and counterclaim on
February 28, 2017. PT Ventures presented its statement of reply on July 7, 2017 and the other shareholders of Unitel presented their
statement of rejoinder on October 16, 2017. PT Ventures filed its statement of rejoinder to the counterclaim on December 19, 2017. A
hearing in the arbitration was held from February 7 to 16, 2018, where each party presented its arguments and the factual witnesses and
experts from each side were heard. A closing hearing was held on May 9, 2018. The parties exchanged their first post-hearing briefs on
July 13, 2018 and their second post-hearing briefs on October 1, 2018. The parties submitted their statements of costs on November 12,
2018. PT Ventures and two other Unitel shareholders filed their responses to the statement of costs on November 28, 2018.
On January 21, 2019, the arbitral tribunal declared the proceeding closed and informed the parties that it had agreed on a draft of
the final award which would be submitted to the ICC Court of Arbitration for approval. The ICC Court of Arbitration approved the draft
of the final award on February 6, 2019. On February 27, 2019, the ICC Secretariat informed the parties that the arbitral tribunal issued
its final award on February 20, 2019.
In the final award, the arbitral tribunal decided that the other Unitel shareholders had repeatedly breached the shareholders’
agreement, and that these breaches had resulted in a significant decrease of value of PT Ventures’ stake in Unitel. The arbitral tribunal
ordered the other Unitel shareholders to jointly and severally pay PT Ventures the amount of US$339.4 million corresponding to the
loss of value of PT Ventures’ stake in Unitel, plus interest from February 20, 2019 at 12-month U.S. dollar LIBOR +2%, compounded
annually. The arbitral tribunal also ordered the other Unitel shareholders to jointly and severally pay PT Ventures the amount of
US$307 million corresponding to the damages arising from the other Unitel’s shareholders’ failure to ensure that PT Ventures received
the same amount of dividends in foreign currency as the other Unitel foreign shareholder. This amount is subject to interest at an annual
rate of 7%, starting at various dates in 2013. In addition, the arbitral tribunal ordered the other Unitel shareholders to pay a substantial
portion of PT Ventures’ legal fees and costs and the administrative and arbitrators’ fees and expenses, in the aggregate net amount of
approximately US$13 million. The arbitral tribunal also entirely dismissed the counterclaim and agreed with PT Ventures that the
conditions for exercising the right of first refusal to acquire PT Ventures’ 25% shareholding in Unitel had not been triggered.
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On June 20, 2016, Oi, together with the other RJ Debtors, filed a joint voluntary petition for judicial reorganization pursuant to the
Brazilian Bankruptcy Law with the RJ Court, pursuant an urgent measure approved by our board of directors.
On December 20, 2017, the RJ Plan was approved by a significant majority of creditors of each class present at the GCM. On
January 8, 2018, the RJ Court entered the Brazilian Confirmation Order, ratifying and confirming the RJ Plan, but modifying certain
provisions of the RJ Plan. The Brazilian Confirmation Order was published in the Official Gazette of the State of Rio de Janeiro on
February 5, 2018.
For more information regarding the RJ Proceedings, see “Item 4. Information on the Company—Our Recent History and
Development—Our Judicial Reorganization Proceedings.”
ANATEL Proceedings
Concurrently with our negotiations with our financial creditors, we engaged in negotiation and litigation with ANATEL, our
largest creditor, with respect to the treatment of outstanding claims for fines, interest and penalties in the RJ Proceedings. On
November 24, 2016, a hearing was held with the goal of consensually resolving ANATEL’s claims against the RJ Debtors’ as part of a
mediation procedure initiated under RJ Proceedings. However, ANATEL filed an appeal against the decision which ordered the
mediation, which is pending judgement.
The revised list of creditors submitted to the RJ Court by the Judicial Administrator of the RJ Debtors, or the Second List of
Creditors, recognized claims of ANATEL in the aggregate amount of approximately R$11.1 billion. On June 9, 2017 ANATEL filed a
challenge to the Second List of Creditors, objecting the inclusion of its claim. We disagree with the amount and are challenging some of
the noncompliance events alleged by ANATEL, and are also challenging the fairness of the penalties, emphasizing the
unreasonableness of the amount of the imposed fines in light of the alleged noncompliance events.
The inclusion of the claims of ANATEL in the RJ Debtor’s judicial reorganization plan does not require the consent of ANATEL,
but instead depends on the recognition of the applicability of the RJ Proceedings to these claims.
On August 23, 2016, ANATEL filed an appeal against the decision of the RJ Court which granted the processing of the RJ
Proceedings, stating that the RJ Proceedings did not apply to ANATEL’s claims. On August 29, 2017, the 8th Civil Chamber of the Rio
de Janeiro State Court of Justice granted ANATEL’s appeal to maintain the name of the RJ Debtors in the databases of the credit
protection agencies, but held that the pre-petition claims of ANATEL were not tax claims and, therefore, were subject to the RJ
Proceedings. On October 20, 2017, ANATEL filed a special and an extraordinary appeals against the decision of the 8th Civil Chamber
of the Rio de Janeiro State Court of Justice. Judgments on these appeals by the Superior Court of Justice and the Supreme Court of
Brazil are pending.
On September 4, 2017, ANATEL filed a request for stay against the decision of the RJ Court that permitted the GCM to be held
without granting the request made by ANATEL to exclude all of its claims from the RJ Proceeding. On June 25, 2018 the Special
Chamber of the Rio de Janeiro State Court of Justice denied the request.
Recognition Proceedings in the United States
On June 22, 2016, the U.S. Bankruptcy Court entered an order granting the provisional relief requested by the Chapter 15 Debtors
in their cases that were filed on June 21, 2016 under Chapter 15 of the United States Bankruptcy Code. This provisional relief prevented
(1) creditors from initiating actions against the Chapter 15 Debtors or their property located within the territorial jurisdiction of the
United States, and (2) parties from terminating their existing U.S. contracts with the Chapter 15 Debtors.
On July 21, 2016, the U.S. Bankruptcy Court held a hearing with respect to the Chapter 15 Debtors petition for recognition of the
RJ Proceedings as a main foreign proceeding with regard to each of the Chapter 15 Debtors and did not receive any objections to such
petition.
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On July 22, 2016, the U.S. Bankruptcy Court granted the U.S. Recognition Order, as a result of which a stay was automatically
applied, preventing (1) the filing, in the United States, of any actions against the Chapter 15 Debtors or their properties located within
the territorial jurisdiction of the United States, and (2) parties from terminating their existing U.S. contracts with the Chapter 15
Debtors.
On April 17, 2018, the foreign representative for the Chapter 15 Debtors filed a motion with the U.S. Bankruptcy Court seeking an
order of that court granting, among other things, full force and effect to the RJ Plan and the Brazilian Confirmation Order in the United
States. On June 14, 2018, the U.S. Bankruptcy Court granted the requested order. As a result, the claims with respect to the Defaulted
Bonds that were governed by New York law have been novated and discharged under New York law and the holders of these Defaulted
Bonds are entitled only to receive the recovery set forth in the RJ Plan in exchange for the claims represented by these Defaulted Bonds.
Recognition Proceedings in the United Kingdom
On June 23, 2016, the High Court of Justice of England and Wales granted the U.K. Recognition Orders. Together, the U.K.
Recognition Orders:
•
•
•
stayed the commencement or continuation of individual actions or individual proceedings concerning the assets, rights,
obligations or liabilities of Oi, Telemar and Oi Mobile;
stayed execution against the assets of Oi, Telemar and Oi Mobile; and
suspended the rights of Oi, Telemar and Oi Mobile to transfer, encumber or otherwise dispose of their assets.
On July 28, 2016, the U.K. Recognition Order granted in respect of Oi Mobile was partially modified to lift the suspension on its
rights to transfer, encumber or otherwise dispose of its assets.
On May 17, 2018, meetings of each series of bonds issued by PTIF were held at which the bondholders voted in favor of
extraordinary resolutions providing for, among other things, the release of Oi’s guarantee for each of the series of PTIF bonds. As a
result, the bonds were modified so as to remove Oi’s obligation as a guarantor, leaving only PTIF as obligor. A deed of release
evidencing the release of Oi’s guarantee obligations was executed by the parties on July 26, 2018.
As a result of the homologation of the PTIF Composition Plan described below under “—Restructuring of Our Dutch Finance
Subsidiaries” on June 20, 2018, the PTIF Composition Plan was automatically recognized by each EU member state of the, including
the UK, under the European Insolvency Regulation (2015/848). As a result, the claims against PTIF with respect to the Defaulted Bonds
that were governed by English law have been novated and discharged as a matter of English law and the holders of these Defaulted
Bonds are entitled only to receive the recovery set forth in the RJ Plan in exchange for the claims represented by these Defaulted Bonds.
Recognition Orders in Portugal
On November 14, 2016, Oi and Telemar requested the Portuguese Court to recognize the RJ Proceedings in Portugal in relation to
Oi and Telemar under the Portuguese Insolvency and Corporate Recovery Code. On July 11, 2017, Oi Mobile requested the Portuguese
Court to recognize the RJ Proceedings in relation to Oi Mobile under the Portuguese Insolvency and Corporate Recovery Code. The
Portuguese Court granted recognition of the RJ Proceedings in Portugal in relation to Oi and Telemar on March 1, 2017 and Oi Mobile
on August 4, 2017.
On May 9, 2018, Oi, Telemar and Oi Mobile, along with Copart 4 and Copart 5, filed a request for recognition of the RJ Plan in
Portugal with respect to these entities. On August 1, 2018, the Portuguese Court rejected this decision on the grounds that the RJ Plan
was still subject to appeal in Brazil. Oi appealed this decision, and on October 26, 2018, the Lisbon Court of Appeal reversed the
decision of the Portuguese Court, recognized in Portugal the decision rendered by the RJ Court on January 8, 2018 and published on
February 5, 2018, which confirmed the RJ Plan, and ordered the publication of the Brazilian decision in Portugal.
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Restructuring of Our Dutch Finance Subsidiaries
Although the RJ Proceedings have been recognized in the United States, England and Wales and Portugal, the laws of The
Netherlands do not provide for the recognition of the RJ Proceedings. Two of the RJ Debtors, Oi Coop and PTIF, are organized under
the laws of The Netherlands. As a result, a group of holders of some of the Defaulted Bonds issued by Oi Coop and PTIF brought
proceedings against these RJ Debtors in The Netherlands.
On June 27, 2016, Syzygy Capital Management, Ltd, an affiliate of Aurelius Capital Management LP, filed a petition for the
involuntary bankruptcy of Oi Coop before the Dutch District Court, requesting that the Dutch District Court (1) declare Oi Coop in a
state of bankruptcy, and (2) declare the bankruptcy of Oi Coop a main insolvency proceeding within the meaning of Article 3.1 of the
European Insolvency Regulation (EC no. 1346/2000). Several other similar petitions were filed by other creditors of Oi Coop during
July 2016.
On August 22, 2016, Citicorp Trustee Company Limited, or Citicorp, in its capacity as the trustee in respect of the a series of
bonds issued by PTIF, purportedly acting at the direction of the requisite majority of the holders of these bonds, filed a petition for the
involuntary bankruptcy of PTIF in the Dutch District Court requesting that the Dutch District Court (1) order the bankruptcy of PTIF,
and (2) declare the bankruptcy of PTIF a main insolvency proceeding within the meaning of Article 3.1 of the European Insolvency
Regulation (EC no. 1346/2000).
On April 10, 2018, PTIF deposited a draft of the PTIF Composition Plan with the Dutch District Court and Oi Coop deposited a
draft of the Oi Coop Composition Plan with the Dutch District Court. The PTIF Composition Plan and the Oi Coop Composition Plan
each provide for the restructuring of the claims against PTIF and Oi Coop on substantially the same terms and conditions as the RJ Plan.
On May 17, 2018, meetings of each series of bonds issued by PTIF were held at which the bondholders voted in favor of
extraordinary resolutions providing for: (1) the release Oi’s guarantee for each of the relevant series of Defaulted Bonds, (2) the
authorization of the trustee of each outstanding series of Defaulted Bonds issued by PTIF to act as a sole creditor of such Defaulted
Bonds, submit a claim on behalf of the holders of such Defaulted Bonds to the PTIF Trustee in relation to the PTIF bankruptcy and vote
in favor of the PTIF Composition Plan, and (3) authorize the trustee of each outstanding series of Defaulted Bonds issued by PTIF to
request the PTIF Trustee in respect of its vote on behalf of PTIF, to vote in favor of the Oi Coop Composition Plan.
On June 1, 2018, at a meeting of the creditors of PTIF in the Netherlands, the creditors of PTIF approved the PTIF Composition
Plan and directed the PTIF Trustee to vote PTIF’s claims in Oi Coop in favor of the Oi Coop Composition Plan. Also on June 1, 2018,
at a meeting of the creditors of Oi Coop, the creditors of Oi Coop approved the Oi Coop Composition Plan.
On June 11, 2018, the Dutch District Court confirmed the PTIF Composition Plan and the Oi Coop Composition Plan at a
homologation hearing. The homologation was subject to an eight day appeal period, which expired on June 19, 2018. As of that date, no
appeals had been filed. As a result, the PTIF Composition Plan and the Oi Coop Composition Plan are effective as a matter of Dutch
law, the bankruptcies of PTIF and Oi Coop have terminated and the PTIF Composition Plan and the Oi Coop Composition Plan have
full force and effect in each member state of the European Union.
Oi Coop Avoidance Proceedings
On May 30, 2017, Mr. Berkenbosch, as Oi Coop’s bankruptcy trustee in the Netherlands, commenced a Dutch Pauliana action on
behalf of the Dutch bankruptcy estate of Oi Coop against Oi and Oi Mobile in the Dutch District Court seeking repayment of and
damages in relation to several intercompany loans made by Oi Coop to Oi and Oi Mobile.
On July 26, 2017, two funds that are holders of bonds issued by Oi Coop filed a request to join these proceedings in their capacity
as creditors of Oi Coop and parties-in-interest the side of Oi and Oi Mobile. On September 13, 2017 and the District Court rendered a
judgment in which it allowed the two funds to join the proceedings. Oi Coop, as an entity distinct from its bankruptcy estate, also
sought to join the proceeding on the side of defendants Oi and Oi Mobile. On August 2, 2017, Oi Coop’s request for joinder was denied
by the Dutch District Court. Oi Coop appealed this judgment. On December 5, 2017 the Court of Appeal rejected Oi Coop’s appeal
against the judgment of the Dutch District Court denying the joinder of Oi Coop. On March 5, 2018, Oi Coop filed an appeal to the
Dutch Supreme Court against the judgment of the Court of Appeal.
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On June 25, 2018, Mr. Berkenbosch requested the Dutch District Court to remove the case from the docket because of the
termination of the bankruptcy of Oi Coop. The Dutch District Court placed the case on the docket of October 3, 2018, for parties to
inform the Dutch District Court whether they would like to continue the proceedings. On September 12, 2018, parties in interest to the
proceeding, including funds Capricorn and Syzygy, informed the Dutch District Court that they agreed with the motion to withdraw the
proceeding. On October 3, 2018, the Dutch District Court formally processed the motion to withdraw the proceedings and the
proceedings were formally terminated.
On September 14, 2018, Oi Coop requested the Dutch Supreme Court to formally withdraw its appeal in cassation regarding its
motion to join the proceedings. The Dutch Supreme Court formally terminated the appeal proceedings on September 28, 2018.
Market Arbitration Chamber Proceeding
Oi’s by-laws provide that disputes arising between shareholders and Oi relating to, among other things, alleged violations of Oi’s
by-laws or the Brazilian Corporate Law must be resolved in arbitration proceedings before the Market Arbitration Chamber (Câmara de
Arbitragem do Mercado) of the B3. In addition, Oi’s by-laws in effect prior to September 17, 2018, also provided that, prior to the
formation of the arbitration panel, emergency measures relating to these alleged violations were required to be brought before an
emergency arbitrator (árbitro de apoio) appointed by the Market Arbitration Chamber.
On February 28, 2018, one of our shareholders, Bratel, filed a petition with the Market Arbitration Chamber requesting the
commencement of an arbitration against Oi and the appointment of an Emergency Arbitrator. Although the Market Arbitration Chamber
does not have jurisdiction to reverse the approval of the RJ Plan by the GCM or to reverse the Brazilian Confirmation Order, Bratel
alleged, among other things, that notwithstanding the Judicial Ratification of the RJ Plan by the RJ Court, certain provisions of the RJ
Plan, including the Capitalization of Credits Capital Increase, the Cash Capital Increase and the changes to Oi’s corporate governance
structure, which we refer to collectively as the “Corporate Law Provisions of the RJ Plan,” were required to be submitted to and
approved by an EGM.
On January 8, 2019, Oi, Bratel and Pharol entered into the Pharol Settlement Agreement, which provides, among other things, for
the termination of all existing litigation involving Oi, Bratel and Pharol in Brazil and abroad. The effectiveness of the Pharol Settlement
Agreement was subject to confirmation by the RJ Court. On February 28, 2019, the RJ Court confirmed the Pharol Settlement
Agreement by a decision published in the Official Gazette of the State of Rio de Janeiro on March 12, 2019. This decision became final
on April 3, 2019.
As a result of the effectiveness of the Pharol Settlement Agreement, on April 8, 2019, Oi and Pharol filed a motion to terminate
this proceeding, which is pending a final order.
Pharol Proceedings in Portugal
By means of the information provided by the media, the registration in the Commercial Registry of some of the Portuguese
subsidiaries and Pharol’s announcement to the market via the Portuguese Securities Market Commission platform, Oi acknowledged
that in May 2018 Pharol filed a motion for preliminary injunction against Oi and its Portuguese subsidiaries. Under Portuguese law, a
preliminary injunction is decided without a prior hearing of the party or parties against whom the injunction is sought. Parties are
summoned to the court only in the event that the court decides to grant the injunction. Portuguese Law also provides that the
preliminary injunction should be decided, by the first instance court, within 15 days of its request by the moving party. According to
Pharol’s announcement to the market via the Portuguese Securities Market Commission platform on September 13, 2018, the
preliminary injunction was rejected, and an appeal against that decision was filed. As of the date of this annual report, no judgement has
yet been rendered. However, as further described below, in light of the effectiveness of the Pharol Settlement Agreement, Pharol has
filed a motion to terminate these proceedings.
Also by means of the information provided by the media and Pharol’s announcement to the market via the Portuguese Securities
Market Commission platform, Oi acknowledged that in November 2018, Pharol filed an application against Oi and one of its
Portuguese subsidiaries, PT Participações, SGPS, S.A., before the Lisbon Civil Court, pursuant to which it seeks to be compensated by
Oi, in the amount of €2,017.1 million, which includes due and falling interest. The proceedings are grounded on the civil liability of Oi
arising from an alleged breach of its duty to disclose information during the relationship with Pharol, particularly at the time of the
General Meetings held in Lisbon, on September 8, 2014, January 12, 2015 and January 22, 2015. As of the date of this annual report, Oi
has not yet been summoned to the proceedings to lodge its opposition. However, as further described below, in light of the effectiveness
of the Pharol Settlement Agreement, Pharol has filed a motion to terminate these proceedings.
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On January 8, 2019, Oi, Bratel and Pharol entered into the Pharol Settlement Agreement, which provides, among other things, for
the termination of all existing litigation involving Oi, Bratel and Pharol in Brazil and abroad. The effectiveness of the Pharol Settlement
Agreement was subject to confirmation by the RJ Court. On February 28, 2019, the RJ Court confirmed the Pharol Settlement
Agreement by a decision published in the Official Gazette of the State of Rio de Janeiro on March 12, 2019. This decision became final
on April 2, 2019.
As a result of the effectiveness of the Pharol Settlement Agreement, Pharol has filed motions to terminate the aforementioned
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, intellectual property and supplementary pension plan, among others, for which
we deem the risk of loss as possible and have not recorded any provisions. As of December 31, 2018, we deemed the risk of loss as
possible with respect to R$30,080 million of these proceedings. This amount is based on total value of the damages being sought by the
plaintiffs; however, the value of some of these claims, cannot be estimated at this time. Typically, we believe the value of individual
claims to be beyond the merits of the case in question.
Dividends and Dividend Policy
Dividend Policy
Oi’s dividend distribution policy has historically included the distribution of periodic dividends, based on the annual financial
statements approved by Oi’s board of directors, in accordance with the Brazilian Corporate Law and as set forth in Oi’s by-laws, which
provide that, in general, a minimum amount of 25% of Oi’s consolidated net income for each fiscal year, as calculated and adjusted for
amounts allocated to legal and other applicable reserves in accordance with the Brazilian Corporate Law, must be distributed to
shareholders. We refer to this amount as the mandatory distributable amount. Oi may pay the mandatory distributable amount as
dividends, interest attributable to shareholders’ equity (which is similar to a dividend but is deductible in calculating corporate income
tax and social contribution on net profits, subject to certain limitations imposed by law as described in “Item 10. Additional
Information—Taxation—Brazilian Tax Considerations—Interest on Shareholders’ Equity”). Payment of intermediate or interim
dividends is also be permitted, subject to market conditions, Oi’s then-prevailing financial condition and other factors deemed relevant
by Oi’s board of directors. Oi may set off any payment of interim dividends against the amount of the mandatory distributable amount
to be paid in the year in which the interim dividends are paid.
Notwithstanding the above, under Section 10.1 of the RJ Plan, Oi and the other RJ Debtors are prohibited from declaring or
paying dividends, interest on shareholders’ equity or other forms of return on capital or making any other payment or distribution on or
related to their shares (including any payment related to a merger or consolidation) until the sixth anniversary of the date of the Judicial
Ratification of the RJ Plan. After the sixth anniversary of the date of the Judicial Ratification of the RJ Plan, Oi and the other RJ
Debtors will be permitted to declare or pay dividends, interest on shareholders’ equity or other forms of return on capital or make any
other payment or distribution on or related to their shares (including any payment related to a merger or consolidation) if the ratio of
Oi’s consolidated net debt (defined as Financial Credits, minus Cash Balance (in each case as defined in the RJ Plan)) to EBITDA (as
defined in the RJ Plan) for the fiscal year ended immediately prior to any such declaration or payment is less than or equal to 2 to 1.
The restrictions of the payment of dividends and other distributions described above are subject to the following exceptions:
•
•
•
dividends, return on capital or other distributions made between the RJ Debtors;
payments by Oi and the other RJ Debtors to dissenting shareholders, according to applicable law, carried out after the date of
the Judicial Ratification of the RJ Plan; and
any payment of dividends made in accordance with the RJ Plan.
There shall not be any restriction to the distribution of dividends under the RJ Plan after the full payment of the Financial Credits.
Pursuant to Section 10.2.1 of the RJ Plan, if at any time any two of Standard & Poor’s, Moody’s and Fitch rate Oi as investment
grade and no default occurs, the restrictions on distributions imposed by Section 10.1 of the RJ Plan will be suspended. However, if one
of these rating agencies, or both of them, subsequently cancels or downgrades Oi’s rating, then the suspended restrictions will be
reinstated.
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When Oi declares dividends, Oi is generally required to pay them within 60 days of declaring them, unless the shareholders’
resolution establishes another payment date. In any event, if Oi declares dividends, Oi 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 Oi’s by-laws, Oi also may pay interest attributable to shareholders’
equity as an alternative form of dividends upon approval of Oi’s board of directors.
Because Oi’s 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 Shares 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 such Common Shares 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 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 the Common Shares, Preferred Shares and ADSs.”
Distributions of dividends, including interest attributable to shareholders’ equity, 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 Oi’s share capital divided by the number of Oi’s total issued shares, or (2) 3.0% per year of the book value of
Oi’s shareholders’ equity divided by the number of Oi’s 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
thereafter, to the holders of Common Shares and Preferred Shares on a pro rata basis.
Under Oi’s by-laws, if the Minimum Preferred Dividend is not paid for a period of three years, holders of Preferred Shares are
entitled to full voting rights. As a result of Oi’s failure to pay the Minimum Preferred Dividend for 2014, 2015 and 2016, holders of
Oi’s Preferred Shares obtained full voting rights on April 28, 2017, the date that Oi’s annual shareholders’ meeting approved our
financial statements for fiscal year 2016.
Historical Payment of Dividends
Oi has not paid any dividends and/or interest attributable to shareholders’ equity since January 1, 2014.
Taxation of Dividends
Under the current Brazilian tax law, dividends paid to persons who are not Brazilian residents, including holders of ADSs, are not
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. Any payment of interest attributable to shareholders’ equity to
holders of Common Shares, Preferred Shares or 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 domiciled in a Favorable Tax Jurisdiction. For
information regarding Brazilian tax implications of dividends and interest attributable to shareholders’ equity, see “Item 10. Additional
Information—Taxation—Brazilian Tax Considerations.”
Holders of Common Shares, Preferred Shares or ADSs may also be subject to U.S. federal income taxation on dividends and
interest attributable to shareholders’ equity. For more information on the U.S. federal income tax implications of dividends and interest
attributable to shareholders’ equity, see “Item 10. Additional Information—Taxation—U.S. Federal Income Tax Considerations.”
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.
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ITEM 9.
THE OFFER AND LISTING
Markets for Oi’s Equity Securities
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The principal trading market for Common Shares and Preferred Shares is the B3, where they are traded under the symbols
“OIBR3” and “OIBR4,” respectively. Common Shares and Preferred Shares began trading on the B3 on July 10, 1992. On
November 16, 2001, Preferred ADSs began trading on the NYSE under the symbol “BTM.” On November 17, 2009, Common ADSs
began trading on the NYSE under the symbol “BTMC.” On April 9, 2012, the trading symbols for Preferred ADSs and Common ADSs
on the NYSE were changed to “OIBR” and “OIBR.C,” respectively.
On June 21, 2016, the NYSE determined that Preferred ADSs should be suspended immediately from trading and commenced
procedures to remove Preferred ADSs from listing and registration on the NYSE based on the “abnormally low” trading price of
Preferred ADSs. On June 23, 2016, the OTC Markets Group, Inc. began publishing quotations for Preferred ADS in the “pink sheets”
under the trading symbol OIBRQ. On July 6, 2016, the NYSE filed a Notification of Removal from Listing and/or Registration under
Section 12(b) of the Securities Exchange Act of 1934 with the SEC with respect to Preferred ADSs, and Preferred ADSs were removed
from listing and registration on the Exchange on July 18, 2016. The Common ADSs continue to be listed and registered on the NYSE.
Oi has registered its Common ADSs and Preferred ADSs with the SEC pursuant to the Exchange Act. On April 23, 2019, there
were 741,936,189 Common ADSs outstanding, representing 3,709,680,945 Common Shares, or 64.00% of the outstanding Common
Shares, and 35,180,071 Preferred ADSs outstanding, representing 35,180,071 Preferred Shares or 22.56% of the outstanding Preferred
Shares.
Price History of the Common Shares, Preferred Shares and ADSs
The tables below set forth the high and low closing sales prices and the approximate average daily trading volume for Common
Shares and Preferred Shares on the B3 and the high and low closing sales prices and the approximate average daily trading volume for
Common ADSs and Preferred ADSs on the NYSE for the periods indicated.
B3
Reais per Common Share(1)
NYSE
U.S. dollars per Common ADS(1)
2014
2015
2016
2017
2018
2017
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2018
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2019
First Quarter
Most Recent Six Months
October 2018
November 2018
December 2018
January 2019
February 2019
March 2019
April 2019(2)
Average Daily
Trading Volume
(thousands of shares)
Closing Price
per Common Share
Low
High
(in reais)
48.80
9.12
4.20
6.06
4.50
5.42
4.65
5.10
6.06
4.50
4.50
3.95
2.22
9.15
2.06
0.80
2.62
1.24
2.62
3.59
4.00
3.38
3.19
3.36
2.09
1.24
467.8
1,060.9
5,236.0
1,973.5
6,866.0
2,533.6
978.9
1,218.0
3,232.5
5,740.0
3,322.6
4,930.8
13,962.0
Closing Price
per Common ADS
High
Low
(in U.S. dollars)
101.5
16.4
6.1
9.49
6.88
16.6
2.5
1.1
3.94
1.56
8.48
7.24
8.09
9.49
6.88
5.98
5.07
3.92
3.94
5.27
6.20
5.00
4.85
4.36
2.47
1.56
1.90
1.25
40,621.8
2.46
1.61
2.90
2.22
1.43
1.43
1.79
1.90
1.75
2.25
1.44
1.24
1.25
1.32
1.52
1.44
7,807.4
14,494.7
20,804.1
27,792.0
54,267.9
40,437.9
50,336.5
3.76
3.92
1.78
1.90
2.29
2.46
2.18
2.79
1.85
1.56
1.61
1.73
1.88
1.80
Average Daily Trading
Volume (thousands
of Common ADSs)
36.3
57.7
178.3
61.4
414.4
64.7
112.3
36.7
32.3
107.8
161.4
514.9
875.2
2,480.2
855.0
1,005.1
755.1
1,797.4
3,388.8
2,341.0
2,044.3
(1) Adjusted to reflect the reverse split of all of the 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 the 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 April 23, 2019.
Source:Quantum Finance/IPREO
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2014
2015
2016(3)
2017
2018
2017
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2018
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2019
First Quarter
Most Recent Six Months
October 2018
November 2018
December 2018
January 2019
February 2019
March 2019
April 2019(5)
NYSE/OTC MARKET
U.S. dollars per Preferred ADS(2)
Average Daily
Trading Volume
(thousands
of Preferred ADSs)
B3
Reais per Preferred Share(1)(2)
Average Daily
Trading Volume
(thousands of shares)
Closing Price
per Preferred Share
High
Low
(in reais)
44.20
8.43
3.47
5.10
3.92
4.80
3.91
3.72
5.10
3.92
3.53
3.36
2.68
8.61
1.30
0.80
2.26
1.25
2.26
2.98
3.16
3.05
3.29
2.61
1.91
1.25
3,692.3
4,608.5
8,047.5
4,152.6
2,104.3
6,839.0
2,120.9
1,970.5
5,797.2
1,815.4
1,668.7
1,370.2
3,647.3
Closing Price
per Preferred ADS
Low
High
(in U.S. dollars)
18.80
3.15
0.92
1.55
1.16
3.17
0.34
0.17
0.65
0.26
1.48
1.24
1.14
1.55
1.16
1.03
0.89
0.76
0.65
0.88
0.95
0.92
0.96
0.73
0.43
0.26
1.88
1.29
4,410.2
0.50
0.31
2.48
2.68
1.49
1.48
1.80
1.88
1.73
1.97
1.46
1.25
1.29
1.41
1.51
1.47
2,016.8
4,786.6
4,437.5
3,426.0
5,365.1
4,492.8
3,885.0
0.69
0.76
0.39
0.40
0.46
0.50
0.45
0.50
0.36
0.26
0.31
0.36
0.39
0.39
1,263.4
2,327.2
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(1) Adjusted to reflect the reverse split of all of the 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) NYSE/OTC Market prices and volumes represent (1) the closing prices reported by (a) the NYSE from January 1, 2016 through June 21, 2016, the date on which
trading of Preferred ADSs was suspended by the NYSE, and (b) the OTC Markets Group, Inc. from June 23, 2016, the date on which quotation reporting for
Preferred ADSs commenced on the “pink sheets” of the OTC Markets Group, Inc., through December 31, 2016, and (2) the average of (a) the volumes reported by
the NYSE from January 1, 2016 through June 21, 2016, and (b) the volumes reported by OTC Markets Group, Inc. from June 23, 2016 through December 31, 2016.
(4) NYSE/OTC Market prices and volumes represent (1) the closing prices reported by (a) the NYSE from March 31, 2016 through June 21, 2016, the date on which
trading of Preferred ADSs was suspended by the NYSE, and (b) the OTC Markets Group, Inc. from June 23, 2016, the date on which quotation reporting for
Preferred ADSs commenced on the “pink sheets” of the OTC Markets Group, Inc., through June 30, 2016, and (2) the average of (a) the volumes reported by the
NYSE from March 31, 2016 through June 21, 2016, and (b) the volumes reported by OTC Markets Group, Inc. from June 23, 2016 through June 30, 2016.
(5) Through April 23, 2019.
Source:Quantum Finance/IPREO
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On April 23, 2019, the closing sales price of:
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•
•
•
•
Common Shares on the B3 was R$1.75 per Common Share;
Common ADSs on the NYSE was US$2.18 per Common ADS;
Preferred Shares on the B3 was R$1.73 per Preferred Share; and
Preferred ADSs in the “pink sheets” as reported by the OTC Markets Group, Inc. was US$0.45 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 Corporate 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 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 Common Shares and Common 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 Corporate Law, a company is either publicly held (companhia aberta), as Oi is, 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 B3 or in the Brazilian over-the-counter market. Shares of
companies, such as Oi, that are listed on the B3 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.
Brazilian regulations also require that any person or group of persons representing the same interest that has directly or indirectly
carried out a material transaction or set of transactions by which the equity interest held by such person or group of persons surpasses or
falls below the thresholds of 5%, or any 5% multiple thereof, of a type or class of shares of a publicly traded company must provide
such publicly traded company with information on such transaction 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 same means of communication usually adopted by the
company.
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Trading on the B3
Overview of the B3
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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 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. In March 2017, BM&FBOVESPA merged with Cetip S.A. – Mercados
Organizados, a settlement and clearing house in Brazil to form the B3 S.A. – Brasil, Bolsa, Balcão.
Trading and Settlement
Trading of equity securities on the B3 is conducted through an electronic trading system called Megabolsa every business day,
typically from 10:00 a.m. to 5:00 p.m., São Paulo time. During certain months, however, to account for daylight saving time in Brazil
and more closely align with trading hours in the United States, trading hours on the B3 are extended by one hour to 6:00 p.m., São
Paulo time. When trading ends at 5:00 p.m. São Paulo time, trading of equity securities on the B3 is also conducted after market
between 5:25 p.m. and 6:00 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. When trading ends at 5:00 p.m. São Paulo time, there is no after
market trading.
Since March 2003, market making activities have been allowed on the B3. As of the date of this annual report Credit Suisse
(Brasil) S.A. Corretora de Títulos e Valores Mobiliários acts as market maker of the Common Shares and Preferred Shares on the B3.
Trading in securities listed on the B3 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 B3 is automatically suspended when a Company announces a material event. It is
also recommended that the company simultaneously make a request to suspend trading in any international stock exchange in which its
securities are traded. The CVM and the B3 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 B3.
In order to reduce volatility, the B3 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. Also, if after the reopening of the market the Ibovespa falls 20% compared to the closing of the previous day,
the operations are suspended for a certain period to be defined by the B3. This mechanism is not applied in the last half hour of the
trading session.
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Settlement of transactions on the B3 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 B3. The
seller is ordinarily required to deliver shares to the clearing and settlement chamber of the B3 on the second business day following the
trade date.
Regulation of Foreign Investments
Trading on the B3 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 Holder
may trade on the B3 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 B3 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—Annex I of Resolution No. 4,373,” and “Item 10. Additional
Information—Exchange Controls—Annex II of Resolution No. 4,373 – ADSs” 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.
B3 Corporate Governance Standards
In December 2000, the B3 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.
Oi’s shares joined Level 1 of Differentiated Corporate Governance Practices on December 14, 2012. As a Level 1 company, Oi
must, among other things:
•
•
•
•
•
•
ensure that shares representing 25% of its total share capital are effectively available for trading;
adopt offering procedures that favor widespread ownership of shares whenever Oi makes 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
its securities made by its controlling shareholders, if any, directors or executive officers;
make a schedule of corporate events available to its shareholders; and
hold public meetings with analysts and investors at least annually.
Pursuant to the regulations of the B3, the members of Oi’s board of directors and board of executive officers are personally liable for its
compliance with the rules and regulations of the B3’s Level 1 Listing Segment.
Moreover, in September 2015, Oi amended its by-laws in order to comply with the rules of the Novo Mercado segment of the B3
even though Oi has not formally joined this special listing segment. These amendments include the requirement that at least 20% of the
members of Oi’s board of directors be independent members as defined in the listing regulations of the Novo Mercado and Article 141,
paragraphs 4 and 5 of the Brazilian Corporate Law.
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ITEM 10.
ADDITIONAL INFORMATION
Description of Oi’s By-laws
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The following is a summary of the material provisions of Oi’s by-laws and of the Brazilian Corporate Law. In Brazil, a company’s
by-laws (estatuto social) are the principal governing document of a corporation (sociedade anônima). This summary also includes
relevant provisions of the RJ Plan. In case of a conflict and/or discrepancy between the RJ Plan and Oi’s by-laws’ rules, the RJ Plan
shall prevail.
General
Oi’s registered name is Oi S.A. – In Judicial Reorganization, and its registered office is located in the City of Rio de Janeiro, State
of Rio de Janeiro, Brazil. Oi’s registration number with the Board of Trade of the State of Rio de Janeiro is No. 33.3.0029520-8. Oi has
been duly registered with the CVM under No. 11312 since March 27, 1980. Oi’s headquarters are located in City of Rio de Janeiro,
State of Rio de Janeiro, Brazil. Oi has a perpetual existence.
As of December 31, 2018, Oi had outstanding share capital of R$32,038,471,375,00, comprised of 2,455,973,860 total shares,
consisting of 2,298,246,619 issued Common Shares and 157,727,241 issued Preferred Shares, including 32,030,595 Common Shares
and 1,811,755 Preferred Shares held in treasury. As of April 23, 2019, Oi had outstanding share capital of R$32,538,937,370.00,
comprised of 5,954,205,001 total shares, consisting of 5,796,477,760 issued Common Shares and 157,727,241 issued Preferred Shares,
including 30,595 Common Shares and 1,811,755 Preferred Shares held in treasury. All of Oi’s outstanding share capital is fully paid.
All of Oi’s shares are without par value. Under the Brazilian Corporate Law, the aggregate number of Oi’s non-voting and limited
voting preferred shares may not exceed two-thirds of Oi’s total outstanding share capital. In addition, Oi’s board of directors may
increase Oi’s share capital to a number of Common Shares equivalent to R$38,038,701,741.49, provided that no Preferred Shares are
issued by Oi in public or private subscriptions.
Section 5.3 of the RJ Plan allows Oi to raise up to R$2.5 billion in additional funds during the two-year period beginning on the
Brazilian Confirmation Date, which occurred on February 5, 2018, including through additional capital increases. Any such additional
capital increases must comply with the terms of the RJ Plan and Oi’s by-laws.
Corporate Purposes
Under Article 2 of Oi’s by-laws, Oi’s corporate purposes are:
•
•
•
•
•
•
•
•
to offer telecommunications services and all activities required or useful for the operation of these services, in conformity
with its 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 its 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 its 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 its services, with no loss of its attributions and responsibilities; and
to perform other activities related to the above corporate purposes.
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Board of Directors
Oi’s by-laws provide for a board of directors of up to 11 members with no alternate members. Members who are absent at
meetings will be entitled to appoint a substitute among the present members to vote in their stead. Under Oi’s by-laws, any matters
subject to the approval of Oi’s board of directors can be approved only by a majority of votes of the members of Oi’s board of directors.
In the event of a tie, the chairman of the board of directors shall cast the deciding vote. Under Oi’s by-laws, Oi’s board of directors may
only deliberate if a majority of its members are present at a duly convened meeting.
Oi’s board of directors is presided over by the chairman of the board of directors and, in his or her absence, on an interim basis, by
the vice-chairman of the board of directors and, in his or her absence, on an interim basis, by another member appointed by the
chairman or, if no such member has been appointed, by another member appointed by the other members in attendance. Pursuant to
Oi’s by-laws, the chairman and vice-chairman of Oi’s board of directors are elected by the members of the Oi’s board of directors
during their first meeting following their election. Oi’s by-laws provide that the positions of chairman of Oi’s board of directors and
Oi’s chief executive officer or principal executive may not be held by the same person.
The following paragraphs describe the material provisions of Oi’s by-laws and of the Brazilian Corporate Law that apply to the
members of Oi’s board of directors.
Election of Directors
The members of Oi’s board of directors are elected at general meetings of shareholders for concurrent two-year terms.
Generally, members of Oi’s board of directors are subject to removal at any time with or without cause at a general meeting of
shareholders. The RJ Plan, however, provides certain corporate governance rules that apply to Oi’s board of directors during the
effectiveness of the RJ Plan, superseding the provisions of Oi’s by-laws. As provided in the RJ Plan, until the expiration of the term of
Oi’s current board of directors, which will occur on September 17, 2020, the members of Oi’s board of directors may not be removed
from office, except due to gross mistake, willful misconduct, gross negligence, abuse of term of office or violation of fiduciary duties in
accordance with applicable law. Following the expiration of the term of Oi’s current board of directors, the election of subsequent
boards of directors will follow the rules established by Oi’s by-laws and the Brazilian Corporate Law.
The tenure of the members of the board of directors and board of executive officers is 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 B3 and complying with applicable legal requirements.
Qualification of Directors
There is no minimum share ownership or residency requirement to qualify for membership on Oi’s board of directors. Oi’s
by-laws do not require the members of its board of directors to be residents of Brazil. The Brazilian Corporate Law requires each of
Oi’s executive officers to be residents of Brazil. The tenure of the members of the board of directors will be conditioned on 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. Pursuant to Oi’s by-laws, Oi’s directors may not (1) hold positions, particularly positions in advisory, management or
audit committees, of companies that compete with Oi or its subsidiaries, and (2) may not have conflicts of interest with Oi or its
subsidiaries.
Pursuant to Oi’s by-laws, at least 20% of the members of Oi’s board of directors must be independent as defined in the listing
regulations of the Novo Mercado segment of the B3 and must be expressly declared as independent in the shareholders’ meeting that
elects them, being also considered as independent the members elected as per article 141, paragraphs 4 and 5 of the Brazilian Corporate
Law. All of the members of Oi’s board of directors are independent.
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Fiduciary Duties and Conflicts of Interest
All members of Oi’s board of directors owe fiduciary duties to Oi and all of Oi’s shareholders.
Under the Brazilian Corporate Law, if one of Oi’s directors or executive officers has a conflict of interest with Oi in connection
with any proposed transaction, such director or executive officer may not vote in any decision of Oi’s board of directors or of Oi’s
board of executive officers, as the case may be, regarding such transaction and must disclose the nature and extent of his or her
conflicting interest for inclusion in the minutes of the applicable meeting.
Any transaction in which one of Oi’s directors 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 Corporate Law provides that the
transaction may be nullified and the interested director or executive officer must return to Oi any benefits or other advantages that he or
she obtained from, or as result of, such transaction. Under the Brazilian Corporate Law and upon the request of a shareholder who owns
at least 5.0% of Oi’s total share capital, Oi’s directors and executive officers must reveal to Oi’s shareholders at an ordinary meeting of
Oi’s shareholders certain transactions and circumstances that may give rise to a conflict of interest. In addition, Oi or any shareholder
who owns 5.0% or more of Oi’s share capital may bring an action for civil liability against directors and executive officers for any
losses caused to Oi as a result of a conflict of interest.
Compensation
Under Oi’s by-laws, holders of Common Shares approve the aggregate compensation payable to Oi’s board of directors, board of
executive officers and fiscal council. Subject to this approval, Oi’s board of directors establishes the compensation of its members and
of Oi’s executive officers. See “Item 6. Directors, Senior Management and Employees—Compensation.”
Mandatory Retirement
Neither the Brazilian Corporate Law nor Oi’s by-laws establish any mandatory retirement age for Oi’s directors or executive
officers.
Share Capital
Under the Brazilian Corporate Law, the number of Oi’s issued and outstanding non-voting shares or shares with limited voting
rights, such as Preferred Shares, may not exceed two-thirds of Oi’s total outstanding share capital.
Each Common Share entitles its holder to one vote at Oi’s annual and extraordinary shareholders’ meetings. Holders of Common
Shares are not entitled to any preference in respect of dividends or other distributions or otherwise in case of Oi’s liquidation.
Preferred Shares are non-voting, except in limited circumstances, and do not have priority over Common Shares in the case of
Oi’s liquidation. See “—Voting Rights” for information regarding the voting rights of Oi’s preferred shares and “Item 8. Financial
Information—Dividends and Dividend Policy” and “—Dividend Preference of Preferred Shares” for information regarding the
distribution preferences of Preferred Shares.
The issuance of new preferred shares by Oi is prohibited.
Shareholders’ Meetings
Under the Brazilian Corporate Law, Oi’s shareholders must hold their ordinary annual meeting by April 30 of each year in
order to:
•
•
approve or reject the financial statements approved by Oi’s board of directors and board of executive officers, including any
recommendation by Oi’s board of directors for the allocation of net profit and distribution of dividends; and
elect members of Oi’s board of directors (upon expiration of their two-year terms) and members of Oi’s fiscal council.
In addition to the annual shareholders’ meetings, holders of Common Shares have the power to determine any matters related to
changes in Oi’s corporate purposes and to pass any resolutions they deem necessary to protect and enhance Oi’s development whenever
Oi’s interests so require, by means of extraordinary shareholders’ meetings.
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Oi convenes shareholders’ meetings, including the 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. Under the Brazilian Corporate Law,
on the first call of any meeting, the notice must be published no fewer than three times, beginning at least 15 calendar days prior to the
scheduled meeting date, and companies that have issued ADSs must publish their notice at least 30 days prior to the scheduled meeting
date. Oi publishes notices of meetings 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 Oi’s by-laws, a description of the subject matter of the proposed
amendment.
Oi’s board of directors may convene a shareholders’ meeting. Under the Brazilian Corporate Law, shareholders’ meetings also
may be convened by Oi’s shareholders as follows:
•
•
•
by any of Oi’s shareholders if, under certain circumstances set forth in the Brazilian Corporate Law, Oi’s directors do not
convene a shareholders’ meeting required by law within 60 days;
by shareholders holding at least 5% of Oi’s total share capital if, after a period of eight days, Oi’s directors fail to call a
shareholders’ meeting that has been requested by such shareholders; and
by shareholders holding at least 5% of either Oi’s total voting share capital or Oi’s total non-voting share capital, if after a
period of eight days, Oi’s directors fail to call a shareholders’ meeting for the purpose of appointing a fiscal council that has
been requested by such shareholders.
In addition, Oi’s fiscal council may convene a shareholders’ meeting if Oi’s 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 and presided over by the chairman of the board of directors or his or her valid
proxy. In the case of absence of the chairman or his or her proxy, the meeting shall be convened and presided over by the vice-chairman
of the board of directors or his or her valid proxy. In the case of absence of the vice-chairman or his or her proxy, the meeting shall be
convened and presided by any director present at the meeting. The chairman of the meeting shall be responsible for choosing the
secretary of the meeting.
In order for a valid action to be taken at a shareholders’ meeting, shareholders representing at least 25% of Oi’s issued and
outstanding voting share capital must be present on first call. However, shareholders representing at least two-thirds of Oi’s issued and
outstanding voting share capital must be present on first call at a shareholders’ meeting called to amend Oi’s by-laws. If a quorum is not
present, Oi’s 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 Corporate Law and Oi’s by-laws, each Common Share entitles its holder to one vote at Oi’s shareholders’
meetings. Preferred Shares generally do not confer voting rights, except in limited circumstances described below. Oi 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.
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
Common Shares present or represented at the meeting, without taking abstentions into account. Under the Brazilian Corporate Law, the
approval of shareholders representing at least half of Oi’s outstanding voting shares is required for the types of action described below:
•
•
•
•
reducing the mandatory dividend set forth in Oi’s by-laws;
changing its corporate purpose;
merging Oi with another company, or consolidating Oi, subject to the conditions set forth in the Brazilian Corporate Law;
transferring all of Oi’s shares to another company, known as an “incorporação de ações” under the Brazilian Corporate Law;
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•
•
•
participating in a centralized group of companies (grupo de sociedades) as defined under the Brazilian Corporate Law and
subject to the conditions set forth in the Brazilian Corporate Law;
dissolving or liquidating Oi or canceling any ongoing liquidation;
creating any founders’ shares (partes beneficiárias) entitling the holders thereof to participate in Oi’s profits; and
spinning-off of all or any part of Oi.
Decisions on the transformation of Oi into another form of company require the unanimous approval of Oi’s shareholders,
including the holders of Preferred Shares.
Oi is required to give effect to shareholders’ agreements that contain provisions regarding the purchase or sale of Oi’s shares,
preemptive rights to acquire Oi’s shares, the exercise of the right to vote Oi’s shares or the power to control Oi, if these agreements are
filed at Oi’s headquarters in Rio de Janeiro. Brazilian Corporate Law requires the president of any meeting of shareholders or board of
directors to disregard any vote taken by any of the parties to any shareholders’ agreement that has been duly filed with Oi 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 meeting of shareholders or board of directors 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 Oi’s shares has been filed at
Oi’s headquarters in Rio de Janeiro.
Under the Brazilian Corporate Law, neither Oi’s by-laws nor actions taken at a shareholders’ meeting may deprive any of Oi’s
shareholders of certain specific rights, including:
•
•
•
•
•
the right to participate in the distribution of Oi’s profits;
the right to participate in any remaining residual assets in the event of Oi’s liquidation;
the right to supervise the management of Oi’s corporate business as specified in the Brazilian Corporate Law;
the right to preemptive rights in the event of an issuance of Oi’s shares, debentures convertible into Oi’s shares or
subscription bonuses, other than as provided in the Brazilian Corporate Law; and
the right to withdraw from Oi under the circumstances specified in the Brazilian Corporate Law.
Voting Rights of Minority Shareholders
Shareholders holding shares representing not less than 5% of Oi’s voting shares have the right to request that Oi adopt a
cumulative voting procedure for the election of the members of Oi’s 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 Corporate Law, shareholders that are not controlling shareholders, but that together hold either:
•
•
Preferred Shares representing at least 10% of Oi’s total share capital; or
Common Shares representing at least 15% of Oi’s voting capital, have the right to appoint one member to Oi’s board of
directors at Oi’s annual shareholders’ meeting. If no group of holders of Common Shares or Preferred Shares meets the
thresholds described above, shareholders holding Common Shares or Preferred Shares representing at least 10% of Oi’s total
share capital are entitled to combine their holdings to appoint one member to Oi’s 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, Oi’s 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
Oi’s 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 Oi’s by-laws, holders of Preferred Shares may appoint, by separate voting, one board member.
In accordance with the Brazilian Corporate Law, the holders of Preferred Shares are entitled to elect one member and an alternate
to Oi’s 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 Preferred Shares and the minority shareholders.
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Voting Rights of Preferred Shares
Holders of Preferred Shares are not entitled to vote on any matter, except:
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•
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•
with respect to the election of a member of Oi’s board of directors by holders of Preferred Shares holding at least 10% of
Oi’s total share capital as described above;
with respect to the election of a member and alternate member of Oi’s fiscal council as described above;
with respect to the approval of the contracting of foreign entities related to the controlling shareholders of Oi, if any, to
provide management services, including technical assistance. In these cases, Preferred Shares will have the right to vote
separately from the Common Shares;
with respect to the approval of the contracting of foreign entities related to the controlling shareholders of Oi, if any, to
provide management services, including technical assistance, the remuneration for which shall not exceed 0.1% of Oi’s
consolidated annual sales for fixed switched telephone service, net of taxes; and
in the limited circumstances described below.
The Brazilian Corporate Law and Oi’s by-laws provide that our Preferred Shares will acquire unrestricted voting rights and will be
entitled to vote together with our Common Shares on all matters put to a vote in Oi’s shareholders’ meetings if the Minimum Preferred
Dividend (as determined in accordance with Oi’s by-laws and Brazilian Corporate Law) is not paid for a period of three years. As a
result of Oi’s failure to pay the Minimum Preferred Dividend for 2014, 2015 and 2016, holders of our Preferred Shares obtained full
voting rights on April 28, 2017, the date that Oi’s annual shareholders’ meeting approved our financial statements for fiscal year 2016.
This voting right will continue until the date on which Oi pays the Minimum Preferred Dividend for the then-most recently
completed fiscal year. During the period during which holders of Preferred Shares are entitled to vote together with Common Shares,
holders of Preferred Shares will not be entitled to the separate votes described above with respect to the election of a member of Oi’s
board of directors, a member and alternate member of Oi’s fiscal council, the approval of the contracting of foreign entities, or decisions
relating to the employment of foreign entities.
Liquidation
Oi may be liquidated in accordance with the provisions of Brazilian law. In the event of Oi’s extrajudicial liquidation, a
shareholders’ meeting will determine the manner of Oi’s liquidation and appoint Oi’s liquidator and Oi’s fiscal council that will
function during the liquidation period.
Upon Oi’s liquidation, Preferred Shares do not have a liquidation preference over Common Shares in respect of the distribution of
Oi’s net assets, but shall be entitled to unrestricted voting rights. In the event of Oi’s liquidation, the assets available for distribution to
Oi’s shareholders would be distributed to Oi’s shareholders in an amount equal to their pro rata share of Oi’s legal capital. If the assets
to be so distributed are insufficient to fully compensate all of Oi’s shareholders for their legal capital, each of Oi’s shareholders would
receive a pro rata amount (based on their pro rata share of Oi’s legal capital) of any assets available for distribution.
Preemptive Rights
Under the Brazilian Corporate Law, each of Oi’s shareholders has a general preemptive right to subscribe for Oi’s shares or
securities convertible into Oi’s shares in any capital increase, in proportion to the number of Oi’s shares held by such shareholder.
Under Oi’s by-laws, Oi’s board of directors or Oi’s shareholders, as the case may be, may decide not to extend preemptive rights
to Oi’s shareholders with respect to any issuance of Oi’s shares, debentures convertible into Oi’s 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 Oi’s shares. Holders of ADSs may not be able to exercise the preemptive
rights relating to Oi’s 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. Oi is 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 ADSs, and Oi is not required to file any such registration statement.
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Redemption, Amortization, Tender Offers and Rights of Withdrawal
Oi’s by-laws or Oi’s shareholders at a shareholders’ meeting may authorize Oi to use its profits or reserves to redeem or amortize
Oi’s shares in accordance with conditions and procedures established for such redemption or amortization. The Brazilian Corporate
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 Oi’s share capital. The Brazilian Corporate Law defines
“amortization” (amortização) as the distribution to the shareholders, without a corresponding capital reduction, of amounts that they
would otherwise receive if Oi were liquidated. If an amortization distribution has been paid prior to Oi’s liquidation, then upon Oi’s
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 Oi’s capital.
The Brazilian Corporate Law authorizes Oi’s shareholders to approve in a shareholders’ meeting the redemption of Oi’s shares not
held by Oi’s controlling shareholders, if any, if after a tender offer effected for the purpose of delisting Oi as a publicly held company,
Oi’s controlling shareholders, if any, increase their participation in Oi’s total share capital to more than 95%. The redemption price in
such case would be the same price paid for Oi’s shares in any such tender offer.
The Brazilian Corporate Law and Oi’s 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 Oi’s 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 Oi under certain circumstances described below under “—Rights of Withdrawal.”
Mandatory Tender Offers
The Brazilian Corporate Law requires that if the Common Shares are delisted from the B3 or there is a substantial reduction in
liquidity of the Common Shares, as defined by the CVM, in each case as a result of purchases by Oi’s controlling shareholders, Oi’s
controlling shareholders must effect a tender offer for acquisition of the remaining Common Shares at a purchase price equal to the fair
value of the Common Shares taking into account the total number of outstanding Common Shares. Oi’s by-laws require the cancellation
of Oi’s registration as a public company with the CVM or Oi’s delisting from the Level 1 Corporate Governance Listing Segment of the
B3 be preceded by a public tender offer for acquisition of the all of the capital stock of Oi based on a fair market valuation of Oi’s
capital stock, in accordance with the Brazilian Corporate Law and the regulations issued by the CVM. The requirement to conduct a
mandatory tender offer preceding Oi’s delisting from the Level 1 Corporate Governance Listing Segment of the B3 may be avoided if
Oi instead joins the Novo Mercado or Level 2 Corporate Governance Listing Segment of the B3 or, certain conditions being met, in the
case of a voluntary withdrawal from the Level 1 Corporate Governance Listing Segment of the B3.
Oi’s by-laws require that any transaction or series of transactions that results in a change of control of Oi be preceded by a public
offer for the purchase of all of Oi’s capital stock by the prospective purchaser in order to ensure the equitable treatment of all of Oi’s
shareholders, in accordance with the rules of the Novo Mercado segment of the B3.
Rights of Withdrawal
The Brazilian Corporate Law provides that, in certain limited circumstances, a dissenting shareholder may withdraw its equity
interest from Oi and be reimbursed by Oi for the value of the Common Shares 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 Oi’s by-laws;
to create Preferred Shares or to increase the existing classes of Preferred Shares, without maintaining the proportion with the
remaining classes of Preferred Shares, except if provided for and authorized in the by-laws, subject to the conditions set forth
in the Brazilian Corporate Law;
changes in the preferences, advantages and conditions of redemption or amortization of one or more classes of Preferred
Shares, or the creation of a new class with greater privileges, subject to the conditions set forth in the Brazilian Corporate
Law;
Oi’s participation in a centralized group of companies;
to merge into another company or to consolidate with another company, subject to the conditions set forth in the Brazilian
Corporate Law;
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•
•
a change in Oi’s corporate purpose;
spinning off of all or any part of Oi, if such spin-off results in (1) a change in Oi’s business purpose (except if the spun-off
assets revert to a company whose main purpose is the same as Oi’s), (2) a reduction of the mandatory dividend set forth in
Oi’s by-laws, or (3) Oi’s 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 Corporate Law:
➣ the merger of Oi with another company, or the consolidation of Oi, in a transaction in which Oi is not the surviving
entity;
➣ the transfer of all of the outstanding shares of another company to Oi in an incorporação de ações transaction; or
➣ Oi’s participation in a centralized group of companies.
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 Oi is consolidated or merged with another company, becomes part of a centralized
group of companies, or acquires the control of another company for a price in excess of certain limits imposed by the Brazilian
Corporate Law, holders of any type or class of Oi’s 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 Oi’s 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 Oi’s most recent audited balance sheet approved by Oi’s 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 Preferred
Shares (such confirmation to be given at an extraordinary meeting of such holders of Preferred Shares 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 holders of Preferred Shares. Oi’s shareholders may reconsider any resolution giving rise to withdrawal rights within 10 days after
the expiration of the exercise period of withdrawal rights if Oi’s management believes that the withdrawal of shares of dissenting
shareholders would jeopardize Oi’s financial stability.
Liability of Oi’s Shareholders for Further Capital Calls
Neither Brazilian law nor Oi’s by-laws require any capital calls. Oi’s 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 Oi’s outstanding share capital have the right to inspect Oi’s corporate records, including
shareholders’ lists, corporate minutes, financial records and other documents of Oi, if (1) Oi or any of its officers or directors have
committed any act contrary to Brazilian law or Oi’s by-laws, or (2) there are grounds to suspect that there are material irregularities in
Oi. However, in either case, the shareholder that desires to inspect Oi’s corporate records must obtain a court order authorizing the
inspection.
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Disclosures of Share Ownership
Brazilian regulations require that (1) each of Oi’s 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 Oi’s shares of any type or class to disclose its or their share
ownership or divestment to Oi, and Oi is 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.
Oi’s controlling shareholders, if any, members of Oi’s board of directors, board of executive officers, fiscal council and members
of other bodies created pursuant to Oi’s by-laws with technical or consulting functions must file a statement of any change in their
holdings of Oi’s shares with the CVM and the Brazilian stock exchanges on which Oi’s securities are traded. Oi also must disclose any
trading of its shares by Oi or Oi’s controlled or related companies.
Form and Transfer
Common Shares and Preferred Shares are in book-entry form, registered in the name of each shareholder or its nominee. The
transfer of Oi’s shares is governed by Article 35 of the Brazilian Corporate Law, which provides that a transfer of shares is effected by
Oi’s 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 Oi by a transferor or its representative. When Common Shares or Preferred Shares are acquired or sold on a
Brazilian stock exchange, the transfer is effected on the records of Oi’s 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 Oi’s shares. Provided that the
provisions of Resolution No. 4,373 are observed, transfers of Oi’s 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 B3 operates a central clearing system, the CSD. A holder of Oi’s 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 Oi’s 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 Oi’s 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 Oi’s 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 Oi’s 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 Common Shares or Preferred Shares by (1) 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 market rate,
acquired with the proceeds of distributions on, and amounts realized through, dispositions of Common Shares or Preferred Shares.
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.
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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 Share or Preferred Share, as the case
may be, on the B3 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 Oi’s 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 Oi’s 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
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; (2) resulting from a corporate reorganization effected abroad, as
long as the final beneficiaries and the amount of the assets remain the same, or (3) authorized by the CVM.
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Annex II of Resolution No. 4,373 – ADSs
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 ADS program was approved by the Brazilian Central Bank and the
CVM prior to the issuance of the Common ADSs. Accordingly, as a general rule, the proceeds from the sale of Common ADSs by
non-Brazilian resident holders of Common ADSs outside Brazil are not subject to Brazilian foreign investment controls, and holders of
Common ADSs who are not domiciled in a “Favorable Tax Haven Jurisdiction” are entitled to favorable tax treatment.
See “—Taxation—Brazilian Tax Considerations—Taxation of Gains.”
Oi pays dividends and other cash distributions with respect to the Common Shares in reais. Oi has obtained electronic certificates
of foreign capital registration from the Brazilian Central Bank in the name of the ADS Depositary to be maintained by the ADS
Custodian. Pursuant to this registration, the ADS Custodian is able to convert dividends and other distributions with respect to Common
Shares represented by Common ADSs into foreign currency and remit the proceeds outside Brazil to the Common ADS Depositary so
that the ADS Depositary may distribute these proceeds to the holders of record of the Common ADSs.
In the event that a holder of Common ADSs exchanges those Common ADSs for the underlying Common Shares, 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 ADS Custodian is authorized to update the electronic registration of the ADS Depositary to reflect conversions of Common
ADSs into foreign portfolio investments under Resolution No. 4,373.
If a holder of Common ADSs elects to convert its Common ADSs 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. If a foreign direct investor under
Law No. 4,131 elects to deposit its Common Shares into the Common ADS program in exchange for Common ADSs, such holder will
be required to present to the ADS Custodian evidence of payment of capital gains taxes and of the execution of Symbolic FX
Agreements. See “—Taxation—Brazilian Tax Considerations—Taxation of Gains” for details of the tax consequences to an investor
residing outside Brazil of investing in Common Shares or Preferred Shares in Brazil.
If a holder of Common ADSs wishes to convert its investment in Common 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 ADSs for the underlying Common Shares. A Non-Brazilian Holder of Common 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 Common Shares into foreign currency or remit those proceeds outside
Brazil. In addition, if the non-Brazilian investor is domiciled in a Favorable Tax 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 Common ADSs. See
“—Taxation—Brazilian Tax Considerations.”
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 Corporate Law.
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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 Common Shares. 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 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 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 Common Shares, Preferred Shares or ADSs.
Prospective purchasers of Common Shares, Preferred Shares or ADSs should consult their own tax advisors as to the tax
consequences of the acquisition, ownership and disposition of 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 Common Shares, Preferred Shares or ADSs by a holder not deemed to be
domiciled in Brazil for Brazilian tax and regulatory purposes (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 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 Common Shares, Preferred Shares or ADSs, are currently not subject to withholding income tax 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 withholding income tax at varying rates, according to the tax legislation applicable to each corresponding year.
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.
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Payment of interest on shareholders’ equity to a Non-Brazilian Holder is subject to withholding income tax 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, the definition of “tax haven” jurisdiction 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 haven 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 withholding income tax, 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 Oi’s 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.
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 withholding income tax on
capital gains in Brazil.
With respect to the disposition of Common Shares or Preferred Shares, as they are assets located in Brazil, the Non-Brazilian
Holder should be subject to withholding 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 Oi’s ADSs, although the matter is not entirely clear, arguably the gains realized by a Non-Brazilian Holder upon
the disposition of ADSs will not be taxed in Brazil, on the 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 Common Shares and Preferred Shares, described below.
As a general rule, gains realized as a result of a disposition of Common Shares, Preferred Shares or ADSs are the positive
difference between the amount realized on the transaction and the acquisition cost of 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 (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,
which are subject to a rate of 1%.
Any other gains assessed on a disposition of Common Shares or Preferred Shares that is not carried out on a Brazilian stock
exchange are subject to withholding income tax at a rate of up to 25%. 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.
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As of January 2017, Law No. 13,259/2016 increased the income tax rates applicable to gains realized by Brazilian resident
individuals on sale or disposition of shares not carried out on a Brazilian stock exchange from a flat tax rate of 15.0% to progressive
rates varying from 15% up to 22.5%. The income tax rates recognized by Brazilian individuals’ capital gains would be: (i) 15% for the
part of the gain that does not exceed R$5 million, (ii) 17.5% for the part of the gain that exceeds R$5 million but does not exceed
R$10 million, (iii) 20% for the part of the gain that exceeds R$10 million but does not exceed R$30 million and (iv) 22.5% for the part
of the gain that exceeds R$30 million. These increased income tax rates may also affect Non-Brazilian Holders, except for 4,373
Holders that are not resident or domiciled in tax haven jurisdictions and that carry out a sale or disposition of Common Shares or
Preferred Shares in a stock exchange environment, including over-the-counter market, which are still exempt from income tax.
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
withholding income tax at rates of up to 25%, as the case may be.
The deposit of Oi’s 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 withholding income tax at rates of up to 25%, as the case may be. In some circumstances, there may be arguments to claim
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. The availability of these arguments to any specific holder of Common Shares or Preferred Shares will depend on the
circumstances of such holder. Prospective holders of Common Shares or Preferred Shares should consult their own tax advisors as to
the tax consequences of the deposit Common Shares or Preferred Shares in exchange for ADSs.
Any exercise of preemptive rights relating to 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 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 Common Shares or Preferred Shares (see above).
Discussion on Definition of “Tax Haven” Jurisdictions
Under Brazilian tax law, in the case of gains derived by 4,373 Holders, a “tax haven” jurisdiction is defined as a country or
location that (a) does not impose taxation on income, or (b) imposes the income tax at a rate lower than 20%. In the case of
Non-Brazilian Holders other than 4,373 Holders, in addition to criteria (a) and (b), the definition of a “tax haven” jurisdiction should
also comprise 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 “tax haven”
jurisdictions enacted by Brazilian tax authorities by means of Normative Ruling 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: (1) do not tax income or tax it at a maximum rate lower than 20%; (2) 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; (3) do not tax or taxes proceeds generated
abroad at a maximum rate lower than 20.0%; or (4) restrict the ownership disclosure of assets and ownership rights or restricts
disclosure about economic transactions carried out.
Consequently, on June 4, 2010, Brazilian tax authorities enacted Normative Ruling No. 1,037 listing (1) “tax haven” jurisdictions
and (2) PTRs. Normative Ruling No. 188/2002 was revoked. Please note that this list does not seem to differ the “tax haven”
jurisdiction definition for the purposes of 4,373 Holders and for other Non-Brazilian Holders. Under Section 2 of Normative Ruling
No. 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 “tax haven” jurisdictions 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. Regulations and tax rulings issued by Brazilian federal tax
authorities seem to confirm this interpretation.
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Notwithstanding the above, we recommend that you consult your own tax advisors regarding the consequences of the
implementation of Law No. 11,727, Normative Ruling No. 1,037/10 and of any related Brazilian tax law or regulation concerning “tax
haven” jurisdictions or PTRs.
On November 28, 2014, the Brazilian Revenue Service issued Rule No. 488, which reduces the threshold income tax rate for
determining a “tax haven” jurisdiction 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 “tax haven” jurisdiction. Furthermore, the RFB issued Normative Ruling No. 1,530/14 providing that compliance with
such standards requires: (1) 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 (2) commitment to the criteria set out in international anti-tax evasion forums of which Brazil is a member. Normative Ruling
No. 1,037/10 is regularly updated by tax authorities.
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 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.
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 Ruling No. 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 Normative Ruling No. 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).
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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 Normative Ruling No. 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 Normative Ruling No. 1,397/2013.
Other Brazilian Taxes
There are no Brazilian inheritance, gift or succession taxes applicable to the ownership, transfer or disposition of Common Shares,
Preferred Shares or ADSs by a Non-Brazilian Holder except for gift and inheritance taxes levied by some states in Brazil in the transfer
of Common Shares, Preferred Shares or ADSs to residents of those states. There are no Brazilian stamp, issue, registration, or similar
taxes or duties payable by Non-Brazilian Holders of 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 Common Shares, Preferred Shares or ADSs, which are evidenced by American Depositary
Receipts, or ADRs. This description addresses only the U.S. federal income tax considerations of U.S. Holders (as defined below) that
are initial purchasers of Common Shares, Preferred Shares or ADSs 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 Common Shares, Preferred Shares or ADSs pursuant
to an exercise of employee stock options or rights or otherwise as compensation for the performance of services, persons that will hold
Common Shares, Preferred Shares or ADSs 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 Common Shares, Preferred Shares or ADSs 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 combined voting power or combined value) of Oi’s shares.
This description does not address any state, local or non-U.S. tax consequences of the acquisition, ownership and disposition of
Common Shares, Preferred Shares or ADSs 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 consequences to such holders of the acquisition, ownership and
disposition of Common Shares, Preferred Shares or ADSs, 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 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 Common Shares, Preferred
Shares or ADSs, 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.
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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
Common Shares or Preferred Shares 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 was classified as a PFIC for its taxable year ended
December 31, 2018. In addition, Oi believes there is a risk it will be a PFIC for the taxable year ending December 31, 2019 and for
future taxable years, unless the market price of the 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, Oi generally
will continue to be treated as a PFIC with respect to such U.S. Holder for all succeeding years during which such U.S. Holder holds
Common Shares, Preferred Shares or ADSs, 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. If such election is made, such U.S. Holder will be deemed to have sold such
Common Shares, Preferred Shares or ADSs 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 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, 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 Common Shares, Preferred Shares or
ADSs) 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 cannot be treated as capital, even if a U.S. Holder holds
Common Shares, Preferred Shares or ADSs as capital assets. In addition, a U.S. Holder’s tax basis in Common Shares, Preferred Shares
or ADSs 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.
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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 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 Common Shares, Preferred Shares or ADSs 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 Common Shares, Preferred Shares or ADSs, 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 Common Shares,
Preferred Shares or ADSs, 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 election, the holder’s tax basis in
Common Shares, Preferred Shares or ADSs, 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 Common Shares, Preferred Shares or ADSs will be treated as ordinary income.
Common Shares, Preferred Shares and ADSs 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 B3 may
constitute a qualified exchange for this purpose provided the B3 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 its common shares,
preferred shares or ADSs will continue to trade on the B3 or the NYSE, respectively, or that its common shares, preferred shares or
ADSs 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 above under “—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.
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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 Common Shares or Preferred
Shares 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 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 it elects to deduct all of its foreign income taxes. The deductibility of
capital losses is subject to limitations under the Code.
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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, the amount realized generally will be the U.S.
dollar value of the payment received determined on the date of disposition. If Common Shares, Preferred Shares or ADSs 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.
Information Reporting and Backup Withholding
In general, information reporting will apply to dividends in respect of Common Shares, Preferred Shares or ADSs and the
proceeds from the sale, exchange or redemption of Common Shares, Preferred Shares or ADSs 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 Common Shares, Preferred
Shares or ADSs, subject to certain exceptions (including an exception for Common Shares, Preferred Shares or ADSs 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.
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.
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 Oi’s annual report on Form 20-F and documents referred to in this annual report and Oi’s by-laws are available for
inspection upon request at Oi’s headquarters at Rua do Lavradio, 71, 2 andar – Centro, CEP 20.230-070 Rio de Janeiro, RJ, Brazil. Oi’s
filings are also available to the public through the internet at Oi’s website at www.oi.com.br/ir. The information included on Oi’s
website or that might be accessed through Oi’s website is not included in this annual report and is not incorporated into this annual
report by reference.
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ITEM 11.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks related to changes in foreign currency exchange rates and interest rates. We are exposed to foreign
currency exchange rate risk mainly because (1) 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, other than those in which we earn revenues (primarily reais), and (2) a significant portion of our loans and
financings are denominated in foreign currencies, primarily the U.S. dollar. We are subject to market risk deriving from changes in
interest rates because a significant portion of our indebtedness bears interest at floating rates. We have historically entered into
derivative transactions to manage certain market risks, mainly our foreign currency exchange rate risk and our interest rate risk.
However, in connection with our RJ Proceedings, we reversed our derivative financial instruments during the second and third quarters
of 2016. As of December 31, 2018, we were not a party to any derivative financial instruments. In 2016 prior to the commencement of
the RJ Proceedings, we developed and approved with Oi’s board of directors a new hedging policy that modified the risk management
objectives from earnings to cash flow at risk. With the conclusion of our RJ Proceedings, and, hence, the accurate measurement of our
risk factors, we have recently approved the hedging strategy for 2019 in line with our hedging policy, focused on cash flows, and
liquidity, while complying with the financial covenants contained in our debt instruments.
Exchange Rate Risk
During 2018, approximately 19% 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, 2018 would have resulted in an
increase of R$113 million in the cost of our capital expenditures during 2018, 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, 2018, R$8,817 million, or 53.6%, of our total consolidated loans and financings was denominated in foreign currency,
after giving effect to the fair value adjustment to our loans and financings. We have recorded foreign currency and monetary
restatement losses of R$2,646 million during 2018 with respect to our foreign currency-denominated financial liabilities and foreign
currency and monetary restatement gains of R$1,399 million during 2018 with respect to the fair value adjustment related to our foreign
currency denominated debt, based on exchange rates in effect at the end of 2018. The potential additional losses on foreign currency
and monetary restatement during 2018 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, 2018 would be approximately R$860 million, 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 10.0%
depreciation of the real against the U.S. dollar and the euro as of December 31, 2018 would be approximately R$883 million.
Interest Rate Risk
As of December 31, 2018, we had total outstanding loans and financings of R$30,379 million, excluding the fair value adjustment
to our loans and financings, and R$16,450 million, after giving effect to the fair value adjustment. Of this outstanding balance after
giving effect to the fair value adjustment, R$7,566 million, or 46.0%, was real-denominated indebtedness that bore interest at floating
rates primarily based on the CDI rate or TJLP rate, R$54 million was real-denominated indebtedness that bore interest at fixed rates and
R$14 million was real-denominated indebtedness that bore interest based at TR (currently at zero).
We invest our excess liquidity (R$4,624 million as of December 31, 2018) mainly in (1) 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, (2) certificates of deposit and time deposits issued by global and domestic financial institutions with AAA and AA
ratings from international rating agencies, 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 investment
policy, approved by Oi’s board of directors. Currently, these funds are comprised mainly of government bonds and other low-risk
financial instruments linked to the CDI and Selic rates.
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We recorded interest on borrowings payable to third parties of R$1,400 million during 2018, based on the applicable interest rates
in effect at the end of 2018. The potential additional interest on borrowings payable to third parties during 2018 that would have
resulted from a hypothetical, instantaneous and unfavorable change of 100 basis points in the interest rates on January 1, 2018 would be
approximately R$123 million considering the impact in our debt obligations. 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.
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;
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 applicable deposit agreement relating to our ADSs;
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 Oi’s 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 Oi’s 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 applicable the
deposit agreements relating to our ADSs), 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 Oi 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 Oi is not necessarily tied to the amount of fees the depositary collects from investors.
During the year ended December 31, 2018, we did not receive any reimbursements from the depositary of Oi’s ADSs.
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ITEM 13.
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Not applicable.
PART II
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, 2018 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, 2018, 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 a material weakness in the
current operation of our internal control over financial reporting was 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.
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.
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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, 2018 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, 2018, our internal control over financial reporting was not
effective because a material weakness 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 weakness identified as of
December 31, 2018 was that although the Company has established effective controls with focus on the related parties’ transactions
entered in 2018, the Company did not design, establish or maintain effective controls over the integrity and accuracy of prior years’
related parties’ transactions, which affects current year balance sheet, including reconciliation, review and elimination of such
transactions, in the consolidation process.
Our independent registered public accounting firm, BDO RCS Auditores Independentes S.S., has issued an adverse opinion on the
effectiveness of our internal control over financial reporting as of December 31, 2018 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 the 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 of 2002 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 the
following:
During 2018, we have implemented controls to ensure correct and timely registration of related parties’ transactions, as well the
procedures and controls to ensure an adequate review of these transactions. By the end of 2019, we expect to complete the entire
reconciliation of the balances from fiscal years prior to 2018 and their respective impacts on the elimination and consolidation process
to ensure that it occurs in a correct and timely manner.
Remediation of Prior Material Weaknesses
Remediation of Material Weakness in Internal Control over Financial Reporting as of December 31, 2017
During our management’s assessment of internal control over financial reporting as of December 31, 2017, our management
identified certain material weaknesses. A material weakness is a deficiency, or a combination of deficiencies, in internal control over
financial reporting, such that there is a reasonable possibility that a material misstatement in our annual or interim consolidated financial
statements will not be prevented or detected on timely basis.
With the support of our management, we took significant measures to successfully remediate these material weaknesses reported
in our annual report on Form 20-F for December 31, 2017, as described below.
Remediation activities related to manual journal entries
We have reinforced the access granting and profile management controls to mitigate the risk of improper access. In addition, we
implemented an automated workflow to allow the appropriate identification, review and approval of manual journal entries.
Based upon the measures adopted, our management concluded that the actions implemented represented an improvement in the
mitigation of risks in the control environment over this process and concluded that this deficiency was remediated as of December 31,
2018.
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Remediation activities related to judicial deposits and contingencies
With the purpose of promoting the timely capture of the alterations to the status of the lawsuits and their relevant deposits, and
also the effective impact on our records, we structured a set of actions mainly based on the following items:
•
•
•
•
Standardize procedures;
Implement automated controls, and improve the interfaces between all systems considered in this process;
Create an internal governance structure for periodic monitoring of inconsistencies arising from conciliation activities, with
subsequent treatment of actions; and
Negotiate with banks to improve the accuracy of information.
Based upon the measures adopted, our management concluded that the actions implemented represented an improvement in the
mitigation of risks in the control environment over this process and concluded that this deficiency was remediated as of December 31,
2018.
Remediation activities related to unbilled revenues provision
We implemented a process of periodic review of the estimates and parameters used to compose the unbilled revenues provision. In
addition, we implemented a multidisciplinary management review process, to periodically perform the analysis and reconciliation of
those accounts.
Based upon the measures adopted, our management concluded that the actions implemented represented an improvement in the
mitigation of risks in the control environment over this process and concluded that this deficiency was remediated as of December 31,
2018.
Remediation activities related to the preparation and review of U.S. GAAP financial statements
We have implemented a set of controls to allow U.S. GAAP executives to perform higher level review duties timely, enhancing
timely internal reviews of our U.S. GAAP financial statements. Additionally, we have implemented additional controls to prevent and
detect possible misstatements to improve the interim and annual financial statement closing process.
Based upon the measures adopted, our management concluded that the actions implemented represented an improvement in the
mitigation of risks in the control environment over this process and concluded that this deficiency was remediated as of December 31,
2018.
Remediation activities related to tax recovery balances
We have strengthened the controls of managerial revision, through the implementation of a multidisciplinary structure of review
for tax recoverable balances. In addition, reformulated our policies and procedures, in order to reinforce the control environment and
ensure that these amounts be effectively considered and timely reviewed.
Based upon the measures adopted, our management concluded that the actions implemented represented an improvement in the
mitigation of risks in the control environment over this process and concluded that this deficiency was remediated as of December 31,
2018.
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, 2018 that have materially affected or are reasonably likely to materially affect our internal control over
financial reporting as of December 31, 2018.
ITEM 16A.
AUDIT COMMITTEE FINANCIAL EXPERT
Oi’s fiscal council currently includes an “audit committee financial expert” within the meaning of this Item 16A. Oi’s fiscal
council has determined that Álvaro Bandeira is Oi’s fiscal council financial expert. Mr. Bandeira’s biographical information is included
in “Item 6. Directors, Senior Management and Employees.” Mr. Bandeira is independent, as that term is defined in Rule 303A.02 of the
New York Stock Exchange’s Listed Company Manual.
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ITEM 16B.
CODE OF ETHICS
We have adopted a code of ethics that applies to members of Oi’s 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 Oi’s website at http://ri.oi.com.br/conteudo_en.asp?
idioma=1&conta=44&tipo=43644. The information included on Oi’s website or that might be accessed through Oi’s website is not
included in this annual report and is not incorporated into this annual report by reference.
ITEM 16C.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit and Non-Audit Fees
On September 12, 2018, our board of directors authorized our management to hire a new independent registered public accounting
firm, BDO RCS Auditores Independentes S.S. The dismissal of KPMG as our independent registered public accounting firm was
effective on October 4, 2018.
The following tables set forth the fees billed to Oi by Oi’s former independent registered public accounting firm, KPMG
Auditores Independentes, during the fiscal years ended December 31, 2018 and 2017.
Audit fees(1)
Tax fees
All other fees
Total fees
Year ended
December 31,
2018(2)
2017
(in millions of reais)
R$ 4.5
0.7
—
R$ 5.2
R$ 5.3
0.5
—
R$ 5.8
(1) Audit fees consist of the aggregate fees billed by KPMG Auditores Independentes in connection with the audits of Oi’s annual financial statements.
(2) Excluding fees billed to Oi by Oi’s independent registered public accounting firm, BDO RCS Auditores Independentes S.S., during the fiscal year ended
December 31, 2018.
The following tables set forth the fees billed to Oi by Oi’s independent registered public accounting firm, BDO RCS Auditores
Independentes S.S., during the fiscal year ended December 31, 2018.
Audit fees(1)
Tax fees
All other fees
Total fees
Year ended
December 31,
2018(2)
(in millions of reais)
5.0
R$
—
0.3
5.3
R$
(1) Audit fees consist of the aggregate fees billed by BDO RCS Auditores Independentes S.S. in connection with the audits of Oi’s annual financial statements.
(2) Excluding fees billed to Oi by Oi’s former independent registered public accounting firm, KPMG Auditores Independentes, during the fiscal year ended
December 31, 2018.
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Pre-Approval Policies and Procedures
Oi’s 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 Oi’s 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 Oi’s fiscal council and Oi’s board of
directors, and (2) assess compliance with the pre-approval policies and procedures. Oi’s management periodically reports to Oi’s fiscal
council the nature and scope of audit and non-audit services rendered by Oi’s independent auditors and is also required to report to Oi’s
fiscal council any breach of this policy of which Oi’s management is aware.
ITEM 16D.
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Oi is 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:
•
•
•
•
•
•
•
Oi is 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 Oi’s fiscal council to be separate from Oi’s board of directors;
members of Oi’s fiscal council are not elected by Oi’s management, and none of Oi’s executive officers is a member of Oi’s
fiscal council;
Brazilian law provides standards for the independence of Oi’s fiscal council from Oi’s management;
Oi’s fiscal council, in accordance with its charter, makes recommendations to Oi’s 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 Oi’s management and Oi’s independent auditors regarding financial reporting) for
the purpose of preparing or issuing an audit report or performing other audit, review or attestation services for Oi, as
Brazilian law requires that Oi’s board of directors appoint, retain and oversee the work of Oi’s independent public
accountants;
Oi’s 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
Oi compensates its independent auditors and any outside advisors hired by Oi’s fiscal council and provides funding for
ordinary administrative expenses incurred by the fiscal council in the course of its duties.
Oi, however, do not believe that its reliance on this general exemption will materially adversely affect the ability of its 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
On September 12, 2018, our board of directors authorized our management to hire a new independent registered public accounting
firm. The dismissal of KPMG as our independent registered public accounting firm was effective on October 4, 2018.
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During the three fiscal years ended December 31, 2018 and the subsequent interim period ended on October 4, 2018, there were
no reportable events as defined under Item 16F(a)(1)(v) of Form 20-F, except that KPMG advised us of the following material
weakness:
• We did not design, establish and maintain effective procedures to ensure adequate review, approval, and existence of
sufficient supporting documentation over manual journal entries. This weakness could impact in a failure to timely detect the
totality of manual journal entries, as well as their adequate approval and revision.
• We did not design, establish or maintain effective controls over the communication of activity that impacted the judicial
deposits and contingencies balances. Further, effective controls over the timely reconciliation of these accounts were not
established or maintained.
• We did not design, establish or maintain effective control over the preparation, timely review, and documented approval of
the reconciliation of unbilled revenues. Specifically, we did not have effective controls over the completeness and accuracy
of supporting schedules. The schedules and historical information used in this process were not reviewed in a periodic and
timely manner.
• We did not have sufficient and skilled accounting and finance personnel necessary to perform appropriate processes and
controls related to the preparation of the financial statements in accordance with U.S. GAAP, which includes timely
identification and review of significant non-routine transactions. As a result, a number of errors in our financial statements
were detected and corrected and could not be detected on a timely basis by management in the normal course of the business.
• We did not design, establish or maintain effective control over the completeness and accuracy of consolidation entries, which
includes timely review of reconciliation of intercompany balances and its elimination in the consolidation process.
• We did not design, establish or maintain effective control over the process level control to capture and identify the statute of
limitation of its recoverable taxes.
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 Corporate Law, the rules of the CVM and the applicable rules of the B3, 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.
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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
have a compensation committee composed of independent directors with a charter that complies with the NYSE corporate
governance rules.
Although Brazilian Corporate Law and Oi’s by-laws establish rules in relation to certain qualification requirements of its directors,
neither Brazilian Corporate 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 Corporate 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, Nomination and Corporate Governance Committee to assist its board
of directors, with the purpose of (1) supervising human resources strategies and matters related to the organizational structure and
attracting and retaining talent for Oi and its subsidiaries; (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; (4) making an annual evaluation of
performance, based on defined goals, of the members of the administrative bodies and internal committees of Oi; (5) monitoring the
policies for corporate governance, maintaining the level of governance adopted by Oi and its subsidiaries and ensuring the effective
adoption of best practices; (6) monitoring compliance with the directives established in the Listing Regulations of the Level 1 of the B3
and other policies adopted by Oi, as well as other applicable legislation, regulations and foreign good practices, including, among
others, conditions for maintaining Oi’s listing on the NYSE; and (7) monitoring the corporate culture based on the principles, values
and purpose defined by Oi’s board of directors, using, among other practices, internal surveys and indicators of the internal
communications and whistleblower channels established by Oi.
Oi believes that the People, Nomination and Corporate Governance Committee substantially serves the functions of the
committees required under NYSE corporate governance standards, although the terms of reference of this committee may not include
each of the duties required under the NYSE corporate governance standards.
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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.
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 Corporate 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 Corporate Law, CVM rules and the
applicable rules of the B3 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 B3—B3 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 Corporate 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
Oi S.A. – In Judicial Reorganization
Management’s Report on Internal Control 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
Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 2018 and 2017
Consolidated Statements of Operations for the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Comprehensive Loss for the years ended December 31, 2018, 2017 and 2016
Consolidated Statement of Changes in Equity for the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016
Notes to the Consolidated Financial Statements
(b) List of Exhibits
F-2
F-3
F-4
F-5
F-6
F-8
F-9
F-10
F-11
F-13
1.01*
2.01
2.02
2.03
2.04
2.05
By-laws of Oi S.A. – In Judicial Reorganization, as amended through April 26, 2019 (English translation).
Form of Amended and Restated Deposit Agreement, among Oi S.A. – In Judicial Reorganization, 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. – In Judicial Reorganization filed on February 28, 2012).
Form of Amended and Restated Deposit Agreement, among Oi S.A. – In Judicial Reorganization, 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. – In Judicial Reorganization filed on February 28, 2012).
Judicial Reorganization Plan of Oi S.A. – In Judicial Reorganization, Telemar Norte Leste S.A. – In Judicial Reorganization,
Oi Móvel S.A. – In Judicial Reorganization, Copart 4 Participações S.A. – In Judicial Reorganization, Copart 5 Participações
S.A. – In Judicial Reorganization, Portugal Telecom International Finance B.V. – In Judicial Reorganization and Oi Brasil
Holdings Coöperatief U.A. – In Judicial Reorganization, dated December 20, 2017 (in Portuguese) (incorporated by reference
to Exhibit 2.03 to Form 20-F of Oi S.A. – In Judicial Reorganization filed on May 16, 2018).
Judicial Reorganization Plan of Oi S.A. – In Judicial Reorganization, Telemar Norte Leste S.A. – In Judicial Reorganization,
Oi Móvel S.A. – In Judicial Reorganization, Copart 4 Participações S.A. – In Judicial Reorganization, Copart 5 Participações
S.A. – In Judicial Reorganization, Portugal Telecom International Finance B.V. – In Judicial Reorganization and Oi Brasil
Holdings Coöperatief U.A. – In Judicial Reorganization, dated December 20, 2017 (English translation) (incorporated by
reference to Exhibit 2.04 to Form 20-F of Oi S.A. – In Judicial Reorganization filed on May 16, 2018).
Indenture, dated as of July 27, 2018, among of Oi S.A. – In Judicial Reorganization, as the Company, Telemar Norte Leste
S.A. – In Judicial Reorganization, Oi Móvel S.A. – In Judicial Reorganization, Copart 4 Participações S.A. – In Judicial
Reorganization, Copart 5 Participações S.A. – In Judicial Reorganization, Portugal Telecom International Finance B.V. – In
Judicial Reorganization and Oi Brasil Holdings Coöperatief U.A. – In Judicial Reorganization, as Subsidiary Guarantors, and
The Bank of New York Mellon, as Trustee, Registrar, Principal Paying Agent and Transfer Agent (incorporated by reference
to Exhibit 4.2 to Form F-1/A of Oi S.A. – In Judicial Reorganization filed on September 4, 2018).
183
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2.06
4.01
4.02
4.03
4.04
4.05
4.06
4.07
4.08
4.09
4.10
4.11
4.12
4.13
4.14
4.15
4.16
Form of 10.000% / 12.000% Senior PIK Toggle Notes due 2025 (included in Exhibit 2.05).
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. – In Judicial Reorganization 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. –
In Judicial Reorganization (English translation) (incorporated by reference to Exhibit 4.06 to Form 20-F of Oi S.A. – In Judicial
Reorganization 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. – In Judicial Reorganization (English translation)
(incorporated by reference to Exhibit 4.07 to Form 20-F of Oi S.A. – In Judicial Reorganization 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. – In Judicial Reorganization 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. – In Judicial Reorganization 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 10.11 to Form F-1/A of
Oi S.A. – In Judicial Reorganization filed on September 4, 2018).
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. – In Judicial Reorganization 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).
Schedule of Omitted Instruments of Authorization for the Use of Radio Frequency Blocks for 3G services (incorporated by
reference to Exhibit 10.15 to Form F-1/A of Oi S.A. – In Judicial Reorganization filed on September 4, 2018).
Instrument of Authorization for the Use of Radio Frequency Blocks for 4G services between ANATEL and TNL PCS S.A.,
No. 520/2012, dated October 16, 2012 (English translation) (incorporated by reference to Exhibit 4.16 to Form 20-F of Oi S.A.
– In Judicial Reorganization filed on May 16, 2018).
Schedule of Omitted Instruments of Authorization for the Use of Radio Frequency Blocks for 4G services (incorporated by
reference to Exhibit 4.17 to Form 20-F of Oi S.A. – In Judicial Reorganization filed on May 16, 2018).
Subscription and Commitment Agreement, dated as of December 19, 2017, among Oi S.A. – In Judicial Reorganization,
Telemar Norte Leste S.A. – In Judicial Reorganization, Oi Móvel S.A. – In Judicial Reorganization, Copart 4 Participações
S.A. – In Judicial Reorganization, Copart 5 Participações S.A. – In Judicial Reorganization, Portugal Telecom International
Finance B.V. – In Judicial Reorganization, Oi Brasil Holdings Coöperatief U.A. – In Judicial Reorganization and certain
bondholders (incorporated by reference to Exhibit 2.04 to Form 20-F of Oi S.A. – In Judicial Reorganization filed on
May 16, 2018).
184
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4.17
4.18
4.19
4.20
4.21
4.22
4.23
4.24
8.01*
12.01*
12.02*
13.01*
101*
Amendment No. 1 to Subscription and Commitment Agreement, dated as of July 13, 2018, among Oi S.A. – In Judicial
Reorganization, Telemar Norte Leste S.A. – In Judicial Reorganization, Oi Móvel S.A. – In Judicial Reorganization, Copart
4 Participações S.A. – In Judicial Reorganization, Copart 5 Participações S.A. – In Judicial Reorganization, Portugal
Telecom International Finance B.V. – In Judicial Reorganization, Oi Brasil Holdings Coöperatief U.A. – In Judicial
Reorganization and certain bondholders (incorporated by reference to Exhibit 10.19 to Form F-1/A of Oi S.A. – In Judicial
Reorganization filed on October 4, 2018).
Amendment No. 2 to Subscription and Commitment Agreement, dated as of September 4, 2018, among Oi S.A. – In Judicial
Reorganization, Telemar Norte Leste S.A. – In Judicial Reorganization, Oi Móvel S.A. – In Judicial Reorganization, Copart
4 Participações S.A. – In Judicial Reorganization, Copart 5 Participações S.A. – In Judicial Reorganization, Portugal
Telecom International Finance B.V. – In Judicial Reorganization, Oi Brasil Holdings Coöperatief U.A. – In Judicial
Reorganization and certain investors (incorporated by reference to Exhibit 1 to Form 6-K of Oi S.A. – In Judicial
Reorganization filed on September 5, 2018).
Instrument of Authorization for the Use of Radio Frequency Blocks for services under the 450 MHz spectrum, between
ANATEL and Oi S.A., No. 522/2012, dated October 16, 2012 (English translation) (incorporated by reference to Exhibit
10.21 to Form F-1/A of Oi S.A. – In Judicial Reorganization filed on October 4, 2018).
Amendment No. 3 to Subscription and Commitment Agreement, dated as of December 10, 2018, among Oi S.A. – In
Judicial Reorganization, Telemar Norte Leste S.A. – In Judicial Reorganization, Oi Móvel S.A. – In Judicial Reorganization,
Copart 4 Participações S.A. – In Judicial Reorganization, Copart 5 Participações S.A. – In Judicial Reorganization, Portugal
Telecom International Finance B.V. – In Judicial Reorganization, Oi Brasil Holdings Coöperatief U.A. – In Judicial
Reorganization and certain investors (incorporated by reference to Exhibit 1 to Form 6-K of Oi S.A. – In Judicial
Reorganization filed on December 11, 2018).
Amendment No. 4 to Subscription and Commitment Agreement, dated as of December 18, 2018, among Oi S.A. – In
Judicial Reorganization, Telemar Norte Leste S.A. – In Judicial Reorganization, Oi Móvel S.A. – In Judicial Reorganization,
Copart 4 Participações S.A. – In Judicial Reorganization, Copart 5 Participações S.A. – In Judicial Reorganization, Portugal
Telecom International Finance B.V. – In Judicial Reorganization, Oi Brasil Holdings Coöperatief U.A. – In Judicial
Reorganization and certain investors (incorporated by reference to Exhibit 1 to Form 6-K of Oi S.A. – In Judicial
Reorganization filed on December 19, 2018).
Registration Rights Agreement, dated as of December 18, 2018, by and among Oi S.A. – In Judicial Reorganization and
certain investors (incorporated by reference to Exhibit 10.24 to Form F-1 of Oi S.A. – In Judicial Reorganization filed on
February 1, 2018).
Joinder Agreement, dated as of January 15, 2019, of CVI EMCVF Lux Securities Trading S.a.r.l. and CVI EMCVF Cayman
Securities Ltd., to the Registration Rights Agreement, dated as of December 18, 2018, by and among Oi S.A. – In Judicial
Reorganization and certain investors (incorporated by reference to Exhibit 10.25 to Form F-1 of Oi S.A. – In Judicial
Reorganization filed on February 1, 2018).
Joinder Agreement, dated as of January 23, 2019, of Solus Alternative Management LP, as investment advisor on behalf of
certain related funds and accounts and those certain related funds and accounts, to the Registration Rights Agreement, dated
as of December 18, 2018, by and among Oi S.A. – In Judicial Reorganization and certain investors (incorporated by
reference to Exhibit 10.26 to Form F-1 of Oi S.A. – In Judicial Reorganization filed on February 1, 2018).
List of subsidiaries of the Registrant.
Certification of the Chief Executive Officer of Oi S.A. – In Judicial Reorganization pursuant to the Sarbanes-Oxley Act of
2002.
Certification of the Chief Financial Officer of Oi S.A. – In Judicial Reorganization pursuant to the Sarbanes-Oxley Act of
2002.
Certifications of the Chief Executive Officer and the Chief Financial Officer of Oi S.A. – In Judicial Reorganization pursuant
to the Sarbanes-Oxley Act of 2002.
XBRL
*
Filed herewith.
There are numerous instruments defining the rights of holders of long-term indebtedness of Oi S.A. – In Judicial Reorganization
and its consolidated subsidiaries, none of which authorizes securities that exceed 10% of the total assets of Oi S.A. – In Judicial
Reorganization and its subsidiaries on a consolidated basis. Oi S.A. – In Judicial Reorganization hereby agrees to furnish a copy of any
such agreements to the SEC upon request.
185
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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: April 26, 2019
Date: April 26, 2019
Oi S.A. – In Judicial Reorganization
/s/ Eurico de Jesus Teles Neto
Name: Eurico de Jesus Teles Neto
Title: Chief Executive Officer
Oi S.A. – In Judicial Reorganization
/s/ Carlos Augusto Machado Pereira de Almeida Brandão
Name: Carlos Augusto Machado Pereira de Almeida Brandão
Title: Chief Financial Officer
185
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Oi S.A. – In Judicial Reorganization
INDEX TO FINANCIAL STATEMENTS
Management’s Report on Internal Control 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
Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 2018 and 2017
Consolidated Statements of Operations for the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Comprehensive Loss for the years ended December 31, 2018, 2017 and 2016
Consolidated Statement of Changes in Equity for the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016
Notes to the Consolidated Financial Statements
F-1
F-2
F-3
F-4
F-5
F-6
F-8
F-9
F-10
F-11
F-13
OI S A
OI SA FORM 20-F
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MANAGEMENT’S REPORT ON INTERNAL CONTROLS OVER FINANCIAL REPORTING
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, 2018 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, 2018, management
concluded that the following material weakness in our internal control over financial reporting existed: that we did not design, establish
or maintain effective control over the completeness and accuracy of consolidation entries, which includes timely review of
reconciliation of intercompany balances and its elimination in the consolidation process.
Because of the existence of these material weaknesses, management has concluded that our internal control over financial reporting was
ineffective as of December 31, 2018.
The effectiveness of our internal control over financial reporting has been audited by BDO RCS Auditores Independentes S.S. 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, 2018. Our independent registered public accountants, BDO RCS Auditores
Independentes S.S., audited the consolidated financial statements as of and for the year ended December 31, 2018 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.
April 26, 2019
/s/ Eurico de Jesus Teles Neto
Name: Eurico de Jesus Teles Neto
Title: Chief Executive Officer
/s/ Carlos Augusto Machado Pereira de Almeida Brandão
Name: Carlos Augusto Machado Pereira de Almeida Brandão
Title: Chief Financial Officer
F-2
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To Stockholders and Board of Directors of Oi S.A. – Under Judicial Reorganization
Opinion on Internal Control over Financial Reporting
We have audited Oi S.A. – Under Judicial Reorganization and subsidiaries (the “Company”) internal control over financial reporting as
of December 31, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In our opinion, the Company did not maintain, in all
material respects, effective internal control over financial reporting as of December 31, 2018, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”), the consolidated balance sheet of the Company and subsidiaries as of December 31, 2018, the related consolidated
statements of income and comprehensive income, stockholders’ equity, and cash flows for the year ended December 31, 2018, and the
related notes (collectively referred to as “the financial statements”) and our report dated April 26, 2019 expressed an unqualified
opinion on those consolidated financial statements.
Basis for Opinion
The Company’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 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 are a public accounting firm registered with the PCAOB and are required to be independent with respect to the
Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. 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 material weakness is a deficiency, or a 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 or interim financial statements will not be prevented or
detected on a timely basis. The material weakness described below have been identified and included in management assessment:
•
Although the Company has established effective controls with focus on the related parties’ transactions entered into 2018, the
Company did not design, establish or maintain effective controls over the integrity and accuracy of prior years’ related parties’
transactions, which affects current year balance sheet, including reconciliation, review and elimination of such transactions, in the
consolidation process.
This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2018
financial statements, and this report does not affect our report on those financial statements.
Definition and Limitations of Internal Control over Financial Reporting
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.
April 26, 2019, Rio de Janeiro-RJ, Brazil.
/s/ BDO RCS Auditores Independentes SS
BDO RCS Auditores Independentes SS
F-3
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OI SA FORM 20-F
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To Stockholders and Board of Directors of Oi S.A. – Under Judicial Reorganization
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of Oi S.A. – Under Judicial Reorganization (the “Company”) and
subsidiaries as of December 31, 2018, the related consolidated statements of income and comprehensive income, stockholders’ equity,
and cash flows for the year ended December 31, 2018, and the related notes (collectively referred to as the “consolidated financial
statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the
Company and subsidiaries at December 31, 2018, and the results of their operations and their cash flows for the year ended December
31, 2018, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB),
the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal
Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our
report dated April 26, 2019 expressed an adverse opinion on the effectiveness of the Company’s internal control over financial
reporting.
Going Concern
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 suffered recurring losses from operations, has a net
accumulated deficit and has recently emerged from judicial reorganization. These events and conditions 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 No. 1. The
consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the
Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error
or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining,
on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.
Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating
the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 2018.
April 26, 2019, Rio de Janeiro-RJ, Brazil.
/s/ BDO RCS Auditores Independentes SS
BDO RCS Auditores Independentes SS
F-4
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Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of
Oi S.A. –– Under Judicial Reorganization - Debtor-in-possession
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of Oi S.A. – Under Judicial Reorganization - Debtor-in-possession and
subsidiaries (the Company) as of December 31, 2017, the related consolidated statements of operations, comprehensive loss,
shareholders’ deficit, and cash flows for each of the years in the two-year period ended December 31, 2017, and the related notes
(collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 2017, and the results of its operations and its cash flows for each of
the years in the two-year period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
Going Concern
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 suffered recurring losses from operations, has a net
capital deficit and netshareholders’ deficit, and needs to achieve the conditions of the judicial reorganization plan which include: (a) the
conversion of the debt into equity of the qualified bondholders’ credits and (b) a capital increase in the amount of $4 billion Reais (local
currency) via a public offering. These events or conditions 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.
Basis for Opinion
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 are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission
and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error
or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining,
on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation
of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG Auditores Independentes
We have served as the Company’s auditor since 2012.
Rio de Janeiro, Brazil
May 15, 2018
F-5
OI S A
OI SA FORM 20-F
Donnelley Financial
FWPAXE-EGVRS01
12.10.7.0
EGV pf_rend
RIO
25-Apr-2019 21:05 EST
ˆ200GFY2&Kg@RaSK6$Š
14*
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200GFY2&Kg@RaSK6$
710585 FIN 6
HTM
ESS
Page 1 of 1
Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Consolidated Balance Sheets at December 31, 2018 and 2017
(In thousands of Brazilian Reais - R$, unless otherwise stated)
Current assets
Cash and cash equivalents
Short-term investments
Trade accounts receivable, less allowance for doubtful accounts of R$1,870,350 in
2018 and R$1,342,211 in 2017
Recoverable income taxes
Other taxes
Judicial Deposits
Inventories
Prepaid expenses
Pension plan assets
Held-for-sale assets
Other assets
Total current assets
Non-current assets
Long-term investments
Other taxes
Deferred tax assets
Judicial Deposits
Investments
Property, plant and equipment, net
Intangible assets
Pension plan assets
Other assets
Total non-current assets
Total assets
Liabilities not subject to compromise
Current liabilities
Trade payables
Borrowings and financing
Payroll, related taxes and benefits
Income taxes payable
Other taxes
Tax financing program
Dividends and interest on capital
Provision for contingencies
Unearned revenues
Advances from customers
Licenses and concessions payable
Liabilities associated to held-for-sale assets
Other payables
Total current liabilities
Non-current liabilities
Trade payables
Borrowings and financing
Other taxes
Deferred taxes liabilities
Tax financing program
Provision for contingencies
Liability for pensions benefits
Unearned revenues
Advances from customers
See accompanying notes to consolidated financial statements.
F-6
Note
12/31/2018
12/31/2017
7
7
8
9
10
11
23
26
7
10
9
11
12
13
14
23
15
16
9
10
18
19
21
17
26
20
15
16
10
9
18
19
23
21
4,385,329
201,975
6,862,684
21,447
6,516,555
621,246
803,252
1,715,934
317,503
743,953
4,880
4,923,187
1,079,670
21,313,484
36,987
715,976
23,050
7,018,786
117,840
28,468,798
8,025,442
753,827
773,411
45,934,117
67,247,601
5,225,862
672,894
906,655
27,026
1,033,868
142,036
6,168
680,542
229,497
73,094
85,619
526,870
629,939
10,240,070
3,593,008
15,777,012
628,716
—
411,170
4,358,178
579,122
1,687,073
142,134
7,367,442
1,123,510
1,081,587
1,023,348
253,624
307,162
1,080
4,675,216
780,627
23,497,727
114,839
627,558
8,289,762
136,510
27,083,454
9,254,839
1,699,392
282,687
47,489,041
70,986,768
5,170,970
54,251
924,560
567,129
1,443,662
278,277
6,222
139,012
402,774
20,306
354,127
469,214
9,830,504
867,664
497,375
610,500
1,368,435
72,374
1,633,816
67,143
OI S A
OI SA FORM 20-F
Donnelley Financial
FWPAXE-EGVRS01
12.10.7.0
EGV pf_rend
RIO
25-Apr-2019 21:05 EST
ˆ200GFY2&Kg@RklXg5Š
13*
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200GFY2&Kg@RklXg5
710585 FIN 7
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ESS
Page 1 of 1
Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Consolidated Balance Sheets at December 31, 2018 and 2017
(In thousands of Brazilian Reais - R$, unless otherwise stated)
Licenses and concessions payable
Other payables
Total non-current liabilities
Prepetition liabilities subject to compromise
Total liabilities
Shareholders’ equity (deficit)
Preferred shares, no par value
Authorized 157,727 shares; issued and outstanding 155,915 shares in 2018 and 155,915 in 2017
Common shares, no par value
Authorized 2,298,247 shares; issued and outstanding 2,266,217 shares in 2018 and 519,752 in
2017
Total share capital
Share issuance costs
Capital reserves
Treasury shares
Other comprehensive loss
Accumulated losses
Shareholders’ equity (deficit) attributable to the Company and subsidiaries
Non-controlling interest
Total Shareholders’ equity (deficit)
Total liabilities and shareholders’ equity
See accompanying notes to consolidated financial statements.
F-7
17
20
29
22
26
—
631,622
27,808,035
—
38,048,105
604
583,186
5,701,097
65,139,228
80,670,829
4,094,909
4,094,909
27,943,562
17,343,465
32,038,471
—
21,438,374
(444,943)
(444,943)
16,053,166
(2,803,250)
(1,817,634)
(14,069,804)
28,956,006
243,490
29,199,496
67,247,601
17,762,545
(5,531,092)
(1,175,521)
(42,026,880)
(9,977,517)
293,456
(9,684,061)
70,986,768
OI S A
OI SA FORM 20-F
Donnelley Financial
FWPAXE-EGVRS01
12.10.7.0
EGV pf_rend
RIO
25-Apr-2019 21:05 EST
ˆ200GFY2&Kg@RwymgXŠ
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Page 1 of 1
Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Consolidated Statements of Operations for the years ended December 31, 2018, 2017 and 2016
(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
Reorganization items, net
Income (loss) before financial and taxes
Financial expenses, net
Income (loss) before income taxes
Income tax expense (current and deferred)
Net income (loss) for the year
Net income (loss) attributable to owners of the Company
Net income (loss) attributable to non-controlling interests
Net income (loss) allocated to common shares – basic and diluted
Net income (loss) allocated to preferred shares – basic and diluted
Weighted average number of outstanding shares
(in thousands of shares)
Common shares – basic and diluted (note 22)
Preferred shares – basic and diluted (note 22)
Net income (loss) per share from continuing operations:
Common shares - basic and diluted
Preferred shares - basic and diluted
See accompanying notes to consolidated financial statements.
F-8
Note
4
5
2018
22,060,014
(15,822,732)
6,237,282
2017
23,789,654
(15,676,216)
8,113,438
2016
25,996,423
(16,741,791)
9,254,632
5
5
5
28
6
9
(4,478,352)
(2,697,865)
417,159
31,580,541
31,058,765
(4,012,067)
27,046,698
347,139
27,393,837
27,369,422
24,415
24,525,692
2,843,730
(4,399,936)
(3,064,252)
(1,043,922)
(2,371,918)
(2,766,590)
(1,612,058)
(4,378,648)
350,987
(4,027,661)
(3,736,518)
(291,143)
(2,874,290)
(862,228)
(4,383,163)
(3,687,706)
(1,237,085)
(9,005,998)
(9,059,320)
(4,375,309)
(13,434,629)
(2,245,113)
(15,679,742)
(15,502,132)
(177,610)
(11,924,904)
(3,577,228)
1,344,686
155,915
519,752
155,915
519,752
155,915
18.24
18.24
(5.53)
(5.53)
(22.94)
(22.94)
OI S A
OI SA FORM 20-F
Donnelley Financial
VDI-W7-PFL-0409
12.10.7.0
EGV concf0bz
RIO
26-Apr-2019 09:37 EST
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Page 1 of 1
Oi S.A. – Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Consolidated Statements Comprehensive Income (loss) for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian Reais – R$, unless otherwise stated)
Net income (loss) for the year
Other comprehensive income (loss)
Foreign currency translation adjustments
Decrease of interest shares in subsidiary
Pension and other postretirement benefit plans:
Net actuarial loss from continuing operations
Less amortization of prior service cost and actuarial loss included in net periodic
pension cost
Pension and other postretirement benefit plans
Changes in effective portion of the fair value of hedging financial instrument
Less reclassification adjustment for gains included in net income (loss)
Income tax effect on other comprehensive income (loss):
Pension and other postretirement benefit plans
Other comprehensive loss
Less comprehensive income (loss) attributable to non-controlling interest
Net comprehensive income (loss) attributable to controlling shareholders
See accompanying notes to consolidated financial statements.
F-9
2018
27,393,837
2017
(4,027,661)
2016
(15,679,742)
(110,098)
(110,098)
165,713
(374,130)
(208,417)
(1,176,359)
(1,176,359)
(918,782)
(130,846)
(120,357)
—
—
(918,782)
(130,846)
—
—
—
—
(755)
(121,112)
546,253
64,360
610,613
312,386
312,386
26,677,343
(49,966)
26,727,309
32,157
32,157
(4,334,767)
(64,153)
(4,270,614)
—
(16,366,600)
(399,551)
(15,967,049)
OI S A
OI SA FORM 20-F
Donnelley Financial
FWPAXE-EGVRS01
12.10.7.0
EGV pf_rend
RIO
25-Apr-2019 21:05 EST
ˆ200GFY2&Kg@SBoGg(Š
13*
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200GFY2&Kg@SBoGg(
710585 FIN 10
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ESS
Page 1 of 1
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OI S A
OI SA FORM 20-F
Donnelley Financial
FWPAXE-EGVRS01
12.10.7.0
EGV pf_rend
RIO
25-Apr-2019 21:05 EST
ˆ200GFY2&Kg@SNJf6PŠ
12*
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200GFY2&Kg@SNJf6P
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Page 1 of 1
Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Consolidated Statements of Cash Flows
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian Reais - R$, unless otherwise stated)
Operating activities
Net income (loss) for the year
Adjustments to reconcile net income (loss) to cash provided by operating activities
Loss (gain) on financial instruments
Derivatives financial instruments
Depreciation and amortization
Impairment (reversal) of held-for-sale securities
Provision for bad debt
Provision (reversal) for contingencies
Provision for pension plans
Impairment (reversal) of assets
Deferred tax expense (benefit)
Reorganization items, net
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable
Other taxes
Purchase of short-term investments
Redemption of short-term investments
Trade payables
Payroll, related taxes and benefits
Provision for contingencies
Net increase in income taxes refundable and payable
Pension plans
Employee and management profit sharing
Changes in assets and liabilities held for sale
Other
Net cash provided by (used in) operating activities
See accompanying notes to consolidated financial statements.
F-11
2018
2017
2016
27,393,837
(4,027,661)
(15,679,742)
3,415,354
—
5,952,905
(292,799)
1,224,248
(19,465)
(114,813)
—
(1,115,823)
—
5,881,302
267,008
784,403
143,517
(197,141)
46,534
(231,433)
(31,580,541)
(1,257,068)
2,371,918
(365,771)
121,951
(1,191,664)
1,103,920
(860,900)
(253,902)
(434,974)
(799,189)
—
237,253
(257,643)
(183,838)
2,862,536
(253,469)
477,164
(601,200)
775,456
(374,003)
(42,727)
(114,336)
399,182
54
298,789
701,416
238,443
4,401,758
(5,342,872)
5,150,478
6,310,619
1,090,295
729,752
1,056,410
(198,554)
225,512
1,532,299
9,005,998
(390,361)
(618,074)
(1,877,885)
3,570,453
(585,813)
(175,690)
(692,001)
213,586
(50,000)
84,000
(557,330)
299,240
3,100,320
OI S A
OI SA FORM 20-F
Donnelley Financial
FWPAXE-EGVRS01
12.10.7.0
EGV pf_rend
RIO
25-Apr-2019 21:05 EST
ˆ200GFY2&Kg@S=NfgQŠ
14*
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710585 FIN 12
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ESS
Page 1 of 1
Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Consolidated Statements of Cash Flows
for the years ended December 31, 2018, 2017 and 2016
(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 25)
Purchase of judicial deposits
Redemption of judicial deposits
Other
Net cash provided by (used in) by in investing activities
Financing activities
Repayment of principal of borrowings, financing
Cash impacts on derivatives transactions
Payments of obligation for licenses and concessions
Payments of obligation for tax refinancing program
Share buyback
Payment of dividends and interest on capital
Exercise of warrants
Net cash used in financing activities
Foreign exchange differences on cash and cash equivalents
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents beginning of year
Cash and cash equivalents end of year
2018
2017
2016
(5,246,241)
(4,344,238)
(3,263,571)
22,276
5,016
6,405
(775,953)
1,083,043
(425,563)
343,129
(1,366,907)
706,657
(4,916,875)
(4,421,656)
(3,917,416)
(161,884)
(659)
(1,491)
(265,495)
(54)
4,580
(424,344)
1,328
(2,477,355)
6,862,684
4,385,329
(104,449)
(226,776)
(300,429)
(59,462)
—
(691,775)
11,106
(700,567)
7,563,251
6,862,684
(6,223,703)
443,709
(204,779)
(96,638)
(37,806)
—
(6,119,217)
(398,499)
(7,334,812)
14,898,063
7,563,251
Non-cash transactions
Conversion of debt into shares
Acquisition of Property, Plant and Equipment and Intangible assets (incurring
liabilities)
Offset of judicial deposits against provision for contingencies
2018
11,613,980
2017
2016
1,034,475
845,088
1,451,068
382,071
1,873,573
1,841,299
Other transactions
Income taxes paid
Financial charges paid
Operating cash payments resulting from the judicial reorganization relating to
professional fees
2018
(683,483)
(22,099)
2017
(506,898)
(3,927)
2016
(499,228)
(2,232,977)
(633,676)
(369,938)
(252,915)
See accompanying notes to consolidated financial statements.
F-12
OI S A
OI SA FORM 20-F
Donnelley Financial
FWPAXE-EGVRS01
12.10.7.0
EGV pf_rend
RIO
25-Apr-2019 21:05 EST
ˆ200GFY2&Kg@Si676@Š
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Page 1 of 1
Oi S.A. – Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
1.
BASIS OF PRESENTATION
Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession (“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 and Rio Grande do Sul, and the
Federal District, in the provision of STFC as a local and intraregional long-distance carrier. From January 2004 on, the Company also
provides domestic and international long-distance services in all Regions and since January 2005 started to provide local services
outside Region II. These services are provided under concessions granted by Agência Nacional de Telecomunicações - ANATEL
(National Telecommunications Agency), the regulator of the Brazilian telecommunications industry (“ANATEL” or “Agency”).
The Company is headquartered in Brazil, in the city of Rio de Janeiro, at Rua do Lavradio, 71 – 2º andar.
The Company also holds: (i) through its wholly-owned subsidiary Telemar Norte Leste S.A. - Under Judicial Reorganization –
Debtor-in-Possession (“Telemar”) a concession to provide fixed telephone services in Region I and nationwide International Long-
distance services; and (ii) through its indirect subsidiary Oi Móvel S.A. - Under Judicial Reorganization – Debtor-in-Possession (“Oi
Móvel”) a license to provide mobile telephony services in Region I, II and III.
The local and nationwide STFC long-distance concession agreements entered into by the Company and its subsidiary Telemar with
ANATEL are effective until December 31, 2025. These concession agreements provide for reviews on a five-year basis and in general
have a higher degree of intervention in the management of the business than the licenses to provide private services, and include several
consumer protection provisions, as perceived by the regulator. On December 30, 2015, ANATEL announced that the review to be
implemented by the end of 2015 had been postponed to April 30, 2016. Subsequently, On April 29, 2016, ANATEL decided, under a
Resolution Circular Letter, to postpone until December 31, 2016 the execution of the revised agreements. On December 30, 2016 and
under a Resolution Circular Letter, ANATEL postponed again the execution of the new concession agreements up to June 30, 2017. On
June 29, 2017, ANATEL informed, in an official letter, that it would no longer make any further amendments to the concession
agreements at this instance. Note that until the end of the concession agreement on December 31, 2025 there would still be a period for
revision, on December 31, 2020. It is worth noting that Congress Bill 79/2016 provides for a special amendment of concession
agreements to adjust them to the possibility of migrating from a public utility regime to an STFC service provision under a private law
regime. Thus, if this bill is passed into law, the concession agreement is subject to amendment in any date other than December 31,
2020. Throughout the years, ANATEL initiated some procedures aiming at monitoring the Company’s financial situation, as well as to
assess the Company’s ability to discharge its obligations arising from the terms of the concession agreements. In light of the approval of
the Judicial Reorganization Plan by the creditors and its subsequent ratification by the competent court, ANATEL started to monitor the
Oi Group Companies’ operating and financial positions based on the effectiveness of said Judicial Reorganization Plan (JRP).
The Company is registered with the Brazilian Securities and Exchange Commission (“CVM”) and the U.S. Securities and Exchange
Commission (“SEC”). Its shares are traded on B3 S.A. – Brasil, Stock Exchange, OTC, and its American Depositary Receipts
(“ADRs”) representing Oi common shares and preferred shares traded on the New York Stock Exchange (“NYSE”).
1.1. JUDICIAL REORGANIZATION
On June 20, 2016, Oi, together with its direct and indirect wholly owned subsidiaries Oi Móvel, Telemar, Copart 4 Participações S.A. –
Under Judicial Reorganization - Debtor-in-Possession (“Copart 4”), Copart 5 Participações S.A. – Under Judicial Reorganization -
Debtor-in-Possession (“Copart 5”), Portugal Telecom International Finance B.V. – Under Judicial Reorganization -
Debtor-in-Possession (“PTIF”), and Oi Brasil Holdings Cooperatief U.A. – Under Judicial Reorganization - Debtor-in-Possession (“Oi
Holanda”) (collectively with the Company, the “Oi Companies” or “JR Debtors”) filed, as a matter of urgency, a request for judicial
reorganization with the Court of the State of Rio de Janeiro, as approved by the Company’s Board of Directors and the competent
governing bodies.
F-13
OI S A
OI SA FORM 20-F
Donnelley Financial
FWPAXE-EGVRS01
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EGV pf_rend
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ˆ200GFY2&Kg@SsTLgAŠ
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Page 1 of 1
Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
On November 29, 2017, the Judicial Reorganization Court determined once again the postponement of the General Creditors Meeting
(“CGM”) to December 19, 2017, on its first notice to convene, which may continue on December 20, 2017, if necessary, and
February 1, 2018, on its second notice to convene, which may continue on February 2, 2018, if necessary.
On December 19, 2017, after confirming that the required quorum of classes I, II, III, and IV creditors was in attendance, the CGM was
held and the JRP was approved by a vast majority of creditors on December 20, 2017.
On January 8, 2018, the Judicial Reorganization Court issued a decision ratifying the JRP and granting the judicial reorganization to the
Oi Companies. Said decision was published on February 5, 2018, initiating the period for the creditors of the Judicial Reorganization
Debtors (“JR Debtors”) to elect one of the payment options to recover their claims, as provided for in the JRP, which ended on
February 26, 2018, except for bondholders, whose deadline was extended to March 8, 2018, as decided by the Judicial Reorganization
Court on February 26, 2018.
On July 20, 2018, the Board of Directors ratified in part the Capital Increase – Claim Capitalization, approved at the Board of Directors’
meeting held on March 5, 2018. This approval was provided after verification of the results of the new common shares’ subscription
calculation by the Company’s shareholders, which exercised their preemptive right and by the holders of the Qualified Bondholders’
Unsecured Claims through the capitalization of their related claims, as provided for by the JRP.
Under Brazilian law, prior to issuing the Common Shares underlying the newly issued Common ADSs or the Warrants underlying the
newly issued ADWs to holders of Defaulted Bonds, Oi was required to conduct a preemptive offer of those Common Shares and
Warrants to all holders of its Common Shares and Preferred Shares. Holders of Common ADSs and Preferred ADSs were not entitled to
participate in that preemptive offer.
Holders of preemptive rights were entitled to subscribe to Common Shares and the associated Warrants during a subscription period
commencing on June 15, 2018 and ending on July 16, 2018 at a subscription price of R$7.00 per Common Share. Holders of Common
Shares and Preferred Shares subscribed for 68,263 Common Shares and 5,197 Warrants in the preemptive offer. The cash proceeds of
the preemptive offer was required to be made available to holders of Defaulted Bonds in lieu of the subscribed Common Shares and
Warrants.
Under the JRP, the Qualified Recovery with respect to each US$1,000 of Qualified Bondholder Credits consisted of approximately:
• US$195.61 aggregate principal amount of New Notes;
•
•
38.57 Common ADSs representing 192.83 Common Shares for a total of 1,514,299,603 shares valued at $10,600,097,221 in
partial settlement of the bonds;
2.75 ADWs; and
• US$0.01 in cash.
In the July 28, 2018 Board of Directors meeting, the Board ratified the issuance of subscription warrants to subscribers who participated
in the preemptive offering and to qualified Bondholders pursuant to the terms of the Capital Increase – Claims Capitalization.
Pursuant to Article 72 of the Bylaws then in effect and because of a dilution of Company’s shareholding base in excess of 50% as a
result of the Capital Increase – Claim Capitalization, the voting constraint therein was discontinued and immediately and irrevocably
ceased to have any effect with respect to the exercise of voting rights by the Company’s shareholders.
On July 31, 2018, the Company that it had completed the restructuring of the Companies under Reorganization with the implementation
of the applicable JRP terms and conditions represented by the completion of the Capital Increase – Claim Capitalization.
F-14
OI S A
OI SA FORM 20-F
Donnelley Financial
FWPAXE-EGVRS01
12.10.7.0
EGV pf_rend
RIO
25-Apr-2019 21:06 EST
ˆ200GFY2&Kg@S$vngÊ
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Page 1 of 1
Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
1.2. CAPITAL INCREASE – NEW FUNDS
As part of the approved JRP, on October 26, 2018, the Board of Directors approved the Capital Increase – New Funds, within the
authorized capital ceiling set in Oi’s Bylaws, through the issuance of three billion, two hundred twenty-five million, eight hundred six
thousand, four hundred fifty-one (3,225,806,451) new common shares, at the price of R$1.24 per share (“New Common Shares”), for
total consideration of R$4.0 billion, in line with the JRP provisions. Any holder of Company common shares (“Common Shares”)
and/or Company preferred shares (“Preferred Shares”), including the custody agent of the American Depositary Shares Program
(“ADSs Custodian”) representing Company Common Shares and/or Company Preferred Shares (“ADS”), is ensured the preemptive
right to subscribe New Common Shares issued as a result of the Capital Increase – New Funds, pursuant to Article 171 of Law
6404/1976. Any and all New Common Shares not subscribed by existing common and/or preferred shareholders under their preemptive
rights are to be subscribe by the Backstop Investors pursuant the deadlines and terms of the Commitment Agreement between the
Company and the Backstop Investors. The preemptive rights were eligible to be exercised upon effectiveness of the U.S. SEC
registration statement the Company filed relating to the sale of New Common Shares and ADS. The SEC declared the registration
statement effective on November 13, 2018, upon which the Company disclosed a Notice to Shareholders communicating the start date
of the preemptive right exercise period, as well as other terms and conditions.
Also on October 26, 2018, the Company became aware that the members of ANATEL’s Board of Directors unanimously decided to
grant a preapproval of the Capital Increase – New Funds.
Between October 3 and December 31, 2018, 115,913,355 common shares have been issued to pursuant to the exercise of warrants that
were issued as part of the Capital Increase – Claims Capitalization transaction, including subscription warrants represented by
22,798,378 American Depository Warrants. On January 4, 2019, 275,985 common shares have been issued to pursuant to the exercise
of warrants that were issued as part of the Capital Increase – Claims Capitalization transaction, including subscription warrants
represented by 55,197 American Depository Warrants. The Subscription Warrants not exercised up to and including January 2, 2019
and the ADWs not exercised up to and including December 26, 2018 have expired and can no longer be exercised.
On December 19, 2018, the Company noticed to Holders of ADSs informing that it changed certain terms of the Rights Offer. The
Company entered into an amendment to the Commitment Agreement, under which the Backstop Investors holders of 60% of the total
amounts of the backstop commitments (“Majority of the Backstop Investors”) agreed to extend the deadlines and waive certain pending
conditions precedent to finance its backstop commitments, including the requirement to publish the updated General Universal Service
Targets Plan (“New PGMU”). The Company also informed that it will pay to the ADS Depository the ADS issue rate of the New
Common ADSs. As a result, the Deposit Amount of the New Common ADSs would no longer be used to pay the ADS issue rate, which
would increase the portion returned to the holders of Common ADSs Rights exercised its Common ADSs Rights to subscribe the initial
New Common ADSs or New Common ADSs Surpluses.
On January 11, 2019, the Company’s Board of Directors verified and confirmed the issuance of 1,530,457,356 New Common Shares
that were subscribed within the preemptive right exercise period of new common shares, at the issue price of R$1.24 per share, for total
proceeds of R$1,897,767,121.44. From the total of New Common Shares issued, (i) 856,519,080 were delivered to the ADS Depositary
so that the ADSs corresponding to such New Common Shares were issued, which were delivered to the holders of ADSs to exercise
their preemptive rights, and (ii) 673,938,276 New Common Shares were delivered to the holders of common shares and preferred shares
that exercised their respective preemptive rights.
On the same date, the Company’s Board of Directors verified the result of the requests regarding the excess distribution of new
common shares (“Excess New Common Shares”) not subscribed within the preemptive right exercise period of new common shares.
The holders of common shares and preferred shares, including the ADS Depository, requested a total of 91,322,933 excess distribution
shares. The Company’s Board of Directors also confirmed that because the number of Excess New Common Shares requested was
lower than the total number of Excess New Common Shares available, the Excess New Common Shares requests filed by the holders of
common shares and preferred shares and the holders of ADSs would be fully met.
F-15
OI S A
OI SA FORM 20-F
Donnelley Financial
FWPAXE-EGVRS01
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RIO
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ˆ200GFY2&Kg@T7S46Š
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Page 1 of 1
Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
On January 21, 2019, the Company’s Board of Directors verified the payment of the Excess New Common Shares and confirmed the
issue of 91,322,933 Excess New Common Shares subscribed by the holders of common shares and preferred shares, including
49,156,560 Excess New Common Shares subscribed by the ADS Depository pursuant to the instructions received from holders of
ADSs, at the issue price of R$1.24 per share, which resulted in the contribution of R$113,000,000.00 to the Company. On the same
date, the Company’s Board of Directors confirmed that the 1,604,268,162 New Common Shares not subscribed within the preemptive
right exercise period and the subscription of Excess New Common Shares would be subscribed by the Backstop Investors, under the
terms of the Plan and the Commitment Agreement. Also on the same date, the Company’s Board of Directors verified that the Backstop
Investors representing 84.4% of the total guarantee commitment of the Capital Increase – New Funds elected, under the terms of the
Plan and the Commitment Agreement, to receive the guarantee commitment premium de commitment of the Capital Increase – New
Funds in common shares, as provided for by Section 5 of the Commitment Agreement, and approved, therefore, in strict compliance
with the Plan and the Commitment Agreement confirmed in court, the issue of 272,148,705 shares (“Commitment Shares”).
On January 28, 2019, the Company informed that, in compliance with the Plan and the terms of the Capital Increase – New Funds, on
January 25, 2019 1,604,268,162 New Common Shares were subscribed and paid in, corresponding to the balance of common shares not
subscribed by the shareholders within the preemptive right exercise period and the Excess New Common Shares period (“Balance of
New Common Shares”). This concluded the Capital Increase – New Funds, provided for by Clause 6 of the Plan, through the
subscription and payment of all 3,225,806,451 New Common Shares issued as part of the Capital Increase – New Funds, representing a
contribution of new funds for the Company totaling R$4,000,000,000.00. The Company also informed that, in strict compliance with
the Plan and the Commitment Agreement, the Backstop Investors that elected to receive their commitment premium in shares, as
provided for by Clause 6.1.1.3 of the Plan and the Commitment Agreement, subscribed and paid in the Commitment Shares, issue price
of R$1.24 per share, in the form of American Depositary Shares. In light of the outcome of the subscription and payment of the New
Common Shares issued as part of the Capital Increase – New Funds and the Commitment Shares, the Company’s paid-in capital
increased to R$32,538,937,370.00, (R$32,038,471,375.00 of share capital plus R$500,465,995.00 of additional paid-in capital),
represented by 5,954,205,001 shares, divided into 5,796,477,760 registered common shares and 157,727,241 registered preferred
shares, without par value.
1.3. CREDITORS SETTLEMENT PROGRAM
On June 23, 2017, as authorized by the Judicial Reorganization Court, the Company initiated a program to enter into settlement
agreements with the Oi Companies’ creditors listed in the Judicial Administrator’s List of Creditors, published on May 29, 2017 (“Oi
Creditor” and “Creditors Settlement Program” or “Program”, respectively), and creditors could join the program via the website
www.credor.oi.com.br.
The Creditors Settlement Program was applicable for creditors with claims amounting to R$50,000 or lower, and allowed the
prepayment of 90% of the claim on the acceptance of the creditor and the remaining 10% of the claim after the approval of the JRP, to
be paid under the terms and conditions of the Creditors Settlement Program. A Oi Creditor whose claim was higher than R$50,000
would be entitled to join the Creditors Settlement Program, in which case they would receive a R$50,000 prepayment, upon acceptance
by such Oi Creditor of the settlement under the terms and conditions set out in the Creditors Settlement Program and the exceeding
amount will be paid as set out in the Plan. The Creditors Settlement Program benefited the participating Oi Creditors as it allowed for
the prepayment of part of the amount under the Program.
Approximately 35,000 creditors jointed the Creditors Settlement Program, of which about 30,000 in Brazil and 5,000 in Portugal, and
approximately R$360 million were made available for the prepayment of the settlements entered into under the Program.
F-16
OI S A
OI SA FORM 20-F
Donnelley Financial
FWPAXE-EGVRS01
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EGV pf_rend
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ˆ200GFY2&Kg@TJc06_Š
14*
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200GFY2&Kg@TJc06_
710585 FIN 17
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Page 1 of 1
Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
1.4. PRE-PETITION CLAIMS, REGULATORY AGENCIES
The Company has reported that it has knowledge of regulatory punitive administrative proceedings and lawsuits that could amount to
approximately R$14.5 billion as at June 30, 2016, including fines imposed, expected fines to be imposed and corresponding monetary
variations. The Company disagreed and challenged a material portion of the noncompliance events pointed out by ANATEL and
challenged the disproportionateness of the punitive actions taken, emphasizing their unreasonableness.
The JRP, as approved at the CGM on December 20, 2017 and subsequently ratified by the Judicial Reorganization Court on January 8,
2018, lays down the payment method Pre-petition Claims, Regulatory Agencies, which include ANATEL’s non-tax claims amounting
to approximately R$14.5 billion as of June 30, 2016:
(i)
Payment of nontax pre-petition claims that are under the jurisdiction of the Federal Attorney General’s Office (AGU) in two
hundred forty (240) installments, commencing June 30, 2018, as follows: (i) from the 1st to the 60th installment: 0.160%; (ii)
from the 61st to the 120th installment: 0.330%; (iii) from the 121st to the 180th installment: 0.500%; (iv) from the 181st to the
239th installment: 0.660%; and (v) 240th installment: the outstanding balance. The first installments shall be fully paid by
cashing amounts initially deposited in courts as collateral of these claims, to be supplemented, if necessary, in cash.
Beginning in the subsequent month, Oi shall pay the other installments in cash. As from the second installment, the monthly
installments shall be adjusted for inflation using the SELIC (Central Bank’s policy rate);
Because the other nontax pre-petition claims of regulatory agencies challenged at the administrative level are illiquid up to this date,
they shall be paid as laid down in Clause 4.3.6 of the JRP, general payment method of unsecure claims.
Note, however, that ANATEL filed interlocutory appeal No. 001068-32.2018.8.19.0000 against the decision that ratified the judicial
reorganization plan, alleging the invalidity of Clause No. 4.3.4, which sets the method for settlement of ANATEL’s claims. This appeal
is pending trial.
Accordingly, the court decisions in effect establish that ANATEL’s non-tax claims against the Company are subject to the judicial
reorganization proceeding and shall be paid as provide for by Pre-petition Claims, Regulatory Agencies (Clause 4.3.4 of the approved
and ratified Judicial Reorganization Plan), as decided by the Oi Group’s creditors at the CGM, and decided by the Judicial
Reorganization Court, pursuant to Law 11101/2005.
1.5. PAYMENT PROPOSALS IN THE JRP APPROVED AT THE CGM ON DECEMBER 20, 2017, RATIFIED BY THE
JUDICIAL REORGANIZATION COURT ON JANUARY 8, 2018 AND IN EFFECT BY DECEMBER 31, 2018
The Oi Group’s creditors shall become creditors of the debt(s) issued by the JR Debtor that was their original debtor.
CLAIMS FROM CREDITORS
This section presents a summarized version of the key terms of the repayment Plan to Oi Group Creditors, including certain information
on the financial terms and conditions included in the JRP.
Note that, as defined in Appendix 1.1 to the JRP, the publication date of the Judicial Reorganization Court’s decision ratifying the JRP,
i.e., the lower court decision granting the judicial reorganization, against which no appeal with a suspensory effect is upheld, which is
January 8, 2018, published on the Official Gazette on February 5, 2018, is taken into consideration for purposes of the way the time
limit in the payment terms is counted.
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Page 1 of 1
Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
According to the approved JRP, there are 4 Classes of creditors, as follows:
Class I – Labor Claims
General rule: labor claims shall be paid in five (5) equal monthly installments, with a 180-day grace period after the Court Ratification
of the Plan. Labor claims not yet acknowledged shall be paid in five (5) equal monthly installments, with a six-month grace period after
a final, unappeasable court on the amount due decision is issued.
Labor Claims that are collateralized by judicial deposits:
•
•
Shall be paid through the immediate withdrawal of the amount deposited in court.
If the deposited amount is lower than the debt listed by the Oi Companies, the deposit shall be used to pay part of the debt
and the outstanding balance shall be paid after a decision is issued by the Court that ratifies the amount due in five (5) equal
monthly installments, with a 180-day grace period from the Court Ratification of the Plan. If the deposit is higher than the
debt, the Oi Companies shall withdraw the difference.
Labor Claims not collateralized by judicial deposits shall be paid via judicial deposits attached to the court records of the related case.
Fundação Atlântico (pension fund) claims:
•
•
Payable in six (6) annual, equal installments, with a five-year grace period as from the Court Ratification of the Plan.
Interest/monetary variation: five-year grace period for interest. National Consumer Price Index (INPC) + 5.5% per year,
levied as from the Court Ratification of the Plan, annually accrued during the grace period and payable annually, as from the
sixth year, together with the principal installments.
Class II – Collateralized Payables
Class 2 claims shall be paid as follows:
Each creditor shall receive the original debt amount, as disclosed in the List of Creditors, adjusted by the interest/monetary variation
rate, as follows:
Principal shall be repaid as follows:
•
•
72-month grace period for principal as from the Court Ratification date of the Judicial Reorganization Plan;
Principal shall be repaid in 108 monthly installments, as described in the table below:
Months
0 a 72nd
73rd to 132nd
133rd to 179th
180th
•
Four-year grace period on interest.
Percentage of the amount to be
repaid per month
0.0%
0.33%
1.67%
1.71%
Interest: Long-term Interest Rate, released by the Central Bank, plus spread of 2.946372%, where the interest levied in the first
four (4) years shall not be paid and shall be accrued annually and added to the principal.
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OI SA FORM 20-F
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Page 1 of 1
Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
Classes III and IV – Unsecured Creditors and MBOs/SBs
The payment proposal for claims of Unsecured Creditors and Micro-business Owners (“MBOs”) and Small Businesses (“SBs”) is
described below, according to the thresholds established in the JRP:
Linear payment to Unsecured Creditors:
•
Linear payment to Unsecured Creditors: Unsecured Creditors’ and MEs/EPPs’ claims of amounting up to R$1,000 were paid
in a single installment within 20 business days after the Court Ratification of the Plan.
• Unsecured Creditors and MEs/EPPs with claims above R$1,000 can elect to receive their claims in a single installment,
providing that they agree to receive only R$1,000 as the full payment of their claims an related costs, payable within 20
business days after the end of the period to elect the payment option.
Unsecured Creditors with Judicial Deposits: Class 3 and 4 claims held by Unsecured Creditors shall be paid after the withdrawal of
the judicial deposits, using the following discount percentages:
Claim Amount Interval
Up to R$1,000.00
R$1,000.01 to R$5,000.00
R$5,000.01 to R$10,000.00
R$10,000.01 to R$150,000.00
Over R$150,000.00
Discount %
0%
15%
20%
30%
50%
•
•
•
Shall be paid through the withdrawal of the deposited amount;
If the deposit is lower than the debt (after the discount above, as applicable), the deposit shall be used to pay part of the debt
and the outstanding balance shall be paid after a decision issued by the competent court that ratifies the amount due
according to the General Payment Method described below;
If the deposit is higher than the debt (calculated after the discount above, as applicable), The Oi Companies shall withdraw
the difference.
Unsecured Creditors and MEs/EPPs that are not paid as provided for above can opt for payments using one of the five restructuring
options described below, limited to a maximum amount per offer.
F-19
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OI SA FORM 20-F
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Page 1 of 1
Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
Restructuring Option 1:
•
•
•
•
•
Part of Classes 3 and 4 claims shall be denominated in Brazilian reais by the amount of Classes 3 and 4 Creditors that elected
this option, up to a ceiling of R$10,000,000,000; these Creditors can elect one of the following methods: (i) claim
restructuring; (ii) private debentures, or (iii) public debentures.
Part of Classes 3 and 4 claims shall be denominated in US dollars by the amount claimed of Classes 3 and 4 Creditors that
elected this option, up to a maximum of US$1,150,000,000.
60-month grace period on principal;
Principal shall be repaid in 24 semiannual, successive installments, as shown in the table below:
Six-month periods
0 to 10th
11th to 20th
21st to 33rd
34th
Percentage of the amount to be
repaid per six-month period
0.0%
2.0%
5.7%
5.9%
The interest rate shall be (i) an annual rate equivalent to 80% of the interbank deposit rate (CDI) for claims denominated in
Brazilian reais and (ii) 1.75% per year for claims denominated in US dollars; interest shall be annually accrued to the
principal and paid semiannually as from the 66th month after the Ratification of the Judicial Reorganization Plan;
• Once this offer’s maximum amounts are reached, the outstanding balances of the claims payable under this offer shall be
paid according to the General Payment Method described below.
Restructuring Option 2:
•
•
•
The claims of the Creditors that elect this payment method shall be restructured in US dollars within up to six (6) months
after the Court Ratification of the Plan, limited to a maximum of US$850,000,000.
60-month grace period on principal;
Principal shall be repaid in 24 semiannual, successive installments, as shown in the table below:
Six-month periods
0 to 10th
11th to 20th
21st to 33rd
34th
F-20
Percentage of the amount to be
repaid per six-month period
0.0%
2.0%
5.7%
5.9%
OI S A
OI SA FORM 20-F
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Page 1 of 1
Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
•
Interest of 1.25% per year, annually accrued to the principal and paid semiannually as from the 66th month after the
Ratification of the Judicial Reorganization Plan, where:
• During the principal grace period, 10% of total interest shall be paid semiannually, while the remaining 90% shall be accrued
to the principal annually. After this period, 100% of total interest shall be paid semiannually.
• Once this offer’s maximum amounts are reached, the outstanding balances of the claims payable under this offer shall be
paid according to the General Payment Method described below.
•
The creditors’ rights granted under this offer can only be assigned with the prior consent of Oi.
Restructuring Option 3:
Restructuring of unqualified bonds:
•
•
This offer is available only to bondholders with claims up to US$750,000, and it is limited to a maximum of
US$500,000,000.
50% discounts, firstly applied to interest and subsequently to principal.
• Grace period on principal: six years as from the Ratification of the Plan.
•
Principal shall be equivalent to 50% of the unqualified bondholders’ claims, capped at US$250,000,000, and shall be repaid
in twelve (12) semiannual, successive installments, as shown in the table below:
Six-month periods
0 to 12th
13th to 18th
19th to 23rd
24th
percentage of the amount to be
repaid per six-month period
0.0%
4.0%
12.66%
12.70%
•
Interest: 6% per year in US dollars, annually accrued to the principal as from the 78th month after the Court Ratification of
the Plan.
Restructuring of qualified bonds:
•
This offer is available only to bondholders with claims in excess of US$750,000, which will receive the following:
•
Common shares issued by Oi and currently held by PTIF;
• New notes;
• New I Common Shares; and
•
Subscription Warrants
•
Exchange ratios: for each US$664,573.98:
•
•
•
•
9,137 common shares issued by Oi and currently held by PTIF;
New Notes, issued at the overall price of US$145,262, which consists of a par value of US$130,000 and an issue
premium of US$15,262;
119,017 New I Common Shares;
9,155 Subscription Warrants.
F-21
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OI SA FORM 20-F
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Page 1 of 1
Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
Note: the exchange ratios assume that the number of Oi common shares and Oi preferred shares is 825,760,902.
•
The New Notes shall be issued in US$1,000 multiples and shall have a maximum par value of R$6,300,000,000, equivalent
to a maximum par value of US$1,918,100,167.
•
•
•
Maturity: 7th year after its issue date.
Principal: shall be repaid in a bullet payment maturing on the 84th month after its issue date;
Interest: can be paid under one of the following two methods:
•
10% per year, paid semiannually; or
• During the first three (3) years as from the plan’s ratification, 12% interest paid semiannually, of which 8% of
the annual interest paid is in cash semiannually and 4% compounded semiannually and paid in the 36th month
after the issue date of the New Notes, and beginning in the 4th year when annual 10% interest in being charged,
paid semiannually.
•
The New I Common Shares shall be due as a result of the capital increase, through the capitalization of the claims:
•
Up to 1,756,054,163 New I Common Shares shall be issued with par value ranging from R$6.70 to R$7 to a total
ranging from R$11,765,562,892.10 to R$12,292,379,141.
•
Subscription warrants: Oi shall issue up to 135,081,089 subscription warrants.
On June 13, 2018, ANATEL agreed with the restructuring of the qualified bonds, in Decision No. 336/2018, authorizing the stages
necessary for the capital increase of the other actions required for complying with Clause 4.3.3.2 of the JRP. Specifically, the authorized
conversion entailed the issue of new shares, the dilution of the current shareholders’ interests, the capital increase, and the change of the
Company’s current shareholding structure. ANATEL ratified the determination of any change in the Company’s Board of Directors that
must be previously submitted to the Regulator’s review.
On June 18, 2018, the Superintendent General of the Administrative Economic Defense Council (“CADE”) (Brazilian antitrust
authority) decided, under SG Order No. 753/2018, not to acknowledge the qualified bonds’ restructuring transaction, which had been
cautiously notified to said authority exclusively to ensure the compliance with JRP within the prescribed deadlines. According to the
CADE Superintendent General, the transaction was not acknowledged because it did not meet the revenue requirement prescribed by
Law 12529/2011. No complaints were filed against this decision.
With the confirmation of the CADE’s decision and taking into account ANATEL’s Steering Board’s decision that granted the
preapproval requested by the Company to complete the capital increase provided for by Clause 4.3.3.2 of the JRP, all the conditions
precedent listed by the Plan, needed to undertake said capital increase, were either verified or waived, considering that the related
conversion of debt into equity instruments was implemented after the ratification of the JRP, on February 5, 2018.
F-22
OI S A
OI SA FORM 20-F
Donnelley Financial
FWPAXE-EGVRS33
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Page 1 of 1
Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
Restructuring Option 4: General Payment Method
This offer applies to creditors that do not meet the terms and conditions of the previous offers or if the offers highlighted above exceed
their maximum amounts and the creditor still holds an outstanding balance.
•
•
•
Principal shall be repaid in five (5) equal annual, successive installments after the 20-year grace period.
Interest/monetary variation:
Interest equivalent to TR, a benchmark rate, per year in the case of unsecure claims whose holders elect to receive payment
for their claims in Brazilian reais; this interest shall be levied as from the Court Ratification of the Plan, and total interest and
monetary variation accrued in the period shall be paid only and together with the last principal installment.
• No interest, in the case of unsecured claims whose holders elect to receive payment for their claims in US dollars.
•
•
The Company shall have an early repayment option consisting of the payment of 15% of principal and accrued interest.
Payment maximum: R$70,000,000,000, minus the amount of pre-petition claims that are restructured under the other offers
of the Plan.
Restructuring Option 5: Strategic Supplier Creditors
•
The claims of Strategic Supplier Creditors, suppliers of goods and/or services that kept the terms and conditions practiced
prior to the filing of the Judicial Reorganization Plan, that do not arise from loans or financing facilities granted to the Oi
Companies, shall be paid, up to a maximum of R$150,000, within up to 20 business days after the end of the period to elect
the payment option.
If these suppliers have claims in excess of R$150,000, they shall receive the outstanding amount minus a 10% discount in four (4) equal
annual, successive installments, plus (i) TR + 0.5% in the case of real-denominated claims and (ii) 0.5% per year in the case of US
dollar- or euro-denominated claims.
F-23
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OI SA FORM 20-F
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Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
CLAIMS FROM RELATED PARTIES
Claims that refer to intragroup loans among the JR Debtors, by using cash generated by transactions conducted in the international
market by the JR Debtors, shall be paid as described below:
•
•
Principal shall be repaid beginning on the 20th year after the settlement of the General Payment Method claims. Principal
shall be repaid in five (5) equal annual, successive installments.
Interest/monetary variation: TR for real-denominated intragroup claims 0.5%, levied as from the Court Ratification of the
Plan. Total interest and monetary variation accrued in the period shall be paid only and together with the last principal
installment. No interest, in the case of dollar- or euro-denominated intragroup claims.
The Oi Companies may mutually agree an alternative method for the settlement of intragroup claims, under the originally agreed terms
and conditions, including, but not limited to, by netting their payables and receivables, as provided for by the law.
CASH SWEEP
Unsecured Creditors, MEs/EPPs, and Secured Creditors can accelerate the receipt of their claims against the Oi Companies with the
cash sweep, which shall be proportionally distributed among the claims, under the following terms:
•
In the first five (5) years after the Court Ratification of the Plan, the Oi Companies shall assign the equivalent to 100% of the
net revenue from the sale of assets that exceeds US$200 million.
• Beginning on the 6th year after the Court Ratification of the Plan, the Oi Companies shall assign the equivalent to 70% of its
Cash Balance that exceeds the Minimum Cash Balance.
•
The Minimum Cash Balance is defined as the higher of:
(i)
(ii)
25% of the aggregate of prior year’s OPEX and CAPEX; or
R$5 billion.
• Additionally, any funds originating from a capital increase shall be added to the calculation of the Minimum Cash Balance.
CAPITAL INCREASES – NEW FUNDS
Pursuant to the shareholders’ preemptive right and fulfilling or waiving the conditions precedent provided for in the Backstop
Agreement or the JRP, the Company was required to make a Capital Increase – New Funds totaling R$4,000,000,000.
The Issue Price of the New II Common Shares was calculated by dividing R$3,000,000,000 by the number of Oi shares outstanding on
the business day immediately prior to the capital increase, taking into consideration possible adjustments provided for in the Backstop
Agreement.
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OI SA FORM 20-F
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Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
Taking into consideration the terms and conditions of the Backstop Agreement, a commitment fee of 8% in US dollars or 10% in
Company common shares was due to the investors identified in the Backstop Agreement that committed to promptly provide or obtain
firm commitments for the full subscription of the capital increase, as established in said Backstop Agreement. On January 25, 2019,
272,148,705 Common Shares have been issued in a private placement to the Backstop Investors and paid US$13 million to the
Backstop Investors as compensation for their commitments under the Commitment Agreement.
FURTHER OBLIGATIONS AND OTHER RELEVANT SITUATIONS:
Restriction to Dividend Payments: The Oi Companies shall be restricted from declaring or paying any dividends, return on capital, or
make any other payment or distribution on (or relating to) its own shares (including any payment relating to any merger or
consolidation involving any JR Debtors), except as otherwise provided for in the Plan.
The JR Debtors shall only distribute dividends to their shareholders as follows: (i) up to the sixth anniversary of the Court Ratification
of Plan, as applicable, the JR Debtors shall not pay any dividends; and (ii) after the sixth anniversary of the Court Ratification of Plan,
as applicable, the JR Debtors shall be authorized to pay dividends if, and only if, the Company’s net debt-to-EBITDA ratio is two (2) or
lower, after the end of the relevant financial year.
Suspension of the Obligations: Beginning on the day of a Suspension of Obligations Event and ending on a Reversal Date (as defined
below) (“Suspension Period”) with regard to the Pre-petition Claims, the following obligations shall no longer apply to the Pre-petition
Claims to be restructured and paid under the Judicial Reorganization Plan (for purposes of this Clause, “Suspended Obligations”):
• Annual early redemption with Surplus Cash Generation;
• Restriction to Dividend Payments.
The JR Debtors shall be fully exempt from liabilities resulting from any actions taken or events incurred during the Suspension Period
or, also, any contractual obligation prior to a Reversal Date (as if, in this period of time, these actions, events, or contractual obligations
were allowed).
At any time, if two (2) credit rating agencies rate Oi with an investment grade and no noncompliance occurs, the obligations listed
above shall be suspended (“Obligation Suspension Event”). If on any subsequent date (“Reversal Date”), one (1) or both rating agencies
cancel the investment grade or downgrade Oi below the investment grade, the suspended obligations shall be reinstated.
Conditions Precedent. The JRP provides for a set of resolution and suspensory conditions precedent that need to be verified or formally
and expressly waived by the qualified unsecured creditors to undertake the Capital Increase – New Funds. As at December 31, 2018, all
Conditions Precedent had been verified or waived.
F-25
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Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
Sale of Capital Assets. The JRP, in the Appendix to Clause 3.1.3, lists a set of capital assets that Management may sell in order to raise
additional funds. The Company’s management has been undertaking efforts to sell some financial investments, having not yet
completed any transaction. Therefore none of these assets were classified as held-for-sale as of December 31, 2018.
Corporate Restructuring activities. The JRP, in the Appendix to Clause 7.1., lists a set of corporate transactions that Management may
implement to optimize and increase the Company’s results, contributing to the compliance with the JRP obligations. As part of these
activities, the merger of Oi Internet with and into Oi Móvel was completed on March 1, 2018.
1.6. LIABILITIES SUBJECT TO COMPROMISE AND OTHER IMPACTS FROM ASC 852 REORGANIZATIONS
(Notes 28 and 29)
As a result of the filing of the Bankruptcy Petitions, the company has applied the FASB Accounting Standards Codification (“ASC”)
852 Reorganizations in preparing its consolidated financial statements. ASC 852 requires that financial statements distinguish
transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Accordingly,
certain expenses, realized gains and losses and provisions for losses that are realized or incurred in the judicial reorganization
proceedings have been recorded in a reorganization line item in its consolidated statements of operations as disclosed in note 28. In
addition, the prepetition obligations that may be impacted by the judicial reorganization proceedings have been classified on the balance
sheet as liabilities subject to compromise as disclosed in note 29. These liabilities are reported as the amounts expected to be allowed by
the Judicial Reorganization Court, even if they may be settled for lesser amounts.
The amounts initially recorded as liabilities subject to compromise were subsequently adjusted and reclassified to reflect the new legal
terms and conditions established by the JRP Court and as of December 31, 2018 there are no outstanding liabilities subject to
compromise.
On December 31, 2018, the Company did not emerge from bankruptcy, due to certain material unsatisfied conditions, which relates to
additional capital increase that occurred on January 25, 2019.
In connection with an emergence from the Judicial Reorganization, under U.S. GAAP the Company would have been required to
consider whether it met the criteria requiring adoption of fresh start accounting as of the January 25, 2019, the emergence date. Fresh
start accounting would have required the reorganization value of the Company to be assigned to the assets and liabilities of the
Company in conformity with the procedures specified in ASC 805-20. However, as the Company intends to file its annual report on
Form 20-F for the year ended December 31, 2019 with financial statements prepared in accordance with International Financial
Reporting Standards (IFRSs) issued by the International Accounting Standards Board (IASB), it does not intend to adopt fresh start
accounting as there is no requirement under IFRS to do so.
F-26
OI S A
OI SA FORM 20-F
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Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
1.7. RECONCILIATION BETWEEN U.S. GAAP AND IFRS
The Company prepares its local financial statements in accordance with IFRS, and the pronouncements, guidelines and interpretations
issued by the Accounting Pronouncements Committee (CPC), approved by the Brazilian Securities and Exchange Commission (CVM).
As the Company is not a fist-time adopter of IFRS, it anticipates it will be required to present, in the audited financial statements
included in its annual report on Form 20-F for the year ended 12/31/2019, a reconciliation from U.S. GAAP to IFRS for the
comparative years presented.
In order to anticipate such requirement, the Company is presenting the reconciliation as of December 31, 2018, as follows:
Accounting differences between U.S. GAAP and IFRS
The financial statements of the Company are prepared in accordance with accounting policies generally accepted in the United States of
America (“U.S. GAAP”). Differences between these accounting policies and practices adopted in International Financial Reporting
Standard - IFRS, where applicable to Oi, are summarized below:
Reconciliation
Under U.S.GAAP
Impairment of long-lived assets
Business combinations prior to January 1, 2009
Pension plans and other post-retirement benefits
Capitalization of interest, net of amortization
Provision for onerous contracts
Settlement of judicial reorganization
Deferred income tax
Under IFRS
(a) Impairment of long-lived assets
12/31/2018
Equity
29,199,496
(1,226,125)
44,981
(689,574)
60,928
(4,493,895)
22,895,811
Net income
27,393,837
(141,418)
4,122
(115,080)
(1,780)
(4,493,895)
(1,331,016)
3,300,785
24,615,555
(a)
(b)
(c)
(d)
(e)
(f)
(g)
In accordance with FASB ASC 360, long-lived assets, such as property, plant, and equipment, and purchased intangibles 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. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to
estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated
future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value
of the asset.
In accordance with IAS 36 Impairment of assets, such as property, plant, and equipment, and purchased intangibles subject to
amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or
group of assets may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying
amount of an asset or group of assets to the fair value of the asset or group of assets.
Therefore, regarding impairment of long-lived assets there is an accounting difference between U.S. GAAP and IFRS namely the
recognition of impairment under IFRS. In 2018, under U.S. GAAP no impairment losses were recognized and under IFRS a provision
for impairment losses amounting to R$1,226,125 were recorded in the balance sheet because of the difference on the impairment
methodology between the two standards. Net income in 2018, under IFRS, includes provision for impairment amounting to R$291,807
and depreciation and amortization related effects amounting to R$150,389.
F-27
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Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
(b) Business combinations prior to January 1, 2009
Under U.S. GAAP, for the acquisitions of interests in Pegasus, Way-TV, Paggo and TNCP (Amazônia) that occurred prior to January 1,
2009, the Company adopted the procedures determined by FASB ASC 805 Business Combinations, resulting in a difference as
compared to the Company’s accounting policy in force prior to that date. The accounting method used under U.S. GAAP in business
combination transactions is the “purchase method”, which requires that acquirers reasonably determine the fair-value of the identifiable
assets and liabilities of acquired companies, individually, to determine goodwill paid.
Since IFRS 3 Business Combinations was effective to business combinations for which the acquisition date was on or after January 1,
2009, under IFRS for all business combinations prior that, the Company typically recognized the difference between the purchase price
and the historical book value of the assets acquired and liabilities assumed as goodwill, which was amortized over the estimated period
over which the Company expected to benefit from the goodwill. This period was determined based on the reasons attributed by
management for the payment of goodwill. A test for impairment is made at least annually or if there is an indication that the unit in
which the goodwill was allocated may be impaired.
Therefore, regarding the business combinations prior to January 1, 2009 there is an accounting difference between U.S. GAAP and
IFRS namely the computation of goodwill, recognition of intangible assets and amortization of goodwill.
(c) Pension plans and other post-retirement benefits
The Company applies FASB ASC 715 - Retirement Benefits, which requires an employer to recognize the overfunded status or funded
status of a defined benefit postretirement plan as an asset or liability in its balance sheet and to recognize changes in that funded status
in the year in which the changes occur through other comprehensive income.
The overfunded status of the pension plans is presented as a prepaid asset. Unrecognized net gain or losses are recognized following the
“10% corridor approach”. Deferred actuarial gains and losses outside the 10% corridor are amortized over the average remaining
service period of active employees or, when all or almost all participants are inactive, over the average remaining life expectancy of
those participants.
Under IFRS, if a plan has an overfunded status, which is not expected to generate future benefits, the company does not recognize the
funded status, unless in case of express authorization for offsetting with future employer contribution. Remeasurement of gains and
losses, including actuarial gains and losses, must be recognized immediately in OCI and are not subsequently recognized (or recycled)
into net income.
Therefore, regarding pension plans and other post-retirement benefits there is an accounting difference between U.S. GAAP and IFRS
namely: (i) the recognized overfunded status under U.S. GAAP, and (ii) the result from the use of the “10% corridor approach” which is
not applicable under IFRS.
(d) Capitalization of interest, net of amortization
Under U.S. GAAP, capitalized interest is added to the individual assets and is amortized over their estimated useful lives. The Company
capitalizes only interest expenses to the extent that borrowings do not exceed the balances of construction in-progress, as generally
foreign exchange differences are not eligible for being recorded as part of the cost of the asset.
Under IFRS, financial charges on obligations financing assets and construction works in progress are capitalized, including interest
expenses and certain foreign exchange differences.
Therefore, regarding capitalization of interest, net of amortization, there is an accounting difference between U.S. GAAP and IFRS
namely the impact of capitalization of foreign exchange under IFRS.
F-28
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Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
(e) Provision for onerous contracts
Under U.S. GAAP, future losses on firmly committed executory contracts (onerous contracts) typically are not recognized. Losses are
recognized only when incurred.
Under IFRSs, an entity is required to recognize and measure the present obligation under an onerous contract as a provision. An
onerous contract is one “in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits
expected to be received under it”.
The Company is party to a telecommunications signals transmission capacity supply agreement using submarine cables that connect
North America and South America. Since the agreement’s obligations exceed the economic benefits that are expected to be received
throughout the agreement and the costs are unavoidable, the Company recognized in 2018, pursuant to IAS 37, an onerous obligation
measured at the lowest of net output cost of the agreement brought to present value, in the amount of R$ 4,493,894.
Therefore, regarding provision for onerous contracts there is an accounting difference between U.S. GAAP and IFRS namely the
recognition of a provision that does not exist under U.S. GAAP.
(f) Settlement of Judicial Reorganization
Under U.S. GAAP, the company has applied the FASB Accounting Standards Codification (“ASC”) 852 Reorganizations in preparing
its consolidated financial statements. Under ASC 852, the company adopted the following accounting procedures:
•
•
•
Prepetition obligations impacted by the judicial reorganization proceedings had been classified on the balance sheet as
liabilities subject to compromise in 2017. These liabilities were reported as the amounts expected to be allowed by the
Judicial Reorganization Court, even if they were settled for lesser amounts;
Interest accruing on unsecured debt subsequent to the date of petition is not an allowed claim and therefore has not been
accrued;
Foreign currency denominated liabilities in Reais using the applicable foreign currency translation rate as of the petition date.
As a result there is no foreign currency translation adjustments recorded after the petition date related to prepetition liabilities
under U.S. GAAP; and
Under IFRS, there is no specific guidance for accounting Bankruptcy Petitions as there is under U.S. GAAP. Financial liabilities were
recorded as before the Bankruptcy Petition, including the accrual of interest based on the contracts, the recognition of foreign currency
translation and the recognition of provisions based on expected payment cash outflow (IAS 37 for liability provisions). Liabilities
subject to compromise were classified on the balance sheet as Current Liabilities. Any differences between the settlement of the liability
and its carrying amount were reorganized upon settlement of the JRP and recorded in the Consolidated Income Statement at such time.
Because all liabilities subject to compromise are already settled in 2018 under the conditions of the JRP, as described in note 29, no
GAAP differences compared to IFRS exist for the balances of liabilities after the settlement date.
Therefore, regarding settlement of judicial reorganization the only accounting difference between U.S. GAAP and IFRS are namely:
(i) the impacts of settlement and present value of liabilities for adopting ASC 852 under U.S. GAAP that needs to be excluded under
IFRS; and (ii) the gain recognition on reversal of interest and foreign currency on loans and financings under IFRS.
F-29
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OI SA FORM 20-F
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Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
The following is a summary of the Judicial Reorganization adjustments to net income for the year ended December 31, 2018:
Judicial reorganization
Settlement for lesser amounts of prepetition obligations and present value recognition under U.S. GAAP
Gain on reversal of interest and foreign currency on loans and financings under IFRS
12/31/18
(6,527,238)
5,196,222
(1,331,016)
(g) Deferred income tax
This relates to the impact of recalculation of the deferred tax assets and liabilities considering the adjusted balances of accounts and
related impacts on net income and the revised valuation allowance based on the reassessed schedule of expected generation of future
taxable income under IFRS.
2. SIGNIFICANT ACCOUNTING POLICIES
The accounting policies detailed below have been consistently applied in all periods presented in these financial statements, including
the effects of adopting ASC 852 Reorganizations as described in notes 28 and 29 and for the fact that the Company reassessed the
assumptions used for certain estimates as described below under “use of estimates”, as present below.
Basis of presentation and going concern assumption
These consolidated financial statements have been prepared according to United States Generally Accepted Accounting Principles
(“U.S. GAAP”), which have been prepared under the assumption that the Company will continue as a going concern.
In August 2014, the FASB issued an accounting standard update that requires management to assess whether there are conditions or
events, considered in aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year
after the financial statements are issued. If substantial doubt exists, additional disclosures are required. This update was effective for the
Company’s annual periods starting ended December 31, 2016. The Company’s assessment of our ability to continue as a going concern
is further discussed below.
The retention of a large amount of funds in court deposits arising from discussions within the regulatory, labor, tax, and civil scope,
with immediate impact on the liquidity of Oi Group, as well as with the imposition of high administrative fines, particularly by
ANATEL, has contributed to the worsening financial situation in prior years.
Additionally, the change in the standards of consumption of telecommunication services, due to the technological evolution, worsened
this scenario of financial difficulties even more. With the mass supply of mobile telephony, cable TV and Internet services, the
attractiveness of fixed telephony services have been reduced, resulting in a decrease in the base of subscribers of Oi Group in this
segment.
F-30
OI S A
OI SA FORM 20-F
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Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
The financial statements for the year ended December 31, 2018, has been prepared assuming that the Company will continue as a going
concern and in compliance with the legal requirements applicable to a judicial reorganization. The judicial reorganization is aimed at
ensuring the continuation of the Oi Companies as going concerns. The likelihood that the Oi Companies will continue as going
concerns increased with the approval of the JRP by a vast majority of creditors, at the General Creditors’ Meeting held on December 20,
2017, and approval that was ratified by the Judicial Reorganization Court on January 8, 2018. This ratification decision was issued on
February 5, 2018 and, as a result, there was the novation of the involved borrowings and financing and the related balances recalculated
pursuant to the terms and conditions of the Judicial Reorganization Plan, in accordance with the actions needed for its implementation.
On July 27, 2018, the Company completed the Capital Increase – Claim Capitalization, through the formalization of the capitalization
of part of the Unsecure Claims of the Qualified Bondholders, as provided for by the JRP and approved at the Board of Directors’
meeting held on March 5, 2018. The new shares issued were delivered to Company’s shareholders who exercised their preemptive
rights and the holders of the Unsecure Claims of the Qualified Bondholders, through the formalization of the capitalization of their
claims.
Finally, on January 25, 2019, the Company completed the capital increase provided for by the JRP through the issue of 3,225,806,451
common shares for an aggregate subscription amount of R$4,000,000. The company believes that it has sufficient funds to continue as a
going concern and discharge its obligations in the coming twelve months.
The continuity of the Company as a going concern is ultimately depending on the successful outcome of the judicial reorganization and
the realization of other forecasts of the Oi Companies.
The Company has been successfully discharging the obligations set forth in the judicial reorganization proceedings and so far there
have been no indications in this regard, we emphasize that these conditions and circumstances are herein described because of their own
nature indicating the existence of uncertainty that may affect the success of the judicial reorganization and that it may cast doubts as to
the Oi Companies’ ability to continue as going concerns.
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.
The estimate of the expected amount of the allowed claim under contingencies, following ASC 852 Reorganizations, is a significant
estimate. As the estimation process is inherently uncertain, future actions and decisions by the Judicial Reorganization Court may differ
significantly from its own estimate, potentially having material future effects on its financial statements. Furthermore, as of
December 31, 2017 these liabilities were reported as the amounts expected to be allowed by the Judicial Reorganization Court, even if
they may be settled for lesser amounts. During 2018, these liabilities have been adjusted to their respective settled amounts, resulting in
significant variation between the settled amount and the expected amount of the allowed claim as described in note 29.
F-31
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OI SA FORM 20-F
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Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
Change in Accounting Estimates
Allowance for doubtful accounts
The Company review its estimates of allowance for doubtful accounts considering the incurred loss model, including the effects of
probable losses on accounts receivable taking into account the measures implemented to restrict the provision of services to and collect
late payments from customers.
Consolidated Financial Statements
The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries, including the ones under
bankruptcy in foreign jurisdictions (Oi Holanda and Portugal Telecom International Finance B.V) which were under the Company´s
control as of December 31, 2018. 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.
The assets and liabilities related to the operations in Africa are stated in a single line item of the balance sheet as held-for-sale assets as
a result of Management’s expectation and decision to hold these assets and liabilities for sale. In the statement of operations, however,
costs/expenses and revenue/gains are stated under the full consolidation method because these assets do not meet the criteria to be
classified as “discontinued operation”.
The table below shows the equity interests held in the capital of the Company’s subsidiaries:
Companies related to the continuing operations
Company
Oi Holanda
Core business
Raising funds in the international
Home country
The Netherlands
market
Portugal Telecom International
Raising funds in the international
The Netherlands
Finance B.V
CVTEL, BV
Carrigans Finance S.à.r.l.
Copart 5
Rio Alto Gestão de Créditos e
Participações S.A. (“Rio Alto”)
Oi Serviços Financeiros S.A. (“Oi
Serviços Financeiros”)
Bryophyta SP Participações Ltda.
Telemar
Oi Móvel
market
Investment management
Investment management
Property investments
Receivables portfolio
The Netherlands
Luxembourg
Brazil
Brazil
management and interests in
other entities
Financial services
Brazil
Property investments
Fixed telephony – Region I
Mobile telephony – Regions I, II,
Brazil
Brazil
Brazil
and III
Paggo Empreendimentos S.A.
Paggo Acquirer Gestão de Meios de
Payment and credit systems
Payment and credit systems
Brazil
Brazil
Pagamentos Ltda.
Paggo Administradora Ltda. (“Paggo
Payment and credit systems
Brazil
Administradora”)
Serede – Serviços de Rede S.A.
Network services
Data traffic
Brazil
Brazil
(“Serede”)
Brasil Telecom Comunicação
Multimídia Ltda. (“BrT
Multimídia”)
Copart 4
Dommo Empreendimentos
Imobiliários Ltda.
Property investments
Purchase and sale of real estate
Brazil
Brazil
Brasil Telecom Call Center S.A. (“BrT
Call center and telemarketing
Brazil
Call Center”)
services
BrT Card Serviços Financeiros Ltda.
Financial services
Brazil
(“BrT Card”)
Pointer Networks S.A. (“Pointer”)
Pointer Peru S.A.C
VEX Venezuela C.A
VEX USA Inc.
VEX Ukraine LLC
Wi-Fi internet
Wi-Fi internet
Wi-Fi internet
Wi-Fi internet
Wi-Fi internet
Brazil
Peru
Venezuela
United States of
America
Ukraine
F-32
Direct
2018
Indirect
2018
Direct
2017
Indirect
2017
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
99.87%
99.80%
100%
0.13% 99.87%
0.20% 99.80%
100%
0.13%
0.20%
100%
100%
100%
100%
100%
100%
100%
100%
17.51%
82.49% 18.57%
81.43%
100%
100%
100%
100%
100%
100%
100%
100%
100%
40%
100%
100%
100%
100%
100%
100%
100%
100%
100%
40%
OI S A
OI SA FORM 20-F
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Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
Companies classified as assets held for sale
Company
PT Participações, SGPS,
S.A. (“PT Participações”)
Core business
Home
country
Direct
2018
Indirect
2018
Direct
2017
Indirect
2017
Management of equity investments
Portugal
100%
100%
Oi Investimentos
Business consulting and management services,
Portugal
Internacionais S.A. (“Oi
Investimentos”)
Africatel GmbH & Co.KG.
Africatel GmbH
Africatel Holdings, BV
PT Ventures, SGPS, S.A.
preparation of projects and economic
studies, and investment management
Investment management
Investment management
Investment management
Management of equity interests in the context
Germany
Germany
The Netherlands
Portugal
of international investments
Directel - Listas Telefónicas
Telephone directory publishing and operation
Portugal
Internacionais, Lda.
(“Directel”)
of related databases, in international
operations
TPT - Telecomunicações
Publicas de Timor, S.A.
(“TPT”)
Provision of telecommunications, multimedia
and IT services, and purchase and sale of
related products in Timor
Portugal
Directel Cabo Verde –
Telephone directory publishing and operation
Cape Verde
Serviços de
Comunicação, Lda.
Kenya Postel Directories,
Ltd.
of related databases in Cape Verde
Production, publishing and distribution of
Kenya
telephone directories and other publications
Elta - Empresa de Listas
Telephone directory publishing
Angola
Telefónicas de Angola,
Lda.
Timor Telecom, S.A.
Telecommunications services concessionaire in
Timor
CST – Companhia
Santomense de
Telecomunicações,
S.A.R.L.
Timor
Operation of fixed and mobile
Sao Tomé
telecommunication public services in Sao
Tomé and Principe
LTM - Listas Telefónicas de
Management, publishing, operation and sale of
Mozambique
Moçambique, Lda.
telecommunications subscriber and
classified ads directories
100%
100%
100%
86%
86%
100%
100%
100%
86%
86%
86%
86%
76.14%
76.14%
51.60%
51.60%
51.60%
51.60%
47.30%
47.30%
44%
44%
43.86%
43.86%
43%
43%
The equity interests in joint arrangements and interests in associates are measured using the equity method and are as follows:
Company
Companhia AIX de Participações (“AIX”) Data traffic
Paggo Soluções e Meios de Pagamento
Core business
S.A. (“Paggo Soluções”)
Gamecorp S.A. (“Gamecorp”)
Hispamar Satélites S.A. (“Hispamar”)
Financial company
Pay TV service, except programmers
Satellite operation
Home
country
Brazil
Brazil
Brazil
Brazil
Direct
2018
Indirect
2018
Direct
2017
Indirect
2017
50%
50%
29.90%
19.04%
50%
50%
29.90%
19.04%
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Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
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.
Transactions and balances
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 translated at the prevailing rate 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.
At December 31, 2018 and 2017, the foreign currency-denominated assets and liabilities were translated into Brazilian Reais using
mainly the following foreign exchange rates:
Currency
Euro
US dollar
Cape Verdean escudo
Sao Tomean dobra
Kenyan shilling
Namibian dollar
Mozambican metical
Angolan kwanza
Segment information
2018
4.4390
3.8748
0.0403
0.000185
0.0381
0.2698
0.0627
0.0126
Closing rate
2017
3.9693
3.3080
0.0360
0.000162
0.0321
0.2687
0.0565
0.0200
2016
3.4384
3.2591
0.0313
0.000140
0.0318
0.2325
0.0450
0.0197
2018
4.3094
3.6558
0.0391
0.000177
0.0361
0.2764
0.0601
0.0147
Average rate
2017
3.6089
3.1925
0.0327
0.000149
0.0309
0.2401
0.0499
0.0193
2016
3.8543
3.4833
0.0352
0.000160
0.0343
0.2369
0.0579
0.0214
The presentation of information relating to operating segments is consistent with the internal reports provided to the chief operating
decision maker of the Company, defined by the Company as the Board of Executive Officers (“Comitê de Gestão”). 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.
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Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
Business combinations
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. There were no business combinations for the years presented.
Investment Securities
Investment securities at December 31, 2018 and 2017 consist of short-term and long-term investments classified as trading and an
investment at Unitel and CVT are 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 collectability 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.
Cash and cash equivalents
This caption includes cash and cash fund, banks, and highly liquid short-term investments (usually maturing within less than three
months), immediately convertible into a known cash amount, and subject to an immaterial risk of change in value, which are stated at
fair value at the end of the reporting period and which do not exceed their market value, and whose classification is determined as
shown below.
Cash investments
Cash investments are classified according to their purpose as: (i) trading securities; (ii) held to maturity; and (iii) available for sale.
Trading security investments are measured at fair value and their effects are recognized in profit or loss. Held-to-maturity short-term
investments are measured at the cost of acquisition plus interest earned, less allowance for impairment losses, where applicable, and
their effects are recognized in profit or loss. Available-for-sale investments are measured at fair value, and their unrealized gains and
losses are excluded from earnings and reported in other comprehensive income until realized, except when all or a portion of the
unrealized holding gain and loss of an available-for-sale security that is designated as being hedged in a fair value hedge when it shall
be recognized in earnings during the period of the hedge. Upon the adoption of ASU 2016-01 on January 1, 2018, all investments in
equity securities are carried at fair value with changes in fair value recognized in net income.
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.
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Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
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.
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
Long-lived assets are classified as held-for-sale if its carrying amount is will be recovered principally through a sale transaction rather
than through continuing use and if meet they the held-for-sale criteria. For this to be the case, the disposal must be available for
immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets, and its sale must be
probable. The results of discontinued operations are reported in one line item 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, including any gain or loss
recognized as adjustment of the carrying amount to fair value less cost to sell.
Property, plant and equipment
Property and equipment consists of transmission equipment, trunking and switching stations, metallic and fiber-optic cable networks
and lines, underground ducts, posts and towers, data communication equipment, network systems and infrastructure and motor-
generator groups.
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.
Costs of major replacements and improvements are capitalized. Repair and maintenance expenditures that do not enhance or extend the
asset’s useful life are charged to operating expenses as incurred.
Depreciation is calculated on a straight-line basis, based on the estimated useful lives of the assets. The Company reviews the useful
lives annually.
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Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
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.
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.
Regulatory licenses acquired in a business combination are amortized over the STFC concession period. The regulatory licenses for the
operation of the mobile telephony services are recognized at cost of acquisition and amortized over the effective period of each licenses.
Long-lived assets
Long-lived assets include assets that do not have indefinite lives, such as property, plant, and equipment, and purchased intangible
assets subject to amortization. They are reviewed for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. If any indicators of impairment are present, it is performed a test for recoverability.
The carrying value of a long-lived asset or asset group is not recoverable if it exceeds the sum of the undiscounted cash flows expected
to be generated from the use and eventual disposition of the asset or asset group. If the undiscounted cash flows do not exceed the asset
or asset group’s carrying amount, then an impairment loss is recorded, measured as the amount by which the carrying amount of a long-
lived asset or asset group exceeds its fair value.
Provision for contingencies
Liabilities for loss contingencies arising from claims, assessment, litigation, fines and penalties are recorded when a present obligation
as a result of past events exists, it is probable that a loss will occur and a reliable estimate of the obligation can be made. These
liabilities do not include estimates of legal fees and other directly related costs to be incurred, and it takes into consideration the 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.
Private pension plans and other postretirement benefits sponsored by the Company and its subsidiaries for the benefit of their
employees are managed by two foundations. Contributions are determined based on actuarial calculations, when applicable, and
charged to profit or loss on the accrual basis
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Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
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 recognizes changes in that funded status in the year in which the changes occur through other comprehensive income.
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
Effective January 1, 2018 the Company adopted Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with
Customers (Topic 606)”, (“Topic 606”) using the “modified retrospective” method, meaning the standard is applied only to the most
current period presented in the financial statements.
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.
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Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
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. They also include banking fees and costs, financial
intermediation costs on the collection of trade receivables, and other financial transactions.
Income taxes
Income taxes are recorded under the asset and liability method. Deferred taxes assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their tax
basis and for tax loss carryforwards. Deferred tax asset is reduced by a valuation allowance if, based on the weight of evidence
available, it is more likely than not that some portion or all of a deferred tax asset will not be realized. 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 of benefit that is greater than 50 percent likely of being realized upon settlement. 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 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. In Brazil, all audit periods prior to
2013 are closed for federal examination purposes.
As of December 31, 2018 and 2017, 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.
Recent Accounting Pronouncements Adopted in 2018
On January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers
(“Topic 606”), using the “modified retrospective” method, meaning the standard is applied only to the most current period presented in
the financial statements.
ASC 606 establishes a new five-step model that to account for revenue from contracts with costumers. Pursuant to ASC 606, revenue is
recognized in an amount that reflects the consideration that an entity expects to be entitled to in exchange from the transfer of goods or
services to a customer.
The new revenue standard supersedes all the revenue recognition requirements in effect until December 31, 2017 pursuant to
U.S. GAAP.
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Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
Management determined the following impacts from adopting the new standard on January 1, 2018:
Sales of handheld devices at a discount
The Company offers its customers, who have acquired a given service package or entered into certain mobility contracts, handheld
devices at a discount. Since the equipment (cellphone) is not a key condition for the provision of the service and there is no
customization by the Company to offer the service using a given device, the Company considers such sale a separate performance
obligation. Pursuant to ASC 606, the discount should be allocated to the performance obligations arising on the sale of plans and in a
mobility contract and the revenue from the sale of handheld devices should increase due to the recognition of the revenue from the sale
of cellphones at the time the control over the good is transferred to the customer, while the service revenue should be reduced
throughout the transfer of the promised service. The total revenue earned throughout the entire service agreement will not change and
there will be no change either in the revenue process from customers and the Company’s cash flows.
The Company did not identify the significant financial impact on the sale of cellphones at a discount because the discounts amount is
immaterial compared to the Company’s revenue as a whole.
Revenue from registration/service installation fees
The registration/installation fee collected from customers at the time a contract is nonrefundable and refers to the activity the Company
is required to undertake when entering into a contract or a comparable activity required to fulfill such contract, while such activity does
not entail the transfer of a good or the service promised to the customer. The fee is an advance payment for future goods or services
and, therefore, should be recognized as revenue when such goods or services are supplied. For purposes of complying with ASC 606,
considering that such fees are a separate performance obligation, revenue must be recognized together with the revenue of said service
provision, i.e., it should be deferred and recognized in profit or loss throughout the contract period.
As at January 1, 2018, the Company and its subsidiaries recognized a contractual liability as a contra entry to accumulated losses, which
generated the deferral of the revenue from registration/installation fee according to contract duration (12 months), amounting to
R$138 million, net of taxes.
Recognition of costs incurred on the performance of a contract
The Company must recognize as an asset the incremental costs incurred to obtain a contract with a customer that are expected to be
recovered, and must recognize an impairment loss in profit or loss as the carrying amount of the recognized assets exceeds the
remaining amount of the consideration the Company expects to receive in exchange for the goods and services to which the asset refers.
The Company must recognize in assets certain costs, substantially commissions on sales, which are currently recognized directly in
profit or loss and recognize them on a systematic basis, consistent with the transfer of the goods and services to which the asset refers to
the customer.
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Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
As at January 1, 2018, the Company and its subsidiaries recognized a contractual asset as a contra entry to accumulated losses, which
generated the deferral of the costs incurred over the performance contract that were recognized in profit or loss based on the transfer of
the goods and services to each customer (churn), amounting to R$793 million, net of taxes.
The Company adopted ASC 606, taking into account the modified retrospective application permitted by the respective standards.
Accordingly, we present below the consolidated results for the years ended December 31, 2018, less the effects recognized as a result of
this application, compared with December 31, 2017.
Net operating revenue
Cost of sales and/or services
Gross profit
Operating income (expenses)
Selling expenses
General and administrative expenses
Other operating income (expenses), net
Reorganization items, net
Income (loss) before financial and taxes
Financial expenses, net
Income (loss) before income taxes
Income tax (current and deferred)
Net income (loss) for the year
12/31/2018
(with ASC 606)
22,060,014
(15,822,732)
6,237,282
(4,478,352)
(2,697,865)
417,159
31,580,541
31,058,765
(4,012,067)
27,046,698
347,139
27,393,837
ASU ASC 606
adjustments
15,588
15,588
(119,214)
(103,626)
(103,626)
35,233
(68,393)
12/31/2018
(w/o ASC 606)
22,075,602
(15,822,732)
6,252,870
12/31/2017
23,789,654
(15,676,216)
8,113,438
(4,597,566)
(2,697,865)
417,159
31,580,541
30,955,139
(4,012,067)
26,943,072
382,372
27,325,444
(4,399,936)
(3,064,252)
(1,043,922)
(2,371,918)
(2,766,590)
(1,612,058)
(4,378,648)
350,987
(4,027,661)
Recognition and Measurement of Financial Assets and Financial Liabilities - In January 2016, the FASB issued ASU 2016-01,
Financial Instruments (Topic 825) 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. ASC 825 requires that
most equity investments be measured at fair value, with subsequent changes in fair value recognized in net income. ASC 825 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, 2017.
The Company adopted this standard effective January 1, 2018 and it did not have a material impact.
New Accounting Standards
Leases - In February 2016, the FASB issued ASU 2016-02, which supersedes FASB ASC Topic 842, 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.
At the lease commencement date, the lessee shall recognize a liability related to the lease payments (i.e., a lease liability) and a lease
asset that represents the right to use the underlying asset during the lease term (i.e., a right-of-use asset). The lessees are required to
separately recognize an interest expense on the cease liability and a depreciation expense on the right-of-use asset.
There is no significant change in the lessor’s recognition based on ASC 842 regarding the current accounting. The lessors shall continue
to classify all leases pursuant to the same classification principle, differentiating between two types of leases: operating and finance
leases.
ASC 842 also requires that both lessees and lessors make disclosures more comprehensive than the previous standard.
ASC 842 is effective for annual periods beginning on or after January 1, 2019. The lessee can elect to adopt the standard using the full
retrospective approach or a modified retrospective approach. The standard’s transition provisions allow certain exemptions.
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Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
During the year ended 2018, the Company and its subsidiaries assessed the potential impacts on its financial statements arising from the
first-time adoption of ASC 842. This valuation was segregated into different stages, such as:
i)
ii)
Inventory-taking of lease agreements;
Transition approach;
iii) Measurement of the opening liability and the opening asset;
iv)
v)
Valuation of the discount rate and estimated term;
Impacts on first-time adoption.
Transition
The Company plans to adopt ASC 842 pursuant to the modified retrospective approach (i.e., beginning January 1, 2019, taking into
account the right-of-use equal to the lese liability upon the first-time adoption), and reflected a cumulative effect adjustment in the first
quarter of 2019, rather than restating any prior periods. The Company will elect to apply the standard to agreements that were identified
as leases pursuant to the previous standard. As a result, the Company will not apply the standard to agreements that have not previously
been identified as containing a lease, and will exclude lease agreements maturing in the next twelve months, without probable renewal
intention, in addition to applying a single discount rate to leases with similar characteristics and excluding to direct initial costs in the
measurement of the right-of-use.
The Company will elect the package of practical expedients permitted under the transition guidance, which does not require
reassessment of prior conclusions related to contracts containing a lease, lease classification and initial direct lease costs. As an
accounting policy election, the company will exclude short-term leases (term of 12 months or less) from the balance sheet presentation
and will account for non-lease and lease components in a contract as a single lease component for most asset classes.
Impacts
On January 1, 2019, the Company’s management estimates that the changes introduced by ASC 842 will have material impacts to be
recognized as a right-of-use asset and a lease liability in the financial statements, and these impacts at present value were estimated
from R$6.9 to R$8.7 billion in the Company’s financial statements.
The impacts refer, basically, to the lease agreements of towers, properties, stores, vehicles, and sites.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on
Financial Instruments.” In November 2018, the FASB issued ASU 2018-19, “Codification Improvements to Topic 326, Financial
Instruments-Credit Losses,” which amends the scope and transition requirements of ASU 2016-13. The standard requires a financial
asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The
measurement of expected credit losses is based on relevant information about past events, including historical experience, current
conditions and reasonable and supportable forecasts that affect the collectibility of the reported amount. The standard will become
effective for us beginning January 1, 2020 and will require a cumulative-effect adjustment to Accumulated deficit as of the beginning of
the first reporting period in which the guidance is effective (that is, a modified-retrospective approach). Early adoption is permitted for
us as of January 1, 2019. We are currently evaluating the impact this guidance will have on our Financial Statements and the timing of
adoption.
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Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
In January 2016, the FASB issued ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities”, 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, 2017. The Company adopted this standard
effective January 1, 2018 and it did not have a material impact.
3.
FINANCIAL INSTRUMENTS AND RISK ANALYSIS
3.1. Overview
The table below summarizes the financial assets and financial liabilities carried at fair value at December 31, 2018 and 2017, excluding
Liabilities subjected to compromise (note 28).
Assets
Cash and banks
Cash equivalents
Short-term investments
Accounts receivable (i)
Available-for-sale financial asset
Dividends receivable
Liabilities
Trade payables (i)
Borrowings and financing (ii) (iv)
Public debentures (iv)
Senior notes (iv)
Dividends and interest on capital
Licenses and concessions payable (iii)
Tax refinancing program (iii)
2018
2017
Accounting
measurement
Carrying
amount
287,491
Fair value
4,097,838
Fair value
Fair value
238,962
Amortized cost 6,516,555
Fair value
1,843,778
Amortized cost 2,566,935
Amortized cost 8,818,870
Amortized cost 7,140,960
3,103,106
6,205,840
6,168
85,619
553,206
Amortized cost
Amortized cost
Amortized cost
Fair value
287,491
4,097,838
238,962
6,516,555
1,843,778
2,566,935
8,818,870
7,140,960
3,103,106
6,937,764
6,168
85,619
553,206
Carrying
amount
277,500
6,585,184
136,286
7,367,442
1,965,972
2,012,146
Fair value
277,500
6,585,184
136,286
7,367,442
1,965,972
2,012,146
5,170,970
54,251
5,170,970
54,251
6,222
20,910
888,777
6,222
20,910
888,777
(i) The balances of accounts receivables and trade payables have near terms and, therefore, they are not adjusted to fair value. Under the
terms and conditions of the Plan, suppliers claiming up to R$150,000, would receive their claims within up to 20 business days, after
the date they elect this payment option, which ended on February 26, 2018. As for suppliers claiming more than R$150,000, in turn,
would receive the remaining balance in four annual installments, which were adjusted to present value.
(ii) Part of this balance of borrowings and financing with the BNDES and export credit agencies correspond to exclusive markets and,
therefore, the fair values of these instruments is similar to their carrying amounts. A portion of the balance of borrowings and financing
refers to the bonds issued in the international market, for which is there is a secondary market, and their fair values are different from
their carrying amounts.
(iii) The licenses and concessions payable, the tax refinancing program, and other obligations (payable for the acquisition of equity
interest) are stated at the amounts that these obligations are expected to be settled and are not adjusted to fair value.
(iv) As a result of the approved Judicial Reorganization Plan, borrowings and financing were novated and their balances recalculated
pursuant to the existing terms and conditions, in accordance with the plan’s stages for debt restructuring purposes. The present value
adjustment recognized on the balance sheet with respect to each financial liability is amortized on a straight-line basis over the term of
that financial liability as a financial expense.
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Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
Fair value of financial instruments
Except for liabilities subject to compromise, 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
As at December 31, 2018, the Company no longer was a party to derivative transactions in effect. Due to the absence of derivative
financial instruments in the portfolio as at this date and in 2017, there were no changes in foreign derivative transactions designated or
not designated for hedge accounting purposes.
(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.
With reference to the fair values of the financial investments in Unitel and CVT, classified as an held-for-sale financial asset including
the recoverable amount of dividends receivable from Unitel, they are estimated based on internal valuation made, including cash flows
forecasts for a seven-year period, the choice of a growth rate to extrapolate the cash flows projections, and definition of appropriate
discount rates and foreign exchange rates consistent with the reality of each country where the businesses are located. In addition to the
financial and business assumptions referred to above, the Company also takes into consideration the fair value measurement of cash
investments, qualitative assumptions, including the impacts of developments in the lawsuits filed against third parties, and the opinion
of the Company’s legal counsel on the outcome of these lawsuits. With regard to the impairment test of dividends, the Company uses
financial assumptions on the discount rate in time and the foreign exchange rate, and uses qualitative assumptions based on the opinion
of the legal counsel on the outcome of filed against Unitel for the nonpayment of dividends and interest.
The Company monitors and periodically updates the key assumptions and critical estimates used to calculate fair value.
(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).
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Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
Additionally, the Company considers all nonperformance risk aspects, including the entity’s credit, when measuring the fair value of a
liability.
The classification of an instrument in the fair value measurement hierarchy is based on the lowest level of input significant for its
measurement. The description of three-level hierarchy is presented below:
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 during December 31, 2018 and 2017.
Assets
Cash
Cash equivalents
Short-term investments
Held-for-sale financial asset (Note 26)
Fair value
measurement
hierarchy
Fair value
2018
Fair value
2017
Level 1
Level 2
Level 2
Level 3
287,491
4,097,838
238,962
1,843,778
277,500
6,585,184
136,286
1,965,972
There were no transfers between levels in the years ended December 31, 2018 and 2017.
3.2. Measurement of financial assets and financial liabilities at amortized cost
The fair value of the financial instruments mentioned below is substantially close to the carrying amounts due to the following reasons:
• Accounts receivables: short-term maturity of bills.
•
Trade payables, dividends and interests on capital: all obligations are due to be settled in the short term.
• 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 expose them to several financial risks, such as: market risk (including currency
fluctuation risk, interest rate risk on fair value, interest rate risk on cash flows, and price risk), credit risk, and liquidity risk. 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. The Company and its subsidiaries may use derivative financial instruments to mitigate certain exposures to
these risks.
The Company’s treasury officer, in accordance with the policies approved by the Board of Directors, carries out risk management.
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Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
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 the Oi Group companies.
In the aftermath of the approval of the JRP, based on the measured new risk factors, the Company approved with the Board of Directors
a new strategy to the Board of Directors to mitigate the risks arising on the foreign exchange exposure of its financial liabilities, as is
ready to implement it as from this point in time. In line with the Hedging Policy pillars, the strategy is focused on the preservation of
the Company’s cash flows, maintaining the liquidity, and comply with the financial covenants.
3.4.1. Market risk
(a)
Foreign exchange risk
Financial assets
The Company is not exposed to any material foreign exchange risk involving foreign currency-denominated financial assets at
December 31, 2018 and 2017, except with regard to the assets held for sale, for which there was no currency hedging transactions.
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.
Financial liabilities
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 fluctuations in foreign exchange rates that could increase the balance of
such liabilities. The Company’s and its subsidiaries’ borrowings and financing exposed to this risk represent approximately 53.6%
(72.9% in 2017) of total liabilities from borrowings and financing.
Foreign currency-denominated financial assets and financial liabilities are presented in the balance sheet as follows (includes intragroup
balances):
Financial assets
Cash
Cash equivalents
Short-term investments
Financial liabilities
Borrowings and financing
2018
Carrying
amount
Fair value
2017
Carrying
amount
Fair
value
70,116
154,514
70,116
154,514
82,482
1,307
662
82,482
1,307
662
8,816,766
9,548,690
(*)
(*)
(*) In light of the filing of the judicial reorganization request on June 20, 2016, the Company’s foreign currency-denominated financial
liabilities are part of the list of payables subject to renegotiation.
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Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
Foreign exchange risk sensitivity analysis
For purposes of this analysis, the rates used for the probable scenario were the rates prevailing at the end of December 2018 and 2017.
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
Rate
2018
Depreciation
2017
Depreciation
3.8748
4.4390
4.8435
5.5488
5.8122
6.6585
0%
0%
25%
25%
50%
50%
3.3080
3.9693
4.1350
4.9616
4.9620
5.9540
0%
0%
25%
25%
50%
50%
The impacts of foreign exchange exposure, in the sensitivity scenarios estimated by the Company, are shown in the table below:
Description
US dollar debt
US dollar cash
Euro debt
Euro cash
Present value adjustment
Total assets/liabilities indexed to exchange
fluctuation
Total (gain) loss
2018
Individual risk
Dollar appreciation
Dollar depreciation
Euro appreciation
Euro depreciation
Dollar/euro depreciation
Probable
scenario
15,216,581
(154,852)
2,656,697
(69,777)
(9,046,285)
Possible
scenario
19,020,726
(193,566)
3,320,871
(87,221)
(11,307,855)
Remote
scenario
22,824,872
(232,279)
3,985,045
(104,666)
(13,569,427)
8,602,364
10,752,955
2,150,591
12,903,545
4,301,181
(b)
Interest rate risk
Financial assets
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), the CDI, or the Benchmark Rate in the case of real-denominated debt as at December 31, 2018. After the approval of the JRP,
the Company does not have borrowings and financing subject to foreign currency-denominated interest rate.
As at December 31, 2018, approximately 46.1% (32.9% at December 31, 2017) of the incurred debt was subject to floating interest
rates. The most material exposure of Company’s and its subsidiaries’ debt after is to CDI. Therefore, a continued increase in this
interest rate would have an adverse impact on future interest payments.
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Page 1 of 1
Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
These assets and liabilities are presented in the balance sheet as follows:
Financial assets
Cash equivalents
Short-term investments
Financial liabilities
Borrowings and financing
2018
2017
Carrying
amount
Fair value
Carrying
amount
Fair value
3,943,324
238,962
3,943,324
238,962
6,583,877
135,624
6,583,877
135,624
7,633,140
7,633,140
Interest rate fluctuation risk sensitivity analysis
Management believes that the most material risk related to interest rate fluctuations arises from its liabilities pegged to the TJLP and
primarily the CDI. This risk is associated to an increase in those rates. It is worth mentioning that the TJLP rate remained stable at 7.0%
per year from April 1, 2017 to until December 31, 2017. Beginning January 1, 2018, the TJLP was being successively reduced: 6.75%
per year up to March 2018, 6.6% per year from April to June 2018, 6.56% from July to September 2018, and increased again from
October to December 2018, to 6.98% per year. At the end of the quarter, however, the National Monetary Council decided to increase
this rate again to 7.03% per year, effective for January-March 2019.
Management estimated the fluctuation scenarios of the rates CDI and TJLP as at December 31, 2018. The rates used for the probable
scenario were the rates prevailing at the end of the reporting year.
For purposes of this analysis, the rates used for the probable scenario were the rates prevailing at the end of December 2018 and 2017.
The probable rates were then depreciated by 25% and 50%, and used as benchmark for the possible and remote scenarios.
Probable scenario
CDI
6.40
TJLP
6.98
Possible scenario
Remote scenario
CDI
8.00
TJLP
8.73
CDI
9.60
TJLP
10.47
2018
Interest rate scenarios
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 impacts of exposure to interest rates, in the sensitivity scenarios estimated by the Company, are shown in the table below:
Description
CDI-indexed debt
TJLP-indexed debt
Total assets/liabilities pegged to the interest rate
Total (gain) loss
Individual
risk
CDI increase
TJLP increase
Probable
scenario
4,122,410
4,067,506
8,189,916
2018
Possible
scenario
5,373,161
5,011,606
10,384,767
2,194,851
Remote
scenario
6,714,517
6,030,280
12,744,797
4,554,881
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Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
3.4.2. Credit risk
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 (cash 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. At December 31,
2018, approximately 94.14% of the consolidated cash investments were made with counterparties with an AAA, AA, A, and or
sovereign risk rating.
The Company has 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 discharge its liabilities on maturity dates and obtain
cash due to market liquidity restrictions. Management uses its resources mainly to fund capital expenditures incurred on the expansion
and upgrading of the network, invest in new businesses.
The Company’s management monitors the continual forecasts of the liquidity requirements to ensure that the company has sufficient
cash to meet its operating needs and fund capital expenditure to modernize and expand its network.
In light of the confirmation of the JR Plan, the Company’s obligations related to the contractual maturities of the financial liabilities,
including interest payments on borrowings, financing, and debentures were novated and the related balances were recalculated
according to the JR Plan terms and conditions, in accordance with the JR Plan stages for debt restructuring purposes.
4. NET OPERATING REVENUE
Gross operating revenue (*)
Deductions from gross revenue
Taxes
Discounts and other deductions (*)
Net operating revenue
2018
30,426,548
(8,366,534)
(6,725,356)
(1,641,178)
22,060,014
2017
36,338,432
(12,548,778)
(7,707,961)
(4,840,817)
23,789,654
2016
45,327,110
(19,330,687)
(7,760,930)
(11,569,757)
25,996,423
(*) The Company simplified the breakdown of its bills sent to its customers. The changes in billing do not impact the taxes levied on
sales and/or services or the net revenue.
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Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
5. OPERATING EXPENSES
Operating expenses by nature
Third-party services
Depreciation and amortization
Rentals and Insurance
Personnel
Network maintenance service
Interconnection
Provision for contingencies
Provision for bad debt (i)
Advertising and marketing
Handset and other costs
Impairment losses (ii)
Taxes and other expenses
Other operating income (expenses), net (iii)
Total operating expenses
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 by function
2018
2017
2016
(5,924,556)
(5,952,905)
(4,341,969)
(2,594,464)
(1,104,015)
(658,068)
(89,777)
(1,070,301)
(382,091)
(196,347)
—
(134,558)
(132,739)
(22,581,790)
(15,822,732)
(4,478,352)
(2,697,865)
2,204,134
(1,773,483)
(13,492)
(22,581,790)
(6,221,058)
(5,881,302)
(4,162,659)
(2,791,331)
(1,251,511)
(778,083)
(143,517)
(691,807)
(413,580)
(223,335)
(46,534)
(345,132)
(1,234,477)
(24,184,326)
(15,676,216)
(4,399,936)
(3,064,252)
1,985,101
(3,028,590)
(433)
(24,184,326)
(6,399,191)
(6,310,619)
(4,329,546)
(2,852,224)
(1,540,320)
(1,173,475)
(1,056,410)
(643,287)
(448,990)
(284,119)
(225,512)
(559,162)
(226,890)
(26,049,745)
(16,741,791)
(4,383,163)
(3,687,706)
1,756,100
(2,988,067)
(5,118)
(26,049,745)
In 2018, the Company reassessed the assumptions for estimate adopted for the provision for bad debt.
(i)
(ii) As at December 31, 2018, no impairment was recognized. As at December 31, 2017 and 2016, the Company conducted the annual
impairment test and recognized a loss on goodwill related to Africa which is being reported as held for sale, in amounting
R$46,534 and R$225,512, respectively.
In 2017 refers to the effects of non-recurring expenses related to unrecoverable tax, write-off of other assets and other expenses of
R$1,234 million (R$227 million in 2016) due to reconcile the accounting balances as part of the process of JRP.
(iii)
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Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
6.
FINANCIAL INCOME (EXPENSES)
Financial income
Exchange differences on translating foreign short-term
investments (trading)
Interest on judicial deposits and other assets
Income from short-term investments
Other income
Total
Financial expenses and other charges
a) Borrowing and financing costs (i)
Inflation and exchange losses on third-party borrowings
Interest on borrowings payable to third parties
Derivatives
Subtotal:
b) Other charges
Loss on held-for-sale financial assets (ii)
Interest on other liabilities
Tax on transactions and bank fees
Monetary variation to provisions for contingencies
Interest on taxes in installments - tax financing program
Other expenses (iii)
Subtotal:
Total
Financial expenses, net
2018
2017
2016
1,329
808,764
142,597
571,884
1,524,574
(2,645,980)
(1,399,687)
(4,045,667)
292,700
(800,413)
(428,872)
8,076
(28,079)
(534,386)
(1,490,974)
(5,536,641)
(4,012,067)
1,049,923
500,260
1,550,183
(267,008)
(1,641,278)
(512,003)
(264,511)
(27,294)
(450,147)
(3,162,241)
(3,162,241)
(1,612,058)
(135,226)
615,085
112,394
578,452
1,170,705
4,580,177
(2,177,976)
(5,147,958)
(2,745,757)
(1,090,295)
(598,301)
(679,294)
(238,428)
(19,869)
(174,070)
(2,800,257)
(5,546,014)
(4,375,309)
(i)
(ii)
In 2018, contractual interest and foreign currency fluctuation result from the incurrence of R$4,045 million of Borrowings and
financing expenses as a result of the settlement of many of the claims in our JR Proceedings related to the debt instruments
compared to no borrowings and financing expenses during the corresponding period of 2017 due to the elimination of the
borrowings and financing expenses as a result of the commencement of the JR Proceedings in June 2016.
In 2018, refers to the exchange gain related to the depreciation of Brazilian real against the US dollar and loss of R$489 million /
US$126 million resulting from the revision of the recoverable amount of dividends receivable from Unitel and the fair value of the
cash investment in Unitel. In 2017, refers to the loss of R$129 million / US$39 million (R$789 million / US$242 million in 2016)
resulting from the revision of the recoverable amount of dividends receivable from Unitel and the fair value of the cash investment
in Unitel and exchange losses related to the depreciation of the Kwanza against the US dollar and the Brazilian real.
(iii) Represented mainly by financial fees and commissions.
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RIO
25-Apr-2019 21:05 EST
ˆ200GFY2&Kg@SSY8g%Š
14*
0C
200GFY2&Kg@SSY8g%
710585 FIN 52
HTM
ESS
Page 1 of 1
Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
7. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Short-term investments made by the Company and its subsidiaries for the years ended December 31, 2018 and 2017 are measured at
their fair values.
(a)
Cash and cash equivalents
Cash
Cash equivalents
Total
Repurchase agreements
Private securities
Bank certificates of deposit (CDBs)
Time deposits
Other
Cash equivalents
(b) Short-term investments
Private securities
Government securities
Total
Current
Non-current
2018
287,491
4,097,838
4,385,329
2017
277,500
6,585,184
6,862,684
2018
2,742,731
2017
6,225,547
301,632
154,514
3,888
4,097,838
348,318
1,307
10,012
6,585,184
2018
213,653
25,309
238,962
201,975
36,987
2017
114,839
21,447
136,286
21,447
114,839
The Company 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.
The amounts of cash equivalents and short-term investments are basically invested through exclusive investment funds, and most of the
portfolio consists of Government Securities with yield pegged to the SELIC rate. The portfolio is preferably allocated to highly liquid
spot market instruments for all investments.
F-52
OI S A
OI SA FORM 20-F
Donnelley Financial
FWPAXE-EGVRS10
12.10.7.0
EGV pf_rend
RIO
25-Apr-2019 21:05 EST
ˆ200GFY2&Kg@SawHg7Š
15*
0C
200GFY2&Kg@SawHg7
710585 FIN 53
HTM
ESS
Page 1 of 1
Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
8.
TRADE ACCOUNTS RECEIVABLE, NET
Billed services
Unbilled services
Mobile handsets and accessories sold
Provision for bad debt
Total
The aging list of trade receivables is as follows:
Current
Past-due up to 60 days
Past-due from 61 to 90 days
Past-due from 91 to 120 days
Past-due from 121 to 150 days
Over 150 days past-due
Total
The movements in the allowance for doubtful accounts were as follows:
Balance in 2016
Provision for bad debt
Trade receivables written off as uncollectible
Balance in 2017
Provision for bad debt
Trade receivables written off as uncollectible
Balance in 2018
F-53
2018
6,783,022
984,062
619,821
(1,870,350)
6,516,555
2017
7,478,145
634,241
597,267
(1,342,211)
7,367,442
2018
6,250,613
672,673
131,798
132,562
104,628
1,094,631
8,386,905
2017
6,096,205
919,421
144,818
130,633
128,175
1,290,401
8,709,653
(1,084,895)
(777,106)
519,790
(1,342,211)
(1,216,658)
688,519
(1,870,350)
OI S A
OI SA FORM 20-F
Donnelley Financial
VDI-W7-PFL-1233
12.10.7.0
EGV ramor0bz
RIO
26-Apr-2019 13:38 EST
ˆ200GFY2&KhFXp6!gÊ
14*
0C
200GFY2&KhFXp6!gˆ
710585 FIN 54
HTM
ESS
Page 1 of 1
Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
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 benefit of R$347,139 for the year ended December 31, 2018, an income tax benefit of R$350,987 for the year ended
December 31, 2017, and an income tax expenses of R$2,245,113 for the year ended December 31, 2016.
Income tax (expense) benefit attributable to income from continuing operations consists of:
Income tax and social contribution
Current tax (expense)
Deferred tax (expense) benefit
Total
The tax rate reconciliation from continuing operation consists of the following:
Income (loss) before taxes (i)
Income tax and social contribution
Income tax and social contribution at statutory rate (34%)
Valuation allowance (ii)
Effect of foreign tax rate differential
Tax effects of nondeductible expenses (iii)
Tax effects of tax-exempt income (iii)
Tax incentives (basically, operating income) (iv)
Tax amnesty program (v)
Other
Income tax and social contribution effect on profit or loss
F-54
2018
2017
2016
115,706
231,433
347,139
(906,080)
1,257,067
350,987
(712,814)
(1,532,299)
(2,245,113)
2018
27,046,698
2017
(4,378,648)
2016
(13,434,629)
(9,195,877)
(4,367,062)
(652,940)
14,564,537
3,068
(4,587)
347,139
1,488,740
(1,134,511)
(23,063)
(92,831)
373,321
14,007
(274,529)
(147)
350,987
4,567,774
(4,048,859)
(12,574)
(2,892,381)
121,546
21,121
—
(1,740)
(2,245,113)
OI S A
OI SA FORM 20-F
Donnelley Financial
VDI-W7-PFL-1233
12.10.7.0
EGV ramor0bz
RIO
26-Apr-2019 13:38 EST
ˆ200GFY2&KhFXu4M6(Š
16*
0C
200GFY2&KhFXu4M6(
710585 FIN 55
HTM
ESS
Page 1 of 1
Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
(i) At December 31, 2018, 2017 and 2016 income (loss) before income taxes and income tax (expense) benefit for continuing
operations is as follows:
Income (loss) before income taxes
Income tax benefit
Current tax income (expense)
Deferred tax income benefit
Brazil
37,559,050
343,082
164,050
179,031
2018
Foreign operations
(10,512,352)
4,057
(48,344)
52,402(*)
Total
27,046,698
347,139
115,706
231,433
(*) The amount of R$ 52,402 is related to the Tax effect of the entities classified as held-for-sale.
Loss before income taxes
Income tax benefit
Current tax (expense)
Deferred tax income benefit
Brazil
(3,115,832)
311,895
(893,031)
1,204,926
2017
Foreign operations
(1,262,816)
39,092
(13,049)
52,141(*)
Total
(4,378,648)
350,987
(906,080)
1,257,067
(*) The amount of R$ 52,141 is related to the Tax effect of the entities classified as held-for-sale.
Loss before income taxes
Income tax (expense)
Current tax (expense)
Deferred tax income (expense) benefit
Brazil
(12,402,406)
(2,054,234)
(521,773)
(1,532,461)
2016
Foreign operations
(1,032,223)
(190,879)
(191,041)
162
Total
(13,434,629)
(2,245,113)
(712,814)
(1,532,299)
(ii) Refers to the increase in the valuation allowance related to the deferred tax assets in 2018, 2017, and 2016.
(iii) The main tax-exempt income refers to the novation of the debt obligations and other liabilities due to the effects of the
Reorganization Judicial Plan, primarily as a result of the present value adjustments in the initial recognition date. The main effects
of nondeductible expenses refers to the reduction of the fair value of Unitel held-for-sale investment, which is not tax deductible in
the amount of R$166 million (R$90 million in 2017 and R$371 million in 2016).
(iv) These tax incentives correspond mainly to a 75% reduction in the current tax due on operating income obtained as a result of
telecommunication services rendered in certain northern and northeast regions of Brazil, where the Company holds facilities for
the purpose of rendering those services. This tax benefit is usually granted for a 10 year period, limited up to January 1, 2024.
F-55
OI S A
OI SA FORM 20-F
Donnelley Financial
FWPAXE-EGVRS10
12.10.7.0
EGV pf_rend
RIO
25-Apr-2019 21:06 EST
ˆ200GFY2&Kg@Sv4D6[Š
15*
0C
200GFY2&Kg@Sv4D6[
710585 FIN 56
HTM
ESS
Page 1 of 1
Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
(v) Refers to a tax position taken in prior periods that were assessed by the taxing authorities. Although the Company believed in prior
periods that these positions would more-likely-than-not of being sustained, it was 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 30, 2015, excluding tax debts that are subject to tax installment payments.
In order to enroll, tax payers were requested to resign their litigation rights with respect to the settled debt amount and pay at least
30% of their outstanding consolidated tax debt accrued through June 30, 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.
In 2017, the Company recognized in current tax the tax debts included in the Tax Compliance Program (PRT) and in the Special
Tax Compliance Program (PERT).
(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)
Total current
Current taxes payable
Income tax payable
Social contribution payable
Total current
F-56
ASSETS
2018
2017
287,472
91,996
241,778
621,246
565,725
135,348
422,437
1,123,510
LIABILITIES
2018
2017
21,628
5,398
27,026
416,080
151,049
567,129
OI S A
OI SA FORM 20-F
Donnelley Financial
VDI-W7-PFL-1233
12.10.7.0
EGV ramor0bz
RIO
26-Apr-2019 13:38 EST
ˆ200GFY2&KhFX@mf6pŠ
18*
0C
200GFY2&KhFX@mf6p
710585 FIN 57
HTM
ESS
Page 1 of 1
Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
Deferred taxes assets and liabilities
Other temporary differences (iii)
Tax loss carryforwards (iv)
Total deferred taxes assets
Other intangibles
Pension plan assets
Other temporary differences (v)
Total deferred tax liabilities
Valuation allowance (iii)
Total deferred taxes, net
2018
2017
5,117,917
13,703,530
18,821,447
(2,121,763)
(249,796)
(790,534)
(3,162,093)
(15,636,304)
23,050
8,854,946
5,752,241
14,607,187
(2,428,128)
(333,899)
(1,073,293)
(3,835,320)
(11,269,242)
(497,375)
(i) Refer mainly to prepaid income tax and social contribution that will be offset against federal taxes payable in the future.
(ii) Refer to withholding income tax (IRRF) credits on cash investments, derivatives, intragroup loans, government entities, and other
amounts that are used as deductions from income tax payable for the years, and social contribution withheld at source on services
provided to government agencies.
(iii) For the year ended December 31, 2018, total valuation allowance increased from R$11,269,242 (10,134,731 in 2016) to
R$15,636,304, reflecting a net change in the valuation allowance totaling R$4,367,062 recognized for the companies that, as of
December 31, 2018, 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
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 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.
(iv) The tax loss carryfowards in Brazil and foreign subsidiaries is approximately R$29,692,453 and R$14,432,380, and corresponding
to R$10,095,435 and R$3,608,095 of deferred tax assets, respectively, which do not expire, and may be carried forward
indefinitely. The Company can offset their tax loss carryforwards against taxable income up to a limit of 30% per year, pursuant to
the prevailing tax law.
(v) Refer mainly the tax effects of foreign exchange liabilities, monetary variations of judicial deposits and tax incentives.
F-57
OI S A
OI SA FORM 20-F
Donnelley Financial
VDI-W7-PFL-1233
12.10.7.0
EGV ramor0bz
RIO
26-Apr-2019 13:38 EST
ˆ200GFY2&KhFY0Kd6ÇŠ
16*
0C
200GFY2&KhFY0Kd6˙
710585 FIN 58
HTM
ESS
Page 1 of 1
Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
Movements in deferred tax assets and liabilities
The table below does not consider the roll forward of the deferred tax asset from held-for-sale companies:
Deferred tax assets arising on:
Temporary differences
Provision for contingencies
Allowance for doubtful accounts
Profit sharing
Foreign exchange differences
Other temporary differences
License
Tax loss carryforwards
Tax loss carryforwards
Total deferred taxes assets
Other intangibles
Pension plan assets
Other temporary differences
Total deferred tax liabilities
Valuation allowance
Total net deferred tax
Deferred tax assets arising on:
Temporary differences
Provision for contingencies
Allowance for doubtful accounts
Profit sharing
Foreign exchange differences
Other temporary differences
Balance at 2017
Recognized in
continuing operations
Other
comprehensive
income
Add-backs/
Offsets /
Transfer
Balance at 2018
4,235,797
693,315
101,993
1,062,308
1,107,660
1,653,873
5,752,241
14,607,187
(2,428,128)
(333,899)
(1,073,293)
(3,835,320)
(11,269,242)
(497,375)
(2,961,996)
(214,488)
(7,489)
340,885
41,889
(231,860)
7,923,539
4,890,480
306,365
(228,283)
(422,469)
(344,387)
(4,367,062)
179,031
1,273,801
478,827
94,504
1,403,193
177,085
1,690,507
13,703,530
18,821,447
(2,121,763)
(249,796)
(790,534)
(3,162,093)
(15,636,304)
23,050
(972,464)
268,494
27,750
(676,220)
312,386
312,386
705,228
705,228
312,386
29,008
Balance at 2016
Recognized in
continuing operations
Other
comprehensive
income
Add-backs/
Offsets (*)
Balance at 2017
3,827,131
654,624
22,304
1,062,308
2,037,477
F-58
408,666
38,691
79,689
—
(383,604)
4,235,797
693,315
101,993
1,062,308
1,653,873
OI S A
OI SA FORM 20-F
Donnelley Financial
FWPAXE-EGVRS10
12.10.7.0
EGV pf_rend
RIO
25-Apr-2019 21:06 EST
ˆ200GFY2&Kg@TMDzg1Š
17*
0C
200GFY2&Kg@TMDzg1
710585 FIN 59
HTM
ESS
Page 1 of 1
Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
License
Tax loss carryforwards
Tax loss carryforwards
Total deferred taxes assets
Other intangibles
Pension plan assets
Other temporary differences
Total deferred tax liabilities
Valuation allowance
Total net deferred tax
1,246,117
(138,457)
4,956,994
13,806,955
(2,707,265)
(316,060)
(1,324,904)
(4,348,229)
(10,134,731)
(676,005)
1,853,701
1,858,686
279,137
(49,996)
251,611
480,752
(1,134,511)
1,204,927
—
32,157
32,157
—
32,157
1,107,660
5,752,241
14,607,187
(2,428,128)
(333,899)
(1,073,293)
(3,835,320)
(11,269,242)
(497,375)
(1,058,454)
(1,058,454)
(1,058,454)
(*) This year offsets relates to the tax debts included in the Tax Compliance Program (PRT) and in the Special Tax Compliance
Program (PERT), as it was possible to convert some amount of tax loss carryforwards into tax credits in order to offset part of the
debts paid under the rules of such Programs, in the amount of R$1,035 million and R$21 million, respectively (Note 18).
R$ 208,642 refers to the utilization of tax loss carryfowards for Income Tax and R$ 849,812 refers to utilization of tax loss
carryfowards for non-income tax.
10. OTHER TAXES
Recoverable State VAT (ICMS) (i)
Taxes on revenue (PIS and COFINS)
Other
Total
Current
Non-current
State VAT (ICMS) (i)
ICMS Agreement No. 69/1998
Taxes on revenue (PIS and COFINS) (ii)
FUST/FUNTTEL/broadcasting fees (iii)
Other (iv)
Total
Current
Non-current
ASSETS
2018
1,240,353
215,860
63,015
1,519,228
803,252
715,976
2017
1,411,538
244,853
52,754
1,709,145
1,081,587
627,558
LIABILITIES
2018
556,693
34,113
235,319
655,022
181,437
1,662,584
1,033,868
628,716
2017
610,847
22,595
184,472
963,259
530,153
2,311,326
1,443,662
867,664
(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.
(ii) Refers, basically, to the Social Integration Program Tax on Revenue (PIS) and Social Security Funding Tax on Revenue
(COFINS) on revenue, financial income, and other income.
F-59
OI S A
OI SA FORM 20-F
Donnelley Financial
FWPAXE-EGVRS10
12.10.7.0
EGV pf_rend
RIO
25-Apr-2019 21:06 EST
ˆ200GFY2&Kg@TSBL6CŠ
15*
0C
200GFY2&Kg@TSBL6C
710585 FIN 60
HTM
ESS
Page 1 of 1
Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
The Company and its subsidiaries have filed legal proceedings to claim the right to deduct ICMS from the PIS and COFINS tax bases
and the recovery of past unduly paid amounts, within the relevant statute of limitations.
In March 2019, the 1st and 2nd Region Federal Courts (Brasília and Rio de Janeiro) issued final and unappealable decisions favorable to
the Company on two of the three main lawsuits of the Company relating to the discussion about the non-levy of PIS and COFINS on
ICMS.
The third lawsuit is still ongoing in the 2nd Region Federal Court.
The total adjusted amount of these credits at December 31, 2018, considering the three lawsuits, is approximately R$3.05 billion. The
taw lawsuits on which a final decision was issued total approximately R$2.05 billion.
In order to initiate the utilization of the tax credits recognized by the courts by offsetting them against federal taxes due, the Company is
conducting a thorough analysis aimed at quantifying these tax credits and taking the actions necessary to secure their confirmation by
the Federal Revenue Service.
(iii) The Company and its subsidiaries Telemar and Oi Móvel filed lawsuits to discuss the correct calculation of the contribution to the
FUST and in the course of the lawsuits made escrow deposits to suspend its collection. These discussions are also being judged by
higher courts and a possible transformation of the deposited amounts into definitive payments should not occur within two
(2) years
(iv) Consisting primarily of monetary variation to suspended taxes and withholding tax on intragroup loans and interest on capital.
11. JUDICIAL DEPOSITS
In some situations, the Company makes as ordered by courts or even at its own discretion to provide guarantees, judicial deposits to
ensure the continuity of ongoing lawsuits. These judicial deposits can be required for lawsuits with a likelihood of loss, as assessed by
the Company based on the opinion of its legal counselors, as probable, possible, or remote.
F-60
OI S A
OI SA FORM 20-F
Donnelley Financial
FWPAXE-EGVRS10
12.10.7.0
EGV pf_rend
RIO
25-Apr-2019 21:06 EST
ˆ200GFY2&Kg@Tep#gTŠ
15*
0C
200GFY2&Kg@Tep#gT
710585 FIN 61
HTM
ESS
Page 1 of 1
Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
As set forth by relevant legislation, judicial deposits are adjusted for inflation.
Civil
Tax
Labor
Subtotal
Provision for losses (i)
Total
Current
Non-current
2018
5,849,978
2,337,508
1,197,144
9,384,630
(649,910)
8,734,720
1,715,934
7,018,786
2017
6,948,344
2,660,132
1,637,668
11,246,144
(1,933,034)
9,313,110
1,023,348
8,289,762
(i)
This amount represents the estimated loss of balances of judicial deposits that are in the process of reconciliation with the obtained
statements.
12.
INVESTMENTS
Joint venture
Investments in associates
Tax incentives, net of allowances for losses
Other investments
Total
Summary of the movements in investment balances
Balance at 2016
Share of profits of subsidiaries
Associates’ share of other comprehensive income
Other
Balance at 2017
Share of profits of subsidiaries
Associates’ share of other comprehensive income
Other
Balance at 2018
2018
31,488
44,124
31,876
10,352
117,840
2017
42,346
42,115
31,579
20,470
136,510
135,652
(433)
1,949
(658)
136,510
(13,492)
(2,270)
(2,908)
117,840
13. PROPERTY, PLANT AND EQUIPMENT
Cost of PP&E (gross amount)
Balance at 2016
Additions
Write-offs
Transfers
Balance at 2017
Additions
Write-offs
Transfers
Balance at 2018
Accumulated depreciation
Works in
progress
Automatic
switching
equipment
Transmission
and other
equipment (i)
Infrastructure
Buildings
Other assets
Total
2,413,770
4,661,570
(93,922)
(3,547,305)
3,434,113
5,117,872
(47,465)
(5,152,907)
3,351,613
19,974,446
2,060
(2,235)
33,016
20,007,287
487
(1,827)
68,518
20,074,465
56,720,433
375,050
(19,656)
1,875,594
58,951,421
372,138
(53,374)
2,672,783
61,942,968
27,568,591
268,931
(666,885)
1,170,165
28,340,802
388,988
(601,842)
2,214,139
30,342,087
4,311,533
17,906
(821)
141,666
4,470,284
10,721
(4,660)
(15,168)
4,461,177
5,866,031
55,614
(31,193)
326,864
6,217,316
39,471
(3,567)
212,635
6,465,855
116,854,804
5,381,131
(814,712)
—
121,421,223
5,929,677
(712,735)
—
126,638,165
F-61
OI S A
OI SA FORM 20-F
Donnelley Financial
FWPAXE-EGVRS10
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RIO
25-Apr-2019 21:06 EST
ˆ200GFY2&Kg@TlhTgMŠ
14*
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200GFY2&Kg@TlhTgM
710585 FIN 62
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ESS
Page 1 of 1
Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
Balance at 2016
Depreciation expenses
Write-offs
Transfers
Balance at 2017
Depreciation expenses
Write-offs
Transfers
Balance at 2018
Property, plant and
equipment, net
Balance at 2016
Balance at 2017
Balance at 2018
Annual depreciation rate
(average)
(18,267,700)
(338,003)
1,158
—
(18,604,545)
(299,925)
1,834
(36)
(18,902,672)
(43,324,619)
(2,175,732)
18,610
(473)
(45,482,214)
(2,271,906)
48,582
(151)
(47,705,689)
(21,665,423)
(1,158,457)
558,879
(625)
(22,265,626)
(1,253,099)
443,347
(353)
(23,075,731)
(2,547,638)
(96,940)
817
(84,895)
(2,728,656)
(95,679)
1,542
33,568
(2,789,225)
(4,969,592)
(396,589)
23,458
85,995
(5,256,728)
(408,379)
2,085
(33,028)
(5,696,050)
(90,774,972)
(4,165,721)
602,922
2
(94,337,769)
(4,328,988)
497,390
—
(98,169,367)
2,413,770
3,434,113
3,351,613
1,706,746
1,402,742
1,171,793
13,395,814
13,469,207
14,237,279
5,903,168
6,075,176
7,266,356
1,763,895
1,741,628
1,671,952
896,439
960,588
769,805
26,079,832
27,083,454
28,468,798
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 handed over to ANATEL upon the termination of the concession agreements that are not renewed.
As at December 31, 2018, the residual balance of the Company’s returnable assets is R$8,218,006 and consists of assets and
installations in progress, switching and transmission equipment, payphones, outside network equipment, power equipment, and systems
and operation support equipment.
14.
INTANGIBLE ASSETS
Cost of intangibles (gross amount)
Balance at 2016
Additions
Transfers
Other
Balance at 2017
Additions
Transfers
Other
Balance at 2018
Accumulated amortization
Balance at 2016
Amortization expenses
Transfers
Balance at 2017
Amortization expenses
Intangibles in
progress
Data processing
systems
Regulatory
licenses (i)
Other
Total
112,842
332,500
(428,295)
17,047
263,305
(253,143)
(14)
27,195
8,301,630
4,356
438,138
(1,111)
8,743,013
4,524
234,157
—
8,981,694
19,076,941
19,076,941
—
—
—
19,076,941
1,971,826
74,972
(9,843)
(382)
2,036,573
73,471
18,986
—
2,129,030
29,463,239
411,828
(1,493)
29,873,574
341,300
—
(14)
30,214,860
(7,148,833)
(524,414)
(10,071,364)
(1,025,438)
(1,731,983)
(116,756)
(18,952,180)
(1,666,608)
53
53
(7,673,194)
(443,268)
(11,096,802)
(1,001,234)
(1,848,739)
(126,181)
(20,618,735)
(1,570,683)
F-62
OI S A
OI SA FORM 20-F
Donnelley Financial
FWPAXE-EGVRS09
12.10.7.0
EGV pf_rend
RIO
25-Apr-2019 21:05 EST
ˆ200GFY2&Kg@RCr!6DŠ
14*
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200GFY2&Kg@RCr!6D
710585 FIN 63
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ESS
Page 1 of 1
Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
Transfers
Balance at 2018
Intangible assets, net
Balance at 2016
Balance at 2017
Balance at 2018
Annual amortization rate (average)
—
—
—
—
(8,116,462)
(12,098,036)
(1,974,920)
(22,189,418)
112,842
17,047
27,195
1,152,797
1,069,819
865,232
9,005,577
7,980,139
6,978,905
239,843
187,834
154,110
10,511,059
9,254,839
8,025,442
20%
10%
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
ANATEL AGU
Other
Adjustment to present value
Liabilities subject to compromise
Total
Current
Non-current
Trade payables subject to the Judicial Reorganization (i)
Trade payables not subject to the Judicial Reorganization
Total
2018
2,861,712
3,397,413
191,723
7,147,137
647,856
(5,426,971)
8,818,870
5,225,862
3,593,008
3,794,610
5,024,260
8,818,870
2017
2,658,436
3,964,912
399,996
293,478
(2,145,852)
5,170,970
5,170,970
246,472
4,924,498
5,170,970
Certain amounts initially recorded as liabilities subject to compromise (Note 29) were adjusted and reclassified to reflect the new legal
terms and conditions established by the JRP Court.
16. BORROWINGS AND FINANCING
As a result of the JRP confirmation, the borrowings and financing contracted by the Oi Group companies were novated and the related
balances were recalculated according to the JRP terms and conditions, in accordance with the measures necessary for its
implementation and booked as current and non-current liabilities.
The Company and the other Oi Group completed the financial debt restructuring with the implementation of the applicable terms and
conditions provided for in the JRP.
F-63
OI S A
OI SA FORM 20-F
Donnelley Financial
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200GFY2&Kg@RM1rg3
710585 FIN 64
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Page 1 of 1
Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
Balances of borrowings and financing as at December 31, 2018 are as follow:
Senior notes
Local currency
Foreign currency
Non-qualified bondholders (*)
Collateralized claims
BNDES
Restructuring I
Local currency
Debentures (I)
Other
Foreign currency
Local currency Financial Institution
Overall Offer
Local currency
Foreign currency
Loan and debentures from subsidiaries (Note 27)
Subtotal
Incurred debt issuance cost
Present value adjustment (*)
Total
Current
Non-current
Contractual maturity
Principal
Interest
Jul 2025
Aug 2024 to
Feb 2030
Semiannual
Semiannual
Mar 2024 to
Feb 2033
Monthly
Aug 2023 to
Feb 2035
Aug 2023 to
Feb 2035
Jan 2019 to
Dec 203
Feb 2038 to
Feb 2042
Feb 2038 to
Feb 2042
Semiannual
Semiannual
Monthly
Single
installment
2018
7,068,263
7,068,263
326,376
3,616,074
3,616,074
14,993,376
8,640,054
6,788,519
1,851,535
6,353,322
54,251
4,332,352
207,035
4,125,317
30,390,692
(12,126)
(13,928,660)
16,449,906
672,894
15,777,012
(*) The financial liabilities have been adjusted to present value according to the criteria of ASC 852 as of the time at which it has
reclassified each of the financial liabilities that were legally affected by the JRP from liabilities subject to compromise to
borrowings and financings or trade payables. It was calculated taking into consideration the contractual flows provided for in the
JRP, discounted using rates that range from 12.6% per year to 16.4% per year, depending on the maturities and currency of each
instrument, the resulting discount will be amortized to financial expense over the term of the debt.
Debt breakdown per currency
Euro
US dollar
Brazilian reais
Total
2018
198,931
8,617,835
7,633,140
16,449,906
F-64
OI S A
OI SA FORM 20-F
Donnelley Financial
FWPAXE-EGVRS09
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EGV pf_rend
RIO
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ˆ200GFY2&Kg@RVKj6(Š
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200GFY2&Kg@RVKj6(
710585 FIN 65
HTM
ESS
Page 1 of 1
Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
Debt breakdown per index
Fixed rate
CDI
TJLP
TR
Other
Total
Maturity schedule of the long-term debt allocation schedule
2020
2021
2022
2023
2024 and following years
Total
Index/rate
1.75% p.a. – 10.00% p.a.
0.75% p.a. – 1.83% p.a.
2.95% p.a. + TJLP
0%
0%
2018
8,562,117
3,949,639
3,614,820
14,430
308,900
16,449,906
2018
Long-term debt
10,958
3,953
970
295,155
29,405,472
29,716,508
Guarantees
BNDES financing facilities are originally collateralized by receivables of the Company and its subsidiaries Telemar and Oi Móvel. The
Company provides guarantees to its subsidiaries Telemar and Oi Móvel for such financing facilities, totaling R$2,712 million.
Covenants
Pursuant to a Clause 17 of Appendix 4.2.4 to the Plan, the Company and its subsidiaries are subject to certain covenants existing in
some loan and financing agreements, based on certain financial ratios, including Gross debt-to-EBITDA. The Company monitors on a
quarterly basis these terms and conditions of the covenants and the terms and conditions for the period ended December 31, 2018, the
Company and its subsidiaries were compliant with all relevant covenants of the agreements.
17. LICENSES AND CONCESSIONS PAYABLE
Personal Mobile Services - SMP
STFC concessions
Total
Current
Non-current
2018
1,025
84,594
85,619
85,619
2017
4,649
16,261
20,910
20,306
604
Correspond to the amounts payable to ANATEL for the radiofrequency concessions and the licenses to provide the SMP services, and
STFC service concessions, obtained at public auctions.
F-65
OI S A
OI SA FORM 20-F
Donnelley Financial
FWPAXE-EGVRS09
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EGV pf_rend
RIO
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ˆ200GFY2&Kg@Rckq6)Š
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200GFY2&Kg@Rckq6)
710585 FIN 66
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Page 1 of 1
Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
18. 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
PRT (MP 766/2017) (i)
PERT (Law 13496/2017) (ii)
Total
Current
Non-current
2018
496,240
54,528
2,438
553,206
142,036
411,170
2017
638,409
4,336
233,051
12,981
888,777
278,277
610,500
The amounts of the tax refinancing program created under Law 11941/2009, Provisional Act (MP) 766/2017, and Law 13469/2017,
divided into principal, fine and interest, which include the debt declared at the time the deadline to join the program (Law 11941/2009
installment plan) 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)
PRT – Other Debts - RFB
PRT – Social Security - INSS
PERT – Other Debts - RFB
Other
Total
The payment schedule is as follows:
2019
2020
2021
2022
2023
2024 e 2025
Total
Principal
42,921
5,873
44,043
1,018
754
19,014
26,685
1,146
29,150
170,604
2018
Fines
1,342
323
2,142
2,374
Interest
156,674
39,094
35,842
2,414
11,426
28,976
25,469
Total
199,595
44,967
79,885
4,774
12,503
50,132
54,528
4,433
10,614
1,292
70,801
371,988
2,438
104,384
553,206
2017
Total
299,533
68,285
89,954
8,450
17,339
49,268
227,261
5,790
12,981
109,916
888,777
142,036
85,070
85,070
85,070
85,070
70,890
553,206
The tax debts, as is the case of the debts included in tax refinancing programs, are not subject to the terms of the judicial reorganization
terms.
(i)
Tax Compliance Program (PRT)
F-66
OI S A
OI SA FORM 20-F
Donnelley Financial
FWPAXE-EGVRS09
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200GFY2&Kg@Rnoqga
710585 FIN 67
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Page 1 of 1
Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
The Company elected to include and settle under said tax refinancing program, created by the Federal Government, under Provisional
Act 766/2017 (PRT), the administrative proceedings with a probable likelihood of an unfavorable outcome and those where, while
attributed a possible likelihood of an unfavorable outcome, the cost effectiveness of including them provided to be highly advantageous
in light of the benefits offered by the program.
The Company elected the payment method that allows settling 76% of the consolidated debt utilizing tax credits arising on tax loss
carryforwards amounting to R$1,035 million, and paid the remaining 24% in 24 monthly installments totaling R$327 million plus
SELIC interest charged as from the adherence month. All the procedures necessary for the Company joining the PRT were completed
within the statutory deadline, while MP 766/2017 was still in effect.
Subsequently, on June 1, 2017 the effective period of said Provisional Act ended because it was not passed into law within the relevant
constitutional deadline. However, as established by the Federal Constitution, the legal relationships established and arising from actions
taken while a provisional act not passed into law was effective, as in the case of the Company’s joining the PRT, continue to be
governed by the former provisional act, except where the National Congress provides for otherwise, by means of a legislative decree.
Note that the PRT, governed by MP 766/2017, is not equivalent to the tax installment plan established by MP 783/2017 (PERT), of
May 31, 2017, because of differences in payment terms and conditions, plan scope, and access requirements.
(ii) Special Tax Compliance Program (PERT)
The Company elected to include in and settle through PERT only tax debts that in aggregate do not exceed the fifteen million Brazilian
reais (R$15,000,000.00) ceiling set by Article 3 of Law 13496/2017.
The tax debts included in said program were those being disputed at the administrative level in proceedings classified with a low
likelihood of the Company winning and which, in the event of an unfavorable outcome, would result in a lawsuit—and entail all the
associated costs—, the reason why the cost effectiveness of joining the program was quite positive, because of the benefits offered by
PERT (especially the payment of just 5% of the debt in cash).
19. PROVISION FOR CONTINGENCIES
Labor
Tax
Civil (i)
Total provisions
Current
Non-current
2018
1,457,181
650,083
2,931,456
5,038,720
680,542
4,358,178
2017
697,190
660,304
10,941
1,368,435
1,368,435
(i) Includes R$157,809 related to the agreement entered into with Pharol, as described in Note 30.
F-67
OI S A
OI SA FORM 20-F
Donnelley Financial
VDI-W7-PFL-1233
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EGV ramor0bz
RIO
26-Apr-2019 13:38 EST
ˆ200GFY2&KhFY7906uŠ
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200GFY2&KhFY7906u
710585 FIN 68
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Page 1 of 1
Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
In compliance with the relevant Law, the provisions are adjusted for inflation on a monthly basis.
The following summarizes the activity of the contingency provision:
Balance in 12/31/2016
Monetary variation (i)
Additions/(reversals) (i)
Write-offs for payment/terminations (ii)
Balance in 12/31/2017
Monetary variation (i)
Additions/(reversals) (i)
Write-offs for payment/terminations (ii)
Reclassification from liabilities subjected to compromise
Balance in 12/31/2018
Labor
543,026
162,695
92,803
(101,334)
697,190
22,244
(57,200)
(241,225)
1,036,172
1,457,181
Tax
576,133
99,902
49,616
(65,347)
660,304
77,697
(49,659)
(38,259)
650,083
Civil
9,915
1,914
1,098
(1,986)
10,941
19,072
133,465
(378,339)
3,146,317
2,931,456
Total
1,129,074
264,511
143,517
(168,667)
1,368,435
119,013
26,606
(657,823)
4,182,489
5,038,720
(i)
The Company has been continually monitoring its proceedings, as well as the reprocessing of the provision estimation model
taking into account the new profile and history of discontinuation of lawsuits in the context of the approval and Ratification of the
JRP. Accordingly, the Company reversed the provision for contingencies and the related monetary variation.
(ii) This line item, basically, includes the amounts related to proceedings terminated and included in the list of the Company’s judicial
reorganization creditors, which were transferred to the line item trade payables and will be paid according to the terms of the JRP.
Labor
The Company is a party to a large number of labor lawsuits and calculates the related provision based on a statistical methodology that
takes into consideration, but not limited to the total number of existing lawsuits, the claims make in each lawsuit, the amount claimed in
each lawsuit, the history of payments made, and the technical opinion of the legal counsel.
(i) Overtime - refers to the claim for payment of salary and premiums by alleged overtime hours;
(ii) 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-68
OI S A
OI SA FORM 20-F
Donnelley Financial
FWPAXE-EGVRS09
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ˆ200GFY2&Kg@R@5J6cŠ
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200GFY2&Kg@R@5J6c
710585 FIN 69
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Page 1 of 1
Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
(iv) Stability/reintegration - claim due to alleged noncompliance with an employee’s special condition which prohibited termination of
the employment contract without cause;
(v) Supplementary retirement benefits - differences allegedly due on the benefit salary referring to payroll amounts;
(vi) 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) 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;
(x) 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.
F-69
OI S A
OI SA FORM 20-F
Donnelley Financial
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Page 1 of 1
Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
Tax
The provisions for tax lawsuits are calculated individually taking into consideration Management and the legal counsel’s risk
assessment. These contingencies are not included in the Judicial Reorganization Plan.
(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 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) 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) ANATEL – On June 30, 2016 the Company was a party to noncompliance administrative proceedings and lawsuits filed by
ANATEL and the Federal Attorney General’s Office (AGU) totaling an estimate R$14.5 billion, which were included in the JRP
as electable for payment as provided for in this Plan (see Note 1). On this date, R$8.4 billion in liquid proceedings and
R$6.1 billion in illiquid proceedings.
With regard to the proceedings included in the JRP and taking into consideration the decision that granted the judicial
reorganization on February 5, 2018, the Company revised the criteria used to calculate the provision for these regulatory
contingencies to start considering the estimate of discounted future cash flows associated to each one of the payment methods
provided for in the JRP for this type of claims. As at December 31, 2018, this provision totals R$580 million.
For the contingencies not subject to the judicial reorganization, the Company takes into consideration the opinions of outside
attorneys when evaluating the outcome of the contingencies.
The Company disagrees and is challenging some of the alleged noncompliance events, and is also challenging the unfairness and
unreasonableness of the amount of imposed fines in light of the pinpointed noncompliance event and has kept in balance sheet the
amount it deems a probable loss.
F-70
OI S A
OI SA FORM 20-F
Donnelley Financial
FWPAXE-EGVRS09
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ˆ200GFY2&Kg@SFT86,Š
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200GFY2&Kg@SFT86,
710585 FIN 71
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Page 1 of 1
Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
The JRP prescribes in a specific clause how regulatory agencies’ claims should be addressed. It should be noted that said Plan was
approved by a vast majority of creditors at the General Creditors’ Meeting and ratified by the by the 7th Corporate Court of the Rio
de Janeiro State Court of Justice. Note also that ANATEL filed bill of review No. 001068-32.2018.8.19.0000 against the decision
that ratifies the JRP alleging that Clause 4.3.4, which prescribes the payment method of this agency’s claims, is null and void. This
bill of review was denied by the 8th Civil Chamber of the Rio de Janeiro State Court of Justice, which will still judge the motions
for clarification filed by ANATEL against the said decision. In addition the 7th Corporate Court of the Rio de Janeiro State Court
of Justice issued a decision establishing that withdrawal of the judicial deposit made by Telemar to settle the first six
(6) installments to repay ANATEL’s claim, as provided for by the JRP. As the maturity date of the seventh light of establish drew
closer, Oi filed a petition requesting the use of the same settlement procedure for the following six (6) installments (from the
seventh to the tenth installments) of ANATEL’s claim. It is worth mentioning that part of the amount recognized in December
2017 related to ANATEL was transferred to accounts payable (non-current) as part of the recognitions resulting from the JRP.
(ii) Corporate – Financial Participation Agreements: these agreements were governed by Administrative Rules 415/1972, 1181/1974,
1361/1976, 881/1990, 86/1991, and 1028/1996. When they entered into a financial participation agreement to acquired a telephone
line, subscribers became holders of 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 merged by the Company, and other local carriers members of the Telebrás
system, 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 for contingencies 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, (iii) the average amount of historical losses, broken down by matter in dispute,
and (iv) the impacts of the payment of these contingencies in the context of the Judicial Reorganization Plan ratified on January 8,
2018. 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
counsel, understands that the likelihood of loss is remote. Therefore, it is not necessary to set up a provision.
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Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
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 CRT’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, 2018.
There may be, however, significant changes in the items above, mainly regarding the market price of Company shares.
(iii) Small claims courts - claims filed by customers for whom the individual indemnification compensation amounts do not exceed the
equivalent of forty (40) minimum wages; and
The Company is a party to a large number of lawsuits filed in small claims courts and calculates the related provision based on a
statistical methodology that takes into consideration, but not limited to, the total number of existing lawsuits, the claims make in
each lawsuit, the amount claimed in each lawsuit, the history of payments made, and the technical opinion of the legal counsel and
the impacts of the Judicial Reorganization Plan.
(iv) Other claims - refer to several of ongoing lawsuits discussing 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.
The provisions for these contingencies are calculated individually taking into consideration Management and the legal counsel’s
risk assessment.
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Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
Breakdown of unrecorded contingent liabilities
The table below shows a summary of the carrying amounts of the main legal matters with possible risk of loss and the amounts on
December 31, 2018 and 2017.
Labor
Tax
Civil
Total
Contingent liabilities
2018
770,982
27,586,094
1,723,110
30,080,186
2017
53,328
26,175,239
191,819
26,420,386
The Company is also party 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
Refer to several lawsuits claiming, but not limited to, the payment of salary differences, overtime, hazardous duty and health hazard
premium, and joint liability.
Tax
The main ongoing lawsuits have the following matters:
(i)
ICMS - it refers to discussions concerning the levy of this tax on certain activities and/or the provision of certain services, such as,
for example, the levy of ICMS on noncore activities, supplemental services, services provided to tax-exempt customers,
subscriptions minimum contract period, or even the disallowance of tax credits because some States qualify them as undue,
including, but not limited to, tax credits of capital assets, different calculation of the tax credit ratio (CIAP), totaling approximately
R$12,523,402 (R$11,730,162 in 2017).
(ii)
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$3,505,366 (2017 - R$3,387,630);
(iii)
INSS – tax assessments to add amounts to the contribution salary allegedly due by the Company, amounting approximately to
R$695,249 (R$573,619 in 2017); 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$10,862,077 (R$10,483,828 in 2017).
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Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
Civil
The main ongoing lawsuits do not have any court decision that has been issued, and are mainly related, but not limited to, challenging
of network expansion plans, compensation for pain and suffering and material damages, collection lawsuits, and bidding processes.
Fenapas civil actions filed with the 5th Corporate Court of Rio de Janeiro, against, in addition to Sistel, the Company and other
operators, aiming at the annulment of the spin-off of the PBS pension plan, alleging, in brief “the breakdown of the Fundação Sistel
supplementary pension fund scheme”, which resulted in several specific PBS mirror plans, and the corresponding allocations of funds
from the technical surplus and the tax contingency existing at the time of the spin-off. The amount of potential loss cannot be estimated
and it is not possible to settle the claims because they are unenforceable since this would require handing back the spun off net assets of
Sistel related to telecommunications operators belonging to the former Telebrás system.
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 adjusted amount of contracted bonds and
guarantee insurances, effective at December 31, 2018 corresponds to R$13,750,739 (R$14,847,243 in 2017). The commission charges
on these contracts are based on market rates.
20. OTHER PAYABLES
Provisions for indemnities payable
Third party consignment
Provision for asset decommissioning
Other
Total
Current
Non-current
2018
676,984
56,302
17,410
510,865
1,261,561
629,939
631,622
2017
607,559
35,293
16,716
392,832
1,052,400
469,214
583,186
21. UNEARNED REVENUES
Refers to the amounts received in advance for the assignment of the right to the commercial operation and use of infrastructure assets
that are recognized in revenues over the effective period of the underlying agreements and service installation fees that are recognized
in revenue when the customers use the services.
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Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
Unearned revenues of the infrastructure assets
Unearned revenues of service installation fees
Other
Total
Current
Non-current
22. SHAREHOLDERS’ EQUITY (DEFICIT)
(a) Share capital
2018
1,596,238
159,345
160,987
1,916,570
229,497
1,687,073
2017
1,661,236
—
111,592
1,772,828
139,012
1,633,816
The Capital Increase – Capitalization of Credits amounting to R$10,600,097 with the issue of 1,514,299,603 new book-entry, registered
common shares without par value was ratified by the Board of Directors on July 20, 2018. The fair value of the shares issued was
R$11,613,980.
On October 28, 2018, the Company commenced the issuance and delivery of warrants and ADWs exercised by their holders and issued
115,913,355 common shares. The process was concluded on January 4, 2019. The Warrants that were not exercised on or prior to
January 2, 2019 have been cancelled.
Subscribed and paid-in capital is R$32,038,471 (R$21,438,374 in 2017), represented by the following shares, without par value:
Total capital in shares
Common shares
Preferred shares
Total
Treasury shares
Common shares
Preferred shares
Total
Outstanding shares
Common shares
Preferred shares
Total outstanding shares
Number of shares (in thousands)
2018
2017
2,298,247
157,727
2,455,974
32,030
1,812
33,842
2,266,217
155,915
2,422,132
668,034
157,727
825,761
148,282
1,812
150,094
519,752
155,915
675,667
Common and preferred shareholders have different rights in relation to dividends, voting rights and in case of liquidation, as determined
by the Company’s by-laws. In this way, basic and diluted earnings per share were calculated based on the profit of the period available
for them.
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Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
Basic and diluted earnings (losses) per share
Basic
Basic earnings per share are calculated by dividing the profit attributable to the Company’s controlling shareholders, available to
holders of common and preferred shares, by the weighted average number of common and preferred shares outstanding during the
period.
Diluted
Diluted earnings per share are calculated by adjusting the weighted average number of outstanding common and preferred shares to
presume the conversion of all diluted potential shares. The Company currently has no potential dilutive shares.
Net income (loss) attributable to owners of the Company
Net income (loss) allocated to common shares – basic and diluted
Net income (loss) allocated to preferred shares – basic and
diluted
2018
27,369,422
2017
(3,736,518)
2016
(15,502,132)
24,525,692
(2,874,290)
(11,924,904)
2,843,730
(862,228)
(3,577,228)
Weighted average number of outstanding shares
(in thousands of shares)
Common shares – basic and diluted
Preferred shares – basic and diluted
Net income (loss) per share (in Reais):
Common shares – basic and diluted
Preferred shares – basic and diluted
1,344,686
155,915
519,752
155,915
519,752
155,915
18.24
18.24
(5.53)
(5.53)
(22.94)
(22.94)
On January 16, 2019, the Company issued 1,530,457,356 common shares to holders of subscription rights. On January 21, 2019, the
Company issued 91,080,933 common shares to holders of subscription rights that had requested subscriptions for excess common
shares. On January 25, 2019, 1,604,268,162 New Common Shares were subscribed and paid in. This concluded the Capital
Increase process, through the subscription and payment of all 3,225,806,451 New Common Shares issued as part of the Capital Increase
– New Funds, representing a contribution of new funds for the Company totaling R$4,000,000,000.00. This transaction will have an
impact on the earnings per share for the next fiscal year, as the current shareholders will be diluted.
(a) Capital reserves
Capital reserves consist mainly of the Special Reserve on Merger that is represented by the corporate reorganizations primarily due to
the corporate reorganization approved on February 27, 2012. In 2015, the increase in this reserve refers to net assets recorded that are
related to the merger of TmarPart.
Restructured Senior Notes convertible into equity instruments:
In light of the new terms, the senior notes were settled by issuing the following:
We highlight below the main features of the securities that qualify as debt instrument (Note 1):
•
•
•
Common shares issued by Oi and currently held by PTIF;
New I Common Shares that will be due as a result of the capital increase, through the capitalization of the claims,
New I Common Shares;
Subscription Warrants.
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Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
For measurement purposes of the amount recognized for each of the transactions qualifiable as an equity instrument, referred to above,
the Company hired an independent specialized consulting firm to estimate the fair value of the stock, using discounted cash flow
valuation methodology (fair value hierarchy, Level 3), considering the following main assumptions: (i) variable discount rate: in reais
(BRL) in nominal terms, according to the CAPM methodology, variable due to year-on-year changes in debt / equity ratio ranging from
14.0% to 16.4%; (ii) terminal growth rate of 4.0% , according to long-term Brazilian inflation, projected by the Central Bank.
Fair Value of Restructured Senior Notes
New I Common Shares
Delivery of treasury shares
Subscription Warrants
10,070,116
773,072
770,792
11,613,980
In July 2018, the related new shares and treasury shares were delivered to the holders of Qualified Senior Notes, as provided for in the
JRP.
(b) Treasury shares
Delivery of treasury shares
On July 27, 2018, the Company delivered 116,251,405 common shares, previously held by PTIF, to the Qualified Bondholders, as part
of the restructuring of the qualified bonds (Note 1). The carrying amount of the derecognized treasury shares R$2,727,842, recognized
as a contra entry to the capital reserve.
(c) Other comprehensive income
The Company recognizes in this line item other comprehensive income, which includes actuarial gains and losses, foreign exchange
differences arising on translating the net investment in foreign subsidiaries, and the tax effects related to these components, which are
not recognized in the statement of profit or loss.
23. PROVISION FOR PENSION PLAN
(a) Pension funds
The Company and its subsidiaries sponsor retirement benefit plans for their employees, if they elect to be part of such plan. The table
below shows the existing pension plans at December 31, 2018.
Benefit plans
TCSPREV
BrTPREV (*)
TelemarPrev
PBS-Telemar
PBS-TNCP
CELPREV
PAMEC
PBS-A
PAMA
Sponsors
Manager
Oi, Oi Móvel and BrT Multimídia
Oi, Oi Móvel and BrT Multimídia
Oi, TMAR and Oi Móvel
Telemar
Oi Móvel
Oi Móvel
Oi
Telemar and Oi
Oi and Telemar
FATL
FATL
FATL
FATL
FATL
FATL
Oi
Sistel
Sistel
(*) Plan merged with into TCSPREV on November 30, 2018.
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Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
Sistel – Fundação Sistel de Seguridade Social
FATL – Fundação Atlântico de Seguridade Social
For purposes of the pension plans described in this note, the Company can also be referred to as the “Sponsor”.
The sponsored plans are valued by independent actuaries at the end of the annual reporting period. For the year ended December 31,
2018, the actuarial valuations were performed by PREVUE Consultoria. The Bylaws provide for the approval of the supplementary
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
Financial obligations - BrTPREV plan (i)
BrTPREV plan
PAMEC plan
Total unfunded status
Reclassification to liabilities subject to compromise (Note 29).
Total non-current
2018
574,725
4,397
579,122
579,122
2017
629,120
3,300
632,420
(560,046)
72,374
(i) Represented by the financial obligations agreement, 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 commitment under
the terms of the JRP.
Overfunded status
TCSPREV plan
TelemarPrev plan
PBS – Telemar plan
Total
Current
Non-current
2018
364,552
343,286
50,869
758,707
4,880
753,827
2017
1,329,931
317,500
53,041
1,700,472
1,080
1,699,392
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Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
Characteristics of the sponsored pension plans
1)
FATL
FATL, close-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) TCSPREV and BRTPREV (Plan merged with into TCSPREV on November 30, 2018)
Variable contribution pension Benefit Plan, closed to new entrants, enrolled with the CNPB under No. 2000.0028-38.
On November 30, 2018, date of the actual merger, TCSPREV Benefits Plan merged the BrTPREV Benefits Plan (CNPB
No. 2002,0017-74) to become the full successor of these Plan’s rights and obligations, assuming all its assets and liabilities. This
merger was approved by PREVIC Administrative Rule 995, of October 24, 2018, published on Federal Official Gazette No. 208 of
October 29, 2018.
With the recognition and registration of the merger, the Participants and Beneficiaries linked to BrTPREV automatically became
Participants and Beneficiaries TCSPREV, in accordance with the categories of Beneficiaries existing on the day prior to the merger
date.
The monthly, mandatory Basic Contribution of the Active Participants of the TCSPREV and BrTPREV (merged plan) groups
corresponds to the outcome obtained by applying a percentage that may range from 3% to 8% on the Contribution Salary (PS), pursuant
to the age and option of each Participant. The Plan’s Charter provides for contribution parity by the Participants and the Sponsors.
The monthly Contribution of the Fundador/Alternativo Plan Participants, previously merged with and into BrTPREV, corresponds to
the sum of: (i) 3% charged on the Contribution Salary; (ii) 2% charged on the Contribution Salary that exceeds half of the highest
Official Pension Scheme Contribution Salary, and (iii) 6.3% charged on the Contribution Salary that that exceeds the highest Official
Pension Scheme Contribution Salary. The Plan’s Charter provides for contribution parity by the Participants and the Sponsors.
In accordance with regulatory criteria, the Sponsors’ contributions, related to TCSPREV and BrTPREV Participants are automatically
cancelled on the month subsequent to the month when the same Participant reaches the age of 60 years old, 10 years of Credited
Services, and 10 years of Plan membership.
For participants who migrated from the PBS-TCS Plan to the TCSPREV Plan, the Sponsors’ contributions are cancelled on the month
subsequent to the month when a Participant reaches the age of 57 years old, 10 years of uninterrupted membership of PBS-TCS and the
TCSPREV Plan, 10 years of Credited Services at the Sponsor, and 35 years of registration with the official Social Security scheme.
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Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
The TCSPREV and BrTPREV 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 is optional and both its amount and frequency are freely chosen by the Participant, as defined by the
TCSPREV or BrTPREV Plan, provided it is not lower than one (1) UPTCS (TCSPREV Pension Unit) or one (1) UPBrT (BrT’s
Pension Unit), respectively. The Sponsor does not make any counterpart contribution to the Participant’s Voluntary or Sporadic
contribution.
The plan is funded under the capital formation approach.
(ii) PBS-Telemar
Defined contribution pension Benefit Plan, closed to new entrants, 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% of the
Contribution Salary (according to the participant’s age on enrollment 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 capital formation 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
capital formation approach.
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Page 1 of 1
Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
(iv) PBS-TNC
Defined contribution pension Benefit Plan, closed to new entrants, enrolled with the CNPB under No. 2000.0013-19.
The contributions from Active Participants of the PBS-TNC Benefit Plan correspond to the sum of: (i) 0.28% to 0.85% of the
Contribution Salary (according to the participant’s age on enrollment date); (ii) 0.57% of Contribution Salary that exceeds half of one
Standard Unit; and (iii) 6.25% of the Contribution Salary that exceeds one Standard Unit. The Sponsors’ contributions are equivalent to
a percentage of the payroll of the employees who are Active Plan Participants, as set on an annual basis in the Costing Plan.
The contribution of the Current Beneficiaries (only those who receive a retirement allowance) is equivalent to a percentage to be set on
an annual basis in the Costing Plan, applied on the overall benefit, limited to the amount of the allowance.
The plan is funded under the capital formation approach.
(v) CELPREV
Defined Contribution Pension Benefit Plan, enrolled with the CNPB under No. 2004.0009-29.
On January 12, 2018, pursuant to Administrative Rule 22, published on the Federal Official Gazette of January 16, 2018, PREVIC
approved the new text of the Plan’s Charter, which closes the number of CELPREV participants and prevents new entrants.
The Participant’s Basic Regular Contribution corresponds to the product obtained by applying a percentage, 0%, 0.5%, 1%, 1.5% or
2%, depending on each participant’s option, to his or her Contribution Salary (SP). The Sponsors contribute with an amount equivalent
to such contribution, less the monthly, mandatory contribution of each Sponsor required to fund risk costs (Sick Pay Benefit).
The Additional Regular Contribution corresponds The Participant’s Basic Regular Contribution corresponds to the product obtained by
applying a percentage ranging from 0% to 6%, in multiples of 0.5%, as elected by each participant, on the Contribution Salary
exceeding 10 Plan Benchmark Units (URPs). The Sponsors contribute with an equivalent amount.
The Participant’s Voluntary Contribution corresponds to a whole number percentage, freely elected by each participant, applied on the
Contribution Salary. The Sponsor does not make any counterpart contribution to this contribution.
The Sponsor’s Nonrecurring Contribution is voluntarily and corresponds to applying a percentage ranging from 50% to 150% of the
aggregate Basic Regular and Additional Regular Contributions of the Sponsor, pursuant to consistent, non-discriminatory criteria, made
with the frequency set by the Sponsor.
The Sponsor’s Special Contribution is specific for new Plan members who have joined the plan within 90 days starting March 18, 2004.
F-81
OI S A
OI SA FORM 20-F
Donnelley Financial
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ESS
Page 1 of 1
Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
The Sponsor’s monthly, mandatory Risk Contribution, required to fund the Sick Pay Benefit, corresponds to percentage of
Non-migrating Participants’ Contribution Salary payroll.
The plan is funded under the capital formation approach.
2)
SISTEL
SISTEL is a nonprofit, private welfare and pension entity, established in November 1977, which is engaged in creating and operating
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, 2018, the PBS-A plan had a surplus of R$2,505,063. No contributions were required in 2018, 2017
and 2016.
(ii) PAMA
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 its 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$2,127 million is related to the plans
sponsored by the Company, apportioned proportionally to the obligations of the defined benefit plan.
F-82
OI S A
OI SA FORM 20-F
Donnelley Financial
FWPAXE-EGVRS38
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ESS
Page 1 of 1
Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
As of December 31, 2018, the PAMA plan had a surplus of R$21,542. No significant contribution in 2018, 2017 and 2016.
3)
PAMEC-BrT - Assistance plan managed by the Company
Healthcare plan intended to provide medical care to the retirees and survivor pensioners linked to the TCSPREV Benefit Plan. This
Benefit Plan is managed by FATL.
The contributions for PAMEC-BrT were fully paid in July 1998, through a single appropriation. However, as this plan is now
administrated by the Company, after the transfer of management by Fundação 14 in November 2007, there are no assets recognized to
cover current expenses, and the actuarial obligation is fully recognized in the Company’s liabilities.
F-83
OI S A
OI SA FORM 20-F
Donnelley Financial
FWPAXE-EGVRS38
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RIO
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710585 FIN 84
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ESS
Page 1 of 1
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OI S A
OI SA FORM 20-F
Donnelley Financial
VDI-W7-PFD-0105
12.10.7.0
EGV deant0bz
RIO
26-Apr-2019 15:12 EST
ˆ200GFY2&KhGvqpQgVŠ
15*
0C
200GFY2&KhGvqpQgV
710585 FIN 85
HTM
ESS
Page 1 of 1
Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
Net periodic defined benefit pension cost for the years ended December 31, 2018, 2017 and 2016 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)
Net periodic pension cost (benefit)
Net service cost
Interest cost
Expected return on plan assets
Amortization of net actuarial losses (gains)
Amortization of prior year service costs (gains)
Net periodic pension cost (benefit)
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
196
78,222
(195,301)
BrTPREV
74
218,104
(161,415)
(5,636)
(122,519)
1,552
58,315
2018
TelemarPrev
1,870
362,887
(394,097)
32,823
PBS-Telemar
41
29,114
(34,332)
3,483
(5,177)
TCSPREV
457
64,927
(220,246)
BrTPREV
102
260,650
(210,579)
(5,636)
(160,498)
1,552
51,724
2017
TelemarPrev
1,545
397,842
(440,696)
16,482
PBS-Telemar
32
32.488
(35,817)
(24,828)
(3,297)
TCSPREV
551
62,214
(193,747)
BrTPREV
138
249,319
(206,407)
(5,636)
1,552
(136,618)
44,603
2016
TelemarPrev
2,042
350,701
(413,965)
4,380
(1,051)
(57,894)
PBS-Telemar
24
30,475
(34,872)
PAMEC
330
(4,373)
330
The net periodic pension cost expected to be recognized in 2019 are as follows:
Net service cost
Interest cost
Expected return on plan assets
Amortization of net actuarial losses (gains)
Amortization of prior year service costs (gains)
Net periodic pension cost (benefit)
TCSPREV
265
287,492
(271,132)
46,728
63,353
2019
TelemarPrev
464
PBS-Telemar
1,484
370,526
(388,996)
23,466
PAMEC
32
29,117
(33,471)
464
6,480
(4,322)
F-85
OI S A
OI SA FORM 20-F
Donnelley Financial
FWPAXE-EGVRS38
12.10.7.0
EGV pf_rend
RIO
25-Apr-2019 21:05 EST
ˆ200GFY2&Kg@RZZDghŠ
9*
0C
200GFY2&Kg@RZZDgh
710585 FIN 86
HTM
ESS
Page 1 of 1
Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
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
2018
BrTPREV
and
PAMEC
TelemarPrev
and
PBS-Telemar
9.20%
9.20%
9.20%
9.20%
TCSPREV
9.20%
9.20%
By Sponsor
By Sponsor
By Sponsor
4,00%
4,00%
4,00%
4,00%
4,00%
4,00%
2017
BrTPREV
and
PAMEC
TelemarPrev
and
PBS-Telemar
9.83%
9.83%
9.83%
9.83%
TCSPREV
9.83%
9.83%
By Sponsor
By Sponsor
By Sponsor
4,30%
4,30%
4,30%
4,30%
4,30%
4,30%
Investment policy of the plans
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, 2018 consists mainly of the following
portfolio: 93% in debt securities, 4% in equity of Brazilian companies and 3% 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 90% of the portfolio in December 31, 2018.
The investment policies and strategies for 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.
F-86
OI S A
OI SA FORM 20-F
Donnelley Financial
FWPAXE-EGVRS38
12.10.7.0
EGV pf_rend
RIO
25-Apr-2019 21:05 EST
ˆ200GFY2&Kg@RfPjgHŠ
10*
0C
200GFY2&Kg@RfPjgH
710585 FIN 87
HTM
ESS
Page 1 of 1
Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
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
PBS-Telemar
TelemarPrev
100.00%
17.00%
20.00%
5.00%
8.00%
15.00%
100.00%
17.00%
20.00%
5.00%
8.00%
15.00%
100.00%
17.00%
20.00%
2.00%
8.00%
15.00%
100.00%
17.00%
20.00%
5.00%
8.00%
15.00%
The allocation of plan assets at December 31, 2018 is as follows:
ASSET SEGMENT
Fixed income
Variable income
Equity securities
Real estate
Investments abroad
Loans to participants
Total
TCSPREV
86.17%
2.90%
9.23%
0.43%
0.85%
0.42%
100.00%
PBS-
Telemar
90.48%
1.30%
6.65%
0.38%
0.92%
0.26%
100.00%
TelemarPrev
92.51%
1.61%
4.21%
0.67%
0.79%
0.21%
100.00%
Expected contribution and benefits
The estimated benefit payments, which reflect future services, as appropriate, are expected to be paid as follows (unaudited):
2019
2020
2021
2022
2023
2024 until 2028
TCSPREV
263,210
259,437
266,985
274,169
281,150
1,501,637
PBS-Telemar
23,288
24,127
24,964
25,811
26,688
145,953
TelemarPrev
275,663
283,101
294,351
305,905
317,588
1,773,564
F-87
OI S A
OI SA FORM 20-F
Donnelley Financial
FWPAXE-EGVRS38
12.10.7.0
EGV pf_rend
RIO
25-Apr-2019 21:05 EST
ˆ200GFY2&Kg@RjcF6Š
11*
0C
200GFY2&Kg@RjcF6´
710585 FIN 88
HTM
ESS
Page 1 of 1
Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
(b)
Employee profit sharing
In the year ended December 31, 2018, 2017 and 2016 the Company and its subsidiaries recognized provisions for employee profit
sharing based on individual and corporate goal attainment estimates totaling R$265,753, R$309,744 and R$74,211, respectively.
(c)
Share-based compensation
The Long-term Incentive Program (2015-2017), approved by the Company’s Board of Directors on March 13, 2015, sought a greater
alignment with the Company’s management cycle and business priorities. The Program consisted of the payment of gross cash reward,
in accordance with the 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. The beneficiaries are not entitled to receiving Company shares since the Program
does not provide for the transfer of shares to its beneficiaries.
The last installment of this program, referring to 2017, was paid in January 2018.
24. SEGMENT INFORMATION
The Company’s management 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: 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 Management based on a view segmented by customer, into the following categories:
• 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 small, medium-sized, and large corporate customers.
No single customer represent more than 10% of revenues neither 10% of receivables,
F-88
OI S A
OI SA FORM 20-F
Donnelley Financial
VDI-W7-PFD-0105
12.10.7.0
EGV deant0bz
RIO
26-Apr-2019 13:15 EST
ˆ200GFY2&KhF8pKp6ÅŠ
15*
0C
200GFY2&KhF8pKp6¯
710585 FIN 89
HTM
ESS
Page 1 of 1
Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
Telecommunications in Brazil
In preparing the financial information 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, 2018, 2017 and 2016 is as
follows:
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 (expenses), net
OPERATING INCOME (LOSS) BEFORE FINANCIAL
INCOME (EXPENSES) AND TAXES
Reorganization items, net
FINANCIAL INCOME (EXPENSES)
Financial income
Financial expenses
PRETAX INCOME
Income tax and social contribution
INCOME (LOSS) FROM CONTINUING OPERATIONS
F-89
2018
8,401,599
7,250,462
5,980,807
226,985
21,859,853
2017
9,170,835
7,644,515
6,485,898
255,692
23,556,940
2016
9,376,266
7,848,610
7,606,598
332,078
25,163,552
(5,881,861)
(653,867)
(2,554,375)
(5,833,570)
(1,102,809)
(185,436)
(379,676)
(4,335,892)
(89,631)
(1,062,712)
(5,803,487)
(771,212)
(2,749,038)
(6,149,189)
(1,235,760)
(214,102)
(410,495)
(4,152,521)
(143,517)
(740,575)
(201,296)
(17,610)
(277,372)
(1,234,477)
(6,128,402)
(1,141,786)
(2,750,323)
(6,243,623)
(1,501,701)
(252,265)
(427,463)
(4,284,672)
(1,056,436)
(622,527)
(225,512)
(399,123)
(132,211)
(438,882)
31,580,541
(324,805)
(2,371,919)
(2,492)
(9,005,998)
1,042,865
(5,068,382)
27,116,142
429,495
27,545,637
1,331,699
(2,075,430)
(3,440,455)
(1,498,216)
(4,938,671)
944,611
(4,539,997)
(12,603,876)
(87,379)
(12,691,255)
OI S A
OI SA FORM 20-F
Donnelley Financial
VDI-W7-PFD-0105
12.10.7.0
EGV deant0bz
RIO
26-Apr-2019 15:09 EST
ˆ200GFY2&KhGt7Rag7Š
16*
0C
200GFY2&KhGt7Rag7
710585 FIN 90
HTM
ESS
Page 1 of 1
Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
Reconciliation of revenue and income (loss) and information per geographic market
In the years ended December 31, 2018, 2017 and 2016, 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
Consolidated net operating revenue
2018
2017
2016
21,859,853
200,161
22,060,014
23,556,940
232,714
23,789,654
25,163,552
832,871
25,996,423
In the years ended December 31, 2018, 2017 and 2016, 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
Consolidated income before taxes
2018
2017
2016
27,116,142
(69,444)
27,046,698
(3,440,455)
(938,193)
(4,378,648)
(12,603,876)
(830,753)
(13,434,629)
Total assets, liabilities and property, plant and equipment and intangible assets per geographic market at December 31, 2018 and 2017
are as follows:
Brazil
Other, primarily Africa
Brazil
Other, primarily Africa
Total assets
62,324,414
4,923,187
Total
liabilities
42,015,131
526,870
2018
Property,
plant and
equipment
assets
28,360,030
108,768
2017
Intangible
assets
7,977,841
47,601
Total assets
66,311,553
4,675,216
Total
liabilities
80,316,703
354,127
Property,
plant and
equipment
assets
26,934,278
149,176
Intangible
assets
9,206,776
48,063
Capital
expenditures
on property,
plant and
equipment and
intangible
assets
5,211,774
34,467
Capital
expenditures
on property,
plant and
equipment and
intangible
assets
4,258,545
57,947
No single customer accounts for more than 10% of consolidated revenue.
F-90
OI S A
OI SA FORM 20-F
Donnelley Financial
FWPAXE-EGVRS38
12.10.7.0
EGV pf_rend
RIO
25-Apr-2019 21:05 EST
ˆ200GFY2&Kg@S5SWgÇŠ
12*
0C
200GFY2&Kg@S5SWg˙
710585 FIN 91
HTM
ESS
Page 1 of 1
Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
25. RELATED-PARTY TRANSACTIONS
Transactions with joint venture, associates, and unconsolidated entities
Accounts receivable and other assets
Other entities
Accounts payable and other liabilities
Hispamar
Other entities
Revenue
Revenue from services rendered
Other entities
Financial income
Other entities
Costs/expenses
Operating costs and expenses
Hispamar
Other entities
Financial expenses
Hispamar
Other entities
2018
6,359
6,359
2017
5,929
5,929
2018
74,210
66,704
7,506
2017
67,654
62,094
5,560
2018
2017
119
119
347
347
430
430
2018
2017
(215,079)
(185,223)
(29,856)
(236,087)
(207,271)
(28,816)
(167)
(158)
(9)
The balances and transactions with jointly controlled entities, 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 lease of their infrastructure.
Compensation of key management personnel
As at December 31, 2018, the compensation of the officers responsible for the planning, management and control of the Company’s
activities, including the compensation of the directors and executive officers, totaled R$81,244 (R$49,688 in 2016). The ratification of
the JRP by the Court, after its voting and approval by the creditors at the General Creditors’ Meeting entailed the payment special,
one-off, nonrecurring compensation to the statutory executive committee, of up to R$15.5 million, net of taxes and charges, as
established in the agreements entered into with the executive officers and previously approved by the Company’s Board of Directors.
F-91
OI S A
OI SA FORM 20-F
Donnelley Financial
FWPAXE-EGVRS38
12.10.7.0
EGV pf_rend
RIO
25-Apr-2019 21:05 EST
ˆ200GFY2&Kg@SDHyg@Š
11*
0C
200GFY2&Kg@SDHyg@
710585 FIN 92
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ESS
Page 1 of 1
Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
26. HELD-FOR-SALE ASSETS
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 at the time 75% of Africatel’s share capital, and/or dispose of its assets.
On February 27, 2019, the Company was notified of the final decision issued by the Arbitration Court under the arbitration proceeding
filed against the other Unitel shareholders. The Arbitration Court judged that the other Unitel shareholders had violated several
provisions of Unitel’s Shareholders’ Agreement, which resulted in a significant decrease of PT Ventures’ stake in Unitel. The Court
also judged that the other Unitel shareholders failed to ensure, after November 2012, that PT Ventures received the same amount of
foreign currency-denominated dividends as the other foreign Unitel shareholder.
As a result, the Court sentenced the other Unitel shareholders to paid to PT Ventures, jointly and severally, US$339.4 million plus
interest (calculated as from February 20, 2019 and equivalent to the 12 months US dollar LIBOR plus two percentage points),
corresponding to the loss of the equity interest amount of PT Ventures, and US$314.8 million plus interest (simple interest of 7% as
from the different dates when such amounts should have been received) related to dividends not received plus the net reimbursement of
the proceeding’s costs of approximately US$12 million. The Court overruled all the retrial requests filed by the other Unitel
shareholders.
The decision results in a reaffirmation of PT Ventures’ rights as shareholder of 25% Unitel’s capital, as prescribed by the Shareholders’
Agreement. PT Ventures retains all its rights provided for in the Shareholders’ Agreement, including the right to appoint the majority of
Unitel’s Board of Directors’ members and the right to receive Unitel’s past and future dividends.
The group of assets and liabilities of the African operations are stated at the lower of their carrying amounts and their fair values less
costs to sell, and are consolidated in the statement of profit or loss since May 5, 2014.
F-92
OI S A
OI SA FORM 20-F
Donnelley Financial
FWPAXE-EGVRS38
12.10.7.0
EGV pf_rend
RIO
25-Apr-2019 21:05 EST
ˆ200GFY2&Kg@SPTugzŠ
12*
0C
200GFY2&Kg@SPTugz
710585 FIN 93
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ESS
Page 1 of 1
Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
The main components of the assets held sale and liabilities associated to assets held for sale of the African operations are as follows:
Held-for-sale assets
Cash, cash equivalents and short-term investments
Accounts receivable
Dividends receivable (i)
Held-for-sale financial asset (ii)
Other assets
Deferred Income Tax
Investments
Property, plant and equipment
Intangible assets
Liabilities directly associated to assets held for sale
Borrowings and financing
Trade payables
Provisions for pension plans
Other liabilities
Non-controlling interests (iii)
Total held for sale assets, net of the corresponding liabilities
2018
4,923,187
82,639
108,343
2,566,935
1,843,778
145,709
19,414
108,768
47,601
526,871
188
52,064
474,619
243,490
4,152,826
2017
4,675,216
156,128
123,109
2,012,146
1,965,972
123,865
54,540
42,217
149,176
48,063
354,127
260
34,407
366
319,094
293,456
4,027,633
(i)
(ii)
This caption refers to the estimated recoverable amount of dividends and correspondent interests receivable from Unitel. As of
December 31, 2018 gross amount of unpaid dividends by Unitel to PT Ventures totaled US$821 million and refers to the
distribution of accumulated earnings in 2009 and the distribution of profits for fiscal years 2011, 2012, 2013, 2014 and 2017. In
order to estimate the present value of the recoverable amount of unpaid dividends the Company takes into account (1) its legal
advisors’ opinion regarding the outcome of the law suits filed in a Angolan’s Court and Paris’ ICC to collect this amounts from
Unitel, (2) the liquidity position of Unitel as of December 31, 2017, (3) the decision of Unitel to accrue interests on the delayed
payments and (4) a weight average cost of capital and an interest rate for accrual of interests;
Refers mainly to the fair value of the indirect interest financial investment of 25% of Unitel’s share capital, classified as held for
sale. As at December 31, 2018 the estimated fair value of the investment in Unitel was R$1,760 million (R$1,920 million at
December 31, 2017). The fair value of this investment is computed by the Company using a discounted cash-flow methodology,
which includes (1) cash flows forecasts for a seven-year period, (2) a 1.5% growth rate to extrapolate the cash flows projections
(1.5% in 2017), (3) exchange rate forecasts of Angolan Kwanza and (4) a weight average cost of capital of 17.6% (17.1% in
2017), which was computed based on financial market information and on the assessment of the management regarding the
business environment and relationship with the others shareholders and Unitel itself. The Company monitors and periodically
updates the main assumptions used in the fair value measurement considering the changes occurred in financial market
conditions and the impacts of news events related to the investment, notably the lawsuits filed against Unitel and its shareholders
in Angolan Courts and ICC Paris.
(iii) Represented mainly by the Samba Luxco’s 14% stake in Africatel and, consequently, in its net assets. In the first quarter of 2017,
the transactions provided for in the contractual instruments entered into with Samba Luxco, which reduced its stake in Africatel,
while Africatel transferred to Samba Luxco its entire stake in MTC.
F-93
OI S A
OI SA FORM 20-F
Donnelley Financial
FWPAXE-EGVRS38
12.10.7.0
EGV pf_rend
RIO
25-Apr-2019 21:05 EST
ˆ200GFY2&Kg@SYVb6}Š
13*
0C
200GFY2&Kg@SYVb6}
710585 FIN 94
HTM
ESS
Page 1 of 1
Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
In December 2018, annual impairment tests were conducted based on the internal valuation made, including cash flows forecasts for a
five-year period, the choice of a growth rate to extrapolate the cash flows projections, and definition of an appropriate discount rate,
calculated based on the weight average cost of capital of from 15.3% to 21.2%, taking into consideration Africans business
environment.
27. OTHER INFORMATION
In December 2018, we became aware that the Penalty Proceedings Authority and CVM’s Specialized Federal Attorney had issued
Punitive Administrative Proceedings Reports proposing that certain executives, directors, and shareholders be held accountable for the
alleged violations of the Brazilian Corporate Law (Law 6404/1976) in connection with the facts related to the restructuring between Oi
and Pharol (former Portugal Telecom) announced in October 2013 and the public offer for distribution of Oi shares completed in May
2014.
The Company is not a party to these proceedings. As for the mentioned executives, if they are considered accountable in these Punitive
Administrative Proceedings, they will be subject to a penalty that can range from a warning to interdiction, for a period of up to 20
years, to act as member of a board of directors or executive committee of publicly-held corporations in Brazil.
28. REORGANIZATION ITEMS, NET
Transactions and events directly associated with the reorganization are required, under the guidance of ASC 852 Reorganizations, to be
separately disclosed and distinguished from those of the ongoing operations of the business. The Company used the classification
“Reorganization items, net” on the consolidated statements of operations to reflect expenses, gains and losses that are the direct result of
the reorganization of its business.
Gain on restructuring of Qualified Bonds
Adjustment to present value – Borrowings and
financing
Adjustment to present value – Anatel (AGU) and other
payables
Anatel provision for contingencies
Other provision for contingencies (a)
Income from short-term investments
Professional fees (b)
Total reorganization items, net
2018
12,881,478
13,928,661
5,577,234
(347,437)
174,281
(633,676)
31,580,541
2017
2016
(1,568,798)
(1,146,458)
713,276
(369,938)
(2,371,918)
(6,604,718)
(2,349,898)
201,533
(252,915)
(9,005,998)
(a) These amounts are the result of the adjustment to record contingent liabilities to their allowed claim amount, which is difference
than their carrying amount prior to the JR Proceedings.
(b) During the year ended December 31, 2018, 2017 and 2016 the Company incurred in R$634 million, R$370 million and
R$253 million related to professional advisors who are assisting with the bankruptcy process, respectively.
F-94
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OI SA FORM 20-F
Donnelley Financial
FWPAXE-EGVRS38
12.10.7.0
EGV pf_rend
RIO
25-Apr-2019 21:05 EST
ˆ200GFY2&Kg@Sdzdg)Š
15*
0C
200GFY2&Kg@Sdzdg)
710585 FIN 95
HTM
ESS
Page 1 of 1
Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
29. LIABILITIES SUBJECT TO COMPROMISE
As a result of the judicial reorganization proceedings in Brazil and other international jurisdictions (which are considered to be similar
in all substantive respects to Chapter 11) prepetition liabilities, as shown below were classified as subject to compromise based on the
assessment of these obligations following the guidance of ASC 852 Reorganizations. Prepetition liabilities subject to compromise are
required to be reported at the amount expected to be allowed as a claim by the Judicial Reorganization Court, regardless of whether they
may be settled for lesser amounts and remain subject to future adjustments based on negotiated settlements with claimants, actions of
the Judicial Reorganization Court, rejection of executory contracts, proofs of claims or other events. The following table reflects
prepetition liabilities subject to compromise as at December 31, 2018 and 2017:
Borrowings and financing
Derivative financial instrument
Trade payables
Provision for civil contingencies - Anatel
Provision for pension plan
Other
Provision for labor contingencies
Provision for civil - other claims
Liabilities subject to compromise (*)
2018
—
—
—
—
—
—
—
—
—
2017
49,129,546
104,694
2,139,312
9,333,795
560,046
43,334
899,226
2,929,275
65,139,228
(*) The total amount of prepetition liabilities subjected to compromise differs from the R$63,960,008 amount of the Creditors List
prepared by the Company and filed on May 29, 2017. Per ASC 852, prepetition liabilities subject to compromise included the best
estimate, as per the criteria set forth in ASC 450, of contingencies/claims subject to compromise and that in accordance with the
Brazilian Law were not included in the Creditor’s List.
Recognition of the effects of the ratification of the Judicial Reorganization Plan
As a result of the approval of JRP at the GCM meeting held on December 19 and 20, 2017 and its subsequent ratification by the Judicial
Reorganization Court on January 8, 2018, and published on the Official Gazette on February 5, 2018, the Company’s management,
based on the terms and conditions of the JRP, recorded the effects caused by the restructuring/novation of the prepetition liabilities
subject to the Judicial Reorganization in the consolidated financial statements for year ended December 31, 2018.
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Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
The movements in the restructured prepetition liabilities and the accounting adjustments made for initial recognition of the terms and
conditions set forth by the approved and ratified JRP, including the effects on the fair value of these liabilities pursuant to the criteria of
ASC 820, and applicable GAAP, are as follow:
12/31/2017
Reclassifications
Mediations
and other
Haircut
(i)
Equity
(ii)
Present value
(iii)
Financial
charges (iv)
12/31/2018
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(4,807,262) 2,035,699
—
6,712,695
Liabilities subject to
compromise
Bondholders
BNDES
Other Borrowings and
32,314,638
3,326,952
(32,314,638)
(3,326,952)
financing
13,487,957
(13,487,957)
—
—
—
—
—
—
—
—
104,694
2,139,312
(104,694)
(2,139,312)
9,333,795
(9,333,795)
560,046
43,333
(560,046)
(43,333)
899,226
(1,036,172) 136,946
2,929,275
(2,218,538) (710,737)
Derivative financial
instrument
Trade payables
Provision for civil
contingencies -
Anatel
Provision for pension
plan
Other
Provision for labor
contingencies
Provision for civil -
other claims
Total - Liabilities
subject to
compromise
Bondholders
BNDES – Borrowings
and financing
Other Borrowings and
financing
Anatel (AGU) and
other trade payables
Provision for labor,
civil and Anatel
contingencies
Provision for pension
plan
Total - Liabilities not
subject to
compromise
65,139,228
—
(64,565,437) (573,791)
32,314,638
(161,600) (11,054,800) (11,613,980)
—
3,326,952
—
—
13,592,651
50,375
—
—
—
—
289,122
3,616,074
—
(9,121,399) 1,599,510
6,121,137
—
10,588,661
445,077
(1,826,678)
—
(5,577,234)
164,784
3,794,610
—
—
4,182,489
56,975
560,046
—
—
—
—
—
—
149,173
4,388,637
—
14,679
574,725
—
64,565,437
390,827
(12,881,478) (11,613,980) (19,505,895) 4,252,967
25,207,878
(i) Represent gains on restructuring of borrowings and financings, trade payables owing to ANATEL-AGU and other trade payables,
as a result of the JR Proceedings.
(ii) Represent the fair value of shares issued in partial settlement of the Senior Notes (Note 22).
(iii) The financial liabilities have been adjusted to present value according to the criteria of ASC 852 as of the time at which it has
reclassified each of the financial liabilities that were legally affected by the JRP from liabilities subject to compromise to
borrowings and financings or trade payables. It was calculated taking into consideration the contractual flows provided for in the
JRP, discounted using rates that range from 12.6% per year to 16.4% per year, depending on the maturities and currency of each
instrument.
(iv) Represent the contractual interest and foreign currency fluctuation calculated after completed the financial debt restructuring and
other claims restructuring in the terms and conditions provided in the JRP.
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Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
Under the Judicial Reorganization proceedings, claims are classified in one of four classes and the treatment of claims under the JRP is
differentiated for each of these classes:
• Class I – labor-related claims;
• Class II – secured claims;
• Class III – unsecured claims, statutorily or generally privileged claims, and subordinated claims; and
• Class IV – claims held by “small companies” under Brazilian law.
30. SUBSEQUENT EVENTS
Market arbitration chamber proceeding
On February 28, 2018, one of the Company’s shareholders, Bratel filed a petition with the Market Arbitration Chamber (Câmara de
Arbitragem do Mercado) of B3 requesting an arbitration, alleging that certain provisions of the JRP, including the Capital Increase -
Capitalization of Claims, the Capital Increase - New Funds and the changes to the Company’s corporate governance structure, should
have been submitted to and approved by an extraordinary general shareholders’ meeting of the Company (“EGM”), which did not take
place prior to the Judicial Ratification of the JRP by the RJ Court. On March 7, 2018, The Company filed a conflict of jurisdiction
petition before the Second Section of the Superior Court of Justice, among other things, challenging the jurisdiction of the Market
Arbitration Chamber to decide on matters pertaining to the JRP. On October 10, 2018, the Second Section of the Superior Court of
Justice decided by majority vote that the Market Arbitration Chamber had jurisdiction to resolve disputes among the Company and its
shareholders. On October 26, 2018, an emergency arbitrator (árbitro de apoio) appointed by the Market Arbitration Chamber, or the
Emergency Arbitrator, issued an order suspending the authorization by the Company’s board of directors on that date of the capital
increase, until the next decision to be rendered by the Emergency Arbitrator. On November 6, 2018, the Emergency Arbitrator
overturned its prior decision to suspend the authorization of the capital increase, allowing the Company to continue to implement the
capital increase.
On January 8, 2019, the Company and its subsidiaries Telemar and PT Participações and Pharol and its wholly-owned subsidiary Bratel
entered into a settlement agreement for the termination of all court and off-court litigation involving the companies of both groups, in
Brazil and abroad.
The terms and conditions of the settlement agreement, approved by both groups’ boards of directors, as summarized below:
I. Terms and conditions to be met by the Company:
a)
Payment of €25 million to Pharol;
b) Delivery to Pharol of 33.8 million Company shares held in treasury;
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Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
c)
d)
The Company shall assume all the costs on court guarantees related to Pharol’s lawsuits in Portugal, as per the assumed
obligation;
In the event of the sale of the Company’s stake in Unitel, the Company shall deposit in a Pharol guarantee account an amount to
cover possible unfavorable outcome in tax contingencies the likelihood of which is probable, as per the assumed obligations.
II. Terms and conditions to be met by Pharol:
a) Use of at least €25 million to make a subscription in the Company’s Capital Increase – New Funds, provided for in the Company’s
JRP;
b) Attend and vote yes in any general shareholders’ meeting of the Company held to approve or confirm any action or measure
provided for in the JRP;
c) Keep aligned with the Company and support the implementation of the Company’s JRP, as approved and ratified at all court
levels;
d) Authorize the use by the Company of any amount returned by Portugal’s Tax Authority beginning March 24, 2015 related to the
cost of guarantees and tax contingencies for purposes of the provisions of Paragraph 1, “c” and “d”, above.
As at December 31, 2018, items a) and b) of the terms and conditions to be met by the Company were recognized in its liabilities,
Provisions for civil contingencies, amounting to R$157,809, pursuant to ASC 855.
Completion of the JRP Stages
As Described in Note 1, on January 8, 2018, the Judicial Reorganization Court issued a decision that ratified the JRP and granted the
judicial reorganization to the Oi Companies, which was published on February 5, 2018. On July 31, 2018, the restructuring of the
financial debt, including the first capital increase provided for in the JRP (Capital Increase – Claim Capitalization) was completed with
the implementation of the applicable terms and conditions, provided for in the JRP. On January 25, 2019 the Company completed the
second capital increase provided for in the JRP (Capital Increase - New Funds), with the issue of 3,225,806,451 book-entry, registered
common shares, without par value, including new common shares represented by ADSs, pursuant to the JRP and the subscription and
commitment agreement entered into by the Company, its subsidiaries, and the Backstop Investors.
Capital increase
Exercise of subscription warrants and ADWs
On October 28, 2018, the Company commenced the issuance and delivery of all exercised warrants and ADWs to its holders. The
process was concluded on January 4, 2019. All warrants that were not exercised on or prior to January 2, 2019 have been cancelled.
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Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
Preferential offer and completion of the Capital Increase – New Funds, pursuant to the commitment agreement
As contemplated by Section 6 of the JRP, on November 13, 2018 the Company commenced a preemptive offering of common shares
that was registered with the SEC under the Securities Act under which holders of common shares and preferred shares, including the
ADS Depositary and The Bank of New York Mellon, as depositary of the Preferred ADS program, received transferable rights for each
common share or preferred share held as of November 19, 2018.
The subscription rights expired on January 4, 2019. On January 16, 2019, the Company issued 1,530,457,356 common shares to holders
of subscription rights that had exercised those subscription rights with respect to the initial common shares. On January 21, 2019, the
Company issued 91,080,933 common shares to holders of subscription rights that had requested subscriptions for excess common
shares. The proceeds of these subscriptions were R$2,011 million.
On January 25, 2019, the Company issued 1,604,268,162 common shares, representing the total number of common shares that were
offered in the preemptive offering less the total number of initial common shares and excess common shares, to the Backstop Investors
in a private placement under the terms of the commitment agreement for the aggregate amount of R$1,989 million. In addition, under
the terms of the commitment agreement, on that date the Company issued 272,148,705 common shares in a private placement to the
Backstop Investors and paid US$13 million to the Backstop Investors as compensation for their commitments under the commitment
agreement.
Buyback of Oi preferred shares
At the meeting held in February 2019, the Board of Directors approved the buyback by Oi of up to 1,800,000 preferred shares in order
to ensure the compliance with the obligation assumed by the Company to transfer own shares held in treasury to shareholder Bratel,
wholly-owned subsidiary of Pharol, in the context of the agreement entered into by the two companies on January 8, 2019.
The acquisition was made by investing part of the balance available in the Company’s capital reserve, through transactions conducted
on B3’s over-the-counter market in February 2019, with the intermediation of BTG Pactual Corretora de Títulos e Valores Mobiliários
S.A.
Arbitration Decision – Unitel
On February 27, 2019, the Company was notified of the final decision issued by the Arbitration Court under the arbitration proceeding
filed against the other Unitel’s shareholders. The Arbitration Court judged that the other Unitel shareholders had violated several
provisions of Unitel’s Shareholders’ Agreement, among other matters. This Court sentenced them to pay PT Ventures approximately
US$653 million, plus interest, as compensation for damages.
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Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
New Unitel Board of Directors
At the General Shareholders’ Meeting of Unitel held on March 19, 2019 a new Board of Directors was elected consisting of five
members, including two appointed by PT Ventures, one of whom will hold the position of Unitel’s General Director.
Capital Increase – Dutch Companies
Pursuant to the JRP approved on December 19 and 20, 2017, the debts of the JR Debtors of the group represented by the bonds were
consolidated at Oi S.A.. In addition, as part of the payment of the bondholders’ claims, shares of the parent company (Oi S.A.) were
delivered, consisting of new shares or existing shares held by PTIF. As a result, in order to correctly reflect these movements in
accounting, it was necessary to enter into loan agreements on July 31, 2018, between Oi S.A. and Oi Coop, and between Oi S.A. and
PTIF. These agreements provided for the possibility of paying and settling he total amount due through a capital increase, which was
undertaken by Oi S.A. on January 31, 2019, amounting to €665,639,602.32 at Oi Coop and €1,100,259.843.00 at PTIF.
31. CONDENSED COMBINED AND CONSOLIDATED DEBTOR IN-POSSESSION FINANCIAL INFORMATION
The financial statements below represent the condensed combined financial statements of the Debtors. The nonfiling entities are
accounted for as nonconsolidated subsidiaries in these financial statements and, as such, their net loss is included using the equity
method of accounting. Intercompany balances among the Debtors amounting to R$45.0 billion in 2018 (R$50.1 billion in 2017) related
mainly with loans granted and have been eliminated in the financial statements presented below. Intercompany balances among the
Debtors and the nonfiling entities have not been eliminated.
Current assets
Cash and cash equivalents
Short-term investments
Trade accounts receivable
Inventories
Related parts
Recoverable taxes
Judicial Deposits
Pension plan assets
Dividends and interest on capital
Other assets
Total current assets
Non-current assets
F-100
12/31/2018
12/31/2017
4,233,558
201,975
7,224,720
177,973
431,276
1,304,991
1,700,428
4,824
14,512
1,845,235
17,139,492
6,690,900
14,605
6,590,543
137,575
949,851
1,818,242
1,000,519
1,072
529,934
1,546,295
19,279,536
OI S A
OI SA FORM 20-F
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Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
Long-term investments
Pension plan assets
Other taxes
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
Payroll, related taxes and benefits
Current income taxes payable
Tax financing program
Provision for Contingencies
Dividends and interest on capital
Licenses and concessions payable
Other payables
Total current liabilities
Non-Current liabilities
Related parts
Loans and financing
Trade payables
Other taxes
Deferred taxes
Tax financing program
Provisions for Contingencies
Liability for pensions benefits
Licenses and concessions payable
Unearned revenues
Advances from customers
Other payables
Total non-current liabilities
F-101
36,987
23,050
714,653
6,837,701
4,335,863
27,965,455
7,978,956
753,827
772,363
49,418,855
66,558,347
6,108,115
672,894
504,152
925,590
141,897
677,229
6,168
85,619
956,770
10,078,434
227,764
15,785,558
3,736,117
623,917
410,500
3,857,871
579,122
1,531,464
9,097
766,730
27,528,140
114,839
626,057
8,110,179
5,852,604
26,561,160
9,185,107
1,598,792
372,142
52,420,878
71,700,415
6,697,217
530,051
575,673
1,334,859
271,503
6,222
20,306
1,146,780
10,582,610
1,116,169
867,657
497,375
599,047
617,103
10,433
604
1,596,462
9,964
641,253
5,956,067
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OI SA FORM 20-F
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Oi S.A. - Under Judicial Reorganization – Debtor-in-Possession and Subsidiaries
Notes to the Financial Statements
for the years ended December 31, 2018, 2017 and 2016
(In thousands of Brazilian reais - R$, unless otherwise stated)
Total liabilities not subject to compromise
Liabilities subject to compromise
Total liabilities
Shareholders’ equity (deficit)
Total share capital
Share issued costs
Capital reserves
Treasury shares
Other comprehensive income
Accumulated losses
Total shareholders’ equity (deficit)
Total liabilities and shareholders’ equity
37,606,574
37,606,574
16,538,677
65,139,227
81,677,904
32,038,471
(377,429)
11,532,995
(2,803,250)
(207,886)
(11,231,129)
28,951,773
66,558,347
21,438,374
(377,429)
13,242,374
(5,531,092)
(241,780)
(38,507,937)
(9,977,489)
71,700,415
Intercompany transactions among the Debtors amounting to R$3.06 billion in 2018 (R$5.64 billion in 2017) related mainly with
interests and interconnection charges and have been eliminated in the financial statements presented below. Intercompany transactions
among the Debtors and the nonfiling entities have not been eliminated.
Net operating revenue
Cost of sales and services
Gross profit
Operating (expenses) income
Selling expenses
General and administrative expenses
Other operating income (expenses), net
Equity pickup
Reorganization items, net
Income (loss) before financial and taxes
Financial expenses, net
Income (loss) before income taxes
Income tax (current and deferred)
Net income (loss) for the year
F-102
12/31/2018
21,036,018
(10,998,010)
10,038,008
12/31/2017
20,429,388
(15,573,190)
4,856,197
(4,834,472)
(2,235,870)
(4,529,992)
570,975
31,580,541
30,589,190
(3,949,716)
26,639,474
562,205
27,201,679
(4,077,876)
(2,438,107)
118,609
(138,999)
(2,371,919)
(4,052,094)
(566,679)
(4,618,772)
884,602
(3,734,170)
OI S A
OI SA FORM 20-F
Donnelley Financial
VDI-W7-PFL-1635
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200GFY2&KgkC@&Jg`
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 B3
S.A. – Brasil, Bolsa, Balcão (“B3”), 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 B3 (“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 B3.
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.
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;
III. perform or procure the importation of goods and services that are necessary for the execution of the activities comprised in
its object;
IV.
render technical assistance services to other telecommunications companies, performing activities of common interest;
V.
perform research and development activities seeking to develop the telecommunications sector;
VI.
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.
OI S A
OI SA FORM 20-F
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CHAPTER II
CAPITAL STOCK
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Article 5 - The subscribed and fully paid-in capital stock is thirty-two billion, five hundred thirty-eight million, nine hundred
thirty-seven thousand, three hundred seventy reais (R$ 32,538,937,370.00), represented by five billion, nine hundred fifty-four million,
two hundred five thousand and one (5,954,205,001) shares, with five billion, seven hundred ninety-six million, four hundred
seventy-seven thousand, seven hundred sixty (5,796,477,760) common shares and one hundred fifty-seven million, seven hundred
twenty-seven thousand, two hundred forty-one (157,727,241) preferred shares, all of them registered and 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$38,038,701,741.49, 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.
OI S A
OI SA FORM 20-F
Donnelley Financial
VDI-W7-PFL-1635
12.10.7.0
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SHARES
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Article 11 - Each common share is entitled to the right to one vote at the deliberations of the Shareholders’ Meetings.
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 seller, pursuant to Article 46 of these Bylaws.
Article 12 - 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 in any given year, until the termination
of the concession, 0.1% (zero point one percent) of annual sales for the Fixed Switched Telephone Service of the Telecommunication
Transport Network.
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 13 - The Shareholders’ Meeting shall be held ordinarily once a year and extraordinarily when convened pursuant to law or
to these Bylaws.
Article 14 - 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 15 - The Shareholders’ Meeting shall be convened and presided over by the Chairman of the Board of Directors or
the individual appointed, either at the time of the Meeting, or in advance, by means of a power of attorney with specific powers.
In the absence of the Chairman of the Board of Directors or at the election of the Chairman of the Board of Directors, the
Shareholders’ Meeting shall be convened and presided over by the Vice-Chairman of the Board of Directors or whomsoever
appointed, or by means of a proxy previously granted with specific powers. In the event of the absence of the Vice-Chairman of
the Board or his or her appointment, it shall be incumbent upon any Statutory Officer present to convene and preside over the
General Meeting. The Chairman of the meeting, in turn, shall choose the corresponding secretary.
Article 16 - Before convening the Shareholders’ Meeting, the duly identified shareholders shall sign the Shareholders’ Attendance
Book.
Sole 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.
OI S A
OI SA FORM 20-F
Donnelley Financial
VDI-W7-PFL-1635
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Article 17 - 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:
(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 or 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 18 - 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 19 - 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 20 - In addition to the other duties provided by law and by these Bylaws, the Shareholders’ Meeting shall be solely
responsible for the following:
(i)
elect and remove members from the Board of Directors and the Audit Committee;
(ii)
establish the aggregate remuneration of members of the Board of Directors and members of the Audit Committee;
(iii) 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)
authorize management to file for bankruptcy, request bankruptcy protection or file for bankruptcy protection;
(vi) deliberate on a proposed delisting of the Company from the special listing segment of Level 1 Corporate Governance of B3;
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
OI SA FORM 20-F
Donnelley Financial
VDI-W7-PFL-1635
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CHAPTER V
COMPANY’S MANAGEMENT
Section I
General Rules
Article 21 - 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 22 - The Board of Directors is comprised of 11 (eleven) members, all elected and dismissible through the Shareholders’
Meeting, with a combined term of 2 (two) years; reelection permitted.
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.
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 23 - The Chairman and the Vice-Chairman of the Board of Directors shall be appointed by the Board Members, in the first
meeting of the Board of Directors to be held after the General Shareholders’ Meeting that elects the Board Members, in compliance
with the provisions of Paragraph 2 of Article 21.
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 an disability or temporary absence, the Chairman shall be replaced by the Vice-Chairman or, in
his absence, by another Director appointed by the Chairman of the Board and, if there is no indication, by other members of the Board.
3rd Paragraph - In the event of a permanent vacancy in the position of Chairman or Vice-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 24 - At least 20% (twenty percent) of the members of the Board of Directors shall be Independent Members of the Board
of Directors, in the manner prescribed in the Novo Mercado Listing Rules, 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.
OI S A
OI SA FORM 20-F
Donnelley Financial
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Sole Paragraph - When, in connection with the calculation of 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 Company shall round the number to the nearest whole number
immediately higher.
Article 25 - Except as provided in Article 26 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 B3, 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 24 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 26 - 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.
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 B3.
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 25 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 25 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.
OI S A
OI SA FORM 20-F
Donnelley Financial
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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. In
all other cases of vacancy, the first General Shareholders’ Meeting will conduct a new election of all the Board of Directors, in
accordance with 3rd paragraph of Article 141 of the Corporate Law.
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 27 - 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 28 - 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 e-mail, letter and/or other
electronic means agreed upon by the totality of it members, 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.
Article 29 - 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.
Paragraph 1 - The Board members are permitted to attend meetings of the Board via conference call, videoconference, any
other means of communication that allows all Directors to see and/or hear each other or, by sending in advance his or her
written vote. The Board Member, in such a case, shall be considered present at the meeting to verify the quorum of installation
and voting, and such vote shall be considered valid for all legal purposes and incorporated into the minutes of such meeting,
which shall be drawn up and signed by all present at the next meeting.
Paragraph 2 - 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 30 - Except as provided in Article 23, 2nd Paragraph above, in the event of absence, members of the Board of Directors
may be replaced by a member of the Board of Directors appointed in writing by the absent Director. The member appointed by the
absent Board Member to represent him at a meeting of the Board of Directors shall have, in addition to his own vote, the absentee
Board member’s vote, except as provided for in Paragraph 1 of Article 29 of these Bylaws.
Sole Paragraph - Considering the provisions of Article 23, 2nd Paragraph above, in the case of a vacancy in a position of a
member of the Board of Directors, the provisions of Article 150 of the Corporate Law shall be complied with, except as provided in the
6th Paragraph of Article 26 hereof.
Article 31 - 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.
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;
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iv.
v.
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;
vi.
elect and dismiss, at any time, Executive Officers and establish their duties, subject to legal and statutory provisions;
vii.
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.
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;
xii.
approve the acquisition of shares issued by the Company to be canceled or held in treasury for subsequent sale;
xiii. 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;
xiv. 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;
xv.
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;
xvi. 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;
xvii. 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 any kind of the Company and
its subsidiaries in amounts equal to or greater than the authority of the Board of Executive Officers;
xviii. authorize the granting of security interests or guarantees by the Company and its subsidiaries for obligations to third parties
in excess of the amount under the authority of the Board of Executive Officers;
xix. approve extraordinary contributions to private pension plans sponsored by the Company or its subsidiaries;
xx.
to prepare and disclose a reasoned opinion 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 Company and the shareholders, including with regards to the price and potential
impacts on liquidity of the shares; (b) the strategic plans disclosed by the offering party in relation to the Company; and
(c) alternatives to the acceptance of the public offering for the acquisition of shares available on the market, other points that
the Board of Directors deems pertinent, as well as the information required by the applicable rules established by the CVM,
also including a favorable or contrary opinion to the acceptance of the public offering for the acquisition of shares and the
warning that each shareholder is responsible for the final decision of such acceptance;
xxi.
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;
xxii. nominate the representatives of the governing bodies of pension funds sponsored by the Company or its subsidiaries;
xxiii. approve the Charters of the Advisory Committees to the Board of Directors of the Company;
xxiv. 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
xxv. distribute the remuneration fixed by the Shareholders’ Meeting among the members of the Board of Directors and Board of
Executive Officers.
OI S A
OI SA FORM 20-F
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xxvi. 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 32 - The Company shall have an Audit, Risks and Controls Committee (“CARC”), an advisory body, directly linked to the
Board of Directors, which may also create other Committees, appointing their respective members from among the members of the
Board of Directors.
1st Paragraph - The CARC shall have its own Internal Regulations, approved by the Board of Directors, which shall describe in
detail all functions, admissibility and independence requirements, competencies and operational procedures of the CARC.
2nd Paragraph - The CARC shall function permanently and shall be composed a minimum of three (3) and at maximum five
(5) members, all independent members as defined in the Company´s Bylaws, appointed by the Board of Directors, for a two year-term,
which will coincide with the term of office of the members of the Board of Directors.
3rd Paragraph - The other Committees created by the Board of Directors shall have their objectives and competencies defined by
the Board of Directors, and shall be composed of a minimum of three (3) and at maximum five (5) members and shall always have a
majority composed of Directors of the Company.
4th Paragraph - No employees or Company Officers may be appointed as members of any Committee.
5th Paragraph - Except about CARC, whenever the duties of a particular Committee require, the Board of Directors may appoint
external expert(s) as member(s) of such Committee, provided that he or she is well-recognized for his or her technical qualification and
experience in matters subject to the Committee, selected through a process organized by the Company. The external member of the
Committee shall be subject to the same duties and responsibilities as the Board Members, within the scope of their actions in the
respective Committee.
Article 33 - The Company’s Internal Audit shall be subordinate to the Board of Directors.
Section III
Board of Executive Officers
Article 34 - 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. 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.
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Article 35 - 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 - providing the casting vote at the meetings of the Board of Executive Officers; and
V - 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.
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 36 - 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 37 - 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 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, in the latter case duly
authorized in compliance with this Article, to perform the following acts:
i. -
receive and pay amounts owed to and by the Company;
ii. - issue, negotiate, endorse and discount trade bills related to its sales;
iii. - sign correspondence that does not create obligations for the Company;
iv. - represent the Company in Meetings and shareholders’ meetings of companies in which the Company holds a stake;
v. - represent the Company in court, except for acts that result in waiver of rights; and
vi. - 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.
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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 38 - 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;
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 39 - The Audit Committee is the supervisory body of the Company’s management, and shall be permanent.
Article 40 - 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.
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Article 41 - The term of the members of the Audit Committee shall end at the first Ordinary Shareholders’ Meeting subsequent to
its formation.
Article 42 - 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.
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 43 - The members of the Audit Committee shall be replaced, in case of temporary absence or vacancy, by their alternates.
Article 44 - 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 45 - The same provisions of the 2nd Paragraph of Article 25 hereof shall apply to members of the Audit Committee.
CHAPTER VII
PUBLIC OFFERINGS
Section I
Sale of Control
Article 46 - Sale of direct or indirect 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 of control undertakes to carry out a public offering to acquire shares
of the other Company shareholders, with the aim to obtain shares issued by the Company held by the other shareholders, subject to the
conditions and terms set forth in applicable law and in the regulations in effect and the Novo Mercado Requirements, in order to ensure
them equal treatment given to the seller.
Article 47 - 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 48 - 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.
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Cancellation of Registration of a Public Company and Delisting from Markets
Section II
Article 49 - The cancellation of the registration as a publicly-held company must be preceded by a public offering for the
acquisition of shares, at a fair price, which shall comply with the procedures and requirements established in the Brazilian
Corporation Law and in the regulations issued by the CVM regarding public offerings for the acquisition of actions for
cancellation of registration as a publicly-held company.
Article 50 - The Company’s exit from Level 1 of Corporate Governance, either voluntarily, compulsorily or by virtue of a
corporate reorganization, must be preceded by a public offering for the acquisition of shares that complies with the procedures
set forth in the regulations issued by the CVM regarding public offerings for the acquisition of actions for cancellation of
registration as a publicly-held company and the following requirements:
I.
II.
the offered price must be fair, therefore, it is possible the request for a new evaluation of the Company, in the form
established in Article 4-A of Law 6,404/76; and
shareholders holding more than 1/3 (one-third) of the outstanding shares must accept the public offering for
acquisition of shares or expressly agree to exit the segment without selling the shares.
1st Paragraph - For the purposes of article 50, item II, of these Bylaws, outstanding shares are considered to be only those shares
whose holders expressly agree to exit Level 1 or qualify for the auction of the public tender offer, pursuant to regulation published by
the CVM applicable to the public offers of acquisition of publicly-held company for cancellation of registration.
2nd Paragraph - If the quorum mentioned in item II of the caput is reached: (i) the acceptors of the public offering for acquisition
of shares may not be subject to apportionment in the sale of their participation, observing the procedures for exemption from the limits
set forth in the regulations issued by the CVM (ii) the offeror will be obliged to acquire remaining outstanding shares for a period of one
(1) month, counted from the date of the auction, for the final price of the public offering for the acquisition of shares, updated until the
effective payment date, in accordance with the notice and regulations in force, which shall occur no later than fifteen (15) days as of the
date of the exercise of the faculty by the shareholder.
3rd Paragraph - The announcement of the public offering referred to in this Article 45 shall be communicated to B3 and disclosed
to the market immediately after the Company’s Shareholders’ Meeting that has approved the delisting or approved such restructuring.
4th Paragraph - The carrying out the public offering for acquisition of shares referred to under the heading of this Article shall be
dismissed if the Company is delisted from Level 1 Corporate Governance due to the execution of the Company’s participation contract
in the special B3 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 51 - Voluntary withdrawal from Level 1 may occur independently of the public offering mentioned in Article 50 above, in
the event of a waiver approved at a General Meeting, subject to the following requirements:
I.
II.
The General Meeting referred to in herein must be installed in the first call with the attendance of shareholders representing
at least 2/3 (two thirds) of the total shares outstanding;
If the quorum of item I is not reached, the General Meeting may be installed on second call, with the presence of any number
of shareholders holding shares in circulation; and
III. The resolution on the exemption from realization of the public offer must occur by a majority of the votes of the shareholders
holding outstanding shares present at the General Meeting.
Article 52 - In the event of the sale of the Company’s control in the 12 (twelve) months following its exit from Level 1, the
seller and the acquirer must, jointly and severally, (i) carry out a public tender offer for the shares issued by the Company by
the other shareholders on the date of the exit or settlement of the public offer for exit from Level 1, at the price and under the
conditions obtained by the seller, duly updated; or (ii) pay such shareholders the difference, if any, between the price of the
public offering of shares accepted by such shareholders and the price obtained by the controlling shareholder in the disposal of
its own shares.
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Paragraph 1 - For the purpose of applying the obligations set forth in the caput of this Article, the same rules applicable to
the sale of control provided for in Articles 46 to 48 of these Bylaws must be observed.
Paragraph 2 - The Company and the controlling shareholder are obligated to record in the Company’s Share Registration
Book, in relation to shares owned by the controlling shareholder, which obliges the acquirer of the control to comply with the
rules set forth in this Article within a maximum period of thirty ) days counted from the disposal of the shares.
Article 53 - 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 54 - 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 55 - 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 57 below.
Article 56 - 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 57 - 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)
c)
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;
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 58 - 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.
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OI SA FORM 20-F
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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 59 - The Company, by resolution of the Board of Directors may, within the legal limits:
(i)
prepare semiannual or shorter period balance sheets and, based thereon, declare dividends; and
(ii) declare interim dividends from retained earnings or profit reserves in the most recent annual or semiannual balance sheet.
Article 60 - 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 61 - 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 62 - 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 63 - 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, 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 submitted to the Legal Department, ensuring that the chosen forum for such measuring is
that of the District of the State of Rio de Janeiro.
CHAPTER XI
FINAL AND TEMPORARY PROVISIONS
Article 64 - Exceptionally, notwithstanding Article 24 of these bylaws, the New Board of Directors elected as provided for
in Clause 9.3 of the Company’s Judicial Reorganization Plan approved at the General Meeting of Creditors held on December 19 and
20, 2017 and ratified by the 7th Corporate Court of the Capital District of the State of Rio de Janeiro by decision rendered on January 8,
2018 and published on February 5, 2018 (“Plan”), shall be composed entirely by Independent Directors, pursuant to Clause 9.3.1 of the
Plan.
*****
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Subsidiaries of Oi S.A. – In Judicial Reorganization
Exhibit 8.01
Name of Subsidiary
Telemar Norte Leste S.A. – In Judicial Reorganization
Portugal Telecom International Finance B.V. – In Judicial
Reorganization
Oi Brasil Holdings Coöperatief U.A. – In Judicial Reorganization
Rio Alto Gestão de Créditos e Participações S.A.
CVTEL B.V.
Carrigans Finance S.à R.L.
PT Participações SGPS, S.A.
Oi Móvel S.A. – In Judicial Reorganization
Bryophyta SP Participações Ltda.
Oi Serviços Financeiros S.A.
SEREDE – Serviços de Rede S.A.
Brasil Telecom Comunicação Multimídia Ltda.
Dommo Empreendimentos Imobiliários Ltda.
Brasil Telecom Call Center S.A.
BrT Card Serviços Financeiros Ltda.
Paggo Empreendimentos S.A.
Paggo Administradora Ltda.
Paggo Acquirer Gestão de Meios de Pagamentos Ltda.
Pointer Networks S.A.
Vex WiFi Canadá Ltd.
Pointer Peru S.A.C.
Vex USA, Inc.
Vex Venezuela, C.A.
Oi Investimentos Internacionais, S.A.
Telecomunicações Públicas de Timor, S.A.
Timor Telecom, S.A.
Africatel GmbH & Co. KG
Africatel Management GmbH
Africatel Holdings BV
Directel – Listas Telefónicas Internacionais, Lda.
Companhia Santomense de Telecomunicações SARL
PT Ventures, SGPS, S.A.
STP Cabo SARL
Kenya Postel Directories Limited
ELTA – Empresa de Listas Telefónicas de Angola, Lda.
Lista Telefónicas de Moçambique, Limitada
Directel Cabo Verde, Lda.
Companhia ACT de Participações
Companhia AIX de Participações
Paggo Soluções e Meios de Pagamentos S.A.
Jurisdiction of Incorporation
Brazil
The Netherlands
The Netherlands
Brazil
The Netherlands
Luxembourg
Portugal
Brazil
Brazil
Brazil
Brazil
Brazil
Brazil
Brazil
Brazil
Brazil
Brazil
Brazil
Brazil
Canada
Peru
United States
Venezuela
Portugal
Portugal
Timor
Germany
Germany
The Netherlands
Portugal
São Tomé and Príncipe
Portugal
São Tomé and Príncipe
Kenya
Angola
Mozambique
Cape Verde
Brazil
Brazil
Brazil
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CERTIFICATION PURSUANT TO
SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
Exhibit 12.01
I, Eurico de Jesus Teles Neto, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 20-F of Oi S.A. – In Judicial Reorganization (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: April 26, 2019
/s/ Eurico de Jesus Teles Neto
Eurico de Jesus Teles Neto
Chief Executive Officer
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CERTIFICATION PURSUANT TO
SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
Exhibit 12.02
I, Carlos Augusto Machado Pereira de Almeida Brandão, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 20-F of Oi S.A. – In Judicial Reorganization (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: April 26, 2019
/s/ Carlos Augusto Machado Pereira de Almeida Brandão
Carlos Augusto Machado Pereira de Almeida Brandão
Chief Financial Officer
OI S A
OI SA FORM 20-F
Donnelley Financial
VDI-W7-PF10-029
12.10.7.0
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25-Apr-2019 06:46 EST
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200GFY2&KgpFsFT6\
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. – In Judicial Reorganization (the “Company”), do hereby certify, to such
officer’s knowledge, that:
The annual report on Form 20-F for the fiscal years ended December 31, 2017 and 2016 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: April 26, 2019
/s/ Eurico de Jesus Teles Neto
Name: Eurico de Jesus Teles Neto
Title: Chief Executive Officer
/s/Carlos Augusto Machado Pereira de Almeida Brandão
Name: Carlos Augusto Machado Pereira de Almeida Brandão
Title: Chief Financial Officer