Company Quick10K Filing
OI
20-F 2019-12-31 Filed 2020-04-30
20-F 2018-12-31 Filed 2019-04-29
20-F 2017-12-31 Filed 2018-05-16
20-F 2015-12-31 Filed 2016-05-20
20-F 2013-12-31 Filed 2014-03-12
20-F 2012-12-31 Filed 2013-04-30
20-F 2011-12-31 Filed 2012-04-27
20-F 2010-12-31 Filed 2011-05-02
20-F 2009-12-31 Filed 2010-07-01

OIBR 20F Annual Report

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
EX-1.01 d171431dex101.htm
EX-8.01 d171431dex801.htm
EX-12.01 d171431dex1201.htm
EX-12.02 d171431dex1202.htm
EX-13.01 d171431dex1301.htm

OI Earnings 2015-12-31

Balance SheetIncome StatementCash Flow

20-F 1 d171431d20f.htm FORM 20-F Form 20-F
Table of Contents

As filed with the Securities and Exchange Commission on May 20, 2016

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 20-F

 

 

 

¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2015

OR

 

¨ 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.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

N/A   The Federative Republic of Brazil
(Translation of Registrant’s Name into English)   (Jurisdiction of Incorporation or Organization)

Rua Humberto de Campos, 425

Leblon, Rio de Janeiro, RJ, Brazil 22430-190

(Address of Principal Executive Offices)

Flavio Nicolay Guimarães

Investor Relations Officer

Rua Humberto de Campos, 425

8º andar

Leblon, Rio de Janeiro, RJ, Brazil 22430-190

Tel: +55 21 3131-2918

invest@oi.net.br

(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

 

Name of Each Exchange on which Registered

Common Shares, without par value, each represented by American Depositary Shares   New York Stock Exchange
Preferred Shares, without par value, each represented by American Depositary Shares   New York Stock Exchange

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

The total number of issued and outstanding shares of each class of stock of Oi S.A. as of December 31, 2015 was:

519,751,658 common shares, without par value

155,915,486 preferred shares, without par value

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

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  x

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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    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  x                Non-accelerated filer  ¨

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAP  x

    

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  x

 

 

 


Table of Contents

TABLE OF CONTENTS

 

          Page  

PRESENTATION OF FINANCIAL AND OTHER INFORMATION

     ii   

CAUTIONARY STATEMENT WITH RESPECT TO FORWARD-LOOKING STATEMENTS

     v   

PART I

        1   

Item 1.

  

Identity of Directors, Senior Management and Advisers

     1   

Item 2.

  

Offer Statistics and Expected Timetable

     1   

Item 3.

  

Key Information

     1   

Item 4.

  

Information on the Company

     32   

Item 4A.

  

Unresolved Staff Comments

     92   

Item 5.

  

Operating and Financial Review and Prospects

     93   

Item 6.

  

Directors, Senior Management and Employees

     140   

Item 7.

  

Major Shareholders and Related Party Transactions

     157   

Item 8.

  

Financial Information

     164   

Item 9.

  

The Offer and Listing

     174   

Item 10.

  

Additional Information

     182   

Item 11.

  

Quantitative and Qualitative Disclosures about Market Risk

     205   

Item 12.

  

Description of Securities Other Than Equity Securities

     206   

PART II

        208   

Item 13.

  

Defaults, Dividend Arrearages and Delinquencies

     208   

Item 14.

  

Material Modifications to the Rights of Security Holders and Use of Proceeds

     208   

Item 15.

  

Controls and Procedures

     208   

Item 16A.

  

Audit Committee Financial Expert

     209   

Item 16B.

  

Code of Ethics

     209   

Item 16C.

  

Principal Accountant Fees and Services

     209   

Item 16D.

  

Exemptions from the Listing Standards for Audit Committees

     210   

Item 16E.

  

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

     211   

Item 16F.

  

Change in Registrant’s Certifying Accountant

     211   

Item 16G.

  

Corporate Governance

     211   

Item 16H.

  

Mine Safety Disclosure

     213   

PART III

        214   

Item 17.

  

Financial Statements

     214   

Item 18.

  

Financial Statements

     214   

Item 19.

  

Exhibits

     214   

SIGNATURES

  

 

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PRESENTATION OF FINANCIAL AND OTHER INFORMATION

All references herein to “real,” “reais” or “R$” are to the Brazilian real, the official currency of Brazil. All references to “U.S. dollars,” “dollars” or “US$” are to U.S. dollars.

On May 13, 2016, the exchange rate for reais into U.S. dollars was R$3.504 to US$1.00, based on the selling rate as reported by the Central Bank of Brazil (Banco Central do Brasil), or the Brazilian Central Bank. The selling rate was R$3.905 to US$1.00 on December 31, 2015, R$2.656 to US$1.00 on December 31, 2014 and R$2.343 to US$1.00 on December 31, 2013, in each case, as reported by the Brazilian Central Bank. The real/U.S. dollar exchange rate fluctuates widely, and the selling rate on May 13, 2016 may not be indicative of future exchange rates. See “Item 3. Key Information—Exchange Rates” for information regarding exchange rates for the real since January 1, 2010.

Solely for the convenience of the reader, we have translated some amounts included in “Item 3. Key Information—Selected Financial Information” and in this annual report from reais into U.S. dollars using the selling rate as reported by the Brazilian Central Bank on December 31, 2015 of R$3.905 to US$1.00. These translations should not be considered representations that any such amounts have been, could have been or could be converted into U.S. dollars at that or at any other exchange rate.

Financial Statements

We maintain our books and records in reais. Our consolidated financial statements as of December 31, 2015 and 2014 and for the three years ended December 31, 2015 are included in this annual report.

We prepare our consolidated financial statements in accordance with United States generally accepted accounting principles, or U.S. GAAP. Based on our operating cash flows and the impact such operating cash flows have had on our liquidity, in combination with the level of our indebtedness and the potential impact if we cannot satisfy certain financial covenants under our current debt instruments in 2016, our independent registered public accounting firm has included an emphasis paragraph related to the substantial doubt with respect to our ability to continue as a going concern in their report on our consolidated financial statements for the year ended December 31, 2015. However, our financial statements have been prepared assuming we will continue to operate as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.

We are also required to prepare financial statements in accordance with accounting practices adopted in Brazil, or Brazilian GAAP, which are based on:

 

    Brazilian Law No. 6,404/76, as amended by Brazilian Law No. 9,457/97, Brazilian Law No. 10,303/01, and Brazilian Law No. 11,638/07, which we refer to collectively as the Brazilian Corporation Law;

 

    the rules and regulations of the Brazilian Securities Commission (Comissão de Valores Mobiliários), or the CVM, and the Brazilian Federal Accounting Council (Conselho Federal de Contabilidade); and

 

    the accounting standards issued by the Brazilian Accounting Pronouncements Committee (Comitê de Pronunciamentos Contábeis), or the CPC.

Certain Defined Terms

Unless otherwise indicated or the context otherwise requires:

 

    all references to “our company,” “we,” “our,” “ours,” “us” or similar terms are to Oi S.A. and its consolidated subsidiaries;

 

    all references to “Oi” are to Oi S.A.;

 

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Table of Contents
    all references to “TmarPart” are to Telemar Participações S.A., which, prior to the capital increase of Oi on May 5, 2014, was the direct controlling shareholder of Oi and which merged with and into Oi on September 1, 2015;

 

    all references to “Telemar” are to Telemar Norte Leste S.A., a wholly-owned subsidiary of Oi;

 

    all references to “Pharol” are to Pharol, SGPS, S.A. (formerly known as Portugal Telecom, SGPS, S.A.);

 

    all references to “PT Portugal” are to PT Portugal, SGPS, S.A., which we acquired on May 5, 2014 and sold on June 2, 2015;

 

    all references to our Common ADSs are to American Depositary Shares, or ADSs, each representing five common shares of our company, all references to our Preferred ADSs are to ADSs, each representing one preferred share of our company, and all references to our ADSs are to our Common ADSs and Preferred ADSs;

 

    all references to “Brazil” are to the Federative Republic of Brazil; and

 

    all references to the “Brazilian government” are to the federal government of the Federative Republic of Brazil.

Acquisition and Disposition of PT Portugal

On May 5, 2014, we concluded a capital increase, which we refer to as the Oi capital increase, in which we issued (1) 121,674,063 of our common shares and 280,483,641 of our preferred shares for an aggregate amount of R$8,250 million in cash, and (2) 104,580,393 of our common shares and 172,025,273 of our preferred shares to Pharol in exchange for the contribution by Pharol to our company of all of the shares of its subsidiary PT Portugal. PT Portugal provides a broad range of telecommunications services in Portugal and owned significant interests in telecommunications companies in Angola, Cape Verde, Namibia, and São Tomé and Principe in Africa and Timor-Leste in Asia.

On June 2, 2015, we sold all of the share capital of PT Portugal to Altice Portugal for a purchase price equal to the enterprise value of PT Portugal of €6,900 million, subject to adjustments based on the financial debt, cash and working capital of PT Portugal on the closing date, plus an additional earn-out amount of €500 million in the event that the consolidated revenues of PT Portugal and its subsidiaries (as of the closing date) for any single year between the year ending December 31, 2015 and the year ending December 31, 2019 is equal to or exceeds €2,750 million.

In connection with the closing, Altice Portugal disbursed €5,789 million, of which €869 million was utilized by PT Portugal to prepay outstanding indebtedness in that amount, and €4,920 million were paid to our company in cash. As of December 31, 2015, we had used R$8,682 million of the net cash proceeds of the PT Portugal Disposition for the prepayment of indebtedness of our company, and as of the date of this annual report have used an additional R$5,350 million of these net cash proceeds for the prepayment and repayment of indebtedness of our company. We expect to use the remainder of these net cash proceeds for the repayment of indebtedness of our company.

In anticipation of the PT Portugal Disposition, PT Portugal transferred Portugal Telecom International Finance B.V., or PTIF, its wholly-owned finance subsidiary, to Oi. As a result of the completion of the PT Portugal Disposition, the indebtedness of PTIF, which had previously been classified as liabilities associated with assets held for sale in our consolidated financial statements, was reclassified as indebtedness of our company. In addition, in connection with the PT Portugal Disposition, PTIF assumed all obligations under PT Portugal’s outstanding 6.25% Notes due 2016.

In addition, PT Portugal transferred to Oi all of the outstanding share capital of PT Participações, SGPS, S.A., or PT Participações, which holds:

 

iii


Table of Contents
    our 75% interest in Africatel Holding B.V., or Africatel, which holds our interests in telecommunications companies in Africa, including telecommunications companies in Angola, Cape Verde, Namibia, and São Tomé and Principe; and

 

    our interests in TPT—Telecomunicações Públicas de Timor, S.A., or TPT, which provides telecommunications, multimedia and IT services in Timor Leste.

Share Splits

On August 15, 2012, we changed the ratio applicable to our Preferred ADS from three preferred shares per Preferred ADS to one preferred share per Preferred ADS. All references to numbers of Preferred ADSs in this annual report have been adjusted to give effect to this change in ratio.

On November 18, 2014, our shareholders acting in an extraordinary general shareholders meeting authorized (1) the reverse split of all of our issued common shares into one common share for each 10 issued common shares, and (2) the reverse split of all of our issued preferred shares into one preferred share for each 10 issued preferred shares. This reverse share split became effective on December 22, 2014. There was no change in the ratio of our Common ADSs or Preferred ADSs in connection with this reverse share split; each Common ADS continues to represent one of our common shares and each Preferred ADS continues to represent one of our preferred shares. All references to numbers of shares of our company, dividend amounts of our company and earnings per share of our company in this annual report have been adjusted to give effect to the 10-for-one reverse share split.

On February 1, 2016, we changed the ratio applicable to our Common ADSs from one common share per Common ADS to five common shares per Common ADS. All references to numbers of Common ADSs in this annual report have been adjusted to give effect to this change in ratio.

Market Share and Other Information

We make statements in this annual report about our market share and other information relating to the telecommunications industry in Brazil. We have made these statements on the basis of information obtained from third-party sources and publicly available information that we believe are reliable, such as information and reports from ANATEL, among others. Notwithstanding any investigation that we may have conducted with respect to the market share, market size or similar data provided by third parties or derived from industry or general publications, we assume no responsibility for the accuracy or completeness of any such information.

Rounding

We have made rounding adjustments to reach some of the figures included in this annual report. As a result, numerical figures shown as totals in some tables may not be arithmetic aggregations of the figures that precede them.

 

iv


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CAUTIONARY STATEMENT WITH RESPECT TO FORWARD-LOOKING STATEMENTS

This annual report contains forward-looking statements. Some of the matters discussed concerning our business operations and financial performance include forward-looking statements within the meaning of the U.S. Securities Act of 1933, as amended, or the Securities Act, or the U.S. Securities Exchange Act of 1934, as amended, or the Exchange Act.

Statements that are predictive in nature, that depend upon or refer to future events or conditions or that include words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates” and similar expressions are forward-looking statements. Although we believe that these forward-looking statements are based upon reasonable assumptions, these statements are subject to several risks and uncertainties and are made in light of information currently available to us.

Many important factors could cause our actual results to differ substantially from those anticipated in our forward-looking statements, including, among other things:

 

    our ability to continue as a going concern and the success of our efforts to optimize our liquidity and debt profile;

 

    the effects of intense competition in Brazil and the other countries in which we have operations and investments;

 

    material adverse changes in economic conditions in Brazil or the other countries in which we have operations and investments;

 

    the Brazilian government’s telecommunications policies that affect the telecommunications industry and our business in Brazil in general, including issues relating to the remuneration for the use of our network in Brazil, and changes in or developments of ANATEL regulations applicable to us;

 

    the cost and availability of financing;

 

    the general level of demand for, and changes in the market prices of, our services;

 

    our ability to implement our corporate strategies in order to expand our customer base and increase our average revenue per user;

 

    political, regulatory and economic conditions in Brazil;

 

    inflation in Brazil and fluctuations in exchange rates;

 

    the outcomes of legal and administrative proceedings to which we are or become a party;

 

    changes in telecommunications technology that could require substantial or unexpected investments in infrastructure or that could lead to changes in our customers’ behavior; and

 

    other factors identified or discussed under “Item 3. Key Information––Risk Factors.”

Our forward-looking statements are not guarantees of future performance, and our actual results or other developments may differ materially from the expectations expressed in the forward-looking statements. As for forward-looking statements that relate to future financial results and other projections, actual results will be different due to the inherent uncertainty of estimates, forecasts and projections. Because of these uncertainties, potential investors should not rely on these forward-looking statements.

 

v


Table of Contents

We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future events or otherwise.

 

vi


Table of Contents

PART I

 

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

 

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

 

ITEM 3. KEY INFORMATION

Selected Financial Information

The following selected financial data should be read in conjunction with our consolidated financial statements (including the notes thereto), “Item 5. Operating and Financial Review and Prospects” and “Presentation of Financial and Other Information.”

The following selected financial data have been derived from our consolidated financial statements. The selected financial data as of December 31, 2015 and 2014 and for the years ended December 31, 2015, 2014 and 2013 have been derived from our audited consolidated financial statements included in this annual report. The selected financial data as of December 31, 2013, 2012 and 2011 and for the years ended December 31, 2012 and 2011 have been derived from our consolidated financial statements that are not included in this annual report.

We have included information with respect to the dividends and/or interest attributable to shareholders’ equity paid to holders of our common shares and preferred shares since January 1, 2011 in reais and in U.S. dollars translated from reais at the commercial market selling rate in effect as of the payment date under the caption “Item 8. Financial Information—Dividends and Dividend Policy—Payment of Dividends.”

 

     As of and For the Year Ended December 31,  
     2015(1)     2015     2014     2013     2012     2011  
     (in millions
of US$,
except per
share
amounts)
   

(in millions of reais, except per share amounts and as otherwise

indicated)

 

Income Statement Data:

            

Net operating revenue

   US$ 7,005      R$ 27,354      R$ 28,247      R$ 28,422      R$ 28,141      R$ 27,907   

Cost of sales and services

     (4,161     (16,250     (16,257     (16,467     (15,825     (16,180
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     2,844        11,104        11,990        11,955        12,316        11,727   

Operating expenses

     (2,533     (9,891     (7,377     (7,972     8,579        9,016   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss) before financial income (expenses) and taxes

     311        1,213        4,613        3,983        3,737        2,712   

Financial income

     1,374        5,365        1,345        1,375        2,332        2,227   

Financial expenses

     (3,048     (11,903     (5,894     (4,677     (4,950     (5,697
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financial income (expenses), net

     (1,674     (6,538     (4,549     (3,302     (2,617     (3,471
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) of continuing operations before taxes

     (1,364     (5,325     64        681        1,120        (759

Income tax and social contribution

     (866     (3,380     (758     (77     (254     202   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) of continuing operations

     (2,229     (8,705     (694     604        866        (557

Net income (loss) of discontinued operations, net of taxes

     (222     (867     (4,086     —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (2,451     (9,572     (4,780     604        866        (557

Other comprehensive income (loss)

     (166     (647     (14     34        (319     (133
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   US$ (2,617   R$ (10,219   R$ (4,794   R$ 638      R$ 547      R$ (690
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to controlling shareholders

     (2,346     (9,159     (4,782     604        859        (296

 

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Table of Contents
     As of and For the Year Ended December 31,  
     2015(1)     2015     2014     2013      2012      2011  
     (in millions
of US$,
except per
share
amounts)
   

(in millions of reais, except per share amounts and as otherwise

indicated)

 

Income Statement Data:

              

Net income (loss) attributable to non-controlling shareholders

     (106     (413     1        —           7         (261

Net income (loss) applicable to each class of shares (2):

       R$ (1,569     190         289         (296

Common shares basic and diluted

   US$ (1,011   R$ (3,947     (3,213     414         570         —     

Preferred shares and ADSs basic and diluted

     (1,335     (5,212          

Net income (loss) per share:

         (7.76     3.69         5.73         (6.49

Common shares – basic and diluted

     (3.21     (12.55     (7.76     3.69         5.73         —     

Preferred shares and ADSs – basic and diluted

     (3.21     (12.55          

Net income (loss) per share from continuing operations:

         (1.13     3.69         5.73         (6.49

Common shares – basic and diluted

     (2.91     (11.36     (1.13     3.69         5.73         —     

Preferred shares and ADSs – basic and diluted

     (2.91     (11.36          

Net income (loss) per share from discontinued operations:

         (6.63     —           —           —     

Common shares – basic and diluted

     0.30        (1.19     (6.63     —           —           —     

Preferred shares and ADSs – basic and diluted

     0.30        (1.19          

Weighted average shares outstanding (in thousands):

              

Common shares – basic

     —          314,518        202,312        51,476         50,499         45,615   

Common shares – diluted

     —          314,518        202,312        51,476         50,499         46,560   

Preferred shares and ADSs – basic

     —          415,321        414,200        112,527         99,488         53,693   

Preferred shares and ADSs – diluted

     —          415,321        414,200        112,527         99,488         54,092   

 

(1) Translated for convenience only using the selling rate as reported by the Brazilian Central Bank on December 31, 2015 for reais into U.S. dollars of R$3.905=US$1.00.
(2) In accordance with ASC 260, basic and diluted earnings per share have been calculated using the “two class method.” See note 23 to our audited consolidated financial statements which are included in this annual report.

 

     As of and For the Year Ended December 31,  
     2015(1)      2015      2014      2013      2012      2011  
    

(in

millions of
US$,
except per
share
amounts)

     (in millions of reais, except per share amounts and as otherwise
indicated)
 

Balance Sheet Data:

                 

Cash and cash equivalents

   US$ 3,815       R$ 14,898       R$ 2,449       R$ 2,425       R$ 4,413       R$ 11,025   

Short-term investments

     461         1,802         171         493         2,426         2,299   

Trade accounts receivable, less allowance for doubtful accounts

     2,146         8,380         7,450         7,097         7,018         5,861   

Assets held for sale

     1,968         7,686         34,255         —           —           —     

Total current assets

     9,786         38,214         51,354         18,100         21,802         26,242   

Property, plant and equipment, net

     6.612         25,818         26,244         25,725         24,640         23,165   

Non-current judicial deposits

     3,360         13,119         12,260         11,051         9,723         7,786   

Intangible assets, net

     3,017         11,780         13,554         14,666         15,869         16,329   

 

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     As of and For the Year Ended December 31,  
     2015(1)      2015      2014      2013      2012      2011  
    

(in

millions of
US$,
except per
share
amounts)

     (in millions of reais, except per share amounts and as otherwise
indicated)
 

Total assets

     25,438         99,335         110,741         78,727         78,647         81,382   

Short-term loans and financings (including current portion of long-term debt)

     3,024         11,810         4,464         4,159         3,114         4,600   

Liabilities of assets held for sale(2)

     191         745         27,178         —           —           —     

Total current liabilities

     6,557         25,605         42,580         15,571         17,127         17,114   

Long-term loans and financings

     12,305         48,048         31,386         31,695         30,232         25,169   

Total liabilities

     21,175         82,688         83,588         58,713         58,218         56,162   

Share capital

     5,490         21,438         21,438         7,471         7,308         3,731   

Shareholders’ equity

     4,263         16,646         27,153         20,013         20,428         25,219   

Shareholders’ equity attributable to controlling shareholders

     3,958         15,456         25,644         20,013         20,428         13,826   

Shareholders’ equity attributable to non-controlling shareholders

     305         1,191         1,509         —           —           11,393   

 

(1) Translated for convenience only using the selling rate as reported by the Brazilian Central Bank on December 31, 2015 for reais into U.S. dollars of R$3.905=US$1.00.
(2) As of December 31, 2014, includes short-term loans and financings (including current portion of long-term debt) of R$1,935 million and long-term loans and financings of R$16,958 million that remained obligations of our company following the completion of our sale of PT Portugal.

 

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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—Restrictions on the movement of capital out of Brazil may impair our ability to service certain debt obligations.”

The following table shows the commercial selling rate or selling rate, as applicable, for U.S. dollars for the periods and dates indicated. The information in the “Average” column represents the average of the exchange rates on the last day of each month during the periods presented.

 

     Reais per U.S. Dollar  

Year

   High      Low      Average      Period End  

2011

     1.902         1.535         1.671         1.876   

2012

     2.112         1.702         1.959         2.044   

2013

     2.446         1.953         2.161         2.343   

2014

     2.740         2.197         2.354         2.656   

2015

     4.195         2.575         3.339         3.905   

 

     Reais per U.S. Dollar  

Month

   High      Low  

October 2015

   R$ 4.001       R$ 3.739   

November 2015

     3.851         3.701   

December 2015

     3.983         3.748   

January 2016

     4.156         3.986   

February 2016

     4.049         3.865   

March 2016

     3.991         3.559   

April 2016

     3.692         3.451   

May 2016 (1)

     3.555         3.465   

 

(1) Through May 13, 2016.

Source: Brazilian Central Bank

 

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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, you may lose all or part of your original investment.

General Risks Relating to the Telecommunications Industry

The telecommunications industry is subject to frequent changes in technology. Our ability to remain competitive depends on our ability to implement new technology, and it is difficult to predict how new technology will affect our business.

Companies in the telecommunications industry must adapt to rapid and significant technological changes that are usually difficult to anticipate. The mobile telecommunications industry in particular has experienced rapid and significant technological development and frequent improvements in capacity, quality and data-transmission speed. Technological changes may render our equipment, services and technology obsolete or inefficient, which may adversely affect our competitiveness or require us to increase our capital expenditures in order to maintain our competitive position. For example, we have made significant investments in the last three years in connection with the implementation of our UMTS (Universal Mobile Telecommunications System), or 3G, services, and are making investments in the implementation of our LTE (Long Term Evolution), or 4G, services. In addition, we believe that in the medium-term, personal mobility service providers in Brazil will experience increasing competition from over-the-top, or OTT, providers, which provide content (such as WhatsApp, Skype and YouTube) over an internet connection rather than through a service provider’s network. OTT providers will become increasingly competitive as customers shift from mobile voice and SMS communications to internet-based voice and data communications through computers and smartphone or tablet applications such as WhatsApp, Viber and Skype. Since November 2011, we have deployed a network of Wi-Fi hotspots in indoor public and commercial sites, outdoor public spaces and residential access points. It is possible that alternative technologies may be developed that are more advanced than those we currently provide. We may not obtain the expected benefits of our investments if more advanced technologies are adopted by the market. Even if we adopt new technologies in a timely manner as they are developed, the cost of such technology may exceed the benefit to us, and we cannot assure you that we will be able to maintain our level of competitiveness.

Our operations depend on our ability to maintain, upgrade and operate efficiently our accounting, billing, customer service, information technology and management information systems and to rely on the systems of other carriers under co-billing agreements.

Sophisticated information and processing systems are vital to our growth and our ability to monitor costs, render monthly invoices for services, process customer orders, provide customer service and achieve operating efficiencies. We cannot assure you that we will be able to operate successfully and upgrade our accounting, information and processing systems or that these systems will continue to perform as expected. We have entered into co-billing agreements with each long-distance telecommunications service provider that is interconnected to our networks in Brazil to include in our invoices the long-distance services rendered by these providers, and these providers have agreed to include charges owed to us in their invoices. Any failure in our accounting, information and processing systems, or any problems with the execution of invoicing and collection services by other carriers with whom we have co-billing agreements, could impair our ability to collect payments from customers and respond satisfactorily to customer needs, which could adversely affect our business, financial condition and results of operations.

Improper use of our networks could adversely affect our costs and results of operations.

We may incur costs associated with the unauthorized and fraudulent use of our networks, including administrative and capital costs associated with detecting, monitoring and reducing the incidence of fraud. Fraud

 

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also affects interconnection costs and payments to other carriers for non-billable fraudulent roaming. Improper use of our network could also increase our selling expenses if we need to increase our provision for doubtful accounts to reflect amounts we do not believe we can collect for improperly made calls. Any increase in the improper use of our network in the future could materially adversely affect our costs and results of operations.

Our operations are dependent upon our networks. A system failure could cause delays or interruptions of service, which could cause us to suffer losses.

Failure in our networks, or their backup mechanisms, may result in service delays or interruptions and limit our ability to provide customers with reliable service over our networks. Some of the risks to our networks and infrastructure include (1) physical damage to access lines and long-distance optical cables; (2) power surges or outages; (3) software defects; (4) disruptions beyond our control; (5) breaches of security; and (6) natural disasters. The occurrence of any such event could cause interruptions in service or reduce capacity for customers, either of which could reduce our net operating revenue or cause us to incur additional expenses. In addition, the occurrence of any such event may subject us to penalties and other sanctions imposed by ANATEL, and may adversely affect our business and results of operations.

The mobile telecommunications industry and participants in this industry, including us, may be harmed by reports suggesting that radio frequency emissions cause health problems and interfere with medical devices.

Media and other entities have suggested that the electromagnetic emissions from mobile handsets and base stations may cause health problems. If consumers harbor health-related concerns, they may be discouraged from using mobile handsets. These concerns could have an adverse effect on the mobile telecommunications industry and, possibly, expose mobile services providers to litigation. We cannot assure you that further medical research and studies will refute a link between the electromagnetic emissions of mobile handsets and base stations, including on frequency ranges we use to provide mobile services, and these health concerns. Government authorities could increase regulation on electromagnetic emissions of mobile handsets and base stations, which could have an adverse effect on our business, financial condition and results of operations. The expansion of our network may be affected by these perceived risks if we experience problems in finding new sites, which in turn may delay the expansion and may affect the quality of our services.

In July 2002, ANATEL enacted regulations that limit emission and exposure for fields with frequencies between 9 kHz and 300 GHz. On June 29, 2015, ANATEL commenced a public consultation regarding its proposed Regulatory Agenda for the 2015-2016 cycle, which, among other items, provides for the reevaluation of regulations regarding human exposure to radiofrequency electromagnetic fields. Although we believe these regulations have not had a material impact on the business of our company to date, the Brazilian government or ANATEL may enact new laws or regulations regarding electromagnetic emissions and exposure that could have an adverse effect on our business.

Risks Relating to Our Company

We have a substantial amount of debt, which could restrict our financing and operating flexibility and have other adverse consequences.

As of December 31, 2015, we had R$59,857 million aggregate principal amount of outstanding debt. We are subject to certain financial covenants under the instruments that govern some of our indebtedness that limit our ability to incur additional debt. The level of our consolidated indebtedness and the requirements and limitations imposed by these debt instruments could adversely affect our financial condition or results of operations. In particular, the terms of some of these debt instruments restrict our ability, and the ability of our subsidiaries, to:

 

    incur additional debt;

 

    grant liens;

 

    pledge assets;

 

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    sell or dispose of assets; and

 

    make certain acquisitions, mergers and consolidations.

If we are unable to incur additional debt, we may be unable to invest in our business and make necessary or advisable capital expenditures, which could reduce future net operating revenue and adversely affect our profitability. In addition, the cash required to service our indebtedness reduces the amount available to us to make capital expenditures. If we are unable to generate operating cash flows, we may not be able to continue servicing our debt.

Furthermore, some of our debt instruments include financial covenants that require Oi or Telemar to maintain certain specified financial ratios. Prior to December 31, 2015, we executed temporary modifications of each of our debt instruments that contain covenants requiring Oi to maintain specified levels of consolidated debt to consolidated EBITDA (other than the debt instruments governing Oi’s 5th and 9th issuances of debentures), pursuant to which Oi was required to maintain a consolidated net debt to consolidated EBITDA ratio, determined based on our financial statements prepared in accordance with Brazilian GAAP, of no more than 6.0 to 1.0 as of December 31, 2015. Most of these temporary modifications continue to require Oi to maintain a consolidated net debt to consolidated EBITDA ratio of no more than 6.0 to 1.0 for each of the fiscal quarters of 2016. Upon the expiration of these temporary modifications, the consolidated debt to EBITDA ratio that Oi is required to maintain under each of these debt instruments will be reduced to their pre-existing levels, the most restrictive of which will require that Oi maintain a consolidated debt to EBITDA ratio of less than 4.0 to 1.0. Under each of these debt instruments, the creditor has the right to accelerate the debt if, at the end of any applicable period we are not in compliance with the defined financial covenants ratios. We have repaid the principal amount outstanding under Oi’s 5th and 9th issuances of debentures in the aggregate amount of R$23 million.

Our debt facilities with BNDES contained a number of financial covenants (including ratios with respect to shareholders equity to total assets and consolidated debt to EBITDA) that were measured on a semi-annual basis on June 30 and December 31. Under these debt facilities, noncompliance with two or more of these covenants in one semi-annual period would automatically trigger the right of BNDES to retain proceeds (in an amount equivalent to three times our next amortization payment under each debt facility with BNDES) from receivables otherwise payable to us in reserve accounts pledged for the benefit of BNDES until such time as the breach is cured.

On June 30, 2015, we were not in compliance with the covenants in each of our debt facilities with BNDES that require Oi to maintain a shareholder’s equity to EBITDA ratio of at least 0.25 to 1 and a consolidated debt to EBITDA ratio of less than 4.0 to 1. As a result, BNDES, had the right to retain proceeds from receivables in reserve accounts pledged for the benefit of BNDES, as described above. In November, 2015, we and BNDES amended the terms of each of our debt facilities with BNDES. As a result of these amendments, (1) the consolidated debt to consolidated EBITDA ratio, determined based on our financial statements prepared in accordance with Brazilian GAAP, that Oi was required to maintain was increased to 6.0 to 1.0 for the December 31, 2015 measurement date, (2) the measurement period under each of these debt facilities was reduced to quarterly periods, and (3) BNDES has the right to accelerate the debt under each of these debt facilities, at the end of any applicable period, we are not in compliance with two or more of the financial covenants contained in these debt facilities.

We were in compliance with each of the financial covenants applicable the debt instruments to which Oi and its subsidiaries are a party as of December 31, 2015 (other than the debt instruments governing Oi’s 5th and 9th issuances of debentures). We are seeking waivers from those creditors for which these temporary modifications do not cover all measurement periods to and including the periods ending on December 31, 2016. We cannot provide investors with any assurance that these waivers will be obtained. In the event that we are unable to obtain waivers of the anticipated breaches of these covenants in these debt instruments, or identify and implement financial and strategic alternatives to optimize our liquidity and debt profile, we may be unable to meet our obligations under these debt instruments in the event that the creditors under these debt instruments seek to enforce their available remedies.

Under the Trust Deed governing each of the Bonds issued by PTIF (other than the PTIF 6.25% Notes due 2016), or the PTIF Bonds, we were required to file audited financial statements of PTIF as of and for the year ended December 31, 2014 with the Dutch Chamber of Commerce no later than January 31, 2016. On April 29, 2016, Citicorp Trustee Company Limited, the trustee under this Trust Deed, or the PTIF Trustee, delivered a written notice to PTIF and Oi noting that the failure of PTIF to provide the 2014 audited financial statements constituted a potential event of default under the PTIF Bonds and requesting the delivery of those financial statements. PTIF is continuing to work with its auditor to complete the preparation of its 2014 audited financial statements as soon as possible.

 

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The PTIF Trustee has notified PTIF that if PTIF fails to deliver the financial statements on or prior to May 29, 2016 and the PTIF Trustee determines that this failure is materially prejudicial to the interests of the holders of the PTIF Bonds, the PTIF Trustee could declare that the PTIF Bonds are immediately due and repayable. Under the terms of the PTIF Bonds, the PTIF Trustee is not obliged to exercise its discretion to declare any PTIF Bonds immediately due and repayable or to take any other action to enforce the rights of the holders of the PTIF Bonds unless it shall have been indemnified to its satisfaction and specifically directed or requested to do so by a requisite percentage of the holders of the PTIF Bonds in accordance with the terms and conditions of the PTIF Bonds.

The instruments governing a substantial portion of our indebtedness contain cross-acceleration clauses and the occurrence of an event of default under one of these instruments, could trigger an event of default under other indebtedness or enable the creditors under other indebtedness to accelerate that indebtedness or those obligations. Were a substantial amount of our outstanding indebtedness to be accelerated, we may not have sufficient funds to repay such debt when due.

If we are unable to meet our debt service obligations or comply with our debt covenants, we could be forced to renegotiate or refinance our indebtedness or seek additional equity capital. In this circumstance, we may be unable to obtain financing on satisfactory terms, or at all.

On March 9, 2016, we announced that we had retained PJT Partners as our financial advisor to assist us in evaluating financial and strategic alternatives to optimize our liquidity and debt profile. On April 25, 2016, we entered into a customary non-disclosure agreement with Moelis & Company, who acts as advisor for a diverse ad hoc group of holders of the bonds issued by Oi and its subsidiaries, as an initial step towards discussions of a potential restructuring of its indebtedness.

For more information regarding the debt instruments of our company and our indebtedness as of December 31, see “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources.”

Our independent registered public accounting firm has indicated that our financial condition raises substantial doubt as to our ability to continue as a going concern.

Based on our operating cash flows and the impact such operating cash flows have had on our liquidity, in combination with the level of our indebtedness and the potential impact if we cannot satisfy certain financial covenants under our current debt instruments in 2016, our independent registered public accounting firm has included an emphasis paragraph related to the substantial doubt with respect to our ability to continue as a going concern in their report on our consolidated financial statements for the year ended December 31, 2015. However, our financial statements have been prepared assuming we will continue to operate as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. If we become unable to continue as a going concern, we may seek the protection of the courts through a judicially supervised reorganization (recuperação judicial) proceeding in Brazil or liquidate our assets, and the values we receive for our assets in liquidation or dissolution could be significantly lower than the values reflected in our consolidated financial statements. The reaction of investors and others to the inclusion of a going concern statement by our auditors, our operating cash flows and questions regarding our potential inability to continue as a going concern may cause others to choose not to deal with us due to concerns about our ability to meet our contractual obligations and may materially adversely affect our share price and our ability to continue to execute our business plans, raise new capital and/or make our scheduled debt payments on a timely basis or at all.

Because our cash flows from operating activities are negative, and are expected to continue to be negative through 2016, we will likely need to meet our obligations and fund our working capital with cash on hand and proceeds from existing amounts available under our financing facilities.

Our cash flows from operations were negative in 2015, and based on our current plans, we expect our cash flows from operating activities to remain negative through 2016. Our current projections are based on a number of key assumptions relating to, among other things, attainment of traffic volume targets, customer base, launching of

 

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bundled products attractive to customers, service sales prices, foreign exchange fluctuation and the success of the efforts to identify and implement financial and strategic alternatives to optimize the liquidity and debt profile. If any of our assumptions are not borne out or are otherwise not correct, our cash flows from operations could be significantly lower than expected. As a result, our cash flows from operating activities could continue to be negative and our capital expenditures and debt service obligations could exceed our cash flows from operations beyond 2016 and for an extended period of time. There can be no assurance that we will succeed in executing on our plans or that we will generate positive cash flows from operations or cash flows from operations sufficient to cover our capital expenditures and debt service obligations in the future.

We plan to maintain a significant level of capital expenditures in order to continue to pursue our business plans. Additionally, based on our current level of debt, we are obligated to make payments of cash interest and principal in the aggregate amount of R$15,282 million during 2016. In addition, we need to pay cash taxes and fund our working capital.

Because of the combined impact of our recent and projected results of operations, our non-investment grade credit rating, the inclusion of the going concern statement in the report of our independent registered public accounting firm, restrictions in our current debt and/or general conditions in the financial and credit markets, our access to the capital markets is likely to be limited or nonexistent. As a result, we will need to meet our obligations and fund our working capital with cash on hand and proceeds from existing amounts available under our financing facilities. We may not be able to meet our obligations or other means for any significant period of time, and as a result, if we are unable to successfully restructure our debt on terms satisfactory to our company, we may not be able to execute our business plan or meet our obligations. If we become unable to meet our obligations, we may seek the protection of the courts through a judicially supervised reorganization (recuperação judicial) proceeding in Brazil.

Any downgrade in the ratings of our company or our debt securities would likely result in increased interest and other financial expenses related to our borrowings and debt securities and could reduce our liquidity.

Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc., or Standard & Poor’s, Moody’s Investors Service, or Moody’s, and Fitch, Inc., or Fitch, maintain ratings of our company and our debt securities. Currently, Standard & Poor’s, Moody’s and Fitch maintain ratings of our company on a local and a global basis. On a global basis, Standard & Poor’s maintains a foreign currency rating for our company of “CCC-,” Moody’s maintains a foreign currency rating for our company of “Caa1,” and Fitch maintains a foreign currency rating for our company of “CCC.” Our export credit facility guaranteed by Exportkreditnämnden, or EKN, contained a requirement that we prepay all outstanding amounts in the event that our credit rating was downgraded below Ba2 by Moody’s or BB by Fitch. As a result of the actions by these rating agencies, we were required to prepay the outstanding principal amount under this export credit agreement of R$202 million in April 2016. Any decision by these agencies to downgrade the ratings of our company or of our debt securities in the future would likely result in increased interest and other financial expenses relating to our borrowings and debt securities and the inclusion of financial covenants in the instruments governing new indebtedness, and could significantly reduce our ability to obtain such financing on satisfactory terms or in amounts required by us.

We rely on strategic suppliers of equipment, materials and services necessary for our operations and expansion. If these suppliers fail to provide equipment, materials or services to us on a timely basis, we could experience disruptions, which could have an adverse effect on our revenues and results of operations.

We rely on a few strategic suppliers of equipment, materials and services, including Nokia Solutions and Networks do Brasil Telecomunicações Ltda., or Nokia Solutions, Huawei do Brasil Telecomunicações Ltda., or Huawei, Ericsson Telecomunicações S.A., or Ericsson, and A.R.M. Engenharia Ltda., or A.R.M. Engenharia, to provide us with equipment, materials and services that we need in order to expand and to operate our business in Brazil. There are a limited number of suppliers with the capability of providing the mobile network equipment and fixed-line network platforms that our operations and expansion plans require or the services that we require to maintain our extensive and geographically widespread networks. In addition, because the supply of mobile network equipment and fixed-line network platforms requires detailed supply planning and this equipment is technologically complex, it would be difficult for our company to replace the suppliers of this equipment. Suppliers of cables that we need to extend and maintain our networks may suffer capacity constraints or difficulties in obtaining the raw materials required to manufacture these cables. As a result, we are exposed to risks associated with these suppliers,

 

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including restrictions of production capacity for equipment and materials, availability of equipment and materials, delays in delivery of equipment, materials or services, and price increases. If these suppliers or vendors fail to provide equipment, materials or service to us on a timely basis or otherwise in compliance with the terms of our contracts with these suppliers, we could experience disruptions or declines in the quality of our services, which could have an adverse effect on our revenues and results of operations, and we might be unable to satisfy the requirements contained in our concession and authorization agreements.

As a result of our financial condition, suppliers of the equipment, materials and services necessary for our operations and expansion may require further assurances from us in order to continue doing business with us.

We believe that our suppliers may take our financial condition, particularly to the extent that it is perceived to impact our ability to continue to make timely payments to them, into account when deciding whether to continue or begin providing equipment and services to us. During 2015, our operating cash flows have been negatively affected by a number of factors. If suppliers or potential suppliers who are aware of our deteriorating financial situation become concerned that we will be unable to continue to perform under our agreements or make timely payments, they may require advance payments, financial guarantees or other assurances before they provide equipment, materials or services to us or may refuse to provide equipment, materials or services to us at all. If suppliers were to do so, our ability to expand and maintain our networks or operate our business may be impaired, which could have an adverse effect on our financial condition or results of operations.

We are subject to numerous legal and administrative proceedings, which could adversely affect our business, results of operations and financial condition.

We are subject to numerous legal and administrative proceedings. It is difficult to quantify the potential impact of these legal and administrative proceedings. We classify our risk of loss from legal and administrative proceedings as “probable,” “possible” or “remote.” We make provisions for probable losses but do not make provisions for possible and remote losses. As of December 31, 2015, we had provisioned R$4,435 million for probable losses relating to various tax, labor and civil legal and administrative proceedings against us. As of December 31, 2015, we had claims against us of R$24,048 million in tax proceedings, R$780 million in labor proceedings and R$1,238 million in civil proceedings with a risk of loss classified as “possible” for which we had made no provisions.

We are not required to disclose or record provisions for proceedings in which our management judges the risk of loss to be remote. However, the amounts involved in certain of the proceedings in which we believe our risk of loss is remote could be substantial. Consequently, our losses could be significantly higher than the amounts for which we have recorded provisions.

If we are subject to unfavorable decisions in any legal or administrative proceedings and the losses in those proceedings significantly exceed the amount for which we have provisioned or involve proceedings for which we have made no provision, our results of operations and financial condition may be materially adversely affected. Even for the amounts recorded as provisions for probable losses, a judgment against us would have an effect on our cash flow if we are required to pay those amounts. Unfavorable decisions in these legal proceedings may, therefore, reduce our liquidity and adversely affect our business, financial condition and results of operations. For a more detailed description of these proceedings, see “Item 8. Financial Information—Legal Proceedings.”

The minority shareholder of Africatel has asserted that our acquisition of PT Portugal triggered its right to require us to purchase its shares of Africatel under the Africatel shareholders’ agreement. If we are required to purchase this interest in Africatel, it will divert resources that could otherwise be deployed to reduce indebtedness or make investments under our business plan. If any such purchase is funded through our incurrence of additional debt, there would be a material adverse effect on our consolidated leverage.

We indirectly own 75% of the share capital of Africatel. Samba Luxco S.à.r.l., an affiliate of Helios Investors L.P., or Samba Luxco, owns the remaining 25%. Africatel holds all of our interests in telecommunications companies in sub-Saharan Africa, including our interests in Unitel, Cabo Verde Telecom, S.A. in Cape Verde, Mobile Telecommunications Limited in Namibia, and CST Companhia Santomense de Telecomunicações S.A.R.L. in São Tomé and Príncipe, among others. Pharol, our subsidiaries Africatel GmbH & Co. KG, or Africatel GmbH, and PT Ventures SGPS S.A., or PT Ventures, and Samba Luxco are parties to a shareholders’

 

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agreement, which we refer to as the Africatel shareholders’ agreement.

On September 16, 2014, our subsidiary, Africatel GmbH, which directly holds our interest in Africatel, received a letter from Samba Luxco in which Samba Luxco claimed that Oi’s acquisition of PT Portugal was deemed a change of control of Pharol under the Africatel shareholders’ agreement, and that this change of control entitled Samba Luxco to exercise a put right under the Africatel shareholders’ agreement at the fair market equity value of Samba Luxco’s Africatel shares. In the letter, Samba Luxco purported to exercise the alleged put right and thereby require Africatel GmbH to acquire its shares in Africatel.

On September 26, 2014, Africatel GmbH responded to Samba Luxco stating that there had not been any action or event that would trigger the right to exercise the put option under the Africatel’s shareholders’ agreement and that Africatel GmbH intended to challenge Samba Luxco’s purported exercise of the put option. On the same date, we issued a Material Fact disclosing Samba Luxco’s purported exercise of the put option, our understanding that the exercise of the put option is not applicable, and that our board of directors had authorized our management to take the necessary actions to sell our interest in Africatel.

On November 12, 2014, the International Court of Arbitration of the International Chamber of Commerce notified Africatel GmbH that Samba Luxco had commenced arbitral proceedings against Africatel GmbH to enforce its purported put right or, in the alternative, certain other rights and claims allegedly arising out of Oi’s acquisition of PT Portugal. Africatel GmbH presented its answer to Samba Luxco’s request for arbitration on December 15, 2014. The arbitral tribunal was constituted on March 12, 2015 and the proceedings are ongoing. Africatel GmbH intends to continue to vigorously defend these proceedings.

If we were to acquire the interest of Samba Luxco in Africatel as a result of the exercise of Samba Luxco’s purported put right under the Africatel shareholders’ agreement, our acquisition of this interest would reduce the resources that would be available to us to reduce our outstanding indebtedness or pursue other investment opportunities. If any such purchase were to be funded through our incurrence of additional debt, the consolidated leverage of our company could increase materially, which could have a material adverse effect on our financial condition and results of operations.

We have indemnification obligations with respect to the PT Exchange and the PT Portugal Disposition that could materially adversely affect our financial position.

In the Exchange Agreement that we entered into with Pharol under which we transferred defaulted commercial paper of Rio Forte to Pharol in exchange for the delivery to our company of common shares and preferred shares of our company as described under “Item 4. Information on the Company—Our Recent History and Development—Rio Forte Defaults and PT Exchange,” we agreed to indemnify Pharol against any loss arising from Pharol’s contingent or absolute tax or anti-trust obligations in relation to the assets contributed to our company in the Oi Capital Increase described under “Item 5. Operating and Financial Review and Prospects—Overview—Oi Capital Increase and Acquisition of PT Portugal,” and from Pharol’s management activities, with reference to acts or triggering events occurring on or prior to May 5, 2014, excluding any losses incurred by Pharol as a result of the financial investments in the Rio Forte commercial paper and the acquisition of the Rio Forte commercial paper from Oi under the Exchange Agreement.

In the Share Purchase Agreement under which we sold PT Portugal in the PT Portugal Disposition, we agreed to indemnify Altice Portugal for breaches of our representations and warranties under the Share Purchase Agreement, subject to certain customary procedural and financial limitations. There can be no assurance that we will not be subject to significant claims under these indemnification provisions and if we are subject to such claims under these indemnification provisions, we could be required to pay significant amounts, which would have an adverse effect on our financial condition.

 

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We are subject to potential liabilities relating to our third-party service providers, which could have a material adverse effect on our business, financial condition and results of operations.

We are subject to potential liabilities relating to our third-party service providers in Brazil. Such potential liabilities may involve claims by employees of third-party service providers in Brazil directly against us as if we were the direct employer of such employees, as well as claims against us for secondary liability for, among other things, occupational hazards, wage parity or overtime pay, in the event that such third-party service providers fail to meet their obligations to their employees. We have not recorded any provisions for such claims, and significant judgments against us could have a material adverse effect on our business, financial condition and results of operations.

We are subject to delinquencies of our accounts receivables. If we are unable to limit payment delinquencies by our customers, or if delinquent payments by our customers increase, our financial condition and results of operations could be adversely affected.

Our business significantly depends on our customers’ ability to pay their bills and comply with their obligations to us. During 2015, we recorded provisions for doubtful accounts in the amount of R$721 million, or 2.6% of our net operating revenue, primarily due to subscribers’ delinquencies. As of December 31, 2015, our provision for doubtful accounts was R$561 million.

ANATEL regulations prevent us from implementing certain policies that could have the effect of reducing delinquency of our customers in Brazil, such as service restrictions or limitations on the types of services provided based on a subscriber’s credit record. If we are unable to successfully implement policies to limit delinquencies of our Brazilian subscribers or otherwise select our customers based on their credit records, persistent subscriber delinquencies and bad debt will continue to adversely affect our operating and financial results.

In addition, if the Brazilian economy declines due to, among other factors, a reduction in the level of economic activity, an increase in inflation or an increase in domestic interest rates, a greater portion of our customers may not be able to pay their bills on a timely basis, which would increase our provision for doubtful accounts and adversely affect our financial condition and results of operations.

Our commitment to meet the obligations of our Brazilian employees’ pension plans, managed by Fundação Sistel de Seguridade Social and Fundação Atlântico de Seguridade Social may be higher than what is currently anticipated, and therefore, we may be required to make additional contributions of resources to these pension plans or to record liabilities or expenses that are higher than currently recorded.

As sponsors of certain private employee pension plans in Brazil, which are managed by Fundação Sistel de Seguridade Social, or Sistel, and Fundação Atlântico de Seguridade Social, or FATL, our subsidiaries cover the actuarial deficits of these pension benefit plans, which provide guaranteed benefits to our retirees in Brazil and guaranteed future benefits to our current Brazilian employees at the time of their retirement. As of December 31, 2015, our Brazilian pension benefit plans had an aggregate deficit of R$544 million. Our commitment to meet these deficit obligations may be higher than we currently anticipate, and we may be required to make additional contributions or record liabilities or expenses that are higher than we currently record, which may adversely affect our financial results. If the life expectancy of the beneficiaries should exceed the life expectancies included in the actuarial models, the level of our contributions to these plans could increase. If the managers of these plans should suffer losses on the investments of the assets of these plans, we would be required to make additional contributions to these plans in order for these plans to be able to provide the agreed benefits. Any increase in the level of our contributions to these plans as a result of an increase in life expectancy or a decline in investment returns could have a material adverse effect on our financial condition or results of operations. For a more detailed description of our Brazilian pension plans, see “Item 6. Directors, Senior Management and Employees—Employees—Employee Benefits—Pension Benefit Plans.”

 

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Risks Relating to Our Brazilian Operations

Our Residential Services business faces competition from mobile services and other fixed-line service providers, which may adversely affect our revenues and margins.

Our Residential Services business, which provides local and long-distance fixed-line voice, fixed-line data, or broadband, and subscription television, or Pay-TV, services to our residential customers, as well as bundles of these services together with mobile services, faces competition from:

 

    mobile services, as reductions in interconnection tariffs, which have led to more robust mobile package offerings, have driven the traffic migration trend of fixed-to-mobile substitution;

 

    other fixed-line voice service providers, primarily Empresa Brasileira de Telecomunicações – Embratel (a subsidiary of América Móvil S.A.B. de C.V., or América Móvil, one of the leading telecommunications service providers in Latin America), or Embratel, and GVT S.A. (a subsidiary of Telefônica Brasil S.A., or Telefônica Brasil, the largest telecommunications operator in Brazil), or GVT;

 

    other broadband service providers, including Net Serviços de Comunicação S.A., or Net (a subsidiary of América Móvil, our primary competitor in the broadband services market); Companhia Paranense de Energia – Copel, or Copel, and Companhia Energética de Minas Gerais – CEMIG, or Cemig Telecom, which provide fiber optic infrastructure; and smaller regional broadband service providers; and

 

    other Pay-TV service providers, including our primary competitor SKY Brasil Serviços Ltda., or SKY, and Net.

Based on information available from ANATEL, from December 31, 2012 to December 31, 2015, the number of fixed lines in service (including the number fixed lines provided to our SME and Corporate Services customers) in our service areas (all of Brazil other than the state of São Paulo) declined from 27.7 million to 27.2 million. As of December 31, 2015, based on information available from ANATEL, (1) we had a market share of 56.4% of the total fixed lines in service in Region I of Brazil and a market share of 52.9% of the total fixed lines in service in Region II of Brazil (in each case, including the fixed lines provided to our SME and Corporate Services customers); (2) Embratel had a market share of 25.3% of the total fixed lines in service in Region I and a market share of 18.4% of the total fixed lines in service in Region II; and (3) GVT had a market share of 9.9% of the total fixed lines in service in Region I and a market share of 23.4% of the total fixed lines in service in Region II.

As a result of competition from mobile services, we expect (1) the number of our fixed lines in service to experience a slow decline, as some of our customers eliminate their fixed-line services in favor of mobile services, and (2) the use of existing fixed lines for making voice calls to decline, as customers replace fixed-line calls in favor of calls on mobile phones as a result of the emergence of “all-net” plans, which allow a customer to make calls to any fixed-line or mobile device of any operator for a flat monthly fee. The rate at which the number of fixed lines in service in our service areas, a large majority of which are used by our residential customers, may decline depends on many factors beyond our control, such as economic, social, technological and other developments in Brazil. Because we derive a significant portion of our net operating revenue from our Residential Services business, the reduction in the number of our fixed lines in service has negatively affected and is likely to continue to negatively affect our net operating revenue and margins.

Our broadband services in Brazil face strong competition from Embratel and Telefônica Brasil, which have market shares of 32.5% and 28.7% for broadband services in Brazil, respectively, according to data from ANATEL. As of January 2016, we had a market share of 25.1% for broadband services in Brazil, according to data from ANATEL. Embratel provides local fixed-line services to residential customers through Net’s cable network in the portions of Regions I and II where Net provides cable television service. Telefônica Brasil provides local fixed-line services through its own network and through its subsidiary GVT’s network. The primary drivers of competition in the broadband industry are speed and price, with discounts typically offered in the form of bundled services. Net and Telefônica Brasil each offer broadband services at higher speeds than ours and both offer integrated voice, broadband and subscription television services, typically as bundles, to the residential services market through a

 

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single network infrastructure. Future offerings by our competitors that are aggressively priced or that offer additional services could have an adverse effect on our net operating revenue and our results of operations.

The primary providers of Pay-TV services in the regions in which we provide residential services are, SKY, which provides direct-to-home, or DTH, service, and América Móvil, which provides DTH service through Embratel under the “Claro TV” brand and Pay-TV services using coaxial cable through Net. We offer DTH services throughout the regions in which we provide residential services. Future changes in satellite technology may result in one of our competitors utilizing new satellites for DTH services that have higher capacities or better quality of service, which could adversely affect our net operating revenue and may adversely affect our results of operations.

Our primary competitors for residential services, Embratel and Telefônica Brasil, are each controlled by multinational companies that may have more significant financial and marketing resources, and greater abilities to access capital on a timely basis and on more favorable terms, than our company. In addition, we compete in our service areas with smaller companies that have been authorized by ANATEL to provide local fixed-line services. Increased competition from these small, regional companies may require us to increase our marketing expenses and our capital expenditures, which would lead to a decrease in our profitability. For a detailed description of our competition in the residential services market in Brazil, see “Item 4: Information on the Company—Competition—Residential Services.”

Our Personal Mobility Services business faces strong competition from fixed-line service providers other mobile services providers and internet data providers, which may adversely affect our revenues and margins.

The mobile services market in Brazil is extremely competitive. Our Personal Mobility Services business, which provides post-paid and pre-paid mobile voice services and post-paid and pre-paid mobile data communications services, faces competition from large competitors such as (1) TIM Participações S.A., or TIM, (2) Telefônica Brasil, which markets its mobile services under the brand name “Vivo,” and (3) Claro S.A., a subsidiary of América Móvil, or Claro. As of December 31, 2015, based on information regarding the total number of subscribers as of that date available from ANATEL, we had a market share of 18.6% of the total number of mobile subscribers (including subscribers in our SME and Corporate Services), ranking behind Telefônica Brasil with 28.4%, TIM with 25.7% and Claro with 25.6%. Telefônica Brasil, TIM and Claro are each controlled by multinational companies that may have more significant financial and marketing resources, and greater abilities to access capital on a timely basis and on more favorable terms, than our company.

Our ability to generate revenues from our Personal Mobility Services business depends on our ability to continue to maintain or increase the ARPU generated by our customer base, retain or increase the size of our customer base, improve the perception of the quality of our services and encourage the migration of our customers to our 3G and 4G networks through our offers of attractive data packages that take advantage of the structural shift from voice to data usage. The recent trend towards SIM card consolidation, reversing the trend of customers using multiple SIM cards to participate in on-net calling plans and the demand for more aggressive data packages in the pre-paid market may result in a decline in the size of our customer base. The increased use of instant internet messaging and Voice over Internet Protocol, or VoiP, services on smartphone applications such as WhatsApp may result in a migration from voice to data services, which could have an adverse effect on the size and profitability of our customer base. Acquiring each additional personal mobility customer entails costs, including sales commissions and marketing costs. Recovering these costs depends on our ability to retain such customers. Therefore, high rates of customer churn could have a material adverse effect on the profitability of our Personal Mobility Services business. During the year ended December 31, 2015, the average customer churn rate in our Personal Mobility Services business, representing the number of subscribers whose service was disconnected during each month, whether voluntarily or involuntarily, divided by the number of subscribers at the beginning of such month, was 12.4%.

We have experienced increased pressure to reduce our mobile rates in response to pricing competition. This pricing competition often takes the form of special promotional packages, which may include, among other things, mobile handset subsidies and traffic usage promotions. We no longer offer handset subsidies for new customers, and competing with the service plans and promotions offered by our competitors may cause an increase in our marketing expenses and customer-acquisition costs, which has adversely affected our result of operations during some periods in the past and could continue to adversely affect our results of operations. Our inability to compete effectively with these packages could result in our loss of market share and adversely affect our net operating revenue and

 

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profitability. For a detailed description of our competition in the personal mobility services market in Brazil, see “Item 4: Information on the Company—Competition—Personal Mobility Services.”

Our SME and Corporate Services business faces strong competition from other mobile, fixed-line and information technology services providers, which may adversely affect our revenues and margins.

Our SME and Corporate Services business provides a la carte and bundled fixed-line voice and data services, mobile voice and data services and information technology services to our small- and medium-sized enterprise, or SME, and corporate customers, as well as interconnection, network usage and traffic transportation services to other telecommunications providers. The competition risks relating to the fixed-line and mobile services we provide to our SME and corporate customers are similar to those relating to the fixed-line and mobile services we provide to our residential and personal mobility customers, respectively.

The Brazilian recession has had a significant negative effect on our operating revenue and margins as SMEs generally, including our customers, have reduced the size of their businesses and in some cases ceased operations, and a number of our Corporate customers have reduced their telecommunications spending as part of their overall cost-cutting efforts. Because we derive a significant portion of our net operating revenue from our SME and Corporate Services business, the loss of a significant number of SME or corporate customers would adversely affect our net operating revenue and may adversely affect our results of operations. For a detailed description of our competition in the business and corporate market in Brazil, see “Item 4: Information on the Company—Operations in Brazil—Competition—SME and Corporate Services.”

Our long-distance services in Brazil face significant competition, which may adversely affect our revenues.

In Brazil, unlike in the United States and elsewhere, a caller chooses its preferred long-distance carrier for each long-distance call, whether originated from a fixed-line telephone or a mobile handset, by dialing such carrier’s long-distance carrier selection code (Código de Seleção de Prestadora). The long-distance services market in Brazil has become less competitive as a result of ongoing reductions in the interconnection rates, as mandated by ANATEL. The proliferation of all-net service plans, particularly for mobile services, offers unlimited long-distance calls and data combination plans that have reduced the relevance of long-distance services for mobile services. As a result, competition for long-distance services in Brazil is limited to fixed-line voice services. We compete with Telefônica Brasil, which is the incumbent fixed-line service provider in the State of São Paulo. Competition in the Brazilian fixed-line long-distance market may require us to increase our marketing expenses and/or provide services at lower rates than those we currently expect to charge for such services. Competition in the Brazilian fixed-line long-distance market has had and could continue to have a material adverse effect on our revenues and margins.

The Brazilian telecommunications industry is highly regulated. Changes in laws and regulations may adversely impact our business.

The Brazilian telecommunications industry is highly regulated by ANATEL. ANATEL regulates, among other things, rates, quality of service and universal service goals, as well as competition among telecommunications service providers. Changes in laws and regulations, grants of new concessions, authorizations or licenses or the imposition of additional universal service obligations, among other factors, may adversely affect our business, financial condition and results of operations. For example, in July 2014 ANATEL approved rules under which interconnection rates charged by our company for the use of our fixed-line and mobile networks would be reduced over a period of years until they were set at rates based on a long-run incremental cost methodology. As a result, the mobile interconnection rates for Regions I, II and III declined by 25% each in February 2014, 33.3% each in February 2015 and 40.0%, 35.2% and 27.6%, respectively, in February 2016, with additional cuts approved through 2019. In addition, ANATEL approved cuts for most of our fixed interconnection rates ranging from 9.1% and 20.0% in February 2016, with additional cuts approved through 2019. These regulations will have adverse effects on our revenues, although as a result of reductions in our costs and expenses for these services that we acquire from other telecommunications providers, we cannot predict with certainty the effects that these regulations will have on our results of operations.

 

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We cannot predict whether ANATEL, the Brazilian Ministry of Communications (Ministério das Comunicações) or the Brazilian government will adopt other telecommunications sector policies in the future or the consequences of such policies on our business or the business of our competitors.

Our local fixed-line and domestic long-distance concession agreements in Brazil are subject to periodic modifications by ANATEL and we cannot assure you that the modifications to these concession agreements will not have adverse effects on our company.

We provide fixed-line telecommunications services in our Brazilian service areas pursuant to concession agreements with the Brazilian government. These concession agreements expire on December 31, 2025, and may be amended by the parties every five years prior to the expiration date. In connection with each five-year amendment, ANATEL has the right, following public consultations, to impose new terms and conditions in response to changes in technology, competition in the marketplace and domestic and international economic conditions.

Our obligations under our concession agreements may be subject to revision in connection with each future amendment. On June 27, 2014, ANATEL opened a public comment period for the revision of the terms of our concession agreements. The comment period, which ended on December 26, 2014, was opened for comments on certain topics such as service universalization, rates and fees, among others. We submitted our comments during this period. Throughout 2015, ANATEL, the Brazilian Ministry of Communications and telecommunications service providers met regularly to discuss possible amendments to each of the concession agreements granted by ANATEL, including ours, and the implications of the developments and demands in the telecommunications sector in recent years. In September 2015, the Ministry of Communications created a working group, consisting of three members from each of ANATEL and the Ministry of Communications, to evaluate the status of the concessions and propose guidelines for the amendment of the concession agreements. In November 2015, the Ministry of Communications opened public consultation on the new regulatory framework for telecommunications. The Ministry of Communications has extended the deadline for contributions on multiple occasions. In April 2016, the Ministry of Communications, based on the working group’s findings, issued a decree addressing guidelines for the establishment of a new regulatory framework for telecommunications, which will be implemented by ANATEL through the conclusion of the concession amendments. The guidelines provide for, among other things, the expansion of broadband services (including in rural regions), the elimination of the reversibility of assets, and an extension of the term of our concessions, which are currently scheduled to expire in 2025. As a result of the publication of these guidelines, ANATEL requested a further postponement of the review of our concession agreements, which was granted. As a result of this extension, the review of our concession agreements is currently scheduled to occur by December 2016.

We cannot assure you that any future amendments to our concession agreements, including the amendments now expected to be made in 2016, will not impose requirements on our company that will require us to undertake significant capital expenditures or will not modify the rate-setting procedures applicable to us in a manner that will significantly reduce the net operating revenue that we generate from our Brazilian fixed-line businesses. If the amendments to our Brazilian concession agreements have these effects, our business, financial condition and results of operations could be materially adversely affected.

Our local fixed-line and domestic long-distance concession agreements expire on December 31, 2025 and we cannot assure you that our bids for new concessions upon the expiration of our existing concessions will be successful or that the pending expiration of these concessions will not have adverse effects on our ability to finance our operations.

Our concession agreements will expire on December 31, 2025. We expect the Brazilian government to offer new concessions in competitive auctions prior to the expiration of our existing concession agreements. We may participate in such auctions, but our existing fixed-line and domestic long-distance concession agreements will not entitle us to preferential treatment in these auctions. If we do not secure concessions for our existing service areas in any future auctions, or if such concessions are on less favorable terms than our current concessions, our business, financial condition and results of operations would be materially adversely affected. In addition, based on the current scheduled expiration of our concession agreements and the uncertainty that term of these concessions will be extended, investors may be unwilling to make investments in our company on terms that are attractive to our

 

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company, or at all. Our inability to raise capital in the equity or debt markets on favorable terms, or at all, could have a materially adverse effect on our business, financial condition and results of operations.

Our local fixed-line and domestic long-distance concession agreements in Brazil, as well as our authorizations to provide personal mobile services in Brazil, contain certain obligations, and our failure to comply with these obligations may result in various fines and penalties being imposed on us by ANATEL.

Our local fixed-line and domestic long-distance concession agreements in Brazil contain terms reflecting the General Plan on Universal Service Goals (Plano Geral de Metas de Universalização), the General Plan on Quality Goals (Plano Geral de Metas de Qualidade) and other regulations adopted by ANATEL, the terms of which could affect our financial condition and results of operations. Our local fixed-line concession agreements in Brazil also require us to meet certain network expansion, quality of service and modernization obligations in each of the Brazilian states in our service areas. In the event of noncompliance with ANATEL targets in any one of these states, ANATEL can establish a deadline for achieving the targeted level of such service, impose penalties and, in extreme situations, terminate the applicable concession agreement for noncompliance with our quality and universal service obligations. See “Item 4: Information on the Company—Regulation of the Brazilian Telecommunications Industry—Regulation of Fixed-Line Services.”

On an almost weekly basis, we receive inquiries from ANATEL requiring information from us on our compliance with the various service obligations imposed on us by our concession agreements. If we are unable to respond satisfactorily to those inquiries or comply with our service obligations under our concession agreements, ANATEL may commence administrative proceedings in connection with such noncompliance. We have received numerous notices of the commencement of administrative proceedings from ANATEL, mostly due to our inability to achieve certain targets established in the General Plan on Quality Goals and the General Plan on Universal Service Goals, among others. As of December 31, 2015, we had recorded provisions in the amount of R$1,149 million in connection with fines sought to be imposed by ANATEL, including fines which we are contesting through judicial proceedings. In the event that we are unsuccessful in obtaining final approval of the inclusion of the R$5 billion of fines and claims we have proposed to be included in the Terms of Adjustment of Conduct (“Termos de Ajuste de Conduta”) program, or the TAC program, we could be required to constitute an additional provision of the portion of these fines and claims for which we have not previously established a provision. Additional fines from ANATEL, the establishment of an additional provision or fines in excess of the provisioned amount could adversely impact our financial condition and results of operations. See “Item 4. Information on the Company—Regulation of the Brazilian Telecommunications Industry” and “Item 8. Financial Information—Legal Proceedings—Civil Claims Relating to Oi S.A. and Our Brazilian Operations—Administrative Proceedings.”

In addition, our authorizations to provide personal mobile services contain certain obligations requiring us to meet network scope and quality of service targets. If we fail to meet these obligations, we may be fined by ANATEL until we are in full compliance with our obligations and, in extreme circumstances, our authorizations could be revoked by ANATEL. For example, on July 23, 2012, ANATEL temporarily suspended our ability to accept new customers for our mobile services in the States of Amazonas, Amapá, Mato Grosso do Sul, Roraima and Rio Grande do Sul due to ANATEL’s perception of our failure to meet capital investment and quality of service commitments in those states. This suspension lasted for approximately two weeks until we were able to propose new quality of service goals to ANATEL. See “Item 4. Information on the Company—Regulation of the Brazilian Telecommunications Industry—Regulation of Mobile Services—Obligations of Personal Mobile Services Providers.”

We may be unable to implement our plans to expand and enhance our existing networks in Brazil in a timely manner or without unanticipated costs, which could hinder or prevent the successful implementation of our business plan and result in revenues and net income being less than expected.

Our ability to achieve our strategic objectives depends in large part on the successful, timely and cost-effective implementation of our plans to expand and enhance our networks in Brazil. Factors that could affect this implementation include:

 

    our ability to generate cash flow or to obtain future financing necessary to implement our projects;

 

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    delays in the delivery of telecommunications equipment by our vendors;

 

    the failure of the telecommunications equipment supplied by our vendors to comply with the expected capabilities;

 

    the failure to obtain licenses necessary for our projects; and

 

    delays resulting from the failure of third-party suppliers or contractors to meet their obligations in a timely and cost-effective manner.

Although we believe that our cost estimates and implementation schedule are reasonable, we cannot assure you that the actual costs or time required to complete the implementation of these projects will not substantially exceed our current estimates. Any significant cost overrun or delay could hinder or prevent the successful implementation of our business plan and result in revenues and net income being less than expected.

Risks Relating to Our African and Asian Operations

We may be unable to dispose of our interest in Africatel for a consideration that exceeds its carrying value in our financial statements or at all. Any impairment of the fair market value at which we record our indirect investment in Unitel in our financial statements would have a material adverse effect on our financial condition and results of operations.

On September 16, 2014, our board of directors authorized our management to take the necessary measures to market our shares in Africatel, representing 75% of the share capital of Africatel. As a result, as of December 31, 2014 and 2015, we recorded the assets and liabilities of Africatel as held-for sale, although we do not record Africatel as discontinued operations in our income statement due to the immateriality of the effects of Africatel on our results of operations. We have engaged a financial advisor to assist us with marketing and selling our interest in Africatel.

As of December 31, 2015, we recorded in our consolidated financial statements as assets held for sale R$7,686 million relating to our interest in Africatel and TPT, including R$2,042 million of accrued dividends owed to our company by Unitel and R$3,436 million representing the fair market value of Africatel’s 25% interest in Unitel, and recorded as liabilities directly associated with assets held for sale of R$745 million relating to our interest in Africatel and TPT. We are currently engaged in negotiations with the other shareholders of Unitel to seek alternatives for the realization of the value of our investment in Unitel.

We may not be able to sell our interest in Africatel for consideration that exceeds the book value of our interest in Africatel, or at all. The book value of our indirect investment in Unitel is subjected to testing for impairment when events or changes in circumstances indicate that the value of our indirect investment in Unitel may be lower than the fair market value at which we carry this investment. For the year ended December 31, 2015, we recorded a R$408 million loss as a result of our review of the fair value of our investment in Unitel. Any further impairment of our indirect investment in Unitel may result in a material adverse effect on our financial condition and operating results.

We cannot assure you as to when PT Ventures will realize the accounts receivable recorded with respect to the declared and unpaid dividends owed to PT Ventures by Unitel or when PT Ventures will receive dividends that may have been declared with respect to 2014 or may be declared with respect to succeeding fiscal years.

Since November 2012, PT Ventures has not received any payments for outstanding amounts owed to it by Unitel with respect to dividends declared by Unitel for the fiscal years ended December 31, 2012 and 2011, and the extraordinary dividends declared by Unitel in November 2010 based on its 2005 results of operations and free reserves held in 2006 through 2009. Based on the dividends declared by Unitel for those fiscal years, PT Ventures is entitled to receive the total amounts of US$187.5 million (R$732.2 million) with respect to fiscal year 2013, US$190.0 million (R$742.0 million) with respect to fiscal year 2012, US$190.0 million (R$742.0 million) with respect to fiscal year 2011, and US$157.5 million (R$615.0 million) with respect to the dividends declared in

 

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2010. As of the date of this annual report, PT Ventures has only received US$63.7 million (R$248.7 million) of its share of the dividends declared by Unitel in 2010, and has not received any amount in respect of dividends declared by Unitel with respect to fiscal years 2011, 2012 or 2013.

On March 25, 2014, Unitel issued a statement claiming that PT Ventures is not listed on the shareholders’ register of Unitel, and that the board of directors of Unitel had notified Pharol about the existence of an irregularity, which purportedly resulted in Unitel being unable to distribute dividends to PT Ventures until the resolution of this irregularity. On June 3, 2014, the Angolan National Foreign Investment Agency endorsed the updating of PT Ventures’ name (formerly Portugal Telecom Internacional, SGPS, S.A.) in its Foreign Investment Certificate, confirming the current corporate name of the PT Ventures and thus remedying the irregularity alleged by Unitel’s board of directors.

At a general meeting of the shareholders of Unitel held on May 13, 2015, the other shareholders discussed the financial statements as well as the payment of dividends with respect to fiscal year 2014. The other Unitel shareholders did not permit PT Ventures to attend and participate in this shareholders’ meeting alleging that they did not acknowledge PT Ventures as a Unitel shareholder. As a result, PT Ventures has filed a suit against Unitel with an Angolan court seeking to nullify and cancel all actions purportedly taken by the May 13, 2015 shareholders’ meeting. PT Ventures has received a draft of the minutes of this meeting but has not received the final version. The draft minutes indicate that Unitel declared dividends in the amount of US$490.0 million (R$1,913.5 million), of which PT Ventures’ share amounts to US$122.5 million (R$478.4 million). Because we have not received fully executed minutes of this meeting, and because we are seeking to annul the actions taken by this meeting, we have not recorded our share of these dividends in our financial statements.

On several occasions, PT Ventures has requested an explanation from Unitel about its failure to pay to PT Ventures its share of the declared dividends. As of the date of this annual report, PT Ventures has not received a satisfactory explanation regarding this failure to pay, nor has PT Ventures received reliable indications as to the expected timing of the payment of the accrued dividends. As a result, PT Ventures has filed a suit against Unitel with an Angolan court seeking to collect its share of the dividends declared by Unitel in 2010, 2011, 2012 and 2013, together with interest thereon. As a result of our institution of this suit, in 2015 we recognized a provision with respect to the unpaid dividends of US$132.2 million (R$516.2 million).

We cannot assure you that we will be successful in this suit, as to the timing, of the payment of the accrued dividends to our company, or whether we will be able to receive dividends that have been declared with respect to fiscal year 2013 or may have been declared with respect to fiscal year 2014 or that may be declared by Unitel in the future. Our inability to receive these dividends could have a material adverse impact on the fair value of our investment in Unitel, our financial position and our results of operations.

The other shareholders of Unitel have claimed that they believe that Pharol’s sale of a minority interest in Africatel to our company did not comply with the Unitel shareholders’ agreement.

The Unitel shareholders’ agreement provides a right of first refusal to the other shareholders of Unitel if any shareholder desires to transfer any or all of its shares of Unitel, other than transfers to certain affiliated companies. This agreement also provides that if any shareholder breaches a material obligation under the Unitel shareholders’ agreement, the other shareholders will have a right to purchase the breaching shareholder’s stake in Unitel at its net asset value.

On March 14, 2016, the other shareholders of Unitel initiated an arbitration proceeding against PT Ventures, claiming that Pharol’s sale of a minority interest in Africatel to our company did not comply with the Unitel shareholders’ agreement. The other shareholders of Unitel had previously made the same claim as a counterclaim in the arbitration started by PT Ventures on October 13, 2015, but then withdrew that counterclaim. PT Ventures disputes the other shareholders’ interpretation of the relevant provisions of the Unitel shareholders’ agreement, and we believe that the relevant provisions of the Unitel shareholders’ agreement apply only to a transfer of Unitel shares by PT Ventures itself.

PT Ventures is seeking to consolidate this arbitration proceeding with the separate arbitration proceeding brought by PT Ventures against the other shareholders of Unitel. We intend to defend against the allegation by

 

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Unitel’s other shareholders vigorously. If a binding decision by the arbitral tribunal were rendered ruling in favor of the interpretation of the Unitel shareholders’ agreement proposed by the other Unitel shareholder, PT Ventures could be required to sell its interest in Unitel for a value significantly lower than the amount that we record in our financial statements with respect to our indirect investment in Unitel. The sale of PT Ventures’ interest in Unitel in these circumstances could have a material adverse impact on our financial condition and results of operations.

The other shareholders of Unitel have prevented PT Ventures from exercising its rights to appoint the chief executive officer and a majority of the board of directors of Unitel.

Under the Unitel shareholders’ agreement, PT Ventures is entitled to appoint three of the five members of Unitel’s board of directors and its chief executive officer. Under the Unitel shareholders’ agreement, the appointment of the chief executive officer of Unitel is subject to the approval of the holders of 75% of Unitel’s shares. However, the other shareholders of Unitel have failed to vote to elect the directors nominated by PT Ventures at Unitel’s shareholders’ meetings, and as a result, PT Ventures’ representation on Unitel’s board of directors was reduced to a single director in June 2006, and the chief executive officer of Unitel has not been PT Ventures’ appointee since June 2006.

On July 22, 2014, the only member of Unitel’s board of directors that had been appointed by PT Ventures resigned from his position, and the other shareholders of Unitel have not permitted PT Ventures to appoint a replacement. In November 2014, the other shareholders of Unitel stated to PT Ventures that its rights as a shareholder of Unitel had been purportedly suspended in October 2012, although these other shareholders have not indicated any legal basis for this alleged suspension. At a general shareholders meeting of Unitel held on December 15, 2014, an election of members of the board of directors of Unitel was held. At this meeting, Unitel’s other shareholders claimed that PT Ventures was not entitled to vote as a result of the alleged suspension of its rights as a shareholder of Unitel in October 2012, and they refused to elect the member nominated by PT Ventures to Unitel’s board of directors. As of the date of this annual report, no nominee of PT Ventures serves on the Unitel board of directors.

On October 13, 2015, PT Ventures initiated an arbitration proceeding against the other shareholders of Unitel as a result of the violation by those shareholders of a variety of provisions of the Unitel shareholders’ agreement, including the provisions entitling PT Ventures to nominate the majority of the members of the board of directors of Unitel and its chief executive officer. Vidatel Ltd., one of the other shareholders, presented its answer to PT Ventures’ request for arbitration on January 8, 2016. The arbitral tribunal was constituted on April 14, 2016 and the proceedings are ongoing.

Unitel has granted loans to a related party and entered into a management contract with a third-party without the approval of PT Ventures.

Under the Unitel shareholders’ agreement, the shareholders of Unitel and their affiliates are not permitted to enter into any contracts with Unitel unless the contracts are approved by a resolution of Unitel’s board of directors adopted by at least four members of its board of directors. As a result of the inability of PT Ventures to appoint members of the Unitel board of directors, PT Ventures is unable to effectively exercise its implied veto right over related party transactions of Unitel.

Between May and October 2012, Unitel made disbursements to Unitel International Holdings B.V. of €178.9 million (R$760.4 million) and US$35.0 million (R$136.7 million) under a “Facility Agreement” entered into between Unitel and Unitel International Holdings B.V., or Unitel Holdings. Unitel Holdings is controlled by Mrs. Isabel dos Santos, an indirect shareholder of Unitel and a member of the board of directors of Unitel. PT Ventures abstained when the consolidated financial statements of Unitel that included these transactions were approved by the other Unitel shareholders at a shareholders meeting.

In addition, Unitel has recognized the payment of a management fee of US$155.7 million (R$608.0 million) payable to a third-party in its individual financial statements for the year ended December 31, 2013 prepared in accordance with Angolan GAAP.

 

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In September and November 2015, PT Ventures commenced litigation in the British Virgin Island and the Netherlands against Unitel Holdings and other entities concerning the related party transactions with Unitel.

Despite requests, PT Ventures has been unable to obtain documents and other information concerning transactions between Unitel and Unitel International Holdings B.V., including any transactions that Unitel may have entered into in addition to those described above from 2012 and 2013. We have evidence that Unitel made additional loans to related parties in 2013 that were not approved in accordance with the terms of the Unitel shareholders’ agreement. We have not been able to obtain information with regard to the existence of similar transactions conducted in 2014 and 2015.

We cannot assure you that we will be able to prevent Unitel from taking actions that should require the approval of the members of the Unitel board of directors nominated by PT Ventures, including approving related party transactions with the other shareholders of Unitel that we believe are detrimental to the financial condition and results of operations of Unitel. The use of the resources of Unitel in this manner could have a material adverse impact on the financial position and results of operations of Unitel and therefore the value of our investment in Unitel.

On October 13, 2015, PT Ventures initiated an arbitration proceeding against the other shareholders of Unitel as a result of the violation by those shareholders of a variety of provisions of the Unitel shareholders’ agreement, including the provisions that would have entitled PT Ventures to veto these related party transactions.

The other shareholders of Unitel have attempted to dilute our indirect ownership of Unitel through a capital increase in which we could be technically unable to participate, and have called shareholders’ meetings at which they have indicated the desire to unilaterally amend the by-laws of Unitel and the Unitel shareholders’ agreement.

At a general shareholders meeting of Unitel held on December 15, 2014, the other shareholders of Unitel voted to increase Unitel’s share capital and alter the nominal value of its shares. The details of this capital increase are obscure to us as they were not included in the prior notice for this meeting nor were they discussed in detail during this meeting. Additional details of this capital increase have been included in draft minutes of this meeting provided to PT Ventures and it appears that, although PT Ventures has determined to subscribe to its pro rata share of this capital increase to avoid dilution of its interest in Unitel, payment of the subscription price may be proposed under conditions that would not permit PT Ventures to obtain the necessary foreign exchange approvals prior to the date on which payment would be due. PT Ventures has filed a suit in Angolan court to annul the approval of the Unitel capital increase at this shareholders’ meeting.

The agenda of this general shareholders meeting of Unitel included amendments to Unitel’s by-laws and purported amendments to Unitel shareholders’ agreement, in addition to other matters that may have been raised at the shareholders’ meeting itself, which included investments by Unitel in Zimbabwe and a study in order to implement a corporate reorganization of Unitel. We have not been provided of the details of the proposed by-law amendments nor of any purported amendments to the Unitel shareholders’ agreement. The December 15, 2014 meeting was suspended without any action taken on these items. PT Ventures has filed a suit in Angolan court to annul all resolutions taken during this general shareholders meeting, including the approval of investments by Unitel in Zimbabwe and a study in order to implement a corporate reorganization of Unitel.

We cannot assess the impact to Unitel or our company of the matters considered at the December 15, 2014 general shareholders’ meeting of Unitel or the proposed amendments to Unitel’s by-laws and purported amendments to the Unitel shareholders’ agreement as we have not been provided with sufficient details to appropriately analyze these matters. We note that there appears to be no legal authority for the other shareholders of Unitel to amend the Unitel shareholders’ agreement through actions taken at a general meeting of shareholders, as this agreement is an agreement among the parties thereto. Should the other shareholders approve actions detrimental to Unitel or our investment in Unitel, these actions could have a material adverse impact on the financial position and results of operations of Unitel and therefore the value of our investment in Unitel.

 

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Unitel’s concession to operate in Angola has expired and has not yet been renewed.

Unitel’s concession to provide mobile telecommunications services in Angola expired in April 2012. We cannot provide you with any assurances regarding the terms under which the Angolan National Institute of Telecommunications (Instituto Angolano das Comunicações), or INACOM, would grant a renewal of this concession, if at all. A failure of Unitel to obtain a renewal of this concession could have a material adverse effect on the ability of Unitel to continue to provide mobile telecommunications services in Angola, which would have a material adverse effect on Unitel’s financial position and results of operations and the value of our investment in Unitel.

Adverse political, economic and legal conditions in the African and Asian countries in which we have acquired investments may hinder our ability to receive dividends from our African and Asian subsidiaries and investments.

The governments of many of the African and Asian countries in which we have investments have historically exercised, and continue to exercise, significant influence over their respective economies and legal systems. Countries in which we have investments may enact legal or regulatory measures that restrict the ability of our subsidiaries and investees to make dividend payments to us. Similarly, adverse political or economic conditions in these countries may hinder our ability to receive dividends from our subsidiaries and investees. Historically, Pharol has received dividends from the African and Asian subsidiaries and investees that we have acquired, however, a limitation on our ability to receive a material portion of those dividends could adversely affect our cash flows and liquidity.

In addition, our investments in these regions are exposed to political and economic risks that include, but are not limited to, exchange rate and interest rate fluctuations, inflation and restrictive economic policies and regulatory risks that include, but are not limited to, the process for the renewal of licenses and the evolution of regulated retail and wholesale tariffs. In addition, our ventures in African and Asian markets face risks associated with increasing competition, including due to the entrance of new competitors and the rapid development of new technologies.

The development of partnerships in these markets raises risks related to the ability of the partners to jointly operate the assets. Any inability of our company and our partners to operate these assets may have a negative impact on our strategy and all of these risks may have material effects on our results of operations.

Risks Relating to Brazil

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

We are a Brazilian corporation and a majority of our operations and customers are located in Brazil. Accordingly, our financial condition and results of operations are substantially dependent on Brazil’s economy. The Brazilian government frequently intervenes in the Brazilian economy and occasionally makes significant changes in policy and regulations. The Brazilian government’s actions to control inflation and implement macroeconomic policies have often involved increases in interest rates, wage and price controls, currency devaluations, blocking access to bank accounts, imposing capital controls and limits on imports, among other things. We do not have any control over, and are unable to predict, which measures or policies the Brazilian government may adopt in the future. Our business, results of operations and financial condition may be adversely affected by changes in policies or regulations, or by other factors such as:

 

    political instability;

 

    devaluations and other currency fluctuations;

 

    inflation;

 

    price instability;

 

    interest rates;

 

    liquidity of domestic capital and lending markets;

 

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    energy shortages;

 

    exchange controls;

 

    changes to the regulatory framework governing our industry;

 

    monetary policy;

 

    tax policy;

 

    other political, diplomatic, social and economic developments in or affecting Brazil, including with respect to alleged unethical or illegal conduct of certain figures in the Brazilian government and legislators, which are currently under investigation.

Uncertainty over whether possible changes in policies or rules affecting these or other factors may contribute to economic uncertainties in Brazil and to heightened volatility in the Brazilian securities markets and securities issued abroad by Brazilian issuers. The President of Brazil has considerable power to determine governmental policies and actions that relate to the Brazilian economy and, consequently, affect the operations and financial performance of businesses such as our company. We can offer no assurances that the policies that may be implemented by the Brazilian federal or state governments will not adversely affect our business, results of operations and financial condition.

In addition, protests, strikes and corruption scandals have led to a fall in confidence and a political crisis. For example, Brazilian markets have been experiencing heightened volatility due to the uncertainties derived from the ongoing “Lava Jato” investigation, which is being conducted by the Office of the Brazilian Federal Prosecutor, and its impact on the Brazilian economy and political environment. Members of the Brazilian federal government and of the legislative branch, as well as senior officers of certain Brazilian private and state-owned companies, have faced allegations of political corruption. These government officials and senior officers allegedly accepted bribes by means of kickbacks on contracts granted by major state-owned companies to several infrastructure, oil and gas and construction companies. The profits of these kickbacks allegedly financed the political campaigns of the main political parties in Brazil that were unaccounted for or not publicly disclosed, as well as served to personally enrich the recipients of the bribery scheme. As a result of the ongoing “Lava Jato” investigation, a number of senior politicians, including congressman and officers of the major state-owned companies in Brazil resigned or have been arrested. The potential outcome of the “Lava Jato” investigation is uncertain, but it has already adversely affected the Brazilian markets and trading prices of securities issued by Brazilian issuers. We cannot predict whether the “Lava Jato” investigation will lead to further political and economic instability or whether new allegations against government officials or other companies in Brazil will arise in the future.

Furthermore, on December 2, 2015, the Brazilian Congress opened impeachment proceedings against Brazilian President Dilma Rousseff for allegedly breaking federal budget laws during her re-election campaign in 2014. On May 12, 2016, the Brazilian Congress voted to suspend President Rousseff from office for a period of up to 180 days during which time the Brazilian Senate will conduct an impeachment trial. Vice-President Michel Temer will serve as acting President of Brazil during this period. We cannot predict the outcome of President Rousseff’s impeachment trial or its effect on the Brazilian economy. Moreover, there is strong popular pressure and several legal and administrative proceedings for the revocation of the mandate or resignation of the Head of the Brazilian House of Representatives, which have led to further uncertainties. The political crisis prompted by these investigations and proceedings could worsen the economic conditions in Brazil and adversely affect our results of operations and financial condition.

Depreciation of the real may lead to substantial losses on our liabilities denominated in or indexed to foreign currencies.

During the four decades prior to 1999, the Brazilian Central Bank periodically devalued the Brazilian currency. Throughout this period, the Brazilian government implemented various economic plans and used various exchange rate policies, including sudden devaluations (such as daily and monthly adjustments), exchange controls, dual exchange rate markets and a floating exchange rate system. Since 1999, exchange rates have been set by the market. The exchange rate between the real and the U.S. dollar has varied significantly in recent years. For example, the real/U.S. dollar exchange rate increased from R$1.9554 per U.S. dollar on December 31, 2000 to R$3.5333 on December 31, 2002. The real appreciated against the U.S. dollar by 4.3% during 2010, and has depreciated by 8.9% against the U.S. dollar during 2012, by 14.6% during 2013, by 13.4% during 2014 and by 47.1% during 2015. In

 

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addition, the real appreciated against the Euro by 10.4% during 2010, and has depreciated by 10.7% against the Euro during 2012, by 19.7% during 2013, was substantially unchanged during 2014 and depreciated by 31.7% in 2015.

A significant amount of our financial liabilities are denominated in or indexed to foreign currencies, primarily U.S. dollars and Euros. As of December 31, 2015, R$47,372 million of our consolidated financial indebtedness was denominated in currencies other than the real. When the real depreciates against foreign currencies, we incur losses on our liabilities denominated in or indexed to foreign currencies, such as our U.S. dollar-denominated and Euro-denominated long-term debt and foreign currency loans, and we incur gains on our monetary assets denominated in or indexed to foreign currencies, as the liabilities and assets are translated into reais. If significant depreciation of the real were to occur when the value of such liabilities significantly exceeds the value of such assets, including any financial instruments entered into for hedging purposes, we could incur significant losses, even if the value of those assets and liabilities has not changed in their original currency. In addition, a significant depreciation in the real could adversely affect our ability to meet certain of our payment obligations. A failure to meet certain of our payment obligations could trigger a default under certain financial covenants in our debt instruments, which could have a material adverse effect on our business and results of operations. Historically, we have maintained currency swaps and non-deliverable forwards to manage our exposure to most of our foreign currency debt. During 2016, in connection with our consideration of potential plans to restructure our indebtedness, we have not rolled over our non-deliverable forwards and have selectively settled several of our long-term currency swaps. As a result, our exposure to foreign currency fluctuations has increased substantially. If we are able to restructure our indebtedness in a manner satisfactory to our company, we expect the increased exposure to foreign currency fluctuations to be temporary. In the event that these expectations are not met, the effects of foreign currency fluctuations on our debt instruments could have a material adverse effect on our financial condition and results of operations.

A portion of our capital expenditures and operating leases require us to acquire assets or use third-party assets at prices denominated in or linked to foreign currencies, some of which are financed by liabilities denominated in foreign currencies, principally the U.S. dollar and the Euro. We generally do not hedge against risks related to movements of the real against foreign currencies. To the extent that the value of the real decreases relative to the U.S. dollar or the Euro, it becomes more costly for us to purchase these assets or services, which could adversely affect our business and financial performance.

Depreciation of the real relative to the U.S. dollar could create additional inflationary pressures in Brazil by increasing the price of imported products and requiring recessionary government policies, including tighter monetary policy. On the other hand, appreciation of the real against the U.S. dollar may lead to a deterioration of the country’s current account and balance of payments, as well as to a dampening of export-driven growth.

If Brazil experiences substantial inflation in the future, our margins and our ability to access foreign financial markets may be reduced. Government measures to curb inflation may have adverse effects on the Brazilian economy, the Brazilian securities market and our business and results of operations.

Brazil has, in the past, experienced extremely high rates of inflation, with annual rates of inflation reaching as high as 2,708% in 1993 and 1,093% in 1994. Inflation and some of the Brazilian government’s measures taken in an attempt to curb inflation have had significant negative effects on the Brazilian economy.

Since the introduction of the real in 1994, Brazil’s inflation rate has been substantially lower than in previous periods. However, actions taken in an effort to control inflation, coupled with speculation about possible future governmental actions, have contributed to economic uncertainty in Brazil and heightened volatility in the Brazilian securities market. More recently, Brazil’s rates of inflation, as measured by the General Market Price Index — Internal Availability (Índice Geral de Preços — Disponibilidade Interna), or IGP-DI, published by Fundação Getúlio Vargas, or FGV, were 5.0% in 2011, 8.1% in 2012, 5.5% in 2013, 3.8% in 2014 and 10.7% in 2015. According to the Broad Consumer Price Index (Índice Nacional de Preços ao Consumidor Ampliado), or IPCA, published by the Brazilian Institute for Geography and Statistics (Instituto Brasileiro de Geografia e Estatística), or IBGE, the Brazilian consumer price inflation rates were 6.5% in 2011, 5.8% in 2012, 5.9% in 2013, 6.4% in 2014 and 10.7% in 2015.

 

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If Brazil experiences substantial inflation in the future, our costs may increase and our operating and net margins may decrease. Although ANATEL regulations provide for annual price increases for most of our services in Brazil, such increases are linked to inflation indices, discounted by increases in our productivity. During periods of rapid increases in inflation, the price increases for our services may not be sufficient to cover our additional costs and we may be adversely affected by the lag in time between the incurrence of increased costs and the receipt of revenues resulting from the annual price increases. Inflationary pressures may also curtail our ability to access foreign financial markets and may lead to further government intervention in the economy, including the introduction of government policies that may adversely affect the overall performance of the Brazilian economy.

Fluctuations in interest rates could increase the cost of servicing our debt and negatively affect our overall financial performance.

Our financial expenses are affected by changes in the interest rates that apply to our floating rate debt. As of December 31, 2015, we had, among other consolidated debt obligations, R$8,950 million of loans and financings that were subject to the London Interbank Offered Rate, or LIBOR, R$6,361 million of loans and financings and debentures that were subject to the Interbank Certificate of Deposit (Certificado de Depósito Interbancário), or CDI, rate, an interbank rate, R$3,151 million of loans and financings and debentures that were subject to the Long-Term Interest Rate (Taxa de Juros de Longo Prazo), or TJLP, a long-term interest rate, and R$1,515 million of loans and financings that were subject to the IPCA.

The TJLP includes an inflation factor and is determined quarterly by the National Monetary Council (Conselho Monetário Nacional). In particular, the TJLP and the CDI rate have fluctuated significantly in the past in response to the expansion or contraction of the Brazilian economy, inflation, Brazilian government policies and other factors. For example, the CDI increased from 6.90% per annum as of December 31, 2012 to 9.77% per annum as of December 31, 2013, increased to 11.57% per annum as of December 31, 2014 and increased to 14.13% per annum as of December 31, 2015. A significant increase in any of these interest rates, particularly the CDI rate, could adversely affect our financial expenses and negatively affect our overall financial performance.

The market value of securities issued by Brazilian companies is influenced by the perception of risk in Brazil and other countries, which may have a negative effect on the trading price of our common shares, preferred shares and ADSs and may restrict our access to international capital markets.

Economic and market conditions in other countries and regions, including the United States, the European Union and emerging market countries, may affect to varying degrees the market value of securities of Brazilian issuers. Although economic conditions in these countries and regions may differ significantly from economic conditions in Brazil, investors’ reactions to developments in these other countries may have an adverse effect on the market value of securities of Brazilian issuers, the availability of credit in Brazil and the amount of foreign investment in Brazil. Crises in the European Union, the United States and emerging market countries have at times resulted in significant outflows of funds from Brazil and may diminish investor interest in securities of Brazilian issuers, including our company. This could materially and adversely affect the market price of our securities, and could also make it more difficult for us to access the capital markets and finance our operations in the future on acceptable terms or at all.

Restrictions on the movement of capital out of Brazil may impair our ability to service certain debt obligations.

Brazilian law provides that whenever there exists, or there is a serious risk of, a material imbalance in Brazil’s balance of payments, the Brazilian government may impose restrictions for a limited period of time on the remittance to foreign investors of the proceeds of their investments in Brazil as well as on the conversion of the real into foreign currencies. The Brazilian government imposed such a restriction on remittances for approximately six months in 1989 and early 1990. The Brazilian government may in the future restrict companies from paying amounts denominated in foreign currency or require that any such payment be made in reais. Many factors could affect the likelihood of the Brazilian government imposing such exchange control restrictions, including the extent of Brazil’s foreign currency reserves, the availability of sufficient foreign exchange on the date a payment is due, the size of Brazil’s debt service burden relative to the economy as a whole, and political constraints to which Brazil may be subject. There can be no certainty that the Brazilian government will not take such measures in the future.

 

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A more restrictive policy could increase the cost of servicing, and thereby reduce our ability to pay, our foreign currency-denominated debt obligations and other liabilities. As of December 31, 2015, our foreign-currency denominated debt was R$47,372 million and represented 78.4% of our consolidated indebtedness. If we fail to make payments under any of these obligations, we will be in default under those obligations, which could reduce our liquidity as well as the market price of our common shares, preferred shares and ADSs.

In addition, a more restrictive policy could hinder or prevent the Brazilian custodian of the common shares and preferred shares underlying our ADSs or holders who have exchanged our ADSs for the underlying common shares or preferred shares from converting dividends, distributions or the proceeds from any sale of such shares into U.S. dollars and remitting such U.S. dollars abroad. In such an event, the Brazilian custodian for our common shares and preferred shares will hold the reais that it cannot convert for the account of holders of our ADSs who have not been paid. Neither the custodian nor The Bank of New York Mellon, as depositary of our ADS programs, which we refer to as the depositary, will be required to invest the reais or be liable for any interest.

Risks Relating to Our Common Shares, Preferred Shares and ADSs

Holders of our common shares, preferred shares or ADSs may not receive any dividends or interest on shareholders’ equity.

According to our by-laws and the Brazilian Corporation Law, we must generally pay our shareholders at least 25% of our annual net income as dividends or interest on shareholders’ equity, as calculated and adjusted under Brazilian GAAP. This adjusted net income may be capitalized, used to absorb losses or otherwise retained as allowed under Brazilian GAAP and may not be available to be paid as dividends or interest on shareholders’ equity. Holders of our common shares or Common ADSs, may not receive any dividends or interest on shareholders’ equity in any given year due to the dividend preference of our preferred shares. Additionally, the Brazilian Corporation Law allows a publicly traded company like ours to suspend the mandatory distribution of dividends in any particular year if our board of directors informs our shareholders that such distributions would be inadvisable in view of our financial condition or cash availability. Holders of our preferred shares or Preferred ADSs may not receive any dividends or interest on shareholders’ equity in any given year if our board of directors makes such a determination or if our operations fail to generate net income.

Our preferred shares and Preferred ADSs have limited voting rights and are not entitled to vote to approve corporate transactions, including mergers or consolidations of our company with other companies, or the declaration of dividends.

Under the Brazilian Corporation Law and our by-laws, holders of our preferred shares and, consequently, our Preferred ADSs, are not entitled to vote at meetings of our shareholders, except in very limited circumstances. These limited circumstances directly relate to key rights of the holders of preferred shares, such as modifying basic terms of our preferred shares or creating a new class of preferred shares with superior rights. Holders of preferred shares without voting rights are entitled to elect one member and his or her respective alternate to our board of directors and our fiscal council. Holders of our preferred shares and Preferred ADSs are not entitled to vote to approve corporate transactions, including mergers or consolidations of our company with other companies, or the declaration of dividends. See “Item 10. Additional Information—Description of Our Company’s By-laws—Voting Rights.”

Holders of our ADSs may find it difficult to exercise their voting rights at our shareholders’ meetings.

Under Brazilian law, only shareholders registered as such in our corporate books may attend our shareholders’ meetings. All common shares and preferred shares underlying our ADSs are registered in the name of the depositary. ADS holders may exercise the voting rights with respect to our common shares and the limited voting rights with respect to our preferred shares represented by our ADSs only in accordance with the deposit agreements relating to our ADSs. There are practical limitations upon the ability of the ADS holders to exercise their voting rights due to the additional steps involved in communicating with ADS holders. For example, we are required to publish a notice of our shareholders’ meetings in certain newspapers in Brazil. To the extent that holders of our common shares or preferred shares are entitled to vote at a shareholders’ meeting, they will be able to exercise their voting rights by attending the meeting in person or voting by proxy. By contrast, holders of the ADSs may receive notice of a shareholders’ meeting by mail from the depositary if we notify the depositary of the shareholders’

 

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meeting and request the depositary to inform ADS holders of the shareholders’ meeting. To exercise their voting rights, ADS holders must instruct the depositary on a timely basis. This noticed voting process will take longer for ADS holders than for holders of our common shares or preferred shares. If the depositary fails to receive timely voting instructions for all or part of our ADSs, the depositary will assume that the holders of those ADSs are instructing it to give a discretionary proxy to a person designated by us to vote their ADSs, except in limited circumstances.

In the circumstances in which holders of our ADSs have voting rights, they may not receive the voting materials in time to instruct the depositary to vote our common shares or preferred shares underlying their ADSs. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions of the holders of our ADSs or for the manner of carrying out those voting instructions. Accordingly, holders of our ADSs may not be able to exercise voting rights, and they will have no recourse if the common shares or preferred shares underlying their ADSs are not voted as requested.

Holders of our common shares, preferred shares or ADSs in the United States may not be entitled to the same preemptive rights as Brazilian shareholders have, pursuant to Brazilian legislation, in the subscription of shares resulting from capital increases made by us.

Under Brazilian law, if we issue new shares in exchange for cash or assets as part of a capital increase, subject to certain exceptions, we must grant our shareholders preemptive rights at the time of the subscription of shares, corresponding to their respective interest in our share capital, allowing them to maintain their existing shareholding percentage. We may not legally be permitted to allow holders of our common shares, preferred shares or ADSs in the United States to exercise any preemptive rights in any future capital increase unless (1) we file a registration statement for an offering of shares resulting from the capital increase with the U.S. Securities and Exchange Commission, or SEC, or (2) the offering of shares resulting from the capital increase qualifies for an exemption from the registration requirements of the Securities Act. At the time of any future capital increase, we will evaluate the costs and potential liabilities associated with filing a registration statement for an offering of shares with the SEC and any other factors that we consider important in determining whether to file such a registration statement. We cannot assure the holders of our common shares, preferred shares or ADSs in the United States that we will file a registration statement with the SEC to allow them to participate in any of our capital increases. As a result, the equity interest of such holders in our company may be diluted.

If holders of our ADSs exchange them for common shares or preferred shares, they may risk temporarily losing, or being limited in, the ability to remit foreign currency abroad and certain Brazilian tax advantages.

The Brazilian custodian for the common shares and preferred shares underlying our ADSs must obtain an electronic registration number with the Brazilian Central Bank to allow the depositary to remit U.S. dollars abroad. ADS holders benefit from the electronic certificate of foreign capital registration from the Brazilian Central Bank obtained by the custodian for the depositary, which permits it to convert dividends and other distributions with respect to the common shares or preferred shares into U.S. dollars and remit the proceeds of such conversion abroad. If holders of our ADSs decide to exchange them for the underlying common shares or preferred shares, they will only be entitled to rely on the custodian’s certificate of registration with the Brazilian Central Bank for five business days after the date of the exchange. Thereafter, they will be unable to remit U.S. dollars abroad unless they obtain a new electronic certificate of foreign capital registration in connection with the common shares or preferred shares, which may result in expenses and may cause delays in receiving distributions. See “Item 10. Additional Information—Exchange Controls.”

Also, if holders of our ADSs that exchange our ADSs for our common shares or preferred shares do not qualify under the foreign investment regulations, they will generally be subject to less favorable tax treatment of dividends and distribution on, and the proceeds from any sale of, our common shares or preferred shares. See “Item 10. Additional information—Exchange Controls” and “Item 10. Additional Information—Taxation—Brazilian Tax Considerations.”

 

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Holders of our ADSs may face difficulties in protecting their interests because, as a Brazilian company, we are subject to different corporate rules and regulations and our shareholders may have fewer and less well-defined rights.

Holders of our ADSs are not direct shareholders of our company and are unable to enforce the rights of shareholders under our by-laws and the Brazilian Corporation Law.

Our corporate affairs are governed by our by-laws and the Brazilian Corporation Law, which differ from the legal principles that would apply if we were incorporated in a jurisdiction in the United States, such as the State of Delaware or New York, or elsewhere outside Brazil. Even if a holder of our ADSs surrenders its ADSs and becomes a direct shareholder, its rights as a holder of our common shares or preferred shares under the Brazilian Corporation Law to protect its interests relative to actions by our board of directors may be fewer and less well-defined than under the laws of those other jurisdictions.

Although insider trading and price manipulation are crimes under Brazilian law, the Brazilian securities markets are not as highly regulated and supervised as the U.S. securities markets or the markets in some other jurisdictions. In addition, rules and policies against self-dealing or for preserving shareholder interests may be less well-defined and enforced in Brazil than in the United States and certain other countries, which may put holders of our common shares, preferred shares and ADSs at a potential disadvantage. Corporate disclosures also may be less complete or informative than those of a public company in the United States or in certain other countries.

Brazilian bankruptcy laws may be less favorable to you than bankruptcy and insolvency laws in other jurisdictions.

If we are unable to pay our indebtedness, then we may become subject to bankruptcy proceedings in Brazil. The bankruptcy laws of Brazil currently in effect are significantly different from, and may be less favorable to creditors than, those of certain other jurisdictions. Any judgment obtained against us in Brazilian courts in respect of any payment obligations under our debt instruments normally would be expressed in the real equivalent of the U.S. dollar amount of such sum at the exchange rate in effect (1) on the date of actual payment, (2) on the date on which such judgment is rendered, or (3) on the date on which collection or enforcement proceedings are started against us. Consequently, in the event of our bankruptcy, all of our debt obligations that are denominated in foreign currency, will be converted into reais at the prevailing exchange rate on the date of declaration of our bankruptcy by the court.

We are exempt from some of the corporate governance requirements of the New York Stock Exchange.

We are a foreign private issuer, as defined by the SEC for purposes of the Exchange Act. As a result, for so long as we remain a foreign private issuer, we will be exempt from, and you will not be provided with the benefits of, some of the corporate governance requirements of The New York Stock Exchange, or the NYSE. We are permitted to follow practice in Brazil in lieu of the provisions of the NYSE’s corporate governance rules, except that:

 

    we are required to have an audit committee that satisfies the requirements of Rule 10A-3 under the Exchange Act;

 

    we are required to disclose any significant ways in which our corporate governance practices differ from those followed by domestic companies under NYSE listing standards;

 

    our chief executive officer is obligated to promptly notify the NYSE in writing after any of our executive officers becomes aware of any non-compliance with any applicable provisions of the NYSE corporate governance rules; and

 

    we must submit an executed written affirmation annually to the NYSE. In addition, we must submit an interim written affirmation as and when required by the interim written affirmation form specified by the NYSE.

The standards applicable to us are considerably different than the standards applied to U.S. domestic issuers. Although Rule 10A-3 under the Exchange Act generally requires that a listed company have an audit committee of

 

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its board of directors composed solely of independent directors, as a foreign private issuer, we are relying on a general exemption from this requirement that is available to us as a result of the features of Brazilian law applicable to our fiscal council. In addition, we are not required to, among other things:

 

    have a majority of independent members of our board of directors;

 

    have a compensation committee or a nominating or corporate governance committee of our board of directors;

 

    have regularly scheduled executive sessions with only non-management directors; or

 

    have at least one executive session of solely independent directors each year.

We intend to rely on some or all of these exemptions. As a result, you will not be provided with the benefits of certain corporate governance requirements of the NYSE.

We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and similar antibribery laws outside of the United States.

The U.S. Foreign Corrupt Practices Act, or the FCPA, and similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments to government officials or other persons for the purpose of obtaining or retaining business. Recent years have seen a substantial increase in anti-bribery law enforcement activity, with more frequent and aggressive investigations and enforcement proceedings by both the U.S. Department of Justice and the SEC, increased enforcement activity by non-U.S. regulators, and increases in criminal and civil proceedings brought against companies and individuals. Our policies mandate compliance with these anti-bribery laws. We operate, through our businesses, in countries that are recognized as having governmental and commercial corruption. We cannot assure you that our internal control policies and procedures will protect us from reckless or criminal acts committed by our employees, the employees of any of our businesses, or third party intermediaries. In the event that we believe or have reason to believe that our employees or agents have or may have violated applicable anti-corruption laws, including the FCPA, we may be required to investigate or have outside counsel investigate the relevant facts and circumstances, which can be expensive and require significant time and attention from senior management. Violations of these laws may result in criminal or civil sanctions, inability to do business with existing or future business partners (either as a result of express prohibitions or to avoid the appearance of impropriety), injunctions against future conduct, profit disgorgements, disqualifications from directly or indirectly engaging in certain types of businesses, the loss of business permits or other restrictions which could disrupt our business and have a material adverse effect on our business, financial condition, results of operations or liquidity.

Holders of our ADSs may face difficulties in serving process on or enforcing judgments against us and other persons.

We are organized under the laws of Brazil, and all of the members of our board of directors, our executive officers and our independent registered public accountants reside or are based in Brazil. The vast majority of our assets and those of these other persons are located in Brazil. As a result, it may not be possible for holders of our ADSs to effect service of process upon us or these other persons within the United States or other jurisdictions outside Brazil or to enforce against us or these other persons judgments obtained in the United States or other jurisdictions outside Brazil. In addition, because substantially all of our assets and all of our directors and officers reside outside the United States, any judgment obtained in the United States against us or any of our directors or officers may not be collectible within the United States. Because judgments of U.S. courts for civil liabilities based upon the U.S. federal securities laws may only be enforced in Brazil if certain conditions are met, holders may face greater difficulties in protecting their interests in the case of actions by us or our board of directors or executive officers than would shareholders of a U.S. corporation.

 

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Brazilian tax laws may have an adverse impact on the taxes applicable to the disposition of our common shares, preferred shares and ADSs.

According to Law No. 10,833, enacted on December 29, 2003, if a nonresident of Brazil disposes of assets located in Brazil, the transaction will be subject to taxation in Brazil, even if such disposition occurs outside Brazil or if such disposition is made to another nonresident. A disposition of our ADSs between nonresidents, however, involves the disposal of a non-Brazilian asset and in principle is currently not subject to taxation in Brazil. Nevertheless, in the event that the concept of “disposition of assets” is interpreted to include the disposition between nonresidents of assets located outside Brazil, this tax law could result in the imposition of withholding taxes in the event of a disposition of our ADSs made by nonresidents of Brazil. Due to the fact that as of the date of this annual report Law No. 10,833/2003 has no judicial guidance as to its application, we are unable to predict whether an interpretation applying such tax laws to dispositions of our ADSs between nonresidents could ultimately prevail in Brazilian courts. See “Item 10. Additional Information—Taxation—Brazilian Tax Considerations.”

We believe we were a passive foreign investment company for our taxable year ended December 31, 2015, which could result in adverse U.S. federal income tax consequences to U.S. Holders of our American depository shares or ordinary shares.

We will be classified as a passive foreign investment company, or PFIC, in any taxable year if either: (1) 50% or more of the fair market value of our gross assets (determined on the basis of a quarterly average) for the taxable year produce passive income or are held for the production of passive income, or (2) 75% or more of our gross income for the taxable year is passive income. As a publicly traded foreign corporation we intend for this purpose to treat the aggregate fair market value of our gross assets as being equal to the aggregate value of our outstanding stock plus the total amount of our liabilities (“market capitalization”) and to treat the excess of the fair market value of our assets over their book value as a nonpassive asset to the extent attributable to our nonpassive income. Based on the market price of our common shares and preferred shares and the composition of our assets, we believe we were a PFIC for U.S. federal income tax purposes for our taxable year ended December 31, 2015. Furthermore, unless the value of our common shares and preferred shares increases and/or we invest a substantial amount of our cash and other passive assets in assets that produce active income, there is a significant risk we will be a PFIC for our taxable year ending December 31, 2016. The application of the PFIC rules is subject to uncertainty in several respects, and we must make a separate determination after the close of each taxable year as to whether we were a PFIC for such year. Because we believe we were a PFIC for our taxable year ended December 31, 2015, certain adverse U.S. federal income tax consequences could apply to a U.S. investor who holds our common shares, preferred shares or ADSs with respect to any “excess distribution” received from us and any gain from a sale or other disposition of our common shares, preferred shares or ADSs, and U.S. investors also may be subject to additional reporting obligations with respect to our common shares, preferred shares or ADSs. We do not intend to provide the information necessary for the U.S. investor to make a qualified electing fund election with respect to our common shares, preferred shares or ADSs. See “Item 10. Additional Information—Taxation – U.S. Federal Income Tax Considerations – Passive Foreign Investment Company Rules.”

The relative volatility and illiquidity of the Brazilian securities markets may adversely affect holders of our common shares, preferred shares and ADSs.

The Brazilian securities markets are substantially smaller, less liquid and more volatile than major securities markets in the United States. The BM&FBOVESPA, which is the principal Brazilian stock exchange, had a market capitalization of R$1.9 trillion (US$490 billion) as of December 31, 2015 and an average daily trading volume of R$6.8 billion (US$2.1 billion) for 2015. In comparison, aggregate market capitalization of the companies (including U.S. and non-U.S. companies) listed on the NYSE was US$17.8 trillion as of December 31, 2015 and the NYSE recorded an average daily trading volume of US$64.0 billion for 2015. There is also significantly greater concentration in the Brazilian securities markets. The ten largest companies in terms of market capitalization represented approximately 51% of the aggregate market capitalization of the BM&FBOVESPA as of December 31, 2015. The ten most widely traded stocks in terms of trading volume accounted for approximately 44% of all shares traded on the BM&FBOVESPA in 2015. These market characteristics may substantially limit the ability of holders of our ADSs to sell the preferred shares underlying our ADSs at a price and at a time when they wish to do so and, as a result, could negatively impact the market price of our ADSs themselves.

 

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The imposition of IOF taxes may indirectly influence the price and volatility of our common shares, preferred shares and ADSs.

Brazilian law imposes the Tax on Foreign Exchange Transactions, or the IOF/Exchange Tax, on the conversion of reais into foreign currency and on the conversion of foreign currency into reais. Brazilian law also imposes the Tax on Transactions Involving Bonds and Securities, or the IOF/Securities Tax, due on transactions involving bonds and securities, including those carried out on a Brazilian stock exchange.

In October 2009, the Brazilian government imposed the IOF/Exchange Tax at a rate of 2.0% in connection with inflows of funds related to investments carried out by non-Brazilian investors in the Brazilian financial and capital markets with the objective of slowing the pace of speculative inflows of foreign capital into the Brazilian market and the appreciation of the real against the U.S. dollar. The rate of the IOF/Exchange Tax generally applicable to foreign investments in the Brazilian financial and capital markets was later increased to 6.0%. In December 2011, the rate of the IOF/Exchange Tax applicable to several types of investments was reduced back to zero percent. As of the date of this annual report, all investments in the Brazilian financial and capital markets are subject to the IOF/Exchange Tax rate of zero percent.

In November 2009, the Brazilian government also established that the rate of the IOF/Securities Tax would apply to the transfer of shares with the specific purpose of enabling the issuance of ADSs. In December 2013, the rate of the IOF/Securities Tax applicable to transactions involving the issuance of ADSs was reduced to zero percent.

The imposition of these taxes may discourage foreign investment in shares of Brazilian companies, including our company, due to higher transaction costs, and may negatively impact the price and volatility of our ADSs and common shares on the NYSE and the BM&FBOVESPA.

 

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ITEM 4. INFORMATION ON THE COMPANY

Overview

We are one of the principal integrated telecommunications service providers in Brazil with approximately 70.0 million revenue generating units, or RGUs, as of December 31, 2015. We operate throughout Brazil and offer a range of integrated telecommunications services that include fixed-line and mobile telecommunication services, network usage (interconnection), data transmission services (including broadband access services), Pay-TV (including as part of double-play, triple-play and quadruple-play packages), internet services and other telecommunications services for residential customers, small, medium and large companies and governmental agencies. We own approximately 363,000 kilometers of installed fiber optic cable, distributed throughout Brazil. Our mobile network covers areas in which approximately 88.7% of the Brazilian population lives and works. According to ANATEL, as of December 31, 2015, we had an 18.6% market share of the Brazilian mobile telecommunications market and, as of December 31, 2015, we had a 34.7% market share of the Brazilian fixed-line market. As part of our convergence strategy, we offer more than one million Wi-Fi hotspots in public places, such as airports and shopping malls.

Our traditional Residential Services business in Brazil includes (1) local and long-distance fixed-line voice services and public telephones, in accordance with the concessions granted to us by ANATEL, (2) broadband services, (3) Pay-TV services, and (4) network usage services (interconnection). We are the largest fixed-line telecommunications companies in Brazil in terms of total number of lines in service as of December 31, 2015. We are the principal fixed-line telecommunications services provider in our service areas, comprising the entire territory of Brazil other than the State of São Paulo, based on our 14.9 million fixed lines in service as of December 31, 2015, with a market share of 55.0% of the total fixed lines in service in our service areas as of December 31, 2015.

We offer a variety of high-speed broadband services in our fixed-line service areas, including services offered by our subsidiaries BrT Serviços de Internet S.A., or BrTI, and Brasil Telecom Comunicação Multimídia Ltda. Our broadband services primarily utilize Asymmetric Digital Subscriber Line, or ADSL, technology. As of December 31, 2015, we had 5.8 million ADSL subscribers, representing 62% of our fixed lines in service as of that date.

We offer Pay-TV services under our Oi TV brand. We deliver Pay-TV services throughout our residential service areas using DTH satellite technology.

Our Personal Mobility Services business offers mobile telecommunications services throughout Brazil, as well as network usage services (interconnection). Based on our 48.1 million mobile subscribers as of December 31, 2015, we believe that we are one of the principal mobile telecommunications service providers in Brazil. Based on information available from ANATEL, as of December 31, 2015 our market share was 18.6% of the total number of mobile subscribers in Brazil.

Our SME and Corporate Services business provide voice and data services to our SME and corporate customers throughout Brazil.

As a result of our acquisition in May 2014 of all of the operating assets then held by Pharol, except interests held directly or indirectly in TmarPart and our company, and subsequent to our sale in June 2015 of PT Portugal, we hold significant interests in telecommunications companies in Angola, Cape Verde, Namibia, São Tomé and Principe in Africa and Timor Leste in Asia. Our interests in telecommunications companies in Africa are held through Africatel, in which we own a 75% interest. Our interests in telecommunications companies in Timor Leste are held through TPT, in which we own a 76.14% interest. On September 16, 2014, our board of directors authorized our management to take the necessary measures to market our shares in Africatel, representing 75% of the share capital of Africatel. In addition, on June 17, 2015, our board of directors authorized our management to take the necessary measures to market our shares in TPT, representing 76.14% of the share capital of TPT. As a result, as of December 31, 2014 and 2015, we recorded the assets and liabilities of Africatel and TPT as held-for sale, although we do not record Africatel or TPT as discontinued operations in our income statement due to the immateriality of the effects of Africatel and TPT on our results of operations. Due to the many risks involved in the ownership of these interests, particularly our interest in Unitel, we cannot predict when a sale of these assets may be completed.

 

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Our principal executive office is located at Rua Humberto de Campos No. 425, 6 1/2th floor–Leblon, 22430-190 Rio de Janeiro, RJ, Brazil, and our telephone number at this address is (55-21) 3131-2918.

Our Recent History and Development

Adoption of Transformation Plan

Following the change in our senior management in 2014, we developed a plan to pursue business growth through innovative solutions that focus on enhancing our customers’ experience rather than merely selling our services, which we refer to as the Transformation Plan. The Transformation Plan emphasizes interdepartmental collaboration and the development of integrated solutions that we believe will result in a cost-efficient, sustainable business with a focus on client satisfaction. The initiatives of the Transformation Plan are grouped under four pillars: Digitalization, Convergence, Data and Cost Control all aiming to provide the customer with a better experience. Digitalization refers to the process of making certain of our services available electronically, either through applications for smartphones or on our website enhancing the relationship with our customers. Convergence refers to offerings of combined services, such as the bundled offerings that we launched during 2015, including the following plan portfolios: Oi Total in the Residential business; Oi Mais and Oi Livre in the Personal Mobility Services business; and Oi Mais Empresas in the SME and Corporate Services business. Offering all products under one package provides better customer satisfaction and higher loyalty and margins, essential to any capital intensive and competitive market. Data refers to the growing customer demand for larger data packages with unrestricted use. Cost Control refers to various measures we are undertaking to reduce our costs and expenses and maximize the efficiency and sustainability of our operations. The solutions we developed in connection with the Transformation Plan were based on a comprehensive study of our customers’ telecommunications needs, with a view to improve the way our customers communicate.

In December 2014, we created a department tasked with monitoring and supporting the execution of the Transformation Plan, which we refer to as the Transformation Project Department. The Transformation Project Department consists of a team of employees from various departments, was initially led by a chief transformation project officer, who oversaw the process and reported directly to our chief executive officer. During 2015, members of the Transformation Project Department team met with senior management on a weekly basis to discuss progress on the more than 300 initiatives developed pursuant to the Transformation Plan. In late 2015, we created a strategy and new business department, which we refer to as the Strategy and New Business Department, which supplemented the Transformation Project Department’s role with respect to initiatives related to new business, human resources, communications, marketing and digitalization. In February 2016, the Strategy and New Business Department took over the chief transformation project officer’s role of overseeing the Transformation Project Department.

The Transformation Plan was divided into two key phases, each of which can be summarized by four key goals. The first phase focused on short-term solutions designed to enable our company to remain competitive in a challenging macroeconomic environment. The four key goals of the first phase of the Transformation Plan are: (1) cost savings, (2) working capital improvements, (3) customer profitability improvements, and (4) optimization of our organizational structure. First phase initiatives included reductions in operating expenses, optimization of capital expenditures, reductions in working capital costs, changes in marketing strategies and pricing models and reductions in head-count related costs, such as overtime pay and travel expenses. We implemented several first phase initiatives during the first quarter of 2015, including the renegotiation of 69% of the number of contracts slated for renegotiation, the reduction of the number of vehicles in our fleet by 13% and the reduction of headcount-related expenses by 37%, as compared to the fourth quarter of 2014.

The second phase consists of end-to-end initiatives designed to integrate our departments and enable our company to provide integrated service to our customers. The four key goals of the second phase of the Transformation Plan are: (1) process and organizational efficiency, (2) commercial and operational productivity, (3) cross-departmental improvement and (4) enhanced customer experience. Second phase initiatives combine elements of each of the pillars of the Transformation Plan to seek to deliver integrated solutions to our customers. An example of a second phase initiative was the transformation of our call center operations, which was accomplished by revising our customer complaint procedures and creating a specialized team of specially trained call center professional to handle all downgrade requests. This initiative involved changes to and collaboration among multiple departments within our company. We began implementing second phase initiatives in the second quarter of 2015 and will continue to do so. As of December 31, 2015, approximately 87% of the initiatives we developed pursuant to the Transformation Plan had been implemented. The remaining initiatives, many of which are more complex and require more time to become fully operational, are in the process of being implemented. We believe that the

 

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Transformation Plan initiatives were the most significant factors that led to increases in our revenues per RGU in 2015, the decline in operating expenses per RGU and a 17% reduction in customer complaint calls in 2015, in each case as compared to 2014.

Outsourcing of Mobile Handset and Tablet Inventory and Distribution Management

In September 2015, we entered into an agreement with Allied S.A., or Allied, a technology equipment distributor in Brazil, pursuant to which Allied has agreed to manage the purchase, distribution and sale of mobile handsets and tablets exclusively to our sales channels. We remain responsible for the strategic management of the supply chain, the relationship with our sales channels and the choice of our handset portfolio. We entered into this agreement with Allied as part of our effort to further accelerate sales and the migration of our mobile customer base to 3G and 4G smartphones, improve logistics efficiencies associated with the supply of mobile handsets and tablets to our sales channels, reduce logistics and warehousing costs and reduce the working capital used in carrying handset and tablet inventories.

Rio Forte Defaults and PT Exchange

Prior to the Oi capital increase, Pharol’s then wholly-owned subsidies PTIF and PT Portugal subscribed to an aggregate of €897 million principal amount of commercial paper of Rio Forte Investments S.A., or Rio Forte, that matured in July 2014. As a result of our acquisition of PT Portugal as part of the Oi capital increase, we became the creditor under this commercial paper.

On July 15 and 17, 2014, Rio Forte defaulted on the commercial paper held by PTIF and PT Portugal. On July 22, 2014, Rio Forte filed a petition for controlled management with the courts of Luxembourg after concluding that it was not in a position to fulfill the obligations resulting from certain debts that had matured in July 2014. Rio Forte’s request was rejected on October 17, 2014. The Luxembourg Commercial Court denied Rio Forte’s request for controlled management on October 17, 2014 and declared Rio Forte bankrupt on December 8, 2014.

On September 8, 2014, we, TmarPart, Pharol and our subsidiaries PT Portugal and PTIF, entered into the Exchange Agreement, or the PT Exchange Agreement, and a stock option agreement, or the PT Option Agreement. On the same date, we, Pharol and TmarPart executed a terms of commitment agreement, which we refer to as the Terms of Commitment Agreement. For more information regarding the PT Option Agreement and the Terms of Commitment Agreement, see “Item 7. Major Shareholders and Related Party Transactions— Related Party Transactions.”

On March 24, 2015, PT Portugal assigned its rights under the PT Exchange Agreement and the PT Option Agreement to PTIF. On March 27, 2015, PT Portugal assigned all of its rights and obligations under the Rio Forte commercial paper that it owned to PTIF.

Under the PT Exchange Agreement, we agreed to transfer the defaulted Rio Forte commercial paper to Pharol and Pharol agreed to deliver to us an aggregate of 47,434,872 of our common shares and 94,869,744 of our preferred shares, representing 16.9% of our outstanding share capital, including 17.1% of our outstanding voting capital prior to giving effect to the PT Exchange.

On March 30, 2015, the transactions contemplated by the PT Exchange Agreement were completed through the transfer of Rio Forte commercial paper in the aggregate amount of €897 million to Pharol in exchange for 47,434,872 of our common shares and 94,869,744 of our preferred shares.

Sale of PT Portugal

On June 2, 2015, we sold all of the share capital of PT Portugal to Altice Portugal for a purchase price equal to the enterprise value of PT Portugal of €6,900 million, subject to adjustments based on the financial debt, cash and working capital of PT Portugal on the closing date, plus an additional earn-out amount of €500 million in the event that the consolidated revenues of PT Portugal and its subsidiaries (as of the closing date) for any single year between the year ending December 31, 2015 and the year ending December 31, 2019 is equal to or exceeds €2,750 million.

 

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In connection with the closing, Altice Portugal disbursed €5,789 million, of which €869 million was utilized by PT Portugal to prepay outstanding indebtedness in that amount, and €4,920 million were paid to our company in cash. As of December 31, 2015, we had used R$8,682 million of the net cash proceeds of the PT Portugal Disposition for the prepayment of indebtedness of our company, and as of the date of this annual report have used an additional R$5,350 million of these net cash proceeds for the prepayment and repayment of indebtedness of our company. We expect to use the remainder of these net cash proceeds for the repayment of indebtedness of our company.

In anticipation of the PT Portugal Disposition, PT Portugal transferred PTIF, its wholly-owned finance subsidiary, to Oi. As a result of the completion of the PT Portugal Disposition, the indebtedness of PTIF, which had previously been classified as liabilities associated with assets held for sale in our consolidated financial statements, was reclassified as indebtedness of our company. In addition, in connection with the PT Portugal Disposition, PTIF assumed all obligations under PT Portugal’s outstanding 6.25% Notes due 2016.

In addition, PT Portugal transferred to Oi all of the outstanding share capital of PT Participações, which holds our direct and indirect interests in Africatel and TPT, which provides telecommunications, multimedia and IT services in Timor Leste.

Issuance of €600 Million of 5.625% Notes due 2021 and Tender for PTIF and Oi Notes

In June 2015, our wholly-owned subsidiary Oi Brasil Holdings Coöperatief U.A., issued and sold 5.625% notes due 2021 in the aggregate principal amount of €600 million. We used €321.54 million of the proceeds of these notes to repurchase €56.92 million aggregate principal amount of PTIF’s 5.625% Notes due 2016, €115.88 million aggregate principal amount of PTIF’s 4.375% Notes due 2017 and €148.74 million aggregate principal amount of Oi’s 5.125% Notes due 2017 that we had offered to purchase in a contemporaneous tender offer. We used the remaining net proceeds of the issuance of these notes to repay or prepay other indebtedness of our company.

Alternative Share Structure and Corporate Ownership Simplification

On March 31, 2015, the shareholders of TmarPart acting at a pre-meeting (reunião prévia) of the shareholders of TmarPart (1) unanimously approved the adoption of an alternative share structure, after analyzing options and taking into consideration the obstacles to the completion of the previously announced merger of shares of Oi and TmarPart, and (2) authorized the managements of TmarPart and Oi to begin taking the applicable steps to implement the alternative share structure. The alternative share structure was intended to achieve many of the primary purposes of the merger of shares of Oi and TmarPart, including the adoption by our company of the best corporate governance practices required by BM&FBovespa’s Novo Mercado segment and the elimination of the control of Oi through the various shareholders’ agreements governing Oi, while maintaining the goal of implementing a transaction that would result in the listing of the shares of Oi on the Novo Mercado.

The implementation of the alternative share structure consisted of the corporate ownership simplification transactions (described below), the adoption of new by-laws of our company, the election of a new board of directors of our company, and a voluntary share exchange through which holders of our preferred shares were entitled to exchange their preferred shares for our common shares.

On September 1, 2015, we and several of our direct and indirect shareholders undertook the following transactions, which we refer to collectively as the corporate ownership simplification transactions:

 

    AG Telecom merged with and into PASA;

 

    LF Tel merged with and into EDSP;

 

    PASA and EDSP merged with and into Bratel Brasil;

 

    Valverde merged with and into TmarPart;

 

    Venus RJ Participações S.A., Sayed RJ Participações S.A. and PTB2 S.A. merged with and into Bratel Brasil;

 

    Bratel Brasil merged with and into TmarPart; and

 

    TmarPart merged with and into our company.

 

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In connection with these transactions, all of the shareholders’ agreements to which we were an intervening party and through which the direct and indirect shareholders of TmarPart had rights to influence our management and operations were terminated. In the merger of TmarPart with and into Oi, the net assets of TmarPart, in the amount of R$122.4 million were merged into the shareholders’ equity of Oi and as a result of the merger, TmarPart ceased to exist. The merger of TmarPart with and into Oi also resulted in the transfer to the shareholders’ equity of Oi of goodwill derived from the acquisition of equity interest recorded by Bratel Brasil, AG Telecom, LF Tel, and TmarPart, in accordance with applicable Brazilian law. In the merger of TmarPart with and into Oi, shareholders of TmarPart received the same number of shares of Oi as were held by TmarPart immediately prior to the merger of TmarPart with and into Oi in proportion to their holdings in TmarPart. No withdrawal rights for the holders of shares of Oi were available in connection with the merger of TmarPart with and into Oi.

At an extraordinary shareholders meeting of our company held on September 1, 2015, our shareholders (1) adopted amended by-laws for our company that were intended to increase the corporate governance standards applicable to our company as well as to limit the voting rights of holders of a large concentration of common shares, and (2) elected a new board of directors with terms of office until the shareholders’ meeting that approves our financial statements for the year ending December 31, 2017. For more information about our amended by-laws, see “Item 10. Additional Information— Description of Our Company’s By-laws.” For more information about the members of our board of directors, see “Item 6. Directors, Senior Management and Employees—Board of Directors.”

On October 8, 2015, we completed a voluntary share exchange under which we had offered (1) the holders of our preferred shares (including preferred shares represented by the Preferred ADSs), the opportunity to convert their preferred shares into our common shares at a ratio of 0.9211 common shares for each preferred share, plus cash in lieu of any fractional share, and (2) the holders of the Preferred ADSs the opportunity to exchange their Preferred ADSs for Common ADSs at a ratio of 0.9211 Common ADSs for each Preferred ADS, plus cash in lieu of any fractional Common ADS. Holders of 314,250,655 of our outstanding preferred shares tendered their shares for conversion or exchange of the related ADSs. Each of Pharol and Caravelas participated in the voluntary share exchange and surrendered all of its preferred shares for conversion. As a result of the voluntary share exchange, 314,250,655 of our outstanding preferred shares were cancelled and in exchange we issued 289,456,278 of our common shares.

Acquisition of Telemont

In October 2015, we acquired the operations in Rio de Janeiro of Telemont Engenharia de Telecomunicações S.A., or Telemont. We had entered into a services agreement with Telemont in January 2012 for installation, operation, and corrective and preventive maintenance in connection with our external plant and associated equipment, public telephones, and fiber optic and data communication networks (including broadband access services) in the State of Rio de Janeiro.

Exclusivity Agreement with LetterOne

In October 2015, we entered into an exclusivity agreement with LetterOne Technology (UK) LLP, or LetterOne, with respect to the negotiation of a potential transaction for the specific purpose of allowing a consolidation in the Brazilian telecommunications industry involving a potential business combination with TIM. As part of the potential transaction, LetterOne proposed to make a capital contribution of up to US$4.0 billion in our company, contingent on the completion of the consolidation transaction. On February 25, 2016, we were notified by LetterOne that it had been informed by TIM that the latter was no longer interested in proceeding with the negotiations of a business combination with our company and that without TIM’s involvement, LetterOne could not proceed with transaction as previously planned.

Engagement of PJT Partners

On March 9, 2016, we announced that we had retained PJT Partners as our financial advisor to assist us in evaluating financial and strategic alternatives to optimize our liquidity and debt profile. On April 25, 2016, we entered into a customary non-disclosure agreement with Moelis & Company, who acts as advisor for a diverse ad

 

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hoc group of holders of the bonds issued by Oi and its subsidiaries, as an initial step towards discussions of a potential restructuring of its indebtedness.

Acquisition of A.R.M.

We had entered into a services agreement with A.R.M. Engenharia in October 2012 for installation, operation and corrective and preventive maintenance in connection with our external plant and associated equipment, public telephones, and fiber optic and data communication networks (including broadband access services) in the States of Maranhão, Piauí, Ceará, Rio Grande do Norte, Paraíba, Pernambuco, Alagoas, Sergipe, Bahia, Amazonas, Roraima, Pará, Amapá, Rio Grande do Sul, Paraná and Santa Catarina.

In April and May 2016, we acquired A.R.M. Engenharia’s operations in the States of Rio Grande do Sul, Santa Catarina and Paraná, and we are managing those operations. Also in May 2016, we entered into an agreement with the shareholders of A.R.M. Engenharia to acquire the totality of the shares issued by ARM Engenharia. The completion of the transaction is subject to customary conditions precedent, including the completion of financial and legal due diligence and approval by the Administrative Council for Economic Defense.

 

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Corporate Structure

The following chart presents our corporate structure and principal operating subsidiaries as of May 13, 2016.

 

LOGO

Operations in Brazil

Our concessions and authorizations from the Brazilian government allow us to provide:

 

    fixed-line telecommunications services in Regions I and II of Brazil;

 

    long-distance telecommunications services throughout Brazil;

 

    mobile telecommunications services in Regions I, II and III of Brazil;

 

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    data transmission services throughout Brazil; and

 

    direct to home (DTH) satellite television services throughout Brazil.

In addition, we have authorizations to provide fixed-line local telecommunications services in Region III.

Region I consists of 16 Brazilian states located in the northeastern and part of the northern and southeastern regions. Region I covers an area of approximately 5.4 million square kilometers, which represents approximately 64% of the country’s total land area and accounted for 40.3% of Brazil’s GDP in 2011. The population of Region I was 105.3 million as of 2011, which represented 54.7% of the total population of Brazil as of that date. In 2011, per capita income in Region I was approximately R$15,869, varying from R$7,836 in the State of Piauí to R$28,696 in the State of Rio de Janeiro.

Region II consists of the Federal District and nine Brazilian states located in the western, central and southern regions. Region II covers an area of approximately 2.9 million square kilometers, which represents approximately 33.5% of the country’s total land area and accounted for approximately 27.1% of Brazil’s GDP in 2011. The population of Region II was 45.5 million as of 2011, which represented 23.7% of the total population of Brazil as of that date. In 2011, per capita income in Region II was approximately R$24,668, varying from R$11,782 in the State of Acre to R$63,020 in the Federal District.

Region III consists of the State of São Paulo. Region III covers an area of approximately 248,000 square kilometers, which represents approximately 2.9% of the country’s total land area and accounted for approximately 32.6% of Brazil’s GDP in 2011. The population of Region III was 41.6 million as of 2011, which represented 21.6% of the total population of Brazil as of that date. In 2011, per capita income in Region III was approximately R$32,449.

The following table sets forth key economic data, compiled by IBGE, for the Federal District and each of the Brazilian states.

 

State

   Population
(in millions)
(2011)
     Population
per

Square
Kilometer
(2011)
     % of GDP
(2011)
     GDP per
Capita
(in 
reais)
(2011)
 

Region I:

           

Rio de Janeiro

     16.1         368.7         11.2         28,696   

Minas Gerais

     19.7         33.6         9.3         19,573   

Bahia

     14.1         25.0         3.9         11,340   

Pernambuco

     8.9         90.2         2.5         11,776   

Espírito Santo

     3.5         77.0         2.4         27,542   

Pará

     7.7         6.2         2.1         11,494   

Ceará

     8.5         57.3         2.1         10,314   

Amazonas

     3.5         2.3         1.6         18,244   

Maranhão

     6.6         20.0         1.3         7,853   

Rio Grande do Norte

     3.2         60.6         0.9         11,287   

Paraíba

     3.8         67.2         0.9         9,349   

Alagoas

     3.1         113.2         0.7         9,079   

Sergipe

     2.1         95.4         0.6         12,536   

Piauí

     3.1         12.5         0.6         7,836   

Amapá

     0.7         4.8         0.2         13,105   

Roraima

     0.5         2.1         0.2         15,105   
  

 

 

       

 

 

    

Subtotal

     105.3            40.3      

Region II:

           

Rio Grande do Sul

     10.7         38.1         6.4         24,563   

Paraná

     10.5         52.7         5.8         22,770   

 

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State

   Population
(in millions)
(2011)
     Population
per

Square
Kilometer
(2011)
     % of GDP
(2011)
     GDP per
Capita

(in reais)
(2011)
 

Santa Catarina

     6.3         66.3         4.1         26,761   

Goiás

     6.1         17.9         2.7         18,299   

Mato Grosso

     3.1         3.4         1.7         23,218   

Federal District

     2.6         448.3         4.0         63,020   

Mato Grosso do Sul

     2.5         6.9         1.2         19,875   

Rondônia

     1.6         6.6         0.7         17,659   

Tocantins

     1.4         5.0         0.4         12,891   

Acre

     0.7         4.5         0.2         11,782   
  

 

 

       

 

 

    

Subtotal

     45.5            27.1      

Region III (State of São Paulo)

     41.6         167.5         32.6         32,449   
  

 

 

       

 

 

    

Total

     192.4            100.0      
  

 

 

       

 

 

    

 

Source: IBGE.

Set forth below is a map of Brazil showing the areas in Region I, Region II and Region III.

 

LOGO

 

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Our business, financial condition, results of operations and prospects depend in part on the performance of the Brazilian economy. See “Item 3. Key Information—Risk Factors — Risks Relating to Brazil.”

Our Services

We provide a variety of telecommunications services to the residential market, the personal mobility market and the SME and corporate markets throughout Brazil.

Residential Services

Our primary services to the residential market are fixed-line voice, broadband and Pay-TV services. We offer these services on an a la carte basis and as bundles, including bundles with other services including our mobile voice services and our mobile data communications services. In the Residential Services business, we view the household, rather than an individual, as our customer, and our offerings–particularly our bundled offerings–are designed to meet the needs of the household as a whole.

We identified cost savings and customer profitability initiatives as two of the pillars of the first phase of the Transformation Plan, which phase was largely implemented in 2015. As a result, we decreased our commercial efforts throughout the year in order to reduce sales expenses and capital expenditures. In late 2015, however,we increased commercial efforts by launching several plans aimed at reducing costs and offering more comprehensive services to our customers at higher prices. These higher-value offerings increased our ARPU in the residential services business even as our customer base decreased.

Also in 2015, our Residential Services business launched a series of initiatives aimed at increasing convergence among our product offerings, one of the key pillars of the Transformation Plan. As a result, offerings of our bundled services took on increasing importance, as they provide a better and more integrated experience for our customers while also increasing our ARPU.

Bundled Services

Our bundled services offerings adopted as part of the Transformation Plan have focused on increasing our profitability by providing a more comprehensive mix of higher-value services to our customers. In 2015, we focused our efforts on upselling and cross-selling our services to existing customers, enhancing existing customer loyalty and attracting new customers by offering higher-value services such as the bundled services in the “Oi Total” and “Oi Conta Total” portfolios. We believe that these measures, together with oursimplified plan offeringsin the Residential Services business, resulted in an ARPU increase for each of our residential services (fixed-line voice, broadband and Pay-TV services) in 2015.

In addition, we believe bundled offerings build customer loyalty and serve to reduce churn rates as compared to standalone services. Certain bundles offer incentives such as free installation of fixed-line and broadband services, free modem and Wi-Fi and access to certain smartphone applications for up to three months free of charge. We believe that a bundle that contains more services can be more appealing to a customer than, for example, standalone broadband services at faster speeds. Both Embratel and Telefônica Brasil offer broadband services at higher speeds than us. However, neither company has a quadruple-play bundle, such as Oi Total Completo, that combines fixed-line voice, broadband, Pay-TV and mobile services. By developing unique, multi-product bundles with joint installation, integrated billing and unified customer service, we set ourselves apart from other service providers. We believe that being at the forefront of multi-product offerings allows us to remain competitive, maintain our customers’ loyalty and provide higher-value services.

Oi Total

In 2015, we launched Oi Total, a residential services bundle designed to increase our market penetration and profitability by attracting new customers and offering a higher number of servicers per user. Each Oi Total plan includes fixed-line voice and broadband services with speeds of up to 35 Mbps through VDSL. Certain Oi Total plans also include Pay-TV and/or mobile services. Oi Total Completo, for example, is our quadruple-play package

 

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that includes fixed-line voice, broadband, Pay-TV, as well as mobile services. The integrated processes (including single billing, joint installation and unified customer service) of Oi Total have also allowed us to generate greater operational efficiencies, thereby reducing our operating costs. By December 2015, Oi Total had been launched in 13 Brazilian states (Espírito Santo, Goiás, Mato Grosso do Sul, Mato Grosso, Acre, Amazonas, Rondônia, Roraima, Tocantins, Rio Grande do Norte, Sergipe, Santa Catarina and Ceará) and the Federal District. As of December 31, 2015, 75.6% of our fixed-line customers subscribed to one of the plans in our Oi Total portfolio. In March 2016, we launched Oi Total in the remaining Brazilian states where we offer fixed-line services.

Our Oi Total portfolio reinforces our convergence strategy, which is one of the pillars of the Transformation Plan. Oi Total embodies the multi-product concept, bringing a unique, complete and convenient experience for our customers by offering a single sale, joint installation, integrated billing in a single bill, and unified customer service. The mobile voice services offered by Oi Total include the all-net model for voice and robust data packages also offered by Oi Livre and Oi Mais, in addition to offering extensive movie, TV and internet content that is available for streaming anytime, anywhere through Oi Play, our content platform that is free of charge for all of our customers. Since its launch in September 2015, Oi Play has shown potential for growth and future revenue generation.

Oi Conta Total

In addition to the launch of Oi Total, we continued to offer our legacy Oi Conta Total portfolio in 2015. Oi Conta Total is a triple-play plan that provides fixed-line and mobile voice services, broadband services, mobile data and unlimited text messages to subscribers of any provider. In addition, Oi Conta Total provides unlimited long-distance calls to our fixed-line and mobile subscribers (except for the low-cost version of this plan, Conta Total Light). On December 31, 2015, 11% of our fixed-line customers subscribed to one of the plans in the Oi Conta Total portfolio.

Our Oi Conta Total plan permits subscribers to make unlimited local calls to any of our fixed-line or mobile customers and includes an allowance of minutes selected by the customer for use to make long-distance calls and local calls to customers of other service providers. Subscribers also elect the speed of their fixed-line broadband service, which is available under this plan at speeds ranging from 2 Mbps to 15 Mbps. Subscribers to this plan are entitled to access our Oi Wi-Fi hotspots, and subscribers who elect speeds of 5 Mbps or greater are provided with a complimentary wireless router. Subscribers can elect add-on features for this plan, including mobile data plans, unlimited text messages to subscribers of any provider and unlimited long-distance calls to our fixed line or mobile customers.

As part of our emphasis on offering bundled services that increase profitability and build customer loyalty, in 2015 we also offered our Oi Conta Total Smartphone plan, which has the same structure as Oi Conta Total but included our Oi Smartphone data plan and unlimited text messages. Subscribers to this plan receive a smartphone, mini-modem or tablet at a subsidized price and are able to access our network of Oi Wi-Fi hotspots.

In March 2016, we discontinued offering Oi Conta Total as an independent portfolio and moved these offerings under the umbrella of Oi Total under the brand name Oi Total Conectado.

Pay-TV and Broadband Bundles

Subscribers to our internet protocal Pay-TV, IP TV, service may subscribe to our Oi TV Mais HD package, together with a broadband subscription at 100 Mbps, or our Oi TV Mega HD package, together with a broadband subscription at 200 Mbps. Subscriptions to our IP TV packages are only available in areas in which we have deployed our fiber-to-the-home, or FTTH, network.

In addition to our service bundles, we have a la carte offerings for fixed-line voice, broadband, and Pay-TV services as described below.

 

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Fixed-Line Voice Services

As of December 31, 2015, we had 14.4 million local fixed-line customers in our fixed-line service areas (including customers of our SME and Corporate Services). Local fixed-line services include installation, monthly subscription, metered services, collect calls and supplemental local services. Metered services include local calls that originate and terminate within a single local area and calls between separate local areas within specified metropolitan regions which, under ANATEL regulations, are charged as local calls. ANATEL recently changed the geographic classification of local areas and currently has divided our fixed-line service areas into approximately 4,400 local areas.

Under our concession agreements, we are required to offer two local fixed-line plans to users: the Basic Plan per Minute (Plano Básico de Minutos) and the Mandatory Alternative Service Plan (Plano Alternativo de Serviços de Oferta Obrigatória), each of which includes installation charges, monthly subscription charges, and charges for local minutes. As of December 31, 2015, 13.6% of our fixed-line customers subscribed to the Basic Plan per Minute or the Mandatory Alternative Service Plan.

Calls within Brazil that are not classified as local calls are classified as domestic long-distance calls. We provide domestic long-distance services for calls originating from fixed-line devices in Region I and Region II through our network facilities in São Paulo, Rio de Janeiro and Belo Horizonte and through interconnection agreements with other telecommunications providers, both fixed-line and mobile, that permit us to interconnect directly with their networks. We provide international long-distance services originating from fixed-line devices in our fixed-line service areas through agreements to interconnect our network with those of the main telecommunications service providers worldwide.

In addition to the Basic Plan per Minute and the Mandatory Alternative Service Plan, we offer a variety of alternative fixed-line plans that are designed to meet our customers’ usage profiles. As of December 31, 2015, 86.4% of our fixed-line customers subscribed to alternative plans, including our bundled plans.

Our Oi Fixo portfolio of fixed-line, voice-only plans provides a range of options, including unlimited on-net or all-net calls from fixed-line to fixed-line (depending on the plan), as well as on-net and off-net calls to mobile devices at pre-established rates.

We own and operate public telephones throughout our fixed-line service regions. As of December 31, 2015, we had approximately 651,000 public telephones in service, all of which are operated by pre-paid cards.

Broadband Services

We provide broadband services to residential customers in our fixed-line service areas. As of December 31, 2015, we offered broadband services in 4,699 municipalities and had 5.7 million broadband customers in our fixed-line service areas (including customers of our SME and Corporate Services). We offer ADSL services through ADSL modems installed using our customers’ conventional lines, which permit customers to use the telephone line simultaneously with the internet. Customers pay a fixed monthly subscription fee, irrespective of their actual connection time to the internet.

We offer broadband a la carte subscriptions to customers that do not subscribe to our bundled services plans at speeds ranging from 2 Mbps to 35 Mbps. To attract customers to this service, we offer new subscribers complementary anti-virus software and backup services, as well as a free wireless router with subscriptions at speeds of 5 Mbps or more.

We periodically offer promotions designed to encourage our existing broadband customers to migrate to plans offering higher speeds and to attract new customers to our broadband services. In some cases, we encourage our customers to migrate to higher broadband plans by providing broadband at faster speeds for the same prices as existing plans. This improvement of service without an increase in cost furthers our goals of improving the perception of quality of our services, enhancing the customer experience and enhancing customer loyalty.

We continue to strategically invest in areas where we see the greatest potential for sales and growth. Our two primary competitors in broadband services, Embratel and Telefônica Brasil, both offer broadband at higher speeds

 

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than our offerings. As a result, in 2015 we devoted a substantial portion of our capital expenditures in investments to our network to increase the available broadband speeds that we are able to offer in order to attract new customers and enhance the loyalty of our existing customer base, which was a significant factor in the increase in our ARPU from broadband services during 2015.

In September 2015, we launched high-speed VDSL broadband service with offers ranging from 15 to 35 Mbps. We expect to be able to offer even greater speeds as we continue to invest in our broadband network infrastructure.

Pay-TV Services

We offer Pay-TV services under our Oi TV brand. We deliver Pay-TV services throughout our fixed-line service areas using our DTH satellite network. In December 2012 and January 2013, we began to offer IP TV services through our FTTH network in Rio de Janeiro and Belo Horizonte, respectively. As of December 31, 2015, we had approximately 1.2 million subscribers to our Pay-TV services. As of December 31, 2015, approximately 11.5% of households with our residential services subscribed to Oi TV.

We offer three packages of Pay-TV services: (1) Oi TV Start HD with 118 channels, including 20 high-definition, or HD, channels, (2) Oi TV Mix HD with 158 channels, including 43 HD channels, and (3) Oi TV Total HD with 183 channels, including 53 HD channels. Subscribers to each of these packages have the option to customize the package through the purchase of additional channels featuring films offered by HBO/MAX and Telecine and sports offered by Futebol. Although these packages are available for a la carte purchase, we promote these packages, and approximately 65% of our subscribers for these packages purchase them as part of a bundle with our broadband and/or fixed-line voice services.

Personal Mobility Services

Our Personal Mobility Services business is comprised of post-paid and pre-paid mobile voice services and post-paid and pre-paid mobile data communications services. As of December 31, 2015, we had an aggregate of approximately 45.9 million subscribers for our mobile services, including subscribers to our bundled plans. As of December 31, 2015, 85.2% of our personal mobility voice customers subscribed to pre-paid plans and 14.8% subscribed to post-paid plans.

As part of our efforts under the Transformation Plan to increase profitability and enhance our customers’ experience, in 2015 we launched three new portfolios of mobile services plans: Oi Mais for the post-paid market, Oi Livre for the pre-paid market and Oi Mais Controle as a hybrid solution. All of these plans provide simpler options, data allowances without usage restrictions, and (with the exception Oi Mais Controle Básico, the basic Oi Mais Controle plan) all-net minutes. The introduction of these new offerings is part of our convergence strategy as these plans combine voice and data packages across our entire portfolio. This combination of voice and data packages encourages our customers to maintain voice services as part of their packages, which reduces that rate of decline of our customer base for fixed-line voice services. In addition, since our 3G and 4G networks offer greater capacity to meet the growing demand for data, we intend to accelerate the migration of users from 2G to 3G and from 3G to 4G by encouraging sales of 3G/4G smartphones and by including more data allowances in our new mobile offers. We believe these measures will enhance our customers’ experience and provide a better perception of the quality of our services.

Mobile Voice and Data Services

Post-Paid Services

Post-paid customers pay a monthly subscription fee and are billed on a monthly basis for services provided during the previous month. Post-paid plans include voice mail, caller ID, conference calling, call forwarding, calls on hold and special services. We believe that our new offerings in the post-paid market enable us to improve revenues and market share by offering a mix of services to the post-paid market at more attractive prices.

 

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In November 2015, we launched the Oi Mais portfolio for the post-paid market. Oi Mais plans offer a substantial increase in the size of data packages with no usage restrictions, all-net minutes to call customers of any operator anywhere in Brazil and a reduced one-time tariff for calls made to customers of any operator in Brazil in excess of the monthly plan allowance. We believe the introduction of all-net plans will eliminate the community effect among voice customers using such plans. Moreover, we believe our new data packages, which contain more data and no usage restrictions, will allow us to satisfy the growing demand from our customers for increased and unrestricted data usage.

Oi Mais plans range from R$79.90 per month to R$149.90 per month. They provide between 250 minutes and 3,000 minutes of calls and offer between 3 GB and 10 GB of 4G data to be used freely (including on social networking sites). All Oi Mais plans offer access to Oi Wi-Fi and unlimited text messaging to customers of any operator.

We continue to offer Oi Conta Conectado 50, our traditional portfolio of plans, which provides an unlimited on-net mobile plan for local and long distance voice services and an all-net plan for fixed-line services. The Oi Conta Conectado 50 plan also provides a limited off-net voice package for mobile calls to customers of other operators and 500 MB of data. In December 2015, we stopped offering new subscriptions to the low-cost plan Oi Conta 100, which offered voice only (no data) to our customers. As of December 31, 2015, Oi Conta Conectado represented 84% of our total post-paid base.

Pre-Paid Services

Pre-paid customers activate their cellular numbers through the purchase and installation of a SIM card in their mobile handsets. Our pre-paid customers are able to add credits to their accounts through point-of-sale machines, ATMs, Apple and Android applications installed on their mobile devices such as Minha Oi and Recarga Oi using a credit card, our toll-free number or the purchase of pre-paid cards at a variety of prices. These credits are valid for a fixed period of time following activation and can be extended when additional credits are purchased.

After conducting a comprehensive ten-month study of the telecommunications consumption habits in Brazil, in November 2015 we launched our Oi Livre portfolio for the pre-paid market, which includes significant increases in data allowances and a flat fee for all-net calls (with the exception of Oi Livre Por Dia, our per-day pre-paid mobile plan) to customers of any operator in Brazil. This initiative changes the mobile service market in Brazil, disrupting the original pre-paid model in which customers acquired SIM cards from different operators and used the respective SIM card for on-net calls with that particular operator in an effort to avoid paying high rates for off-net calls.

The launch of Oi Livre was a strategic move given the recent reductions in interconnection tariffs in Brazil. It also follows a global trend and adopts a model widely used in developed markets such as the United States and Europe. In addition, we believe the increase in data allowances satisfies the growing customer demand for larger data packages that allow access to the great variety of applications available for smartphones.

Oi Livre allows flexibility to our pre-paid consumers by offering monthly, weekly, daily and per-minute plans. Our monthly plan has a 300 minute allowance for calls to all Brazilian landlines and mobile subscribers, plus a 1GB data package and 500 text messages for R$40 per month. Our weekly plan includes a 75 minute allowance for calls to all Brazilian landlines and mobile subscribers, plus a 400MB data package and 300 text messages for R$10 per week. We also offer a weekly plan for those who still value unlimited on-net calls, which includes a 250MB data package and 300 text messages for R$8 per week. Our daily plan has unbundled voice and data packages, each of which is available for less than R$1 per day. Finally, we offer a per minute plan with 60 MB daily for data usage and text messages, and calls to any landline or mobile subscriber in Brazil for R$0.30 per minute. Our monthly and weekly plans have a higher ARPU relative to our other plans, and they help us to achieve the objectives set forth in the Transformation Plan. Since its launch, Oi Livre has acquired 6.2 million customers and, as of December31, 2015, Oi Livre represented 15.9% of our total pre-paid base.

Under our pre-paid voice plans, our customers may exchange the credits they purchase for additional services, such as:

 

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    Bônus Extra, which permits our customers to purchase additional minutes for local or long-distance calls to our fixed-line or mobile subscribers at discounted rates;

 

    Pacote de Dados, which permits our customers to purchase a specified data allowance for use on their handsets; and

 

    Pacote de SMS, which permits our customers to purchase the ability to send a specified number of text messages.

In keeping with the Transformation Plan’s focus on cost control and increasing profitability, throughout 2015 we disconnected inactive users of our pre-paid plans, which reduced FISTEL taxes, which are calculated based on the number of our active subscribers, resulting in an increase in the profitability of our customer base. We intend to continue to disconnect inactive users periodically.

Hybrid Services

The hybrid voice services market presents strategic value for our company because it combines advantages of pre-paid offerings, such as the absence of bad debt and a favorable impact on working capital, with advantages of post-paid offerings, such as a heavier consumption profile. We improve our revenues and market share through the offer of hybrid plans by consolidating customer recharges in our hybrid plans’ SIM cards and by improving the mix of offerings to the post-paid market.

In November 2015, we launched the Oi Mais Controle portfolio of plans for customers who wish to combine the cost savings of our post-paid plans with the self-imposed limits of our pre-paid plans. Oi Mais Controle subscribers have similar benefits as the Oi Mais customers, such as data packages with no usage restrictions, unlimited text messaging and (with the exception of the Oi Mais Controle Básico plan) all-net minutes to call customers of any operator anywhere in Brazil. We believe these new data packages, which contain more data and no usage restrictions, will allow us to satisfy the growing demand from our customers for increased and unrestricted data usage.

The Oi Mais Controle plans range from R$34.90 per month to R$54.90 per month. They offer between 1GB and 2GB of data to be used freely (including on social networking sites), between 250 and 500 all-net minutes (with the exception of the Oi Mais Controle Básico plan), and unlimited text messaging to customers of any operator (with the exception of the Oi Mais Controle Básico plan). If customers require additional credits under the Oi Mais Controle plans, they can be purchased through point of sale machines in retail stores, ATMs or mobile applications such as Minha Oi and Recarga Oi.

The Oi Mais Controle Básico plan allows customers to make unlimited local and long-distance calls to our mobile and fixed-line subscribers (on-net calls) and offers 1GB of data. Customers can also purchase credits that can be used for calls to customers of other providers (off-net calls) and other add-on services.

Until November 2015, we offered hybrid plans under the brand name Oi Controle, which lack bad debt risk and have a favorable impact on working capital. Oi Controle allows customers to make unlimited local and long-distance calls to our mobile and fixed-line subscribers (on-net calls) and purchase credits that can be used for calls to customers of other providers (off-net calls) and other add-on services. Oi Controle is composed of five plans. One of the plans, Oi Controle Voz, offers a credit of R$10.90 for customer use on a pay-as-you go plan in addition to the above benefits. The other four plans include mobile data, unlimited text messages to our mobile customers, limited voice and text message plans to customers of other operators and access to our Wi-Fi hotspots. In keeping with the Transformation Plan’s focus on cost control and profitability of the customer base, in the second half of 2015 we disconnected all inactive users of our hybrid Oi Controle plan, which reduced certain unnecessary costs. As of December 31, 2015, Oi Controle represented 41% of our total post-paid base.

 

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Mobile Data Only Services

We offer post-paid and pre-paid mobile data communications services to customers who seek to access the internet through our network using mobile devices, including smartphones or tablets and laptop computers with the aid of a mini-modem. As with our post-paid voice plans, our post-paid mobile internet customers pay a monthly subscription fee and are billed on a monthly basis for services provided during the previous month. We also offer internet access for a daily fee to customers who do not subscribe to a monthly plan. In December 2014, we began the practice of blocking access to data services for pre-paid customers who exceeded their data allowances. For post-paid data packages, we continue to throttle the speed of service for customers who exceed their data allowances.

Post-Paid Services

We offer a variety of post-paid mobile data communications plans that provide data allowances from 300 MB to 10 GB for smartphones and from 300 MB to 10 GB for tablets and laptop computers and provide data transmission at speeds of 1 Mbps (3G network) or 5 Mbps (4G network). In addition to data traffic, our post-paid mobile internet plans for use with mobile devices include allowances for text messages. Our post-paid mobile internet plans for smartphones are available to our Oi Conta and Oi Mais customers. Our post-paid mobile internet plans for tablets and laptop computers are sold on a stand-alone basis or, in some cases, through our Oi Conta Total voice and data bundle. Subscribers to our post-paid mobile internet plans for smartphones, tablets and laptop computers also receive free access to our network of Wi-Fi hotspots. In addition to these post-paid plans, subscribers can purchase anti-virus software and backup data storage services.

Pre-Paid Services

We offer two pre-paid mobile data communications plans: through mobile devices and through the purchase and installation of a SIM card in a mini-modem or tablet. Our pre-paid customers are able to add credits to their accounts through the purchase of pre-paid credits at prices that vary based on the data allowance purchased (from 5MB to 1GB) and duration (daily, weekly and monthly).

Value-Added Services

The value-added services we provide include voice, text and data applications, including voicemail, caller ID, and other services, such as personalization (video downloads, games, ring tones and wallpaper), text messaging subscription services (horoscope, soccer teams and love match), chat, mobile television, location-based services and applications (mobile banking, mobile search, email and instant messaging). Applications such as the ones described below contributed an increase in revenues from value-added services during 2015.

Oi Apps Club: A subscription-based marketplace for highly rated Android apps, Oi Apps Club provides customers unlimited access to download apps, charged to the customer’s Oi bill rather than a credit card.

Oi Conselheiros: In this service, renowned and famous professionals in different areas of expertise known as “Oi’s Ambassadors” endorse exclusive content covering travel, fashion, cooking, celebrities and music, among others.

Oi Para Aprender: Oi’s mobile learning platform, which provides a variety of courses and tips regarding languages, entrance examinations, job assessments, how to develop a home office business and software lessons, among others.

Our value-added services are developed by third-party application or content providers and offered to our customers. On average, these providers receive 35% of the net revenues generated by the services they develop and or provide to our customers.

 

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SME and Corporate Services

In the SME and corporate services market we serve SME and corporate customers. We offer a variety of services to these customers, including our core fixed-line, broadband and mobile services, as well as our value-added services, advanced voice services and commercial data transmission services. For our corporate customers, we also offer information technology services, such as network management and security, Smartoffice, Smartcloud, anti-distributed denial of service and machine-to-machine products, which enable communication between a product and its control center or database (such as a car and its GPS navigation system), in order to expand our revenue sources from corporate customers beyond voice services, increase customer loyalty and ensure greater revenue predictability.

The implementation of the Transformation Plan throughout 2015, coupled with the declining macroeconomic conditions in Brazil, has prompted certain changes in our portfolios and recent offerings. SMEs are more vulnerable to economic instability than our more established corporate customers, so there has been a reduction in our SME customer base as a result of SMEs going out of business. Our corporate customers, while better able to survive the current economic instability, often respond by reducing their economic activity and tightening their budgets for telecommunications products and services.

In addition, in a move to better align our products with the needs of our consumers, and to increase customer satisfaction, we have taken a “back-to-basics” approach to product and service offerings and, as a result, developed simpler, more predictable flat-rate plans that enable the customer to better understand, project and plan for upcoming expenses. Furthermore, our sales focus has shifted to upgrading existing contracts, which has not required us to make any additional investments.

Services for SMEs

We offer SME services similar to those offered to our residential and personal mobility customers, including fixed-line and mobile voice services, and fixed-line and mobile broadband services. We also recently launched FTTH plans for SMEs in December 2015. In addition, we offer SMEs:

 

    advanced voice services, primarily 0800 (toll free) services, as well as voice portals where customers can participate in real-time chats and other interactive voice services;

 

    dedicated internet connectivity and data network services; and

 

    value-added services, such as help desk support that provides assistance for technical support issues, web services with hosting, e-mail tools and website builder and security applications.

In general, our sales team works with our SME customer to determine that customer’s telecommunications needs and negotiates a package of services and pricing structure that is best suited to its needs. In December 2015, we launched Oi Mais Empresas for SMEs. Oi Mais Empresas provides 4G voice and mobile data and fixed-line (voice and broadband) services for a flat fee. This simplified portfolio is easier to understand, purchase and use, fostering a better relationship with the SME. The flat rate model eliminates billing issues and disputes and reduces the risk of default by the SME. Concurrently, as part of our digitalization efforts set forth in the Transformation Plan, we launched the Oi Mais Empresas app, a fully digital customer channel through a smartphone application that can be downloaded at no cost at Apple Store or Google Play. The Oi Mais Empresas app provides exclusive service to SMEs, enabling them to acquire services, upgrade their contract plan and make requests and track the status of those requests, such as repairs and bill copies, among others, all using a smartphone. We made the same improvements and enabled the same functionalities as the Oi Mais Empresas app on our website, enabling our customers to perform the same functions from a computer. The creation of the Oi Mais Empresas app and website improvements, changed the way our customers communicate and reinforced our commitment to simplify our product portfolios and better understand our customers’ needs.

We continue to service our SME customers with a variety of legacy mobile plans, including our Oi Equipe Flat plan for groups of employees, our Oi Empresa Especial plan for individual users in an SME and our Oi Controle

 

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plan which, similarly to our residential fixed-line plan, is designed to permit an SME to control usage of mobile minutes.

Services for Corporate Customers

We offer corporate customers all of the services offered to our SME customers. In addition, we provide a variety of customized, high-speed data transmission services through various technologies and means of access to corporate customers. Our principal data transmission services for Corporate customers are:

 

    we act as the internet service provider for our Corporate customers, connecting their networks to the internet;

 

    SLD, under which we lease dedicated lines to corporate customers for use in private networks that link different corporate websites; and

 

    IP services which consist of dedicated internet connection, as well as Virtual Private Network, or VPN, services that enable our customers to connect their private intranet and extranet networks to deliver videoconferencing, video/image transmission and multimedia applications.

We provide these services at data transmission speeds of 2 Mbps to 10 Gbps.

We also offer information technology infrastructure services to our corporate customers, seeking to offer them end-to-end solutions through which we are able to provide and manage their connectivity and information technology needs. For example, we offer Oi SmartCloud, a suite of data processing and data storage services that we perform through our five cyber data centers located in Brasília, São Paulo, Curitiba and Porto Alegre. In addition, through these data centers, we provide hosting, collocation and IT outsourcing services, permitting our customers to outsource their IT infrastructures to us or to use these centers to provide backup for their IT systems.

We also offer the following four major service groups through Oi SmartCloud, which operate through our five cyber data centers:

 

    collaborative solutions, a hosting and sharing platform that provides employees with access to company documents;

 

    business applications, an in-memory computing platform for large amounts of data;

 

    Oi Gestão Mobilidade, a mobile device management service focused on providing logistics and security solutions relating to mobile devices; and

 

    security, a centralized, anti-spam filtering solution for corporate email.

We also offer various services based on IT applications:

 

    fleet management services, which provide a management system for fleet monitoring and location targeting, economies of scale for fuel costs, driver profile analysis and kilometer control for maintenance;

 

    workforce management, which provides a system with web and mobile applications to monitor and control the workforce in the field and optimize routes and control logistics activities; and

 

    digital content management (corporate TV platform and queue management), which provides a digital signage platform with queue management solutions, creating a powerful marketing tool for companies that have interactions with customers at points of sale.

 

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Our Oi Smart Office service provides a system to control daily work and productivity of employees working remotely, including through the use of biometrics. The platform offers a connection between the home environment and the corporate network, providing unified communication options including chat, voice, video, conferencing and document sharing along with corporate applications for cloud computing.

In response to the reduced demand for traditional telecommunications services due to the challenging macroeconomic environment in Brazil, we have focused our new offerings in 2015 on information technology infrastructure services. As of December 31, 2015, approximately 15% of our corporate customers had contracted for at least one information technology service. In 2015, our revenues from information technology offerings increased as compared to 2014.

In order to provide complete solutions to our corporate clients, we have entered into service agreements for the joint supply of international data services with a number of important international data services providers. These commercial relationships with international data services providers are part of our strategy of offering telecommunications services packages to our customers.

Services for Other Telecommunications Providers

We offer specialized services to other telecommunications providers, primarily consisting of interconnection to our networks, network usage charges for the use of portions of our long-distance network, traffic transportation through our physical infrastructure, and RAN sharing agreements.

Interconnection and Network Usage Charges

All telecommunications services providers in Brazil are required, if technically feasible, to make their networks available for interconnection on a non-discriminatory basis whenever a request is made by another telecommunications services provider. Interconnection permits a call originated on the network of a requesting local fixed-line, mobile or long-distance service provider’s network to be terminated on the local fixed-line or mobile services network of the other provider.

We are authorized to charge for the use of our local fixed-line network on a per-minute basis for (1) all calls terminated on our local fixed-line networks in Regions I and II that originate on the networks of other mobile and long-distance service providers, and (2) all long-distance calls originated on our local fixed-line networks in Regions I and II that are carried by other long-distance service providers.

Conversely, other local fixed-line service providers charge us interconnection fees (1) to terminate calls on their local fixed-line networks that are originated on our mobile or long-distance networks, and (2) for long-distance calls originated on their local fixed-line networks that are carried by our long-distance network.

In addition, we charge network usage fees to long-distance service providers and operators of trunking services that connect switching stations to our local fixed-line networks. We are authorized to charge for the use of our long-distance network on a per-minute basis for all calls that travel through a portion of our long-distance networks for which the caller has not selected us as the long-distance provider. Conversely, other long-distance service providers charge us interconnection fees on a per-minute basis for all calls that travel through a portion of their long-distance networks for which the caller has selected us as the long-distance provider.

We are authorized to charge for the use of our mobile network on a per-minute basis for all calls terminated on our mobile network that originate on the networks of other local fixed-line, mobile and long-distance service providers. Conversely, other mobile services providers charge us interconnection fees to terminate calls on their mobile networks that are originated on our local fixed-line, mobile or long-distance networks. The amounts that we charge and owe for these interconnections with respect to SMEs have reduced dramatically, however, as a result of the recent reductions in interconnection tariffs mandated by ANATEL. The pricing for services to our corporate customers are not immediately affected by the ANATEL reductions. Rather, these rate reductions are only reflected in the negotiation and pricing of new contracts.

 

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Transportation

We provide Industrial Exploitation of Dedicated Lines (Exploração Industrial de Linha Dedicada), or EILD, services under which we lease trunk lines to other telecommunications services providers, primarily mobile services providers, which use these trunk lines to link their radio base stations to their switching centers.

Long-distance and mobile services providers may avoid paying long-distance network usage charges to us by establishing an interconnection to our local fixed-line networks. In order to retain these customers of our long-distance services, we offer a long-distance usage service, called national transportation, under which we provide discounts to our long-distance network usage fees based on the volume of traffic and geographic distribution of calls generated by a long-distance or mobile services provider.

We also offer international telecommunications service providers the option to terminate their Brazilian inbound traffic through our network, as an alternative to Embratel and TIM. We charge international telecommunications service providers a per-minute rate, based on whether a call terminates on a fixed-line or mobile telephone and the location of the local area in which the call terminates.

Rates

Our rates for local fixed-line services, domestic long-distance services, mobile services, interconnection, EILD and SLD services are subject to regulation by ANATEL, subject to certain exceptions relating to the rates we charge under alternative fixed-line and mobile plans that we are authorized to offer to our customers. For information on ANATEL regulation of our rates, see “—Telecommunications Regulation—Regulation of the Brazilian Telecommunications Industry.”

Many of the services we provide charge on a per-minute basis. For these services, we charge for calls based on the period of use. The charge unit is a tenth of a minute (six seconds), and rounding is permitted to the next succeeding tenth of a minute. There is a minimum charge period of 30 seconds for every call. For local fixed-line to fixed-line calls during off-peak hours, charges apply on a per-call basis, regardless the duration of the call.

Fixed-Line Rates

Local Rates

Our revenues from local fixed-line services consist mainly of monthly subscription charges, charges for local calls and charges for the activation of lines for new subscribers or subscribers that have changed addresses. Monthly subscription charges are based on the plan to which the customer subscribes and whether the customer is a residential, commercial or trunk line customer.

Under our concession agreements, we are required to offer two local fixed-line plans to users: the Basic Plan per Minute and the Mandatory Alternative Service Plan, each of which includes installation charges, monthly subscription charges, and charges for local minutes. The monthly subscription fees under the Basic Plan per Minute and the Mandatory Alternative Service Plan vary in accordance with the subscribers’ profiles, as defined in the applicable ANATEL regulations. As of December 31, 2015, 13.6% of our local fixed-line customers subscribed to the Basic Plan per Minute or the Mandatory Alternative Service Plan.

In addition to the Basic Plan per Minute and the Mandatory Alternative Service Plan, we are permitted to offer non-discriminatory alternative plans to the basic service plans. The rates for applicable services under these plans (e.g., monthly subscription rates and charges for local and long-distance calls) must be submitted for ANATEL approval prior to the offering of those plans to our customers. In general, ANATEL does not raise objections to the terms of these plans. As of December 31, 2015, 86.4% of our local fixed-line customers subscribed to alternative plans.

On an annual basis, ANATEL increases or decreases the maximum rates that we are permitted to charge for our basic service plans. ANATEL increased the rates that we may charge by an average of 0.55% as of February 8,

 

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2013, decreased the rates that we may charge by an average of 0.10% as of April 18, 2014, and increased the rates that we may charge by an average of 3.6% as of June 13, 2015. In addition, we are authorized to adjust the rates applicable to our alternative plans annually by no more than the rate of inflation, as measured by the IST. Discounts from the rates set in basic service plans and alternative service plans may be granted to customers without ANATEL approval.

Local Fixed Line-to-Mobile Rates (VC-1) and Mobile Long Distance Rates (VC-2 and VC-3)

When one of our fixed-line customers makes a call to a mobile subscriber of our company or another mobile services provider that terminates in the mobile registration area in which the call was originated, we charge our fixed-line customer per-minute charges for the duration of the call based on rates designated by ANATEL as VC-1 rates. In turn, we pay the mobile services provider a per-minute charge based on rates designated by ANATEL as VU-M rates for the use of its mobile network in completing the call. Rates for long-distance calls that originate or terminate on mobile telephones are based on whether the call is an intrasectorial long-distance call, which is charged at rates designated by ANATEL as VC-2 rates, or an intersectorial long-distance call, which is charged at rates designated by ANATEL as VC-3 rates. If the caller selects one of our carrier selection codes for the call, we receive the revenues from the call and must pay interconnection fees to the service providers that operate the networks on which the call originates and terminates. VC-1, VC-2 and VC-3 rates, collectively, the “VC Rates” vary depending on the time of the day and day of the week, and are applied on a per-minute basis.

On an annual basis, ANATEL may increase or decrease the maximum VC Rates that we are permitted to charge. In February 2012, ANATEL ordered us to reduce our VC Rates by approximately 10%, although we are appealing the timing of the application of this rate decrease to our company as our VC Rates was increased in Region I by 1.54% in accordance with our application for this increase in February 2012.

ANATEL has changed our VC-1 rates as follows:

 

    In February 2014, reduced by approximately 18% and 33.5% in Regions I and II, respectively.

 

    In August 2014, increased by approximately 1.5% and 3.3% in Regions I and II, respectively.

 

    In February 2015, reduced by approximately 21.8% and 21.3% in Regions I and II, respectively.

 

    In August 2015, increased by approximately 5.5% in Regions I and II.

ANATEL has changed our VC-2 and VC-3 rates as follows:

 

    In February 2014, reduced our VC-2 rate by 12.1% and 27.5% in Regions I and II, respectively, and reduced our VC-3 rate by approximately 10.6% and 26.4% in Regions I and II, respectively.

 

    In August 2014, increased both our VC-2 and VC-3 rates by approximately 1.5% and 3.1% in Regions I and II, respectively.

 

    In February 2015, reduced our VC-2 rate by 13.6% and 12.4% in Regions I and II, respectively, and reduced our VC-3 rate by approximately 11.8% and 10.8% in Regions I and II, respectively.

 

    In August 2015, increased both our VC-2 and VC-3 rates by approximately 5.5% in Regions I and II.

As a result of the substantial reductions in VC Rates over the past several years, and in keeping with our strategy of simplifying our portfolios to enhance the customer experience, in 2015 we launched several fixed-line and mobile plans that allow all-net calls for a flat fee. All-net plans eliminate the effect of VC Rate reductions on our customers’ telephone bills and simplify the billing process.

 

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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. Rates on these calls are applied on a per-minute basis.

On an annual basis, ANATEL increases or decreases the maximum domestic fixed line-to-fixed line long-distance rates that we are permitted to charge. ANATEL increased the rates that our company and Telemar may charge by an average of 0.55% as of February 8, 2013, 0.65% as of April 18, 2014, and 3.6% as of June 13, 2015. Discounts from the domestic fixed line-to-fixed line long-distance rates approved by ANATEL may be granted to customers without ANATEL approval.

Mobile Rates

Mobile telecommunications service in Brazil, unlike in the United States, is offered on a “calling-party-pays” basis under which a mobile subscriber pays only for calls that he or she originates (in addition to roaming charges paid on calls made or received outside the subscriber’s home registration area). A mobile subscriber receiving a collect call is also required to pay mobile usage charges.

Our revenues from mobile services consist mainly of charges for local and long-distance calls paid by our pre-paid and post-paid mobile subscribers and monthly subscription charges paid by our post-paid plan subscribers. Monthly subscription charges are based on a post-paid subscriber’s service plan. If one of our mobile subscribers places or receives a call from a location outside of his or her home registration area, we are permitted to charge that customer the applicable roaming rate. We offer basic service plans (post-paid and pre-paid), as well as non-discriminatory alternatives to the basic service plans. As of December 31, 2015, fewer than 1% of our mobile customers subscribed to our basic plans (post-paid or pre-paid); substantially all of our post-paid and pre-paid customers subscribed to non-discriminatory alternative plans to the basic service plans.

Although subscribers of a plan cannot be forced to migrate to new plans, existing plans may be discontinued as long as all subscribers of the discontinued plan receive a notice to that effect and are allowed to migrate to new plans within six months of such notice.

We charge for all mobile calls made by our pre-paid customers, and for mobile calls made by our post-paid customers in excess of their allocated monthly number of minutes, on a per-minute basis.

Rates under our mobile plans may be adjusted annually by no more than the rate of inflation, as measured by the IGP-DI. These rate adjustments occur on the anniversary dates of the approval of the specific plans. Discounts from the rates set in basic service plans and alternative service plans may be granted to customers without ANATEL approval. The rate of inflation as measured by the IGP-DI was 5.5% in 2013, 3.8% in 2014, and 10.7% in 2015.

Network Usage (Interconnection) Rates

Fixed-Line Networks

Our revenues from the use of our local fixed-line networks consist primarily of payments on a per-minute basis, which are charged at rates designated by ANATEL as TU-RL rates, from:

 

    long-distance service providers to complete calls terminating on our local fixed-line networks;

 

    long-distance service providers for the transfer to their networks of calls originating on our local fixed-line networks; and

 

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    mobile services providers to complete calls terminating on our local fixed-line networks.

Fixed-line service providers are not permitted to charge other fixed-line service providers for local fixed-line calls originating on their local fixed-line networks and terminating on the other provider’s local fixed-line networks. TU-RL rates vary depending on the time of the day and day of the week, and are applied on a per-minute basis.

Our revenues from the use of our long-distance networks consist primarily of payments on a per-minute basis, which are charged at rates designated by ANATEL as TU-RIU rates, from other long-distance carriers that use a portion of our long-distance networks to complete calls initiated by callers that have not selected us as the long-distance provider. TU-RIU rates for intrasectorial calls are designated by ANATEL as TU-RIU1 rates, and TU-RIU rates for intersectorial calls are designated by ANATEL as TU-RIU2 rates.

TU-RIU rates vary depending on the time of the day and day of the week, and are applied on a per-minute basis. Since January 1, 2013, the TU-RIU rates of Oi and Telemar have been equal to 20% of their respective domestic fixed line-to-fixed line long-distance rates for such calls.

In July 2014, ANATEL approved a rule for the definition of maximum fixed reference rates, including TU-RL and TU-RIU, for entities with significant market power, such as our company, based on a long-run incremental cost methodology. Under this rule, TU-RL and TU-RIU reference rates will decline from 2016 through 2019 when TU-RL and TU-RIU reference rates reflecting the long-run incremental cost methodology will apply.

Mobile Networks

Our revenues from the use of our mobile networks consist primarily of payments on a per-minute basis from (1) local fixed-line, long-distance and mobile services providers to complete calls terminating on our mobile networks, and (2) long-distance service providers for the transfer to their networks of calls originating on our mobile networks.

The terms and conditions of interconnection to our mobile networks, including the rates charged to terminate calls on these mobile networks, which are designated by ANATEL as VU-M rates, commercial conditions and technical issues, may be freely negotiated between us and other mobile and fixed-line telecommunications service providers, subject to compliance with regulations established by ANATEL relating to traffic capacity and interconnection infrastructure that must be made available to requesting providers, among other things. We must offer the same VU-M rates to all requesting service providers on a nondiscriminatory basis. We apply VU-M charges on a per-minute basis.

Under ANATEL regulations, in December 2013 ANATEL established the maximum VU-M rate of R$0.33 per minute that is applicable in the event that providers could not agree upon the VU-M applicable in their interconnection agreements. Under the General Plan on Competition Targets (Plano Geral de Metas de Competição), in February 2014 the VU-M rate was reduced to 75% of the maximum VU-M rate established by ANATEL in December 2013, and in February 2015 the VU-M rate was reduced to 50% of the maximum VU-M rate established by ANATEL in December 2013. In July 2014, ANATEL approved a rule for the definition of maximum VU-M reference rates for entities with significant market power, such as our company, based on a long-run incremental cost methodology. Under this rule, VU-M reference rates will decline from 2016 through 2019 when VU-M reference rates reflecting the long-run incremental cost methodology will apply.

Data Transmission Rates

Broadband services, IP services and frame relay services are deemed to be value-added services under ANATEL regulations and, therefore, the rates and prices for these services are not subject to regulation and are market-driven. We offer broadband services subscriptions at prices that vary depending on the download speeds available under the purchased subscription.

A significant portion of our revenues from commercial data transmission services are generated by monthly charges for EILD and SLD services, which are based on contractual arrangements for the use of part of our networks. Under ANATEL regulations, because we are deemed to have significant market power in the fixed-line

 

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services business, we are required to make publicly available the forms of agreements that we use for EILD and SLD services, including the applicable rates, and are only permitted to offer these services under these forms of agreements. ANATEL publishes reference rates for these services and if one of our customers objects to the rates that we charge for these services, that customer is entitled to seek to reduce the applicable rate through arbitration before ANATEL.

In May 2014, ANATEL approved a standard for setting maximum values for EILD services based on a long-run incremental cost methodology. In July 2014, ANATEL published reference rates for EILD services that contain a single reference table which will be valid from 2016 until 2020. Under ANATEL regulations, EILD reference rates will decline from 2016 through 2020 when EILD reference rates reflecting the long-run incremental cost methodology will apply. In addition, under the General Plan of Competition Targets, companies with significant market, such as our company, are required to present a public offer every six months including standard commercial conditions, which is subject to approval by ANATEL.

Our revenue from IP services is based on the number of data ports to which the customer is granted access. Our revenue from frame relay services consists mainly of charges for access to the data transmission network and metered service charges based on the amount of data transmitted. Such services are offered as pay-per-use or volume-based packages. Our revenue from cyber data center services is generally based on contractual arrangements that are tailored to the specific services provided.

DTH and IP TV Services Rates

DTH and IP TV services are deemed to be conditional access services under the private regime, which Oi provides pursuant to authorizations. As a result, the rates and prices for these services are not subject to regulation and are market-driven. We offer DTH and IP TV subscriptions at prices that vary depending on the content of the subscription package. We offer basic subscription packages for our Oi TV services, as well as a variety of premium packages which allow subscribers to tailor the content that they receive to their individual tastes.

Marketing and Distribution

During 2015, we incurred R$406 million in marketing expenses in our Brazilian operations. On a company-wide basis, we focus our marketing efforts on strengthening the “Oi” brand, reinforcing the image of the convergence of the integrated company. We also engage in marketing programs to support our Residential Services, our Personal Mobility Services and our SME and Corporate Services.

We advertise through a diverse array of media outlets as part of our strategy to reach all types and classes of customers and potential customers. We use television, radio, billboards, exterior signage, telemarketing, direct mail and internet advertising to market our fixed-line, mobile, long-distance, broadband and subscription television services. We use our branded assets in advertising campaigns, such as the “Orelhão Mágico” Christmas campaign, in which children are able to place calls to Santa Claus from our telephone booths. We sponsor sporting events and individual athletes, as well as cultural events, such as fashion shows and popular music concerts. The goal of our marketing initiatives is to increase brand awareness of our company as a convergent provider capable of meeting all of the telecommunications needs of our customers and expand the use of our distribution channels to increase net operating revenue.

Our principal marketing expenditures to support our Residential Services were designed to:

 

    promote our bundled plans, such as Oi Total and Oi Conta Total as part of our effort to expand our customer base;

 

    promote cross-selling of our services, including by promoting our bundled plans and higher value offers, as part of our effort to increase the profitability and enhance the loyalty of the existing customer base

 

    expand our Oi fixed-line and Oi TV customer bases with offers through our other services.

 

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Our principal marketing expenditures to support our Personal Mobility Services were designed to:

 

    promote our pre-paid mobile services via ad campaigns on television and digital media with a focus on our weekly packages and the launch of 4G technology on pre-paid plans;

 

    promote our post-paid mobile plans, primarily Oi Mais and Oi Mais Controle, as well as 4G data services at higher speeds, through specific marketing campaigns and mobile device subsidies (through our Oi Pontos program, which provides existing post-paid customers with a phone credit based on amount spent in the preceding 12-month period, to be applied as a credit against the price of a new mobile device), as part of our effort to increase our market share in mobile services; and

 

    expand our 4G internet customer base, focusing on geographic regions covered by the National Broadband Plan.

In 2015, our SME and Corporate Services business did not engage in any marketing initiatives for its products and services. Instead, our ongoing marketing efforts in our SME and Corporate Services business include:

 

    press releases for launches of new products and services;

 

    client events, including attendance at fairs and conferences; and

 

    other day-to-day marketing.

Distribution Channels

We distribute our services through channels focused on three separate sectors of the telecommunications services market: (1) residential customers, including customers of our mobile services to whom we sell bundled plans; (2) personal mobility customers that purchase our mobile services independently of our bundled plans; and (3) business and corporate customers.

Residential Services

Our distribution channels for residential customers are focused on sales of fixed-line services, including voice, broadband services and Oi TV, and post-paid mobile services. As part of the restructuring of our distribution channels, we have begun to provide more extensive training to our employees and the employees of third-party sales agents and have revised our commission structures to incentivize selective sales of bundled and higher-value plans and services that generate higher ARPU and reduce customer churn rates. As of December 31, 2015, the principal distribution channels that we used for sales to residential customers were:

 

    our own network of stores, which included 197 “Oi” branded stores.

 

    approximately 300 “Oi” franchised service stores and kiosks located in the largest shopping malls and other high density areas throughout Brazil.

 

    approximately 270 stores located throughout our service areas that primarily sell telecommunications products and services and have entered into exclusivity agreements with us.

 

    our telemarketing sales channel, which is operated by our call center and other third-party agents and consists of approximately 1,650 sales representatives that answer more than 1.2 million calls per month. This channel provides us with the ability to pro-actively reach new customers, thereby increasing our client base and revenues, and also receives calls prompted by our offers made in numerous types of media.

 

    our “teleagents” channel, which consists of approximately 300 local sales agents that operate in specific regions and complement our telemarketers.

 

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    door-to-door sales calls made by our sales force of approximately 1,900 salespeople trained to sell our services throughout Brazil in places where customers generally are not reachable by telemarketing.

 

    our e-commerce sites through which customers may purchase a variety of our services.

Our distribution channels for personal mobility customers are focused on sales of mobile services to post-paid customers and pre-paid customers, including mobile broadband customers. As part of the restructuring of our distribution channels, our distribution channels for our post-paid personal mobility services have converged with our distribution channels for residential services. As of December 31, 2015, the principal distribution channels that we used for sales of our pre-paid personal mobility services were:

 

    approximately 10,000 stores that are part of large national chains which sell our SIM cards and pre-paid mobile cards;

 

    approximately 23 multibrand distributors that distribute our SIM cards and pre-paid mobile cards to approximately 179,000 pharmacies, supermarkets, newsstands and similar outlets; and

 

    our website, through which our pre-paid customers may recharge their SIM cards.

SME and Corporate Services

We have established separate distribution channels to serve small and medium-sized enterprise, or SMEs, and large enterprises, or corporate customers. We market a variety of services to SMEs, including our core fixed-line, broadband and mobile services, as well as our value-added services, advanced voice services and commercial data transmission services. We have five regional offices from which approximately 100 employees supervise our marketing efforts to SMEs and our third-party sales force serving this sector. We also have begun to provide more extensive training to our employees and the employees of third-party sales agents. As of December 31, 2015, the principal distribution channels that we use to market our services to SMEs were:

 

    approximately 100 “Oi” exclusive agents with approximately 800 door-to-door sales consultants that are dedicated to understanding and addressing the communications needs of our existing and prospective SME customers.

 

    our telemarketing sales channel, which consists of three agents that use approximately 350 sales representatives that are specifically trained to discuss the business needs of our prospective SME customers to make sales calls, as well as representatives in our call center and representatives at call centers under contract with us to receive calls from existing and prospective SME customers to sell services to new customers and promote higher-value and additional services to existing customers. In addition, our telemarketing channel utilizes approximately 300 customer retention representatives.

We market our entire range of services to corporate customers through our own direct sales force which meets with current and prospective corporate customers to discuss the business needs of these enterprises and design solutions intended to address their communications needs. Our client service model focuses on post-sale service and we regularly discuss service needs and improvements through calls and meetings with our customers. As of December 31, 2015, our corporate sales team, including post-sale service personnel, was composed of approximately 1,250 employees operating in six regional offices.

Billing and Collection

Residential Services

We send each of our Residential Services customers a monthly bill covering all the services provided during the prior monthly period. Customers are grouped in billing cycles based on the date their bills are issued. Each bill separately itemizes service packages, local calls, long-distance calls, calls terminating on a mobile network, toll-free services and other services such as call waiting, voicemail and call forwarding. We have agreements with several

 

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banks for the receipt and processing of payments from our Residential Services customers. A variety of businesses, such as lottery houses, drugstores and grocery stores, accept payments from our Residential Services customers as agents for these banks.

We are required to include in our monthly Residential Services bills charges incurred by our customers for long-distance services provided by other long-distance service providers upon the request of these providers. We have billing agreements with each long-distance telecommunications service provider that interconnects with our networks under which we bill our customers for any long-distance calls originated on our network that are carried by another long-distance service provider and transfer the balance to the relevant provider after deducting any access fees due for the use of our network.

Payments of Residential Services bills are due within an average of 15 days after the billing date. We charge late-payment interest at a rate of 1% per month plus a one-time late charge of 2% of the amount outstanding.

ANATEL regulations permit us to restrict outgoing calls made by a Residential Services customer when the customer’s account is more than 31 days past due, restrict incoming calls received by a Residential Services customer when the customer’s account is more than 61 days past due, and disconnect a Residential Services customer when the customer’s account is more than 91 days past due, provided in each case that 15-days’ prior notice has been given to that customer prior to the imposition of each restriction. The disconnection process thus comprises several stages, including customer notification regarding the referral of their delinquency to credit bureaus, before the Residential Services customer may be ultimately disconnected due to non-payment. Notices range from voice messages to active calls for negotiation with the customer. Our collection system enables us to access delinquent subscribers’ accounts according to their payment profile. This profile takes into consideration, among other things, the length of subscription, the outstanding balance of the account and the longest payment delays.

Personal Mobility Services

We bill our post-paid Personal Mobility Services customers on a monthly basis and itemize charges in the same manner as we bill our Residential Services customers. In addition, the monthly bills also provide details regarding minutes used and roaming charges. Payments are due within an average of 15 days after the billing date. We charge late-payment interest at a rate of 1% per month plus a one-time late charge of 2% of the amount outstanding. As with our Residential Services business, we have agreements with several banks for the receipt and processing of payments from our post-paid Personal Mobility Services customers. A variety of businesses, such as lottery houses, drugstores and grocery stores, accept payments from our post-paid Personal Mobility Services customers as agents for these banks.

ANATEL regulations permit us to partially suspend services to a post-paid Personal Mobility Services customer when the customer’s account is more than 15 days past due, restrict all incoming calls received and outgoing calls made by a post-paid Personal Mobility Services customer when the customer’s account is more than 45 days past due, and cancel services to a post-paid Personal Mobility Services customer when the customer’s account is more than 90 days past due, provided in each case that 15-days’ prior notice has been given to that customer prior to the imposition of each restriction. The cancellation process thus comprises several stages, including customer notification regarding the referral of their delinquency to credit bureaus, before services to the post-paid Personal Mobility Services customer may be ultimately cancelled due to non-payment. Notices range from text messages to active calls for negotiation with the customer. Our collection system enables us to access delinquent subscribers’ accounts according to their payment profile. This profile takes into consideration, among other things, the length of subscription, the outstanding balance of the account and the longest payment delays. We have also implemented an information tool to assist with account management that is designed to warn subscribers of high outstanding amounts due and unpaid.

 

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Customers of our pre-paid Personal Mobility Services can only use a paid service if they have enough active credits in their accounts to do so. In order to acquire credits, customers must recharge their SIM cards in one of our many points of sales. Services are charged directly from the customer´s accounts and are free of bad-debt risk.

Network and Facilities

Our Brazilian networks are comprised of physical and logical infrastructures through which we provide fully-integrated services, whether fixed-line or mobile, voice, data or image, thereby optimizing available resources. We monitor our networks remotely from our centralized national network operations center in Rio de Janeiro. Network operating and configuration platforms, located at the network operations center, perform failure monitoring, database and configuration management, security management and performance analysis for each network.

Access Networks

Our Brazilian access networks connect our customers to our signal aggregation and transportation networks. We have a large number of network access points, including twisted copper pair wires to residences and commercial buildings, fiber optic lines to residences and commercial buildings, wireless transmission equipment and Wi-Fi hotspots. Our fixed-line networks are fully digitalized.

Voice and data signals that originate through fixed-line access points are routed through Multi-service Access Nodes, or MSANs, to our aggregation networks, or are rerouted to our aggregation networks through Digital Subscriber Line Access Multiplexer, or DSLAM, equipment which split the voice signal from the digital signal which is transmitted using ADSL or VDSL technology. We are engaged in a long-term program to update our MSAN equipment to DSLAM equipment as demand for data services increases. As of December 31, 2015, approximately 90% of our fixed-line network had been updated to support ADSL2+ or VDSL2 and we provided ADSL or VDSL2 services in 4,476 municipalities.

ADSL technology allows high-speed transmission of voice and data signals on a single copper wire pair for access to the network. Since voice transmission through telephone lines uses only one of many available frequency bands, the remaining frequency bands are available for data transmission. Our network supports ADSL2+ and VDSL2, or very-high-bitrate digital subscriber line, technologies. ADSL2+ is a data communications technology that allows data transmission at speeds of up to 24 Mbps downstream and 1 Mbps upstream, which is much faster than data transmission through conventional ADSL. ADSL2+ permits us to offer a wider range of services than ADSL, including IP TV. VDSL2 is a DSL technology providing faster data transmission, up to 100 Mbps (downstream and upstream), permitting us to support high bandwidth applications such as HDTV, VoIP and broadband internet access, over a single connection.

We are engaged in a long-term program to upgrade portions of our fixed-line access networks with optical fiber networks based on gigabit passive optical network, or GPON, technology to support VDSL2 service and facilitate our offering of our Oi TV service. The implementation of this technology permits us to provide broadband with speeds up to 100 Mbps to residential customers and up to 1 Gbps to commercial customers.

For our non-residential customers, we have a fully integrated and managed network providing access for networks based on internet protocol, or IP, and Asynchronous Transfer Mode, or ATM, protocol over legacy copper wire through which are able to provide:

 

    symmetric and transparent access to Frame Relay services at speeds from 64 kbps to 1.5 Mbps;

 

    symmetrical access with PPP (Point to Point) for the Internet connection services at speeds from 64 kbps to 1.5 Mbps; and

 

    symmetrical access with PPP (Point to Point) to provide connection services for virtual private networks, or VPNs, through Multiprotocol Label Switching, or MPLS, protocol at speeds from 64 kbps to 1.5 Mbps.

 

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The following table sets forth selected information about our fixed-line networks as of the dates and for the periods indicated.

 

     As of and For Year Ended
December 31,
 
     2015      2014      2013  

Installed access lines (in millions)

     27.5         28.0         28.3   

Access lines in service (in millions)

     14.9         16.3         17.7   

Public telephones in service (in thousands)

     651.7         653.3         655.6   

Broadband access lines in service (in millions)

     5.9         6.1         6.1   

Mobile devices access our GSM (Global System for Mobile Communications), or 2G, mobile networks on frequencies of 900 MHz/1800 MHz, our 3G mobile networks on frequencies of 2100 MHz and our 4G mobile networks on frequencies of 2500 MHz. Our 2G access points use General Packet Radio Service, or GPRS, which allows speeds in the range of 115 kilobytes per second (Kbps), and Enhanced Data Rates for Global Evolution, or EDGE, which allows speeds in the range of 230 Kbps, to send and receive data signals. Our 3G access points use high speed packet access, or HSPA, which allows speeds in the range of 14.2 Mbps, to send and receive data signals. Our 4G access points use 10+10 MHz and 2x2 Multiple Input Multiple Output, which allows speeds in the range of 75 Mbps, to send and receive data signals. Voice and data signals sent and received through our 2G and 3G access points are routed to our aggregation networks. Our mobile networks have unique data core and are fully integrated with our fixed-line data networks.

As of December 31, 2015, our 2G mobile access networks, consisting of 13,777 active radio base stations, covered 3,386 municipalities, or 93% of the urban population of Brazil. We have GPRS coverage in 100% of the localities covered and EDGE coverage in all state capitals.

As of December 31, 2015, our 3G mobile access networks, consisting of 9,265 active radio base stations, covered 1,288 municipalities, or 79% of the urban population of Brazil. We have HSPA coverage in all state capitals.

As of December 31, 2015, our 4G access networks, consisting of 5,213 active radio base stations, covered 133 municipalities, or 51% of the urban population of Brazil.

In addition to these mobile access networks, we also operate Wi-Fi hotspots in public areas such as coffee shops, airports and shopping centers. Since 2012, we have provided outdoor urban wireless networks, including in the neighborhoods of Copacabana and Ipanema in the city of Rio de Janeiro. As of December 31, 2015, our Wi-Fi network consisted of over two million hotspots, with broadband access compatible with over two million access points provided by Fon Wireless Ltd., or Fon, which allows our customers to access Fon lines worldwide.

Aggregation Networks

Voice and data signals sent through our access network are routed through our aggregation networks to digital switches which connect voice calls and route digital signals to their destinations. Portions of our aggregation network use conventional copper trunk lines to connect our access network to our switches and transportation networks. We use ATM protocol to permit high speed transmission of these signals. Other portions of our aggregation network use fiber optic cable to connect our access network to our switches and transportation networks using Synchronous Digital Hierarchy, or SDH, protocol. In large metropolitan areas where the density of access point results in increased demand, we have deployed Metro Ethernet networks. We are currently deploying Metro Ethernet networks in additional cities to serve rising customer demand. Our Metro Ethernet networks are fully-integrated management systems and provide:

 

    ethernet data services from 4 Mbps up to 1 Gbps for point-to-point and multipoint dedicated access;

 

    ethernet access services from 4 Mbps up to 1 Gbps for IP access and MPLS/VPN access;

 

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    aggregation network services for ADSL2+ and VDSL2 platforms;

 

    aggregation network services for GPON platforms; and

 

    DWDM systems for services above 1Gbps to prevent overbooking our Metro Ethernet network.

Historically, we have used ATM protocol to transport digital signals through our access network from non-residential customers that require dedicated bandwidth to our switching stations. Our ATM networks have a fully-integrated management system and provide:

 

    frame relay data services (a data transmission service using fast protocols based on direct use of transmission lines) from 64 Kbps up to 2 Mbps;

 

    ATM data services supporting access rates from 2 Mbps to 622 Mbps; and

 

    aggregation network services for ADSL2+ platforms.

In response to changing customer needs, we converted elements of our network that use ATM and SDH protocols, that permit us to offer dedicated bandwidth to our customers, to MPLS protocol, which supports IP and permits the creation of VPNs through our MetroEthernet networks.

We have begun to use MPLS-TP capable devices that have been designed to interface with our existing Metro Ethernet Network to increase the bandwidth of our networks to support our 4G network data traffic and replace our legacy SDH networks.

Transportation Networks

We have a nationwide long-distance backbone, consisting of an optical fiber network that connects the Federal District and all state capitals in Brazil. This fiber network supports high capacity Dense Wavelength Division Multiplex, or DWDM, systems that can operate with up to 80 channels at 10 and 40 Gbps. In 2015, we completed the implementation of a new Optical Transport Network/DWDM, or OTN/DWDM network, with 100 Gbps links that connect 11 capitals, including São Paulo, Rio de Janeiro, Brasília and Belo Horizonte. This new OTN/DWDM network spreads over approximately 30,000 km of optical cables. Our optical network is complemented by microwave links to reach smaller cities and towns.

Most of the large urban areas of our fixed-line service areas are also connected by our fiber optic cable networks. Our transmission infrastructure connects our digital switches to four international gateway switches: two in Rio de Janeiro, one in Curitiba and one in Brasília.

We employ automatic traffic protection to improve the reliability of our network and increase its traffic capacity. The network is fully supervised and operated by management systems that allow rapid response to customer service requests and reduce the recovery time in case of failures.

We operate an internet backbone network and a fully IP-routed network, which provides a backbone for all internet dedicated services and VPN offerings. Our internet backbone connects to the public internet via international links that we maintain abroad.

We have implemented an address control and name resolution system for our IP networks with the objective of optimizing resources and improving the availability of internet access services.

Our transportation network is directly interconnected to the national and international long-distance networks of all long-distance service providers operating in Regions I, II and III and all mobile services providers in Regions I, II and III.

 

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Satellite Network

We have deployed an expanded range of satellite-based services to comply with our public service obligations to the rural and remote areas of Brazil, including the Amazon rainforest region. These satellite services include internet access and access to corporate data applications. As of December 31, 2015, our satellite network covered approximately 5,165 localities in 26 states and the Federal District and provided voice and data services.

In 2000, we began the implementation of the land-based segment of our respective satellite networks in order to extend transmission to remote areas in the states of Acre, Paraná, Rondônia, Rio Grande do Sul, Santa Catarina, Pará, Amazonas, Amapá and Roraima, as well as to other areas with limited access to telecommunications services due to geographical conditions, such as Mato Grosso, Mato Grosso do Sul, Goiás and Tocantins. The satellite network comprises satellite earth stations located in less-populated rural areas, as well as hub stations in the cities of Brasília, Manaus, Boa Vista, Macapá, Belém, Santarém, Marabá, Rio de Janeiro and Porto Velho. These satellite networks use digital technology and began operating in August 2000. The fiber optic and satellite backbones are interconnected in Brasília, Belém, Manaus, Rio de Janeiro and Porto Velho. The integration of the land-based segment of our satellite network allows us to provide fixed-line and mobile voice service to our subscribers in any location in our fixed-line service areas.

Hispamar Satellite S.A., or Hispamar, a Spanish-Brazilian consortium created in November 1999 by Hispasat (the leading satellite telecommunications provider in the Iberian Peninsula), and our company operates the Amazonas 2 and Amazonas 3 satellites, which were manufactured by Astrium (EADS Space Company). In December 2002, we entered into an agreement with Hispasat that granted and transferred to Hispamar the rights to exploit geostationary orbital position 61 degrees west, and we acquired a minority equity stake in Hispamar.

In 2009, the Amazonas 2 satellite was launched and this satellite commenced commercial operations in early 2010. The Amazonas 2 satellite was manufactured by Astrium and launched into geostationary orbit of 61 degrees West. This satellite provides both C and KU band transponders and on-board switching, with an expected useful life of 15 years. The Amazonas 2 satellite is owned by a subsidiary of Hispasat and Hispamar has been granted the right to operate and lease all of the transponder’s space segment on this satellite.

The Amazonas 3 satellite was launched and commenced commercial operations in early 2013. The Amazonas 3 satellite was manufactured by Space Systems/Loral and launched into geostationary orbit of 61 degrees West. This satellite provides both C and KU band transponders, with an expected useful life of 15 years. The Amazonas 3 satellite is owned by Hispamar, a subsidiary of Hispasat, which operates and leases the transponder’s entire space segment on this satellite.

We lease transponders from:

 

    Hispamar with 754 MHz of capacity, in the C band, on the Amazonas 3 satellite and 540 MHz of capacity in the C band on the Amazonas 2 satellite to provide voice and data services through 653 remote switches covering 390 municipalities;

 

    Hispamar with 98.3 Mhz of capacity, in the KU band, on the Amazonas 3 satellite and 576 Mhz of capacity in the KU band on the Amazonas 2 satellite to provide voice and data services to approximately 3,028 localities; and

 

    Intelsat Satellite with 68 MHz of capacity, in the C band, on the IS-905 satellite to transport voice and data signals from Macapá to Rio de Janeiro and Boa Vista to Rio de Janeiro.

As part of our goal to maximize investments and allocate resources to certain strategic developments, in 2015 we focused on the expansion of our backbone infrastructure. We now service more areas through our fixed line infrastructure, which reduced the number of satellites needed to comply with our public service obligations. As a result, we terminated leases and operations for the following satellites:

 

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    Intelsat Satellite with 122 MHz of capacity, in the C band, on the IS-805 satellite and 648 MHz of capacity in the C band on the IS 10-02 satellite to transport voice and data signals from Manaus to Rio de Janeiro; and

 

    SES New Skies with 108 MHz of capacity, in the KU band, on the SES-4 satellite to provide voice and data services throughout Brazil.

DTH Network

We historically provide our DTH services through a satellite uplink located in Lurin, Peru which receives, encodes and transmits the television signals to satellite transponders. We lease these facilities and license the related technology from a subsidiary of Telefónica. We lease transponders for the delivery of these television signals to our subscribers from Telefónica. We have leased 216 Mhz of capacity in the KU band on the Amazonas 3 satellite and 36 Mhz of capacity in the KU band on the Amazonas 2 satellite to provide DTH services.

In December 2013, we started providing DTH services through our own head-end located in Rio de Janeiro, Alvorada - Barra da Tijuca, which receives, encodes and transmits television signals for satellite transponders. We lease transponders for the delivery of these television signals to our subscribers from SES New Skies. We have leased 1.5 GHz of capacity in the KU-band, on the SES-6 satellite to provide DTH services throughout Brazil.

Our customers lease satellite dishes and set-top boxes from us as part of their subscriptions to our Oi TV services.

IP TV Network

We offer IP TV services in the cities of Rio de Janeiro and Belo Horizonte through our FTTH network. For customers who have the IP TV service, we also offer OTT services, which provide customers with access to different content on different devices (mobile phones, tablets and computers).

Fixed-Line and Mobile Tower Leases

In December 2012, we entered into an operating lease agreement with Sumbe to lease space to install our equipment on 1,200 communications towers and rooftop antennae of Sumbe. The monthly payments under this operating lease agreement reflect a base rental amount specified in the agreement, adjusted annually by the positive variation of IPCA. This operating lease has a 15-year term and is automatically renewable for successive 12-month periods unless any party to the agreement provides 60-day prior written notice terminating such renewal.

In April 2013, we entered into an operating lease agreement with São Paulo Cinco Locação de Torres Ltda. to lease space to install our equipment on 2,113 fixed-line communications towers of São Paulo Cinco Locação de Torres Ltda. The monthly payments under this operating lease agreement reflect a base rental amount specified in the agreement, adjusted annually by the positive variation of IPCA. This operating lease has a 20-year term that commenced upon completion of the assignment of the right to lease space and install equipment on the fixed-line communication towers, and is renewable for another 20 years.

In April 2013, we entered into an operating lease agreement with BR Towers SPE 3 S.A. to lease space to install our equipment on 2,113 fixed-line communications towers of with BR Towers SPE 3 S.A. The monthly payments under this operating lease agreement reflect a base rental amount specified in the agreement, adjusted annually by the positive variation of IPCA. This operating lease has a 20-year term that commenced upon completion of the assignment of the right to lease space and install equipment on the fixed-line communication towers, and is renewable for another 20 years.

In July 2013, we entered into an operating lease agreement with SBA Torres Brasil Ltda. to lease space to install our equipment on 2,113 fixed-line communications towers of São Paulo Cinco Locação de Torres Ltda. The monthly payments under this operating lease agreement reflect a base rental amount specified in the agreement, adjusted annually by the positive variation of IPCA. This operating lease has a 20-year term that commenced upon

 

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completion of the assignment of the right to lease space and install equipment on the fixed-line communication towers, and is renewable for another 20 years.

In December 2013, we entered into an operating lease agreement with Caryopoceae to lease space to install our equipment on 2,007 communications towers and rooftop antennae of Caryopoceae. The monthly payments under this operating lease agreement reflect a base rental amount specified in the agreement, adjusted annually during the first seven years of the lease by the greater of 6.5% or the positive variation of IPCA, and adjusted annually thereafter by the positive variation of IPCA. This operating lease has a 15-year term and is automatically renewable for successive 60-month periods unless any party to the agreement provides 60-day prior written notice terminating such renewal.

In June 2014, we entered into an operating lease agreement with Tupã Torres to lease space to install our equipment on 1,641 communications towers and rooftop antennae of Tupã Torres. The monthly payments under this operating lease agreement reflect a base rental amount specified in the agreement, adjusted annually during the first seven years of the lease by the greater of 6.5% or the positive variation of IPCA, and adjusted annually thereafter by the positive variation of IPCA. This operating lease has a 15-year term and is automatically renewable for successive 60-month periods unless any party to the agreement provides 60-day prior written notice terminating such renewal.

Infrastructure Sharing Agreements

2G and 3G Networks

In April 2014, we and TIM entered into a memorandum of understanding under which we agreed to the joint construction, implementation and reciprocal assignment of elements of our respective 2G and 3G network infrastructure.

4G Network

We currently are party to two Radio Access Network, or RAN, sharing agreements with other operators. RAN sharing enables operators to share the same physical network, each using its own frequency spectrum resources, thus reducing the deployment costs in proportion to each operator’s respective coverage requirements while maintaining all of the characteristics of an individual network with respect to our customers. RAN sharing makes use of 3GPP standard features, permitting full technical support. As a result, RAN sharing agreements allow us to reduce operating expenses and capital expenditures, a key priority of the Transformation Plan.

In November 2012, we entered into a memorandum of understanding with TIM under which we agreed to the joint use of elements of our 4G network under a RAN sharing model pursuant to which we have invested in (and provided TIM with access to) infrastructure in certain cities, while TIM has invested in (and provided us with access to) infrastructure in other cities. In late 2013, we and TIM extended this memorandum of understanding to additional cities and revised certain obligations of each party under the memorandum of understanding, which we refer to as the 2013 RAN Sharing Agreement. The 2013 RAN Sharing Agreement has a term of 15 years. Under the 2013 RAN Sharing Agreement, we offer 4G technology to over 80% of urban areas in all Brazilian capital cities and cities with over 500,000 inhabitants. In 2015, we expanded the 2013 RAN Sharing Arrangement with TIM to cities with over 200,000 inhabitants, approximately 133 municipalities covered by 4G technology, and we began a RAN sharing arrangement with Vivo in five municipalities, which we expect to expand during 2016 and succeeding years.

In June 2015, we entered into a memorandum of understanding under which we agreed to the joint use of elements of the 4G network under a RAN sharing model pursuant to which Oi, TIM, and Vivo agreed to invest proportionally (50% Vivo, 25% Oi and 25% TIM) in sites in certain cities based on each operators’ respective coverage obligations, which we refer to as the 2015 RAN Sharing Agreement. The 2015 RAN Sharing Agreement has a term of 12 years. In early 2016, ANATEL required the inclusion of additional clauses in the agreement allowing an additional operator to be added. This agreement covers 32 cities in 2015, 150 cities in 2016 and 525 cities in 2017.

 

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Network Maintenance

Our external plant and equipment maintenance, installation and network servicing are performed by third-party service providers. We employ our own team of technicians for the maintenance of our internal plant and equipment.

In January 2012, we entered into a services agreement with Telemont for installation, operation, and corrective and preventive maintenance in connection with our external plant and associated equipment, public telephones, and fiber optic and data communication networks (including broadband access services) in the State of Rio de Janeiro. In October 2012, we entered into a services agreement with Telemont for installation, operation, and corrective and preventive maintenance in connection with our external plant and associated equipment, public telephones, and fiber optic and data communication networks (including broadband access services) in the States of Minas Gerais, Espírito Santo, Mato Grosso, Mato Grosso do Sul, Tocantins, Acre, Rondônia and Goiás and the Federal District. The total estimated payments during the five-year terms of these contracts are expected to be R$6.6 billion. In October 2015, we acquired all of the operations of Telemont related to our installation, operation, and corrective and preventive maintenance services in connection with our external plant and associated equipment, public telephones, and fiber optic and data communication networks (including broadband access services) in the State of Rio de Janeiro.

In October 2012, we entered into a services agreement with A.R.M. Engenharia for installation, operation and corrective and preventive maintenance in connection with our external plant and associated equipment, public telephones, and fiber optic and data communication networks (including broadband access services) in the States of Maranhão, Piauí, Ceará, Rio Grande do Norte, Paraíba, Pernambuco, Alagoas, Sergipe, Bahia, Amazonas, Roraima, Pará, Amapá, Paraná and Santa Catarina. The total estimated payments under this contract are R$6.3 billion during the five-year term of this contract. In April and May 2016, we acquired A.R.M. Engenharia’s operations in the States of Rio Grande do Sul, Santa Catarina and Paraná, and we are managing those operations. Also in May 2016, we entered into an agreement with the shareholders of A.R.M. Engenharia to acquire the totality of the shares issued by ARM Engenharia. The completion of the transaction is subject to customary conditions precedent, including the completion of financial and legal due diligence and approval by the Administrative Council for Economic Defense.

In May 2013 and June 2013, we internalized our installation, operations, and corrective and preventive maintenance services in connection with our fixed-line telecommunications services, mobile telecommunications services, data transmission services (including broadband access services), satellite services, buildings, access ways and towers. These services had previously been provided by Nokia Solutions and Alcatel-Lucent Brasil S.A.

Through our wholly-owned subsidiary, Serede, we perform installation, operation, and corrective and preventive maintenance services in connection with our external plant and associated equipment, public telephones, and fiber optic and data communication networks (including broadband access services) in the States of Rio de Janeiro and Rio Grande do Sul.

Competition

The Brazilian telecommunications industry is highly competitive. The competitive environment is significantly affected by key trends, including technological and service convergence, market consolidation and combined service offerings by service providers. See “Item 5. Operating and Financial Review and Prospects—Principal Factors Affecting Our Financial Condition and Results of Operations—Effects of Competition on the Rates that We Realize and the Discounts We Record.”

Residential Services

We are the leading provider of residential services in Regions I and II of Brazil with 14.9 million fixed lines in service (including the number fixed lines provided to our SME and Corporate Services customers) as of December 31, 2015. Based on information available from ANATEL, as of December 31, 2015, we had a market share of 56.4% of the total fixed lines in service in Region I (including the number fixed lines provided to our SME and Corporate Services customers) and a market share of 52.9% of the total fixed lines in service in Region II (including the number fixed lines provided to our SME and Corporate Services customers). Our principal competitors for fixed-

 

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line services are (1) Embratel, which had a market share of 25.3% of the total fixed lines in service in Region I and a market share of 18.4% of the total fixed lines in service in Region II as of December 31, 2015, based on information available from ANATEL, and (2) GVT, which had a market share of 9.9% of the total fixed lines in service in Region I and a market share of 23.4% of the total fixed lines in service in Region II as of December 31, 2015, based on information available from ANATEL.

We face competition from other telecommunications services providers, particularly from mobile telecommunications services providers, which has led to traffic migration from fixed-line traffic to mobile traffic and the substitution of mobile services in place of fixed-line services, encouraged by the prevalence of all-net packages and offers of aggressively-priced packages from some mobile telecommunications service providers. The decrease in interconnection rates has discouraged the construction of new fixed-line networks. In addition, the decrease in interconnection rates has led to decreases in market prices for telecommunications services by enabling telecommunications service providers that use the local fixed-line networks of incumbent fixed-line providers, such as our company, to offer lower prices to their customers. We and other companies have combatted this trend by offering subscriptions with unlimited calling privileges at the same or similar prices to mitigate the pricing pressure. Finally, our competitors have begun competing in the consumer market with bundles or services targeted to the needs of lower income customers.

Mobile

We expect to continue to face competition from mobile services providers, which represent the main source of competition in our Residential Services business. As of December 31, 2015, there were 129.3 million mobile subscribers (including our mobile customers) in Region I, an 8.9% decrease over December 31, 2014, and there were 64.0 million mobile subscribers (including our mobile customers) in Region II, a 9.6% decrease over December 31, 2014, based on information available from ANATEL. In addition, due to the proliferation of all-net service plans, particularly for mobile services, which offer unlimited long-distance calls and data combination plans, we believe that we may be vulnerable to traffic migration as customers with both fixed-line and mobile telephones use their mobile devices to make calls to other mobile subscribers.

Fixed Line

Embratel provides local fixed-line services to residential customers through the cable network owned by its subsidiary Net in the portions of Regions I and II where Net provides cable television service. As a result, Net is able to offer cable television, broadband and telephone services as a bundle at a very competitive price. We also expect competition from Embratel to increase in certain cities in our service areas where the volume of demand is attractive.

We also compete in the State of São Paulo with Telefônica Brasil, which is the incumbent fixed-line service provider in the State of São Paulo. Telefônica Brasil has been increasing its competitive activities in Regions I and II, expanding its fiber optic network in high-income residential areas and increasing its services to low- and medium-size businesses. We expect competition from Telefônica Brasil to increase in certain cities in our service areas where the volume of demand is attractive.

Competition from long-distance fixed-line service providers has decreased as a result of recent reductions in interconnections tariffs. The proliferation of all-net plans by fixed-line and mobile services providers that include free minutes for calls to subscribers of any operator have and may continue to adversely impact our revenues from fixed-line long-distance calls if our fixed-line customers choose to migrate to mobile services for long-distance communications and/or cancel their fixed-line services. Moreover, new technologies that serve as alternatives to traditional long-distance telephone calls, such as VoIP and instant internet messaging, have captured part of Brazil’s long-distance traffic.

Broadband

Cable television providers that offer broadband services, particularly Net and Telefônica Brasil, represent our principal competition in the broadband market. Both Embratel and Telefônica Brasil offer broadband services at

 

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higher speeds than our offerings, and they offer integrated packages, consisting of subscription television, broadband and voice telephone services to cable television subscribers who, in general, have more purchasing power than other consumers. Net and Telefônica Brasil offer strong competition for fixed broadband services in municipalities that have the highest concentration of purchasing power.

In addition, we compete in our service areas with smaller companies that have been authorized by ANATEL to provide fixed-line services, such as voice and broadband. Although regional broadband service providers do not have the same national footprint as national operators, they have established networks in the regions in which they operate and often have a market share of 20-30% of broadband customers.

Pay-TV

In Brazil, the high quality programming of television broadcasters has resulted in aggregate ratings for these broadcasters of approximately 60% of viewers and has limited the perceived value of subscription television. As a result, the subscription television market in Brazil has a low penetration compared to developed countries and even to other South American countries such as Argentina, Chile and Mexico. Penetration rates by subscription television have grown from approximately 8% of Brazilian households in 2005 to approximately 32% in 2015. According to information available from ANATEL, the Brazilian subscription television market decreased by 2.1% to 19.1 million subscribers as of December 31, 2015 from 19.5 million subscribers as of December 31, 2014.

The primary providers of subscription television services in the regions in which we provide Residential Services are SKY, which provides DTH services, and América Móvil, which provides DTH service through Embratel under the “Claro TV” brand and provides subscription television services using coaxial cable through Net. We offer DTH subscription television services throughout the regions in which we provide Residential Services.

We deliver Oi TV through our fiber optic network using an internet protocol, or IP TV, in the cities of Rio de Janeiro and Belo Horizonte, respectively.

Personal Mobility Services

The mobile telecommunications services market in Brazil is characterized by intense competition among providers of mobile telecommunications services. We compete primarily with Telefônica Brasil, which markets its mobile services under the brand name “Vivo,” TIM and Claro, each of which provides services throughout Brazil.

As of December 31, 2015, based on information available from ANATEL (which includes SME and Corporate Services subscribers), we had a market share of 18.6% of the total number of mobile subscribers in Brazil, ranking behind Telefônica Brasil with 28.4%, TIM with 25.7% and Claro with 25.6%. As of December 31, 2015, based on information available from ANATEL, the competitive landscape for mobile services was as follows: in Region I, we had a market share of 24.3% of the total number of mobile subscribers, ahead of Telefônica Brasil and behind TIM with 25.1% and Claro with 24.7%; in Region II, we had a market share of 14.4% of the total number of mobile subscribers, ranking behind Telefônica Brasil with 32.0%, TIM with 26.8% and Claro with 26.7%; and in Region III, we had a market share of 12.2% of the total number of mobile subscribers, ranking behind Telefônica Brasil with 33.1%, Claro with 26.1% and TIM with 25.7%.

Competition in Mobile Voice and Data Communications Services

Competitive efforts in the pre-paid and post-paid personal mobility services market generally take the form of traffic subsidies and aggressive discounts on data packages. We no longer offer handset subsidies (with the exception of the Oi Pontos program, which provides credit to existing post-paid customers to be used on the purchase of a new mobile device), but we do compete on the basis of traffic subsidies, all-net plans that eliminate the community effect of traditional telecommunications services in Brazil and discounts on data packages. The aggressiveness of promotions is generally driven by the desire of the operator offering the promotion to increase market share; however, these promotions generally are for a short duration as the pricing terms offered are not sustainable over the long term.

 

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Studies of telecommunications consumption habits in Brazil show that, given budget restrictions caused by the macroeconomic situation, users have shifted away from owning a SIM card from each of the operators (in response to traditional on-net plans that offer substantial discounts for calls to the same operator) and have begun to consolidate telecommunications services on a the SIM card that offers the best data package. This trend will result in a decline in the overall customer base for pre-paid services, which will require operators to offer increasingly comprehensive data packages at aggressive discounts in order to maintain and potentially increase their customer bases.

Our launches of the Oi Mais, Oi Mais Controle and Oi Livre portfolios have kept us on the forefront of competition in the mobile services market. We believe our innovative flat rate pricing, all-net model for voice services and text messaging, and robust data packages at competitive rates enable us to satisfy the growing customer demand for simpler product offerings and greater access to data.

In addition, we believe that in the medium-term, personal mobility service providers in Brazil will experience increasing competition from OTT providers, as customers shift from mobile voice and SMS communications to internet-based voice and data communications through computers and smartphone or tablet applications such as WhatsApp, Viber and Skype. Since November 2011, we have deployed a network of Wi-Fi hotspots, which is composed of sub networks that are accessible from (1) indoor public and commercial sites, such as coffee shops, airports and shopping centers, (2) outdoor public spaces and (3) residential access points of our fixed-line customers that share access points in association with Fon. As of December 31, 2015, our Wi-Fi network consisted of over two million hotspots, with broadband access compatible with over two million access points provided by Fon, which allows our customers to access Fon lines worldwide. Our data customers (both mobile and fixed) have unlimited access to our Wi-Fi hotspots, extending our mobile coverage and improving customer experience.

Competition in Mobile Data Only Services

Studies of telecommunications consumption habits in Brazil show that users are demanding more data for use in social networking sites and smartphone applications such as WhatsApp. This shift from voice to data consumption affects our Personal Mobility Services business in two ways: (1) it enables customers to use data to communicate with anyone anywhere in the world via internet instant messaging systems available on smartphone applications such as WhatsApp, and (2) it enables consumers to use data to call anyone anywhere in the world using the VoiP capabilities available in such smartphone applications.

Following a study of the telecommunications consumption habits in Brazil, in November 2015 we launched our Oi Livre portfolio, a set of innovative offerings with significant increase in data allowances and a flat fee for all-net calls (with the exception of Oi Livre Por Dia) to customers of any operator in Brazil. This initiative changes the mobile service market in Brazil and the manner in which our customers communicate, disrupting the original pre-paid model in which customers acquired SIM cards from different operators and used the respective SIM for on-net calls with that particular operator in an effort to avoid paying high rates for off-net calls.

In the post-paid mobile data communications market, our primary competitors are Telefônica Brasil, Claro and TIM. As of December 31, 2015, based on information available from ANATEL, which includes SME and Corporate Services subscribers, we had a market share of 11.9% of the total number of post-paid mobile data subscribers in Brazil (including hybrid data plan subscribers), ranking behind Telefônica Brasil with 42.4%, Claro with 22.7% and TIM with 18.5%. We believe that our most direct competitor in this market is TIM, whose customer acquisition and retention strategy of offering traffic subsidies, all-net plans and aggressive discounts on data packages most closely resembles ours. On the other hand, Vivo and Claro, whose prices are typically higher than those of the other mobile data service providers in the market, primarily focus on the high-end consumer market.

In the pre-paid mobile data communications market, our primary competitors are also Telefônica Brasil, Claro and TIM. As of December 31, 2015, based on information available from ANATEL, which includes SME and Corporate Services subscribers, we had a market share of 21.3% of the total number of pre-paid mobile data subscribers in Brazil, ranking behind Telefônica Brasil with 22.9%, Claro with 26.7% and TIM with 28.5%. As in the post-paid mobile data communications market, we believe that our most direct competitor in the pre-paid mobile data communications market is TIM, who offer plans similar to Oi Livre.

 

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Competition in Mobile Long-Distance Services

Recent reductions in the interconnections rates for Regions I, II and III have resulted in lower costs for long-distance services, both to us and to our customers. As a result, we and TIM have introduced “all-net” voice and messaging plans that allow customers to call anywhere in Brazil for a flat rate. Nearly all the plans in our recently launched Oi Mais, Oi Mais Controle and Oi Livre portfolios offer all-net calling and text messaging services, which capitalized on the reductions in interconnection rates and simplified our portfolios, thereby eliminating the community effect. We believe that the introduction of all-net plans, coupled with more robust and data packages that allow consumers to use smartphones applications more freely, have substantially reduced competition in the mobile long-distance services market.

SME and Corporate Services

The competition risks relating to the fixed-line and mobile services we provide to our SME customers are similar to those relating to the fixed-line and mobile services we provide to our residential and personal mobility customers. The competition risks relating to the fixed-line and mobile services we provide to our corporate customers are also similar.

In recent years, there has been a shift among SME and corporate services providers toward value-added services. With the exception of the Oi Mais Empresas app and web service, our value-added products and services for the SME segment are substantially similar to those offered by our competitors, and we rely on client service and customer satisfaction to maintain existing customers and attract new customers. Our principal competitors for both core and value-added services for SME and corporate customers are Embratel, Telefônica Brasil and TIM, as well as smaller niche companies.

The Brazilian recession has had a significant negative effect on our operating revenue and margins as SMEs generally, including our customers, have reduced the size of their businesses and in some cases ceased operations. In addition, a number of our Corporate customers have reduced their telecommunications spending as part of their overall cost-cutting efforts.

Concessions, Authorizations and Licenses

Under the General Telecommunications Law and ANATEL regulations, the right to provide telecommunications services is granted either through a concession under the public regime or an authorization under the private regime. For additional details regarding the rights and obligations of service providers operating under the public regime and the private regime, see “—Telecommunication Regulations—Regulation of the Brazilian Telecommunications Industry— Concessions and Authorizations.” We operate under:

 

    a concession to provide local fixed-line services in Region I (other than the 57 municipalities in the State of Minas Gerais that are excluded from the concession area of Region I) and a concession to provide local fixed-line services in Region II (other than the nine municipalities in the States of Goiás, Mato Grosso do Sul and Paraná that are excluded from the concession area of Region II);

 

    a concession to provide domestic long-distance services in Region I (other than the 57 municipalities in the State of Minas Gerais that are excluded from the concession area of Region I) and a concession to provide domestic long-distance services in Region II (other than the nine municipalities in the States of Goiás, Mato Grosso do Sul and Paraná that are excluded from the concession area of Region II);

 

    authorizations to provide personal mobile services in Regions I, II and III;

 

    authorizations to provide local fixed-line services and domestic long-distance services in (1) the 57 municipalities in the State of Minas Gerais that are excluded from the concession area of Region I, (2) the nine municipalities in the States of Goiás, Mato Grosso do Sul and Paraná that are excluded from the concession area of Region II, and (3) Region III;

 

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    authorizations to provide international long-distance services originating anywhere in Brazil;

 

    authorizations to provide Multimedia Communication Services (Serviço de Comunicação Multimídia) throughout Brazil; and

 

    an authorization to provide subscription television services throughout Brazil.

These concessions and authorizations allow us to provide specific services in designated geographic areas and set forth certain obligations with which we must comply.

Fixed-Line and Domestic Long-Distance Services Concession Agreements

We have entered into concession agreements with ANATEL that govern our concessions to provide (1) fixed-line services in the Federal District and each of the states of Regions I and II and (2) domestic long-distance services originating from the Federal District and each of the states of Regions I and II. Each of our fixed-line and domestic long-distance concession agreements:

 

    expires on December 31, 2025;

 

    sets forth the parameters that govern adjustments to our rates for fixed-line services;

 

    requires us to comply with the network expansion obligations set forth in the General Plan on Universal Service Goals;

 

    requires us to implement electronic billing systems;

 

    sets forth the conditions under which ANATEL may access information from us; and

 

    requires us to pay fines for systemic service interruptions.

In addition to the above, each of our concession agreements for fixed-line services requires us to comply with certain quality of service obligations set forth in these concession agreements as well as the quality of service obligations set forth in the General Plan on Quality Goals.

Each of our fixed line concessions requires payment of biannual fees equal to 2.0% of our net operating revenue that is derived from the provision of local fixed-line services (excluding taxes and social contributions) during the immediately preceding year, while allowing us to apply the amount of such fees to finance the expanded service obligations created by the amended General Plan on Universal Service Goals in lieu of making payment to ANATEL. Similarly, each of our domestic long-distance concessions requires payment of biannual fees equal to 2.0% of our net operating revenue that is derived from the provision of domestic long-distance services (excluding taxes and social contributions) during the immediately preceding year.

These concession agreements also required us to provide transmission lines connecting our fiber-optic internet backbones to municipalities in our concession areas in which we did not provide internet service, which we refer to as backhaul. Under these concession agreements, we were obligated to set up backhaul in 3,252 municipalities in Regions I and II. The facilities that we constructed to meet these obligations are considered to be property that is part of our concessions and will therefore revert to the Brazilian government on January 1, 2026.

These concession agreements provide that ANATEL may modify their terms in 2015 and 2020 and may revoke them prior to expiration under the circumstances described under “—Telecommunications Regulation—Regulation of the Brazilian Telecommunications Industry—Regulation of Fixed-Line Services—Termination of a Concession.” The modification right permits ANATEL to impose new terms and conditions in response to changes in technology, competition in the marketplace and domestic and international economic conditions. ANATEL is obligated to engage in public consultation in connection with each of these potential modifications.

 

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On June 27, 2014, ANATEL opened a public comment period for the 2015 revision of the terms of our concession agreements. The comment period, which ended on December 26, 2014, was opened for comments on certain topics such as service universalization, rates and fees, among others. We submitted our comments during this period. Throughout 2015, ANATEL, the Brazilian Ministry of Communications and telecommunications service providers met regularly to discuss possible amendments to each of the concession agreements granted by ANATEL, including ours, and the implications of the developments and demands in the telecommunications sector in recent years. In September 2015, the Ministry of Communications created a working group, consisting of three members from each of ANATEL and the Ministry of Communications, to evaluate the status of the concessions and propose guidelines for the amendment of the concession agreements. In November 2015, the Ministry of Communications opened public consultation on the new regulatory framework for telecommunications. The Ministry of Communications has extended the deadline for contributions on multiple occasions. In April 2016, the Ministry of Communications, based on the working group’s findings, issued a decree addressing guidelines for the establishment of a new regulatory framework for telecommunications, which will be implemented by ANATEL through the conclusion of the concession amendments. The guidelines provide for, among other things, the expansion of broadband services (including in rural regions), the elimination of the reversibility of assets, and an extension of the term of our concessions, which are currently scheduled to expire in 2025. As a result of the publication of these guidelines, ANATEL requested a further postponement of the review of our concession agreements, which was granted. As a result of this extension, the review of our concession agreements is currently scheduled to occur by December 2016.

For more information regarding the regulation of our fixed-line services, the General Plan on Universal Service Goals and the General Plan on Quality Goals, see “—Telecommunications Regulation—Regulation of the Brazilian Telecommunications Industry— Regulation of Fixed-Line Services.”

2G Radio Frequency Licenses

We hold five licenses to use radio frequency spectrum to provide 2G services in Regions I and II and four in Region III. These licenses grant us permission to use the applicable radio spectrum for 15 years from the date of the authorization agreement under which they are granted and are renewable for additional 15-year terms. Upon renewal of any of these licenses and on every second anniversary of such renewal, we will be required to pay an amount equal to 2.0% of our prior year’s net operating revenue from personal mobile services. The initial terms of our radio frequency spectrum licenses expire between 2016 and 2022.

Our authorization agreements are subject to network scope and service performance obligations set forth in these authorization agreements. Under these obligations we are required to service all municipalities in Brazil with a population in excess of 100,000. A municipality is considered “serviced” when the covered service area contains at least 80% of the urban area in the municipality. Our failure to meet these targets may result in the imposition of penalties established in ANATEL regulations and, in extreme circumstances, in termination of our personal mobile services authorizations by ANATEL. As of the date of this annual report, we have satisfied the network scope and service performance obligations set forth in these authorization agreements; however, we have not yet received ANATEL’s inspection report.

3G Radio Frequency Licenses

We hold five licenses to use radio frequency spectrum to provide 3G services in Regions I, II and III. Each of these licenses grants us permission to use the applicable radio spectrum for 15 years from the date of grant and is renewable for additional 15-year terms. We will be required to pay an amount equal to 2.0% of our prior year’s net operating revenue from personal mobile services upon renewal of the license and on every second anniversary of the renewal. The initial terms of these licenses expire in 2023.

These radio frequency licenses include network scope obligations. Under these obligations, we are currently required to (1) provide service to 459 municipalities that did not have mobile services at the time these licenses were granted with either 2G or 3G mobile telecommunications services, (2) provide 3G service to all state capitals in Brazil, the Federal District and all municipalities with a population in excess of 200,000 inhabitants, (3) provide 3G service to all of the municipalities covered by these licenses with a population in excess of 100,000, and (4) provide 3G service to 50% of all of the municipalities with a population between 30,000 and 100,000. In addition, we will be

 

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required to provide 3G service to 60% of the municipalities, including 641 specified municipalities, covered by these licenses with a population less than 30,000 by 2016.

A municipality is considered “serviced” when the covered service area contains at least 80% of the urban area in the municipality. Our failure to meet these targets may result in the imposition of penalties established in ANATEL regulations and, in extreme circumstances, in termination of our 3G frequency licenses by ANATEL. As of the date of this annual report, we have satisfied the network scope and service performance obligations set forth in these licenses; however, we have not yet received ANATEL’s inspection report.

4G Radio Frequency Licenses

We hold three licenses to use radio frequencies in 2.5 GHz sub-bands to provide 4G services in Regions I, II and III. Each of these licenses grants us permission to use the applicable radio spectrum for 15 years from the date of grant and is renewable for additional 15-year terms. We will be required to pay an amount equal to 2.0% of our prior year’s net operating revenue from 4G services upon renewal of the license and on every second anniversary of the renewal. The initial terms of these licenses expire in 2027.

These radio frequency licenses include network scope obligations. Under these obligations, we are currently required to provide:

 

    4G service in all state capitals, municipalities with a population in excess of 200,000 and the Federal District;

 

    voice services in the 450 MHz spectrum and data services at minimum upload speeds of 128 kbps and download speeds of 256 kbps and a minimum monthly allowance of 250 MB in 384 municipalities in the States of Goiás, Mato Grosso, Mato Grosso do Sul, Rio Grande do Sul and the Federal District;

 

    unlimited data services at minimum upload speeds of 256 kbps and download speeds of 128 kbps to rural schools in 384 municipalities in the States of Goiás, Mato Grosso, Mato Grosso do Sul, Rio Grande do Sul and the Federal District; and

 

    make our fixed-line network available to other telecommunications service providers to allow them to comply with their obligations under the General Plan on Universal Service Goals in 962 municipalities in the States of Goiás, Mato Grosso, Mato Grosso do Sul, Rio Grande do Sul and the Federal District.

In addition, we will be required to:

 

    provide 4G service to all of the municipalities covered by these licenses with a population in excess of 100,000 by December 31, 2016;

 

    provide 4G service to all of the municipalities covered by these licenses with a population between 30,000 and 100,000 by December 31, 2017;

 

    provide 4G service to 30% of the municipalities covered by these licenses with a population less than 30,000 by December 31, 2017;

 

    provide 4G service to 60% of the municipalities covered by these licenses with a population less than 30,000 by December 31, 2018;

 

    provide 4G service to all of the municipalities covered by these licenses with a population less than 30,000 by December 31, 2019;

 

    offer voice services in the 450 MHz spectrum and data services at minimum upload speeds of 256 kbps and download speeds of 1Mbps and a minimum monthly allowance of 500 MB in 962 in the States of Goiás, Mato Grosso, Mato Grosso do Sul, Rio Grande do Sul and the Federal District by December 31, 2017; and

 

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    provide unlimited data services at minimum upload speeds of 256 kbps and download speeds of 128 kbps to rural schools in 962 municipalities in the States of Goiás, Mato Grosso, Mato Grosso do Sul, Rio Grande do Sul and the Federal District by December 31, 2017.

In addition, our 4G radio frequency licenses impose minimum investment obligations in domestic technologies. At least 65% of the cost of all goods, services, equipment, telecommunications systems and data networks that we purchase to meet our 4G service obligations must developed in Brazil. This minimum requirement will increase to 70% between January 1, 2017 and December 31, 2022.

Our failure to meet these targets may result in the imposition of penalties established in ANATEL regulations and, in extreme circumstances, in termination of our 4G frequency licenses by ANATEL. As of the date of this annual report, we have satisfied the network scope and service performance obligations set forth in these licenses.

Fixed-Line Services Authorization Agreements

We have entered into authorization agreements with ANATEL that govern our authorizations to provide local fixed-line services in and domestic long-distance services originating from (1) the 57 municipalities in the State of Minas Gerais that are excluded from the concession area of Region I, (2) the nine municipalities in the States of Goiás, Mato Grosso do Sul and Paraná that are excluded from the concession area of Region II, and (3) Region III. These authorizations do not have termination dates and require us to comply with certain quality of service obligations set forth in the General Plan on Quality Goals.

We have also entered into authorization agreements with ANATEL that govern our authorizations to provide international long-distance services originating from anywhere in Brazil. These authorizations do not have termination dates and require us to comply with quality of service obligations set forth in the General Plan on Quality Goals.

Multimedia Communication Services Authorization Agreements

We have Multimedia Communication Services authorizations, which superseded our prior Telecommunications Network Transportation Services (Serviço de Rede de Transporte de Telecomunicações) authorizations, permitting us to provide high speed data service.

The Multimedia Communication Services authorizations became effective in May 2003 and cover the same geographical areas as our concession agreements. In April 2008, in connection with the amendments to our fixed-line services concessions, we agreed to provide internet service free of charge until December 31, 2025 to all urban schools in the areas of our concession agreements.

Term of Commitment to Adhere to National Broadband Plan

On June 30, 2011, we entered into a Term of Commitment (Termo de Compromisso) with ANATEL and the Ministry of Communications to formalize our voluntary commitment to adhere to the terms of the National Broadband Plan, created in May 2010 by Executive Decree No. 7,175/10 with the goal to make broadband access available at low cost, regardless of technology, throughout Brazil. Pursuant to the Term of Commitment, we are required to offer (1) broadband services with minimum upload and download capabilities to retail customers in certain sectors of Region I and II for a maximum price of R$35 per month (or R$29.90 in ICMS-exempt states), plus fees, and (2) access to our broadband infrastructure to certain wholesale customers, including small businesses and municipalities, in certain sectors of Region I and II for a maximum price of R$1,253 per 2 Mbps per month and a one-time installation fee, while observing all quality standards under ANATEL regulations. Both retail and wholesale services are subject to certain network capacity limits and need only be provided at the demand of the customer. Pursuant to the Term of Commitment, we have offered the required services to all eligible retail and wholesale customers since the date of its execution and have gradually increased the capacities offered to wholesale customers since November 2011. We have been obligated to provide the maximum capacities established by the Term of Commitment to eligible wholesale customers since June 30, 2015. In addition, the Term of Commitment requires that we:

 

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    provide one public internet access point for the first 20,000 inhabitants and one additional access point for each subsequent 10,000 inhabitants, with a limit of six access points, at a speed of 2 Mbps, in each municipality that has only satellite service, free of charge and upon demand of such municipality;

 

    adequately advertise the services contemplated by the Term of Commitment and present to the Ministry of Communications semi-annual reports detailing our marketing efforts; and

 

    make our best efforts to offer broadband services to retail customers at speeds of up to 5 Mbps, reaching the largest possible number of municipalities.

The Term of Commitment will expire on December 31, 2016.

Subscription Television Authorization Agreement

In November 2008, we entered into an authorization agreement with ANATEL that governs our use of satellite technology to provide DTH satellite television services throughout Brazil. The authorization agreement permits us to provide DTH satellite television services for 15 years and is renewable for an additional 15-year term in exchange for a fee to be agreed upon between us and ANATEL.

Under this authorization, we are required to furnish equipment to certain public institutions, to make channels available for broadcasting by specified public institutions, and to comply with quality of service obligations set forth in applicable ANATEL regulations.

In December 2012, ANATEL granted our request to convert our DTH authorization agreement into a Conditional Access Service authorization allowing us to provide nationwide subscription television services through any technology, including satellite, wireline and coaxial cable. The Conditional Access Service authorization agreement authorized us to offer the services to be governed by such agreement, including IP TV. In accordance with the ANATEL resolution that approved the Conditional Access Service regime, our Conditional Access Service authorization prohibits us from creating television content or owning more than 30% of a company that creates content. We are also required to carry a certain percentage of Brazilian programming, including open channels and public access channels.

Research and Development

We conduct independent innovation, research and development in areas of telecommunications services but historically we have not independently developed new telecommunications technologies. We depend primarily on suppliers of telecommunications equipment for the development of new technology.

As a condition to ANATEL’s approval of Telemar’s acquisition of control of our company in January 2009, Telemar agreed to make annual investments in innovation, research and development through 2018 in amounts equal to at least 50% of the amounts of its contributions to the Fund for the Technological Development of Telecommunications (Fundo para o Desenvolvimento Tecnológico das Telecomunicações), or FUNTTEL. To fulfill this obligation, as well as to centralize our innovation, research and development activities and programs, in 2009, we created a division to manage innovation, research and development with the mission of coordinating and promoting efforts and projects that it develops.

Our technology laboratory performs a variety of functions, such as operation support systems, business support systems and information security. We conduct trials of technologies from different vendors in this laboratory to evaluate these technologies for deployment.

Since 2009, we have executed cooperation agreements with the following national research centers: Technological Projects, Research and Studies Coordination Foundation (Fundação Coordenação de Projetos, Pesquisas e Estudos Tecnológicos – COPPETEC), Telecommunications Research and Development Foundation (Fundação Centro de Pesquisa e Desenvolvimento em Telecomunicações - CPqD),

 

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and PUC-RJ. We have also executed cooperation agreements with Brazilian national telecommunications suppliers which develop technology in Brazil, such as Nokia AsGa S.A., Digitel S.A. – Indústria Eletrônica and Padtec S.A. Since 2009, we have signed more than 10 such cooperation agreements.

In order to achieve our goals on innovation investments, in 2015, we intensified the process for the exploration of innovative services and activities concerning innovation, research and development to promote our innovation ecosystem.

Our investments in innovation, research and development totaled R$20 million in 2015, R$16 million in 2014 and R$13 million in 2013.

Property, Plant and Equipment in Brazil

Our principal Brazilian properties, owned and leased, are located in Regions I and II. As of December 31, 2015, the net book value of our property, plant and equipment in Brazil was R$25,817 million. Our main equipment in Brazil consists of transmission equipment, trunking and switching stations (including local, tandem and transit telephone exchanges), metallic and fiber-optic cable networks and lines, underground ducts, posts and towers, data communication equipment, network systems and infrastructure (including alternating and direct current supply equipment) and motor-generator groups.

As of December 31, 2015, of the net book value of our property, plant and equipment in Brazil, transmission and other equipment represented 52.2%; infrastructure, primarily underground ducts, post and towers, cables and lines represented 22.7%; automatic switching equipment represented 7.8%; buildings represented 7.2%; work in progress represented 6.4%; and other fixed assets represented 3.8%.

All Brazilian property, plant and equipment that are essential in providing the services described in our concession agreements are considered “reversible assets,” which means that, should our concession agreements expire or terminate without being renewed, these assets will automatically revert to ANATEL. There are no other encumbrances that may affect the utilization of our property, plant and equipment. For more details, see note 14 to our consolidated financial statements.

Intellectual Property

We believe the trademarks that identify us and our Brazilian businesses are important for us, and as a result, we have taken steps to protect them before the Brazilian Patent and Trademark Office (Instituto Nacional de Propriedade Industrial), or BPTO. As of December 31, 2015, we had 1,126 trademarks registered by the BPTO and 684 pending trademark applications. Our main trademark used in Brazil, “Oi,” is registered by the BPTO in several classes, which allows us to use this trademark in a variety of markets in which we operate, including in connection with our fixed-line, mobile and broadband services. Among the various registered trademarks 36 are being contested by third parties. In addition, 173 of our pending trademark applications have been challenged by third parties.

As of December 31, 2015, we had 1,239 domain names registered by the Center of Information and Coordination of Dot Br –NIC. Br, the agency responsible for registering domain names in Brazil. The information included on our websites or that might be accessed through our websites is not included in this annual report and is not incorporated into this annual report by reference.

As of December 31, 2015, the BPTO had granted 12 patents, utility models or industrial designs in the name of our company. We had also filed 18 patent applications, which are currently being examined by the BPTO. Requests for technical examination have been submitted to the BPTO for all of these pending patent applications. Once the examination is concluded, BPTO will issue an official decision accepting or rejecting the application, which will be published in the Official Gazette. If granted, the patent will be enforced for 20 years beginning from filing date.

 

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Insurance

Pursuant to requirements in our Brazilian concession agreements, we maintain the following insurance policies: (1) all risk property insurance covering all insurable assets pertaining to the concessions; (2) loss of profit insurance covering lost profits deriving from property damage and business interruption; and (3) performance bond insurance to assure compliance with our obligations related to quality of service and universal service targets set forth in our concession agreements.

In addition to the above policies, we maintain civil liability insurance in Brazil. Our assets that are of material value and/or exposed to high degrees of risks are also insured. All of our insurance coverage was purchased from highly rated insurance companies in Brazil.

We believe that our current insurance coverage is suitable to our Brazilian operations.

Social Responsibility

In 2001, we created Oi Futuro, a corporate social responsibility institute that has been designated a Public Interest Organization (Organização da Sociedade Civil de Interesse Público) by the Brazilian Ministry of Justice (Ministério da Justiça). Oi Futuro develops and supports cultural, sustainability and educational programs using information technology and communications to promote social inclusion and human development.

Oi Futuro operates two cultural centers and a telecommunications museum in Rio de Janeiro. Oi Futuro also manages the “Programa Oi de Patrocínios Culturais Incentivados,” which sponsored more than 100 projects through a public selection in 2015.

Oi Futuro supports and develops educational projects using new communication and information technologies to transform the classroom environment and prepare young people from low-income communities for future jobs. Oi Futuro’s diverse initiatives include (1) the Advanced Education Center (Núcleo Avançado em Educação), or NAVE, a public vocational high school established through a public-private partnership with campuses in Rio de Janeiro and Recife, and (2) the “Oi Kabum!” Arts and Technology School (Oi Kabum! Escola de Arte e Tecnologia) with campuses in Rio de Janeiro, Recife, Belo Horizonte and Salvador. In 2015, more than 4,000 students participated in both educational programs (NAVE and Oi Kabum!) and through partnership with other public schools.

Since 2009, NAVE has been consistently recognized by Microsoft as one of the most innovative schools in the world. The NAVE Rio was the only Brazilian school invited by Qatar Foundation to participate in the WISE (World Innovation Summit for Education) Book, one of the most relevant publications worldwide in the field of innovation and education in 2014. In 2015, NAVE was recognized by the Award Rio+Entrepreneur (Rio + Empreendedor) for its contribution to the economic and social development of the State of Rio de Janeiro.

Oi Futuro supports social-environmental programs through its Oi Novos Brasis program, which focuses on community development, environmental and biodiversity projects. In 2015, more than 8,800 people benefited from these programs. In addition, in 2015, Oi Futuro supported 20 projects through the Public Funds for Childhood and Adolescence (FIA - Fundos Públicos da Infância e da Adolescência) and sports projects.

We contributed R$24 million in each of 2015, 2014 and 2013 to these projects and programs.

Operations in Africa

In 2006, PT Ventures formed Africatel Holdings B.V., or Africatel, and subsequently (1) contributed to Africatel its equity interests in (a) Unitel, which operates in Angola, and (b) Cabo Verde Telecom, S.A., or CVTelecom, which operates in Cape Verde, among others, and (2) acquired (a) 34% of the equity interests in Mobile Telecommunications Limited, or MTC, which operates in Namibia, and (b) 51% of the equity interest in CST – Companhia Santomense de Telecomunicações S.A.R.L., or CST, which operated in São Tomé and Príncipe. In 2007, PT Ventures sold 22% of the equity interests in Africatel to Samba Luxco, an affiliate of Helios Investors L.P., or Helios, a private equity firm operating in sub-Saharan Africa, and entered into a shareholders’ agreement with Samba Luxco regarding governance and liquidity rights relating to Africatel. In 2008, PT Ventures transferred

 

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its equity interests in Africatel to Pharol, which sold an additional 3% of the equity interests in Africatel to Samba Luxco. In 2009, Pharol sold 100% of the equity interests in PT Ventures to Africatel.

As of December 31, 2015, in addition to its interests in Unitel, MTC, CVTelecom and CST, Africatel owns Directel—Listas Telefónicas Internacionais, Lda., or Directel, which publishes telephone directories and operates related data bases in Angola, Cabo Verde, Mozambique, Uganda and Kenya.

As a result of our acquisition of PT Portugal in May 2014 and PT Portugal’s transfer of all of the outstanding share capital of PT Participações, which holds our direct and indirect interests in Africatel and TPT, to Oi in connection with our sale of PT Portugal, we own 75% of the equity interests in Africatel. Pharol, our subsidiaries PT Ventures and Africatel GmbH & Co KG, of Africatel GmbH, and Samba Luxco are parties to a shareholders’ agreement under which we have ownership and management control of Africatel, which we refer to as the Africatel shareholders’ agreement.

On September 16, 2014, our subsidiary, Africatel GmbH, which directly holds our interest in Africatel, received a letter from Samba Luxco in which Samba Luxco claimed that Oi’s acquisition of PT Portugal was deemed a change of control of Pharol under the Africatel shareholders’ agreement, and that this change of control entitled Samba Luxco to exercise a put right under the Africatel shareholders’ agreement at the fair market equity value of Samba Luxco’s Africatel shares. In the letter, Samba Luxco purported to exercise the alleged put right and thereby require Africatel GmbH to acquire its shares in Africatel.

On September 26, 2014, Africatel GmbH responded to Samba Luxco stating that there had not been any action or event that would trigger the right to exercise the put option under the Africatel’s shareholders’ agreement and that Africatel GmbH intended to challenge Samba Luxco’s purported exercise of the put option. On the same date, we issued a Material Fact disclosing Samba Luxco’s purported exercise of the put option, our understanding that the exercise of the put option is not applicable, and that our board of directors had authorized our management to take the necessary actions to sell our interest in Africatel.

On November 12, 2014, the International Court of Arbitration of the International Chamber of Commerce notified Africatel GmbH that Samba Luxco had commenced arbitral proceedings against Africatel GmbH to enforce its purported put right or, in the alternative, certain other rights and claims allegedly arising out of Oi’s acquisition of PT Portugal. Africatel GmbH presented its answer to Samba Luxco’s request for arbitration on December 15, 2014. The arbitral tribunal was constituted on March 12, 2015 and the proceedings are ongoing. Africatel GmbH intends to continue to vigorously defend these proceedings.

Unitel, Angola

In 2000, PT Ventures, then a wholly-owned subsidiary of Pharol, acquired 25% of the share capital of Unitel, a 2G mobile operator in Angola. Unitel began operations in Luanda in 2001. In connection with this investment, PT Ventures entered into a shareholders’ agreement with the other shareholders of Unitel regarding governance and liquidity rights relating to Unitel, and dispute resolution provisions. In 2007, Pharol contributed its shares of PT Ventures to Africatel. As a result of our acquisition of PT Portugal in May 2014 and PT Portugal’s transfer of all of the outstanding share capital of PT Participações to Oi in connection with our sale of PT Portugal, we have an 18.75% economic interest in Unitel. We account for this investment as an asset held-for-sale.

MTC, Namibia

In 2006, Pharol entered into an agreement to acquire 34% of the capital of MTC, a Namibian mobile operator, from Namibia Post and Telecom Holdings, a state-controlled entity, or NPTH. In connection with this transaction, Pharol entered into a shareholders’ agreement with NPTH regarding governance and liquidity rights relating to MTC that allowed Pharol to set and control the financial and operating policies of MTC. In 2006, Pharol assigned its rights to acquire the capital of MTC and its rights under the shareholders’ agreement to Africatel. As a result of our acquisition of PT Portugal in May 2014 and PT Portugal’s transfer of all of the outstanding share capital of PT Participações to Oi in connection with our sale of PT Portugal, we fully consolidate MTC in our consolidated financial statements.

 

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As of December 31, 2015, MTC had 2.4 million customers, of which 93.7% were customers under pre-paid plans.

MTC was established in 1994 and provides mobile telecommunications services under the terms of a 15-year technology- and service-neutral concession granted in March 2012 that replaced its earlier licenses. Under the terms of this concession, MTC is permitted to offer 2G, 3G and 4G services. MTC commenced offering 4G services in Windhoek, the capital of Namibia, in May 2012 and, as of December 31, 2015, MTC provided 4G services to 65% of cities in Namibia.

In 2006, a license was granted to Powercom to provide mobile telecommunications services in Namibia. Powercom commenced operations in 2007. In November 2012, Telecom Namibia, the incumbent provider of fixed-line telecommunications services in Namibia and a wholly-owned subsidiary of NPTH, acquired Powercom. Telecom Namibia re-launched Powercom’s portfolio of service plans under the brand “TN Mobile” in August 2013. In November 2013, TN Mobile began offering 4G services in Windhoek and other urban areas.

During 2015, MTC focused its marketing efforts and commercial activity on selling new pre-paid plans with increased data packages in an effort to differentiation itself from its competitors and promoting the upselling of new pricing plans aimed at increasing usage and revenues.

CVTelecom, Cape Verde

PT Ventures owns 40% of the share capital of CVTelecom, a provider of fixed-line and mobile services in the Cabo Verde Islands. In 2000, PT Ventures, entered into a shareholders’ agreement with the other shareholders of CVTelecom, regarding governance and liquidity rights relating to CVTelecom, which allowed PT Ventures to set and control the financial and operating policies of CVTelecom. As a result of our acquisition of PT Portugal, we fully consolidated CVTelecom in our financial statements as of December 31, 2014. In November 2014, the Government of Cape Verde, which is a shareholder of CVTelecom, notified us that as a result of our acquisition of PT Portugal, the shareholders’ agreement governing CVTelecom had been terminated. At a general shareholders’ meeting of CVTelecom in March 2015, we were only able to elect three of the seven members of the board of directors of CVTelecom. In March 2015, we commenced arbitration proceedings disputing this interpretation of the shareholders’ agreement, and we intend to vigorously defend our rights under the shareholders’ agreement. We are currently engaged in negotiations with the other shareholder of CVTelecom to seek an alternative resolution of this dispute. As a result of this dispute, for dates and periods ending after January 1, 2015, we have recorded our interest in CVTelecom under the equity method.

As of December 31, 2015, CVTelecom had approximately 54,200 fixed-lines in service, which represents approximately 10.6 fixed main lines per 100 inhabitants. As of December 31, 2015, CVTelecom had approximately 404,000 active mobile telephone cards.

CVTelecom was established in 1995 and provides fixed-line and mobile telecommunications services under the terms of a 25-year license granted in 1996. In December 2011, CVTelecom was granted a license to provide 3G services in Cabo Verde. In May 2012, CVTelecom’s connection to the West African Cable System, a submarine cable which connects CVTelecom’s network to networks in West Africa and Europe, began operating.

In 2006, the National Communications Agency (Agência Nacional das Comunicações) granted the second license to provide fixed-line and mobile telecommunications services in Cabo Verde to T Plus S.A., or T Plus, which commenced operations under the brand “T+” in December 2007. In December 2011, T Plus was granted a license to provide 3G services in Cabo Verde. In October 2012, a controlling interest in T Plus was acquired by Unitel Holdings, which is controlled by Mrs. Isabel dos Santos.

During 2014, CVTelecom launched several commercial offers, both mobile and fixed lines, aimed at promoting usage and customer loyalty, including: (1) the development of a youth segment, based on the “Powa Swag” service, (2) the launch of several voice promotions, such as “Di Borla Domingão,” and (3) the development of “ ZAP,” an NPlay offer. As of December 31, 2015, broadband and IPTV customers represented 28.2% and 10.9% of CVTelecom’s fixed line customer base, respectively.

 

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CST, São Tomé and Principe

Africatel owns 51.0% of the share capital of CST, which provides fixed and mobile services in São Tomé and Principe. As of December 31, 2015, CST had approximately 155,300 mobile customers.

CST was established in 1989 and provides fixed-line and mobile telecommunications services under the terms of a 20-year license granted in 2007. CST began offering 3G services in São Tomé and Principe in March 2012 anticipating the connection of its network to the Africa Coast to Europe submarine cable which was inaugurated at the end of 2012. In March 2013, the General Regulatory Authority (Autoridade Geral de Regulação), the telecommunications regulator in São Tomé and Principe granted the second license to provide fixed-line and mobile telecommunications services in São Tomé and Principe to Unitel Holdings, which is controlled by Mrs. Isabel dos Santos. The second operator commenced commercial activity in July 2014.

During 2015, CST worked on several initiatives designed to promote its commercial brand and customer loyalty in order to mitigate the effects of the new competitor. In addition, CST also launched a new data link between the islands of São Tomé and Principe, which increased the capacity more than nine times compare to the previous link connecting the two islands.

Regulation of the Brazilian Telecommunications Industry

Overview

Our business, including the nature of the services we provide and the rates we charge, is subject to comprehensive regulation under the General Telecommunications Law and a comprehensive regulatory framework for the provision of telecommunications services promulgated by ANATEL. We provide fixed-line, domestic and international long-distance and mobile telecommunications services under concessions, authorizations and licenses that were granted by ANATEL and allow us to provide specified services in designated geographic areas, as well as set forth certain obligations with which we must comply. See “— Concessions, Authorizations and Licenses.”

ANATEL is a regulatory agency that was established in July 1997 pursuant to the General Telecommunications Law and the Regulamento da Agência Nacional de Telecomunicações. ANATEL oversees our activities and enforces the General Telecommunications Law and the regulations promulgated thereunder. ANATEL is administratively independent and is financially autonomous. ANATEL is required to report on its activities to the Brazilian Ministry of Communications. ANATEL has authority to propose and to issue regulations that are legally binding on telecommunications service providers. ANATEL also has the authority to grant concessions and licenses for all telecommunications services, other than broadcasting services. Any regulation or action proposed by ANATEL is subject to a period of public comment, which may include public hearings, and ANATEL’s decisions may be challenged administratively before the agency itself or through the Brazilian judicial system.

Concessions and Authorizations

Under the General Telecommunications Law and ANATEL regulations, the right to provide telecommunications services is granted either through a concession under the public regime (as discussed below) or an authorization under the private regime (as discussed below). A concession is granted for a fixed period of time following a public auction and is generally renewable only once. An authorization is granted for an indeterminate period of time and public auctions are held for some authorizations. These concessions and authorizations allow service providers to provide specific services in designated geographic areas, set forth certain obligations with which the service providers must comply and require equal treatment of customers by the service providers.

The three principal providers of fixed-line telecommunications services in Brazil, Telefônica Brasil, Embratel and our company, provide these services under the public regime. In addition, CTBC and Sercomtel, which are secondary local fixed-line telecommunications service providers, operate under the public regime. All of the other providers of fixed-line telecommunications services and all providers of personal mobile services and data transmission services in Brazil operate under the private regime.

 

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Providers of public regime services are subject to more obligations and restrictions than providers of private regime services. Under Brazilian law, providers of public regime services are subject to certain requirements with respect to services such as network expansion and network modernization. Additionally, the rates that public regime service providers may charge customers are subject to ANATEL supervision. Another distinctive feature of public concessions is the right of the concessionaire to maintain certain economic and financial standards, which are calculated based on the rules set forth in our concession agreements and was designed based on a price cap model. The concessions are granted for a fixed period of time and are generally renewable only once.

Our concession agreements provide that ANATEL may modify their terms in 2015 and 2020 and may revoke them prior to expiration under the circumstances described below under “—Termination of a Concession.” The modification right permits ANATEL to impose new terms and conditions in response to changes in technology, competition in the marketplace and domestic and international economic conditions. ANATEL is obligated to engage in public consultation in connection with each of these potential modifications.

On June 27, 2014, ANATEL opened a public comment period for the 2015 revision of the terms of our concession agreements. The comment period, which ended on December 26, 2014, was opened for comments on certain topics such as service universalization, rates and fees, among others. We submitted our comments during this period. Throughout 2015, ANATEL, the Brazilian Ministry of Communications and telecommunications service providers met regularly to discuss possible amendments to each of the concession agreements granted by ANATEL, including ours, and the implications of the developments and demands in the telecommunications sector in recent years. In September 2015, the Ministry of Communications created a working group, consisting of three members from each of ANATEL and the Ministry of Communications, to evaluate the status of the concessions and propose guidelines for the amendment of the concession agreements. In November 2015, the Ministry of Communications opened public consultation on the new regulatory framework for telecommunications. The Ministry of Communications has extended the deadline for contributions on multiple occasions. In April 2016, the Ministry of Communications, based on the working group’s findings, issued a decree addressing guidelines for the establishment of a new regulatory framework for telecommunications, which will be implemented by ANATEL through the conclusion of the concession amendments. The guidelines provide for, among other things, the expansion of broadband services (including in rural regions), the elimination of the reversibility of assets, and an extension of the term of our concessions, which are currently scheduled to expire in 2025. As a result of the publication of these guidelines, ANATEL requested a further postponement of the review of our concession agreements, which was granted. As a result of this extension, the review of our concession agreements is currently scheduled to occur by December 2016.

Providers of private regime services, although not generally subject to the requirements concerning continuity and universality of service and network modernization, are subject to certain network expansion and quality of service obligations set forth in their respective authorizations.

Under the concession agreements and authorizations, each of the service providers is required to comply with the provisions of (1) the General Plan on Universal Service Goals that was adopted by ANATEL in June 2003, (2) the General Plan on Quality Goals that was adopted by ANATEL in June 2003, and (3) the General Plan on Competition Targets that was adopted by ANATEL in November 2012. Regulatory provisions are included in the relevant concession agreements and authorizations, and the service providers are subject to public service principles of continuity, changeability and equal treatment of customers.

In addition, ANATEL is authorized to direct and control the provision of services, to apply penalties and to declare the expiration of the concession and the return of assets from the concessionaire to the government authority upon termination of the concession.

Regulation of Fixed-Line Services

Rate Regulation

Under the concession agreements, public regime service providers are required to offer basic local fixed-line plans to users. Rates for long-distance services originated and terminated on fixed lines vary in accordance with certain criteria. The concession agreements establish a price-cap mechanism for annual rate adjustments for basic

 

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service plans and domestic long-distance rates based on formulas set forth in each provider’s concession agreement. The formula provides for two adjustments to the price cap based on the local rate basket, the long-distance rate basket and the use of a price index. The price cap is first revised upward to reflect increases in inflation, as measured by an index, then ANATEL applies a productivity discount factor, or Factor X, which reduces the impact of the rate readjustment provided by the index.

ANATEL has calculated the sector’s weighted average productivity rate. As of the date of this annual report, Factor X is equal to (1) 50% of the increase in the weighted average productivity rate of public regime providers, plus (2) 75% of a factor calculated by ANATEL that is designed to reflect cost optimization targets for the telecommunications industry as a whole. If the weighted average productivity rate is negative, ANATEL will not allow an annual adjustment in excess of the IST.

ANATEL has proposed new regulations under which it would modify the Factor X applicable to the determination of rate increases available to public concessionaires providing fixed-line services. ANATEL expected to launch a public consultation process relating to these proposed regulations during 2016.

A provider may increase rates for individual services within the local rate basket or the long-distance rate basket by up to 5% more than the IST so long as the rates for other services in that rate basket are reduced to the extent necessary to ensure that the weighted average increase for the entire rate basket does not exceed the permitted annual rate adjustment.

A provider may also offer alternative plans in addition to the basic service plan. Alternative plans must be submitted for ANATEL’s approval. The rates offered under the alternative plans may be adjusted annually based on the IST.

For information on our rates and service plans, see “—Rates.”

General Plan on Universal Service Goals

The General Plan on Universal Service Goals was approved by ANATEL in June 2011. The General Plan on Universal Service Goals sets forth the principal network expansion and modernization obligations of the public regime providers.

Public regime providers are subject to network expansion requirements under the General Plan on Universal Service Goals, which are revised by ANATEL from time to time. No subsidies or other supplemental financings are anticipated to finance our network expansion obligations. Our failure to meet the network expansion and modernization obligations established by the General Plan on Universal Service Goals or in our concession agreements may result in fines and penalties of up to R$50 million, as well as potential revocation of our concessions.

The General Plan on Universal Service Goals, as amended, requires the following, among other things:

 

    local fixed-line service providers to provide individual access to fixed-line voice services to economically disadvantaged segments of the Brazilian population within their service areas, through programs to be established and regulated by ANATEL;

 

    local fixed-line service providers to provide public telephones in urban areas within their service areas, including in localities with a population in excess of 100, and to install residential fixed lines within seven days of a request in localities with a population in excess of 300; and

 

    local and long-distance fixed-line providers that obtain authorizations to use radio spectrum in the 450 Mhz band to provide universal service in rural and remote areas, as well as to provide individual and group access to fixed-line voice services.

 

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The General Plan on Universal Service Goals is expected to be amended again in 2016 In connection with the amendments to the concession agreements.

Service Restrictions

Pursuant to regulations in effect as of the date of this annual report, public regime providers are subject to certain restrictions on alliances, joint ventures and mergers and acquisitions with other public regime providers, including:

 

    a prohibition on holding more than 20% of the voting shares of more than one other provider of public regime services; and

 

    a restriction on mergers between regional fixed-line service providers.

In December 2010, ANATEL adopted new regulations eliminating the limitation on the number of authorizations to provide subscription television services. In September 2011, Law No. 12,485 became effective, which creates a new legal framework for subscription television services in Brazil, replacing and unifying the previously existing regulatory provisions that governed various forms of subscription television services, such as cable television, Multichannel Multipoint Distribution Service, or MMDS, and DTH. The principal provisions of Law No. 12,485:

 

    allow fixed-line telephone concessionaires, such as us, who previously were allowed to provide subscription television services using only MMDS and DTH technologies, to enter the cable television market in Brazil;

 

    remove existing restrictions on foreign capital investments in cable television providers;

 

    establish minimum quotas for domestic content programming on every television channel;

 

    limit the total and voting capital held by broadcast concessionaires and authorized providers, and in television programmers and producers, with headquarters in Brazil to 30%; and

 

    prohibit telecommunications service providers with collective interests from acquiring rights to disseminate images of events of national interest and from hiring domestic artistic talent.

The framework established by Law No. 12,485 increased the availability and lower the price of subscription television services in Brazil, through increased competition among providers, and improve the quality, speed and availability of broadband internet services as a result of the expected proliferation of fiber optic cables used to transmit cable television.

In March 2012, ANATEL adopted new regulations under which the authorizations to provide various existing subscription television services have been consolidated into authorizations to provide a newly-defined service called Conditional Access Service. Under these regulations, authorizations to provide Conditional Access Service apply to private telecommunications services, the receipt of which are conditioned on payment by subscribers, for the distribution of audiovisual contents in the form of packages, individual channels and channels with required programming, by means of any communications technology, processes, electronic means or protocols. An authorization granted by ANATEL to provide Conditional Access Service will be valid for the entire Brazilian territory, however, the provider must indicate in its application for an authorization the localities that it will service. In December 2012, ANATEL granted our request to convert our DTH authorization agreement into a Conditional Access Service authorization. In September 2014, we entered into a Conditional Access Service authorization agreement with ANATEL that authorized us to offer the services to be governed by such agreement, including IP TV.

 

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Termination of a Concession

ANATEL may terminate the concession of any public regime telecommunications service provider upon the occurrence of any of the following:

 

    an extraordinary situation jeopardizing the public interest, in which case the Brazilian government is authorized to start rendering the services set forth under the concession in lieu of the concessionaire, subject to congressional authorization and payment of adequate indemnification to the owner of the terminated concession;

 

    termination by the provider (through an agreement with ANATEL or pursuant to legal proceedings) as a consequence of an act or omission of the Brazilian government that makes the rendering of the services excessively burdensome to the provider;

 

    annulment of the concession due to a contractual term, which is deemed by subsequent law to be illegal;

 

    material failure to comply with the provider’s universalization targets;

 

    failure to meet insurance requirements set forth in the concession agreement;

 

    a split-up, spin-off, amalgamation, merger, capital reduction or transfer of the provider’s control without ANATEL’s authorization;

 

    the transfer of the concession without ANATEL’s authorization;

 

    the dissolution or bankruptcy of the provider; or

 

    an extraordinary situation in which Brazilian government intervention, although legally permissible, is not undertaken, as such intervention would prove to be inconvenient, unnecessary or would result in an unfair benefit to the provider.

In the event a concession is terminated, ANATEL is authorized to administer the provider’s properties and its employees in order to continue rendering services.

General Plan on Quality Goals

The General Plan on Quality Goals was approved by ANATEL in June 2003 and became effective in January 2006. Each fixed-line service provider operating under the public regime or the private regime must comply with the provisions of the General Plan on Quality Goals. All costs related to compliance with the quality goals established by the General Plan on Quality Goals must be borne exclusively by the service provider. The General Plan on Quality Goals establishes minimum quality standards with regard to:

 

    modernization of the network;

 

    responses to repair requests;

 

    responses to change of address requests;

 

    rate of call completion;

 

    operator availability;

 

    availability of services to customers;

 

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    personal services to customers;

 

    issuance of bills;

 

    responses to mail received from customers; and

 

    quality of public telephones.

These quality standards are measured according to the definitions and quality indicators established by ANATEL. Every month, fixed-line service providers are required to report their compliance with quality goals to ANATEL. Additionally, they are obligated to provide ANATEL with an in-depth report and analysis on each quality goal that is not satisfied. ANATEL may also collect such data from fixed-line service providers at any time without prior notice. Fixed-line service providers that fail to meet quality goals established by ANATEL may be subject to warnings, fines, intervention by ANATEL, temporary suspensions of service or cancellation of their concessions and authorizations.

ANATEL measures the performance of fixed-line service providers in each individual state in which they operate. As a result, the performance of fixed-line service providers in any particular state may not meet one or more quality performance targets even if such service provider’s overall performance is satisfactory. Therefore, fixed-line service providers, including us, could be subject to fines or penalties as a result of the failure to meet the quality performance targets in one or more particular states.

Our failure to meet the quality of service obligations established by the General Plan on Quality Goals or in our concession agreements may result in fines and penalties of up to R$40 million.

General Plan on Competition Targets

The General Plan on Competition Targets, which was approved by ANATEL and became effective in November 2012, contemplates the creation of one entity to manage information about telecommunications networks, act as an intermediary in contracts between telecommunications providers and supervise the offering of wholesale data traffic services. The General Plan on Competition Targets also addresses a variety of other matters relating to both fixed-line and mobile service providers, including criteria for the evaluation of telecommunications providers to determine which providers have significant market power, regulations applicable to the wholesale markets for trunk lines, backhaul, access to internet backbone and interconnection services, and regulations related to partial unbundling and/or full unbundling of the local fixed-line networks of the public regime service providers.

The General Plan on Competition Targets imposes stricter restrictions on providers that are deemed to have significant market power in a particular geographic area, ranging from a neighborhood within a municipality to the entire national territory. In order to determine whether a provider has significant market power, ANATEL established criteria that consider:

 

    that provider’s market share in particular mobile interconnection markets and personal mobile services market;

 

    the economies of scope and scale available to that provider;

 

    that provider’s dominance over infrastructure that is not economically viable to duplicate; and

 

    that provider’s concurrent operations in the wholesale and retail markets.

Infrastructure Sharing

Prior to the adoption of the General Plan on Competition Targets, ANATEL had established rules for partial unbundling of the local fixed-line networks of the public regime service providers, which we refer to as “line sharing,” and which (1) limited the rates service providers can charge for line sharing, and (2) addressed related

 

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matters such as co-location space requirements. Co-location means that a service provider requesting unbundling may place its switching equipment in or near the local exchange of the service provider whose network the requesting service provider wishes to use and may connect to the network at this local exchange.

The General Plan on Competition Targets requires public regime service providers that have significant market power to share their fixed-line network infrastructure with other providers, including their local fixed-line access networks. Providers that are deemed to have significant market power must offer (1) full unbundling of their copper wire or coaxial cable access networks, and (2) partial unbundling of their broadband networks to accommodate bitstreams of up to 10 Mbps. The methodology by which the wholesale prices for these services will be determined will be established by ANATEL. We expect that ANATEL will commence a public consultation process with respect thereto during the second half of 2016.

Providers with significant market power must also share their passive infrastructure, such as telecommunications towers, with other service providers at prices determined by bilateral negotiations between the providers.

Interconnection Regulations Applicable to Personal Mobile Services Providers

The General Plan on Competition Targets established regulations for the rates charged by mobile service providers to terminate calls on their mobile networks (the VU-M rate). The General Plan on Competition Targets established a reference value for VU-M rates of providers that are deemed to hold significant market power and determined that beginning in 2016, VU-M rates will be determined on the basis of costs. In July 2014, ANATEL approved a rule for the definition of maximum VU-M reference rates for entities with significant market power, such as our company, based on a long-run incremental cost methodology. Under this rule, VU-M reference rates will decline from 2016 through 2019 when VU-M reference rates reflecting the long-run incremental cost methodology will apply.

The General Plan on Competition Targets established that the VU-M would be paid only when the traffic out of a network in a given direction was greater than (1) 80% of the total traffic exchanged until February 23, 2015, and (2) 60% of the total traffic exchanged from February 24, 2015 to February 23, 2016. After February 24, 2016, each mobile service provider would be entitled to collect the VU-M on all calls for which its network was used to originate or terminate the call.

In February 2015, ANATEL revised the General Plan on Competition Targets regulation relating to the VU-M applicable to the relationship between companies with significant market power and companies without significant market power. Under the revised regulations, the dates and percentages applicable to the VU-M partial bill-and-keep system were revised so that the VU-M will be paid only when the traffic out of a network in a given direction is greater than:

 

    75% of the total traffic exchanged until February 23, 2016;

 

    65% of the total traffic exchanged until February 23, 2017;

 

    55% of the total traffic exchanged until February 23, 2018; and

 

    50% of the total traffic exchanged until February 23, 2019.

The full billing system is scheduled to come into effect on February 24, 2019.

Roaming

Under the General Plan on Competition Targets, a mobile service provider with significant market power, such as our company, must offer roaming services to other mobile providers without significant market power at the maximum rate that the mobile service provider with significant market power is permitting ANATEL to offer such services to its retail customers.

 

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Regulation of Mobile Services

In September 2000, ANATEL adopted regulations that established operating rules for providers under the personal mobile service (Serviço Móvel Pessoal) regime. The regulations permitted ANATEL to grant authorizations to provide mobile telecommunications services under the personal mobile service regime. For purposes of the personal mobile service regulations, Brazil is divided into three service regions covering the same geographic areas as the concessions for fixed-line telecommunications services.

Auction of 3G Spectrum

In preparation for auctions of spectrum in Bands F, G, I and J (2.1 GHz), the use of which allows personal mobile services providers to offer 3G services to their customers, ANATEL issued regulations that divide the Brazilian territory into nine regions for purposes of operations using these frequency bands. In December 2007, ANATEL auctioned radio frequency licenses to operate on each of these frequency bands in each of the nine regions and the related licenses to use these frequency bands. In this auction, we acquired the radio frequency licenses necessary to offer 3G services in two of the nine regions delineated by ANATEL for 3G services (corresponding to Regions II under the personal mobile services regime) and TNL PCS acquired radio frequency licenses necessary to offer 3G services in six of the nine regions delineated by ANATEL for 3G services (corresponding to Regions I and III under the personal mobile services regime, other than an area that consists of 23 municipalities in the interior of the State of São Paulo that includes the city of Franca and surrounding areas).

Authorizations to Use 450MHz Band and 2.5 GHz Band

In preparation for auctions of the 450MHz band and 2.5 GHz band, the use of which allows personal mobile services providers to offer 4G services to their customers, ANATEL issued regulations that divided the Brazilian territory into three regions for purposes of providing personal mobile services. In June 2012, ANATEL auctioned radio frequency licenses to operate and the related licenses to use the frequency bands in the following manner: (1) four national lots for 2.5 GHz bands, each accompanied by a regional band of 450 MHz, and (2) 132 regional lots for 2.5GHz bands. In this auction, we acquired (1) one of the national lots for 2.5 GHz and the corresponding regional lot of 450MHz to provide rural broadband services in the States of Goiás, Mato Grosso, Mato Grosso do Sul, Rio Grande do Sul and the Federal District, and (2) 11 regional lots for 2.5 GHz bands to provide personal mobile services in the following areas: interior of Ceará, the capital or Roraima(and its metropolitan area), the State of Amapá, the capital of Bahia (and its metropolitan area), interior of the Pará, the capital of Pernambuco (and its metropolitan area), interior of Paraná, the capital of Rio Grande do Sul (and its metropolitan area), the City of Jaguarão (and its metropolitan area) and the capital of São Paulo (and its metropolitan area). ANATEL is currently reviewing whether the obligations that should have been met by the end of 2015, as set out in the auction for the 2.5 GHz and 450 MHz frequencies have been met. In December 2015, ANATEL and CADE approved the RAN Sharing Agreement between Telefônica Brasil, TIM and Oi for the construction, implementation and mutual assignment of network tools to support personal mobile services (voice and broadband) in the 2.5 GHz band, among others, in order to ensure compliance with the scope of commitments between 2015 and 2017 and the expansion of 4G coverage in municipalities with a population over 30,000. ANATEL rejected the proposal to conduct RAN sharing in conurbations, however, because it detected interference in the service. As a result, ANATEL will not allow RAN sharing in municipalities experiencing interference until a solution has been found.

Obligations of Personal Mobile Services Providers

As a telecommunications service provider, we are subject to requirements concerning network expansion and quality of service, as established in applicable regulations and in our personal mobile services authorizations. If we fail to meet these obligations, we may be fined, subject to a maximum penalty of R$50 million, until we are in full compliance with our obligations. While it is possible for an authorization to be revoked for non-compliance with these obligations, there are no precedents for such a revocation.

 

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Quality of Service Obligations

Our personal mobile services authorizations impose obligations on us to meet quality of service standards relating to our network’s ability to make and receive calls, call failure rates, capacity to handle peak periods, failed interconnection of calls and customer complaints. ANATEL defines this quality of service standards, and we must report information in connection with such standards to ANATEL.

To restructure the process of assessing the quality of mobile service, with the inclusion of new processes and measurement of new indicators to check the quality of mobile broadband and the quality perceived by the user, and the modernization of existing indicators, ANATEL approved the Regulation for the Management of Quality of Provision of Personal Mobile Service (Regulamento de Gestão da Qualidade da Prestação de Serviço Móvel Pessoal), or SMP-RGQ. The SMP-RGQ provides for the assessment of the network connection and their respective data transmission rate, assessing aspects of availability, stability and connection speed for the data network. Targets are defined as 80% of speed hired (on average per month) by users and 40% of the instant speed, according to the definitions of the Resolution 575/2011.

Interconnection Regulations

Under the General Telecommunications Law, all telecommunications service providers are required, if technically feasible, to make their networks available for interconnection on a non-discriminatory basis whenever a request is made by another telecommunications service provider. Interconnection permits a call originated on the network of a requesting fixed-line or personal mobile services provider’s network to be terminated on the fixed-line or personal mobile services network of the other provider. ANATEL has adopted General Rules on Interconnection (Regulamento Geral de Interconexão) to implement these requirements.

Interconnection Regulations Applicable to Fixed-Line Providers

Interconnection fees are charged at a rate per minute of use of a fixed-line provider’s network. Interconnection rates charged by a fixed-line provider to terminate a call on its local network (the TU-RL rate) or intercity network (the TU-RIU rate) are subject to a price cap established by ANATEL. The price cap for interconnection rates varies from service provider to service provider based on the retail prices of each service provider.

Fixed-line service providers must offer the same TU-RL and TU-RIU rates to all requesting providers on a nondiscriminatory basis. The price caps on interconnection rates are adjusted annually by ANATEL at the same time that rates for local and long-distance calls are adjusted.

Under ANATEL regulations, fixed-line service providers are not able to charge other fixed-line service providers for local fixed-line calls originating on their local fixed-line networks and terminating on the other provider’s local fixed-line networks.

In August 2012, the TU-RIU rates were reduced to 25% of the applicable domestic fixed line rates for calls with more than 300 km, and in January 2013, TU-RIU rates were reduced to 20% of the applicable domestic fixed line rates for such calls.

In July 2014, ANATEL approved a rule for the definition of maximum fixed reference rates, including TU-RL and TU-RIU, for entities with significant market power, such as our company, based on a long-run incremental cost methodology. Under this rule, TU-RL and TU-RIU reference rates will decline from 2016 through 2019 when TU-RL and TU-RIU reference rates reflecting the long-run incremental cost methodology will apply.

Interconnection Regulations Applicable to Personal Mobile Services Providers

Interconnection fees are charged at a flat rate per minute of use of a personal mobile services provider’s network. The terms and conditions of interconnection agreements of all personal mobile services providers, including the rates charged by the operator of the network to terminate a call on its mobile network (the VU-M rate), commercial conditions and technical issues, are freely negotiated between mobile and fixed-line telecommunications

 

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service providers, subject to compliance with regulations established by ANATEL relating to traffic capacity and interconnection infrastructure that must be made available to requesting providers, among other things.

Personal mobile services providers must offer the same VU-M rate to all requesting providers on a nondiscriminatory basis. Interconnection agreements must be approved by ANATEL before they become effective and they may be rejected if they are contrary to the principles of free competition and the applicable regulations. If the providers cannot agree upon the terms and conditions of interconnection agreements, ANATEL may determine terms and conditions by arbitration. Since no agreement with fixed-line service providers could be reached regarding VU-M rates when we began offering personal mobile services, ANATEL set the initial VU-M rates.

Personal mobile services providers negotiate annual rate increases for their VU-M charges with the fixed-line telecommunications providers. If the providers cannot agree upon the terms and conditions of annual rate increases, ANATEL may determine the annual rate increases by arbitration.

Under ANATEL regulations, in December 2013 ANATEL established the maximum VU-M rate of R$0.33 per minute that is applicable in the event that providers could not agree upon the VU-M applicable in their interconnection agreements. Under the General Plan on Competition Targets, in February 2014 the VU-M rate was reduced to 75% of the maximum VU-M rate established by ANATEL in December 2013, and in February 2015 the VU-M rate was reduced to 50% of the maximum VU-M rate established by ANATEL in December 2013. In July 2014, ANATEL approved a rule for the definition of maximum VU-M reference rates for entities with significant market power, such as our company, based on a long-run incremental cost methodology. Under this rule, VU-M reference rates will decline from 2016 through 2019 when VU-M reference rates reflecting the long-run incremental cost methodology will apply.

Consumer Protection Regulation

In March 2014, ANATEL published a regulation approving the General Regulation on Telecommunications Customers Rights (Regulamento Geral de Direitos do Consumidor de Serviços de Telecomunicações), a single regulation for the telecommunications sector with general rules for customer service, billing, and service offers, which are applicable to fixed, mobile, broadband and Pay-TV customers. This regulation establishes a period ranging from 120 days to 24 months from the date of publication for entering into compliance with the new rules. Most of the new rules that expand the rights of those who use the telecommunications services entered into force on July 8, 2014.

Number Portability Regulations

Number portability is the ability of a customer to move to a new home or office or switch service providers while retaining the same fixed-line or mobile telephone number. ANATEL’s General Regulation of Portability (Regulamento Geral de Portabilidade) establishes general rules regarding portability of fixed-line and mobile telephone numbers. These regulations permit fixed-line customers to retain their telephone numbers if they become customers of a different fixed-line service provider in the same municipality or if they move to a new home or office in the same municipality. Personal mobile services customers are permitted to retain their telephone numbers if they change their service plan or if they become customers of a different personal mobile services provider within the same registration area. Each telecommunications provider has been required to contract a third-party management entity to manage all procedures relating to number portability.

Regulation of Data Transmission and Internet Services

Under Brazilian regulation, ISPs are deemed to be suppliers of value-added services and not telecommunications service providers. Value-added services are considered an activity that adds features to a telecommunications service supported by such value-added services. Telecommunications service providers are permitted to render value-added services through their own networks. In addition, ANATEL regulations require all telecommunications service providers and cable television operators to grant network access to any party interested in providing value-added services, including internet access, on a non-discriminatory basis, unless not technically feasible.

 

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ANATEL has adopted regulations applicable to fixed-line service providers with significant market power. Under these regulations, these providers are required to make the forms of agreements that they use for EILD and SLD services publicly available, including the applicable rates, and are only permitted to offer these services under these forms of agreement. ANATEL publishes reference rates for these services, and if a customer of one of these providers objects to the rates which that provider charges for these services, the customer is entitled to seek to reduce the applicable rate through arbitration before ANATEL.

In May 2014, ANATEL approved a standard for setting maximum values for EILD services based on a long-run incremental cost methodology. Reference rates for EILD services were published containing a single reference table which will be valid from 2016 until 2020. Under this ANATEL regulation, EILD reference rates will decline from 2016 through 2020 when EILD reference rates reflecting the long-run incremental cost methodology will apply. In addition, under the General Plan of Competition Targets, companies with significant market, such as our company, are required to present a public offer every six months including standard commercial conditions, which is subject to approval by ANATEL.

Multimedia Communications Service Quality Management Regulations

In June 2011, the President of Brazil issued Executive Decree No. 7,512/11, which mandated ANATEL to take the necessary regulatory measures to establish quality standards for broadband internet services. In compliance with such decree, on October 31, 2011, ANATEL published a resolution approving the Multimedia Communications Service Quality Management Regulations (Regulamentação de Gestão da Qualidade do Serviço de Comunicação Multimídia), or the Regulations, which identify network quality indicators and establish performance goals for multimedia communications service providers, including broadband internet service providers, with more than 50,000 subscribers. Such providers will be required to collect representative data using dedicated equipment installed at the site of each network connection and be subject to periodic measurements to ensure their compliance with such regulations, including:

 

    individual upload and download speeds of at least 40% of contracted speeds per measurement for at least 95% of all measurements;

 

    average upload and download speeds of at least 80% of contracted speeds for all measurements; and

 

    individual round-trip latencies for fixed-line connections of up to 80 milliseconds per measurement for at least 95% of the measurements.

To increase transparency, customers must be provided with specialized software at no cost to measure their own network quality, although such customer-generated measurements will not be included in official calculations. In addition to ensuring network quality standards, service providers must hire specialized companies to measure customer service and customer satisfaction indicators, including complaint resolution, customer service personnel competence, customer perceptions relating to billing and quality of technical support staff. Service providers must comply with the above-mentioned quality standards beginning on the thirteenth month following implementation of such regulations. Failure to meet such standards will subject non-compliant service providers to sanctions.

National Broadband Plan

On June 30, 2011, we entered into a Term of Commitment (Termo de Compromisso) with ANATEL and the Ministry of Communications to formalize our voluntary commitment to adhere to the terms of the National Broadband Plan, created in May 2010 by Executive Decree No. 7,175/10 with the goal to make broadband access available at low cost, regardless of technology, throughout Brazil. Pursuant to the Term of Commitment, we are required to offer (1) broadband services with minimum upload and download capabilities to retail customers in certain sectors of Region I and II for a maximum price of R$35 per month (or R$29.90 in ICMS-exempt states), plus fees, and (2) access to our broadband infrastructure to certain wholesale customers, including small businesses and municipalities, in certain sectors of Region I and II for a maximum price of R$1,253 per 2 Mbps per month and a one-time installation fee, while observing all quality standards under ANATEL regulations. Both retail and wholesale services are subject to certain network capacity limits and need only be provided at the demand of the

 

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customer. Pursuant to the Term of Commitment, we have offered the required services to all eligible retail and wholesale customers since the date of its execution and have gradually increased the capacities offered to wholesale customers since November 2011. We have been obligated to provide the maximum capacities established by the Term of Commitment to eligible wholesale customers since June 30, 2015. In addition, the Term of Commitment requires that we:

 

    provide one public internet access point for the first 20,000 inhabitants and one additional access point for each subsequent 10,000 inhabitants, with a limit of six access points, at a speed of 2 Mbps, in each municipality that has only satellite service, free of charge and upon demand of such municipality;

 

    adequately advertise the services contemplated by the Term of Commitment and present to the Ministry of Communications semi-annual reports detailing our marketing efforts; and

 

    make our best efforts to offer broadband services to retail customers at speeds of up to 5 Mbps, reaching the largest possible number of municipalities.

The Term of Commitment will expire on December 31, 2016.

Legal Framework for the Use of the Internet (Internet Bill of Rights)

In April 2014, President Dilma Rousseff approved the Legal Framework for the Use of the Internet (Marco Civil da Internet), or the Internet Framework, which establishes the principles, guarantees, rights and duties for the use of the Internet in Brazil. The bill sets forth a number of guidelines and rules to be observed by internet and application service providers, such as the protection of privacy, the protection of personal data, the preservation and guarantee of net neutrality, the liability for damages caused by content generated or published by third parties and the storage and disclosure of usage logs. Certain parts of the Internet Framework went into effect on June 23, 2014 and others will become effective on the adoption of implementing regulations.

Under the Internet Framework, a presidential decree will be enacted to regulate the law’s provisions, and enacting specific rules regarding network traffic management techniques. The Brazilian Internet Steering Committee (Comitê Gestor da Internet) and ANATEL will express their opinion on the decree after public hearings. Brazil’s Ministry of Justice has also launched a public debate on the main themes related to this law.

Other Regulatory Matters

Regulatory Agenda 2015-2016

On June 29, 2015, ANATEL put in public consultation its proposed Regulatory Agenda for the 2015-2016 cycle, and revocation of the General Plan of the Telecommunication Regulatory Update in Brazil (PGR). The agenda contained 33 topics of interest to the sector, which should have final approval or some progress in 2015 and 2016. The listed items include: Civil Rights Framework for Internet, Revision of the Concession Agreement and General Plan on Universal Service Goals, review of the quality management model, review of spectrum management model, review the arrangements and scope of telecommunications services, review of the regulation of the SeAC (Serviço de Acesso Condicionado) and review of regulatory reversible assets.

New Regulatory Framework

On November 23, 2015, the Ministry of Communications opened public consultation on the new regulatory framework for telecommunications. The consultation is based on a series of questions under four basic axes: purpose of the public policy, universal policy, public regime versus the private regime and public concession. The Ministry of Communications has extended the deadline for contributions on multiple occasions. In April 2016, the Ministry of Communications issued a decree addressing guidelines for the establishment of a new regulatory framework for telecommunications, which will be implemented by ANATEL through the conclusion of the concession amendments. The guidelines provide for, among other things, the expansion of broadband services (including in rural regions), the elimination of the reversibility of assets, and an extension of the term of our concessions, which

 

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are currently scheduled to expire in 2025. As a result of the publication of these guidelines, ANATEL requested a further postponement of the review of our concession agreements, which was granted. As a result of this extension, the review of our concession agreements is currently scheduled to occur by December 2016.

Environmental and Other Regulatory Matters in Brazil

As part of our day-to-day operations, we regularly install ducts for wires and cables and erect towers for transmission antennae. We may be subject to federal, state and/or municipal environmental licensing requirements due to the installation of cables along highways and railroads, over bridges, rivers and marshes and through farms, conservation units and environmental preservation areas, among other places. As of the date of this annual report, we have been required to obtain environmental licenses for the installation of transmission towers and antennae in several municipalities with no material impact on our operations. However, there can be no assurances that other state and municipal environmental agencies will not require us to obtain environmental licenses for the installation of transmission towers and antennae in the future or that such a requirement would not have a material adverse effect on the installation costs of our network or on the speed with which we can expand and modernize our network.

We must also comply with environmental legislation regarding the management of solid waste. According to resolutions adopted by the National Environmental Council (Conselho Nacional do Meio Ambiente), companies responsible for the treatment and final disposal of solid industrial waste, special waste and solid urban waste are subject to environmental licensing. Should the waste not be disposed of in accordance with standards established by environmental legislation, the company generating such waste may be held jointly and severally liable with the company responsible for waste treatment for any damage caused. Also, in all states where we operate, we have implemented management procedures promoting the recycling of batteries, transformers and fluorescent lamps.

In addition, we are subject to ANATEL regulations that impose limits on the levels and frequency of the electromagnetic fields originating from our telecommunications transmissions stations.

We believe that we are in compliance with ANATEL standards as well as with all applicable environmental legislation and regulations. We are currently not involved in any administrative or judicial proceeding involving material liability for environmental damage.

Disclosure Pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act

Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012 added Section 13(r) to the Exchange Act. Section 13(r) requires an issuer to disclose in its annual or quarterly reports filed with the SEC whether the issuer or any of its affiliates has knowingly engaged in certain activities, transactions or dealings with the Government of Iran, relating to Iran or with designated natural persons or entities involved in terrorism or the proliferation of weapons of mass destruction during the period covered by the annual or quarterly report. Disclosure is required even when the activities were conducted outside the United States by non-U.S. entities and even when such activities were conducted in compliance with applicable law.

In December 2011, we entered into a roaming agreement with MTN Irancell. Pursuant to such roaming agreement, our customers are able to roam in MTN Irancell’s network (outbound roaming) and customers of MTN Irancell are able to roam in our network (inbound roaming). For outbound roaming, we pay MTN Irancell roaming fees for use of their network by our customers, and for inbound roaming MTN Irancell pays us roaming fees for use of our network by its customers.

Our inbound and outbound roaming services with MTN Irancell were launched commercially in October and November 2012, respectively. During 2015, we recorded revenues of R$2,529 and expenses of R$2,383 in connection with this roaming agreement.

We do not maintain any bank accounts in Iran. All payments in connection with our international roaming agreements are effected through our bank accounts in London.

 

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The purpose of all of these agreements is to provide our customers with coverage in areas where we do not own networks. For that purpose, we intend to continue maintaining these agreements.

We also provide telecommunications services in the ordinary course of business to the Embassy of Iran in Brasilia. We recorded gross revenues and net profits of less than R$6,000 from these services in 2015. As one of the primary providers of telecommunications services in Brasilia, we intend to continue providing such services, as we do to the embassies of many other nations.

 

ITEM 4A. UNRESOLVED STAFF COMMENTS

Not applicable.

 

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ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements as of December 31, 2015 and 2014 and for the three years ended December 31, 2015, which are included in this annual report, as well as with the information presented under the sections entitled “Presentation of Financial and Other Information” and “Item 3. Key Information—Selected Financial Information.”

The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including those set forth in “Forward-Looking Statements” and “Item 3. Key Information—Risk Factors.”

Overview

We are one of the principal integrated telecommunications service providers in Brazil with approximately 70.0 million RGUs as of December 31, 2015. We operate throughout Brazil and offer a range of integrated telecommunications services that include fixed-line and mobile telecommunication services, network usage (interconnection), data transmission services (including broadband access services), Pay-TV (including as part of double-play, triple-play and quadruple-play packages), internet services and other telecommunications services for residential customers, small, medium and large companies and governmental agencies. We own approximately 363,000 kilometers of installed fiber optic cable, distributed throughout Brazil. Our mobile network covers areas in which approximately 88.7% of the Brazilian population lives and works. According to ANATEL, as of December 31, 2015, we had an 18.6% market share of the Brazilian mobile telecommunications market and, as of December 31, 2015, we had a 34.7% market share of the Brazilian fixed-line market. As part of our convergence strategy, we offer more than one million Wi-Fi hotspots in public places, such as airports and shopping malls. In 2015, we recorded net operating revenue of R$27,354 million and net loss of R$9,572 million.

Our results of operations and financial condition have been and will be significantly influenced in future periods by the Oi capital increase, the acquisition of PT Portugal and the disposition of PT Portugal. In addition, our results of operations for the years ended December 31, 2015, 2014 and 2013 and our financial condition as of December 31, 2015 and 2014 have been influenced, and our future results of operations and financial condition will continue to be influenced, by a variety of factors, including:

 

    the evolution of Brazilian GDP, which declined by an estimated 3.8% in 2015, and grew by 0.1% in 2014 and 2.3% in 2013, which we believe affects demand for our services and, consequently, our net operating revenue;

 

    the number of our fixed lines in service, which declined to 14.9 million as of December 31, 2015 from 15.8 million as of December 31, 2014 (excluding fixed-line customers of our discontinued operations), and the percentage of our fixed-line customers that subscribe to our alternative plans which increased to 86.4% as of December 31, 2015 from 84.5% as of December 31, 2014;

 

    the number of our mobile customers, which declined to 48.1 million as of December 31, 2015 from 50.9 million as of December 31, 2014 (excluding fixed-line customers of our discontinued operations);

 

    the number of our fixed-line customers that subscribe to our broadband services, which declined to 5.1 million as of December 31, 2015 from 5.9 million as of December 31, 2015 and December 31, 2014 (excluding fixed-line customers of our discontinued operations);

 

    the number of our Pay-TV customers, which remained stable at 1.2 million as of December 31, 2015 and 2014 (excluding fixed-line customers of our discontinued operations);

 

    the increased competition in the Brazilian market for telecommunications services, which affects the amount of the discounts that we offer on our service rates and the quantity of services that we offer at promotional rates;

 

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    inflation rates in Brazil, which were 10.6% in 2015 and 5.72% in 2014, as measured by the IST, and the resulting adjustments to our regulated rates in Brazil, as well as the effects of inflation on our real-denominated debt that is indexed to take into account the effects of inflation or bears interest at rates that are partially adjusted for inflation;

 

    our compliance with our quality of service obligations under the General Plan on Quality Goals and our network expansion and modernization obligations under the General Plan on Universal Service Goals and our concession agreements, the amount of the fines assessed against us by ANATEL for alleged failures to meet these obligations and our success in challenging fines that we believe are assessed in error;

 

    changes in the exchange rates of the real against (1) the U.S. dollar, including the 47.0% depreciation of the real against the U.S. dollar during 2015 and the 13.4% depreciation of the real against the U.S. dollar during 2014, and (2) the Euro, including the 31.7% depreciation of the real against the Euro during 2015, which has affected our financial expenses as a result of exchange variations on our indebtedness denominated in U.S. dollars and Euros, and the cost in reais of a substantial portion of the network equipment that we purchase for our capital expenditure projects, the prices of which are denominated in U.S. dollars or are U.S. dollar-linked; and

 

    the level of our outstanding indebtedness, fluctuations in LIBOR and benchmark interest rates in Brazil, principally the CDI rate and the TJLP rate, which affects our interest expenses on our floating rate debt.

Our financial condition and liquidity is influenced by a variety of factors, including:

 

    our ability to generate cash flows from our operations;

 

    prevailing Brazilian and international interest rates, which affect our debt service requirements;

 

    our ability to borrow funds from Brazilian and international financial institutions and to sell our debt securities in the Brazilian securities markets, which is influenced by a number of factors discussed below;

 

    the success of our program to monetize non-core assets;

 

    our capital expenditure requirements, primarily relating to a variety of projects designed to expand and upgrade our data transmission networks, our mobile services networks, our voice transmission networks, our information technology equipment and our telecommunications services infrastructure; and

 

    the requirement under the Brazilian Corporation Law and our by-laws that we pay dividends on an annual basis in an amount equal to at least 25% of our adjusted net income, unless our board of directors deems it inconsistent with our financial position.

Oi Capital Increase and Acquisition of PT Portugal

On May 5, 2014, we concluded a capital increase, which we refer to as the Oi capital increase, in which we issued (1) 121,674,063 of our common shares and 280,483,641 of our preferred shares for an aggregate amount of R$8,250 million in cash, and (2) 104,580,393 of our common shares and 172,025,273 of our preferred shares to Pharol in exchange for the contribution by Pharol to our company of all of the shares of its subsidiary PT Portugal. PT Portugal provides a broad range of telecommunications services in Portugal and owned significant interests in telecommunications companies in Angola, Cape Verde, Namibia, and São Tomé and Principe in Africa and Timor-Leste in Asia.

Disposition of PT Portugal

On June 2, 2015, we sold all of the share capital of PT Portugal to Altice Portugal for a purchase price equal to the enterprise value of PT Portugal of €6,900 million, subject to adjustments based on the financial debt, cash and working capital of PT Portugal on the closing date, plus an additional earn-out amount of €500 million in the event

 

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that the consolidated revenues of PT Portugal and its subsidiaries (as of the closing date) for any single year between the year ending December 31, 2015 and the year ending December 31, 2019 is equal to or exceeds €2,750 million.

In connection with the closing, Altice Portugal disbursed €5,789 million, of which €869 million was utilized by PT Portugal to prepay outstanding indebtedness in that amount, and €4,920 million were paid to our company in cash. As of December 31, 2015, we had used R$8,682 million of the net cash proceeds of the PT Portugal Disposition for the prepayment of indebtedness of our company, and as of the date of this annual report have used an additional R$5,350 million of these net cash proceeds for the prepayment and repayment of indebtedness of our company. We expect to use the remainder of these net cash proceeds for the repayment of indebtedness of our company.

In anticipation of the PT Portugal Disposition, PT Portugal transferred PTIF, its wholly-owned finance subsidiary, to Oi. As a result of the completion of the PT Portugal Disposition, the indebtedness of PTIF, which had previously been classified as liabilities associated with assets held for sale in our consolidated financial statements, was reclassified as indebtedness of our company. In addition, in connection with the PT Portugal Disposition, PTIF assumed all obligations under PT Portugal’s outstanding 6.25% Notes due 2016.

In addition, PT Portugal transferred to Oi all of the outstanding share capital of PT Participações which holds:

 

    our 75% interest in Africatel, which holds our interests in telecommunications companies in Africa, including telecommunications companies in Angola, Cape Verde, Namibia, and São Tomé and Principe; and

 

    our interests in TPT, which provides telecommunications, multimedia and IT services in Timor Leste.

Proposed Disposition of Africatel

On September 16, 2014, our board of directors authorized our management to take the necessary measures to market our shares in Africatel. As a result, as of December 31, 2014 and 2015, we recorded the assets and liabilities of Africatel as held-for sale, although we do not record Africatel as discontinued operations in our income statement due to the immateriality of the effects of Africatel on our results of operations. Due to the many risks involved in the ownership of these interests, particularly our interest in Unitel, we cannot predict when the sale of these assets may be completed.

Financial Presentation and Accounting Policies

Presentation of Financial Statements

We have prepared our consolidated financial statements as of December 31, 2015 and 2014 and for the years ended December 31, 2015, 2014 and 2013 in accordance with U.S. GAAP. Based on our operating cash flows and the impact such operating cash flows have had on our liquidity, in combination with the level of our indebtedness and the potential impact if we cannot satisfy certain financial covenants under our current debt instruments in 2016, our independent registered public accounting firm has included an emphasis paragraph related to the substantial doubt with respect to our ability to continue as a going concern in their report on our consolidated financial statements for the year ended December 31, 2015. However, our financial statements have been prepared assuming we will continue to operate as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.

Business Segments and Presentation of Segment Financial Data

As a result of our acquisition of PT Portugal, we consolidated the results of PT Portugal and its subsidiaries into our financial statements as from May 5, 2014 until our disposition of PT Portugal on June 2, 2015. Following our acquisition of PT Portugal, we implemented a new organizational structure that we believe reflects our business activities and corresponds to our principal services. We have identified only one operating segment that corresponds to the telecommunications business in Brazil.

 

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The Telecommunications in Brazil segment includes our services in Brazil, Africa and Asia, including operations that were reported as part of our Fixed-Line and Data Transmission Services, Mobile Services and Other Services segments in prior periods. Prior to our acquisition of PT Portugal, we accounted for our operations under three segments: Fixed-Line and Data Transmission Services, Mobile Services, and Other Services. As a result of our implementation of our new organizational structure, our three previously existing segments have been combined into our Telecommunications in Brazil segment.

Within our Telecommunications in Brazil segment, our management assesses revenue generation based on customer segmentation into the following categories:

 

    Residential Services, focused on the sale of fixed telephony services, including voice services, broadband, and Pay-TV;

 

    Personal Mobility, focused on the sale of mobile telephony services to post-paid and pre-paid customers that include voice services and data communication services; and

 

    SME and Corporate, which includes corporate solutions offered to our small, medium-sized, and large corporate customers, including voice services and corporate data solutions.

In addition to the Telecommunications in Brazil segment, we conduct other businesses that individually or in aggregate do not meet any of the quantitative indicators that would require their disclosure as reportable business segments. These businesses include primarily the following companies: Mobile Telecommunications Limited in Namibia, Companhia Santomense de Telecomunicações, Listas Telefónicas de Moçambique, ELTA – Empresa de Listas Telefónicas de Angola, and Timor Telecom, which provide fixed and mobile telecommunications services and publish telephone directories, and which have been consolidated since May 2014.

We evaluate and manage business segment performance based on information prepared in accordance with Brazilian GAAP, and, accordingly, the segment data included in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Oi” section is presented under Brazilian GAAP.

Critical Accounting Policies and Estimates

Our critical accounting policies and estimates described in note 2(c) to our consolidated financial statements. In preparing our consolidated financial statements in conformity with U.S. GAAP, we relied on estimates and assumptions derived from historical experience and various other factors, including expected future events, that we deemed reasonable and relevant. Critical accounting policies are those that are important to the portrayal of our consolidated financial position and results of operations and require management’s subjective and complex judgments, estimates and assumptions. The application of these critical accounting policies often requires judgments made by management regarding the effects of matters that are inherently uncertain with respect to our results of operations and the carrying value of our assets and liabilities. Our results of operations and financial position may differ from those set forth in our consolidated financial statements, if our actual experience differs from management’s assumptions and estimates. In order to provide an understanding of our critical accounting policies, including some of the variables and assumptions underlying the estimates, and the sensitivity of those assumptions and estimates to different parameters and conditions, we set forth below a discussion of our critical accounting policies relating to:

 

    revenue recognition and trade receivables;

 

    provision for doubtful accounts;

 

    depreciation of property, plant and equipment;

 

    impairment of long-lived assets;

 

    provisions;

 

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    fair value of derivative financial instruments and other financial instruments;

 

    deferred income taxes and social contribution; and

 

    employee benefits.

Revenue Recognition and Trade Receivables

Our revenues correspond primarily to the amount of the payments received or receivable from sales of services in the regular course of our activities and our subsidiaries’ activities.

Service revenue is recognized when services are provided. Local and long distance calls are charged based on time measurement according to the legislation in effect. The services charged based on monthly fixed amounts are calculated and recorded on a straight-line basis. Prepaid services are recognized as unearned revenues and recognized in revenue as these services are used by customers.

Revenue from sales of handsets and accessories is recognized when these items are delivered and accepted by the customers. Discounts on services provided and sales of cell phones and accessories are taken into consideration in the recognition of the related revenue. Revenues involving transactions with multiple elements are identified in relation to each one of their components, and the recognition criteria are applied on an individual basis. Revenue is not recognized when there is significant uncertainty as to its realization.

Our revenue is a material component of our results of operations. Management’s determination of price, collectability and the rights to receive certain revenues for the use of our network are based on judgments regarding the nature of the fee charged for services rendered, the price for certain services delivered and the collectability of those revenues. Should changes in conditions cause management to conclude that these criteria are not met for certain transactions, the amount of accounts receivable could be adversely affected. In addition, for certain categories of revenue we rely upon revenue recognition measurement guidelines set by ANATEL.

We consider revenue recognition to be a critical accounting policy, because of the uncertainties caused by different factors such as the complex information technology required, high volume of transactions, fraud and piracy, accounting regulations, management’s determination of collectability and uncertainties regarding our right to receive certain revenues (mainly revenues for use of our network). Significant changes in these factors could cause us to fail to recognize revenues or to recognize revenues that we may not be able to realize in the future, despite our internal controls and procedures. We have not identified any significant need to change our revenue recognition policy.

Provision for Doubtful Accounts

Our provision for doubtful accounts is established in order to recognize probable losses on accounts receivable and takes into account limitations we impose to restrict the provision of services to customers with past-due accounts and actions we take to collect delinquent accounts. For additional information regarding our provision for doubtful accounts, see note 8 to our consolidated financial statements.

We have entered into agreements with certain customers to collect past-due accounts receivable, including agreements allowing customers to settle their delinquent accounts in installments. The amounts that we actually fail to collect in respect of these accounts may differ from the amount of the allowance established, and additional allowances may be required.

Depreciation of Property, Plant and Equipment

We depreciate property, plant and equipment using the straight-line method at rates we judge compatible with the useful lives of the underlying assets. The depreciation rates of our most significant assets are presented in note 14 to our consolidated financial statements. The useful lives of assets in certain categories may vary based on

 

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whether they are used primarily to provide fixed-line or mobile services. We review the estimated useful lives of the assets taking into consideration technical obsolescence and a valuation by outside experts.

Given the complex nature of our property, plant and equipment, the estimates of useful lives require considerable judgment and are inherently uncertain, due to rapidly changing technology and industry practices, which could cause early obsolescence of our property, plant and equipment. If we materially change our assumptions of useful lives and if external market conditions require us to determine the possible obsolescence of our property, plant and equipment, our depreciation expense, obsolescence write-off and consequently net book value of our property, plant and equipment could be materially different.

Impairment of Long-Lived Assets

Long-lived assets, such as property, plant, and equipment, and purchased intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment, we first compare the undiscounted cash flows expected to be generated by that asset or asset group to its carrying amount. If the carrying amount of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying amount exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as deemed necessary.

We have not recorded any impairment of our long-lived assets during the three years ended December 31, 2015.

Provisions

Liabilities for loss contingencies arising from claims, assessment, litigation, fines and penalties are recorded when it is probable that the liability has been incurred and the amount can be reasonably estimated, based on the opinion of management and its in-house and outside legal counsel. The amounts are recognized based on the cost of the expected outcome of ongoing lawsuits.

We classify our risk of loss in legal proceedings as remote, possible or probable. Provisions recorded in our consolidated financial statements in connection with these proceedings reflect reasonably estimated losses at the relevant date as determined by our management after consultation with our general counsel and the outside legal counsel. As discussed in note 20 to our consolidated financial statements, we record as a liability our estimate of the costs of resolution of such claims, when we consider our losses probable. We continually evaluate the provisions based on changes in relevant facts, circumstances and events, such as judicial decisions, that may impact the estimates, which could have a material impact on our results of operations and shareholders’ equity. While management believes that the current provision is adequate, it is possible that our assumptions used to estimate the provision and, therefore, our estimates of loss in respect of any given contingency will change in the future based on changes in the relevant situation. This may therefore result in changes in future provisioning for legal claims. For more information regarding material pending claims against our company, see “Item 8. Financial Information—Legal Proceedings” and note 20 to our consolidated financial statements.

Fair Value of Derivative Financial Instruments and Other Financial Instruments

We recognize derivative financial instruments at fair value based on future cash flow estimates associated with each instrument contracted. The financial assets available for sale related to our investment in Unitel have been valued at fair value according to the operating assets used as basis in the valuation related to the Oi capital increase. Our estimates of future cash flows may not necessarily be indicative of the amounts that could be obtained in the current market. The use of different assumptions to measure the fair value could have a material effect on the amounts obtained and not necessarily be indicative of the cash amounts that we would receive or pay to settle such transactions.

 

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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.

We recognize and settle taxes on income based on the results of operations determined in accordance with the Brazilian Corporation Law, taking into consideration the provisions of Brazilian tax law, which are materially different from the amounts calculated for U.S. GAAP purposes. Under U.S. GAAP, we recognize deferred tax assets and liabilities based on the differences between the carrying amounts and the taxable bases of the assets and liabilities.

We regularly test deferred tax assets for impairment and recognize a provision for impairment losses when it is probable that these assets may not be realized, based on the history of taxable income, the projection of future taxable income, and the time estimated for the reversal of existing temporary differences. These projections require the use of estimates and assumptions. In order to project future taxable income, we need to estimate future taxable revenues and deductible expenses, which are subject to a variety of external and internal factors, such as economic trends, industry trends and interest rates, changes in business strategies, and changes in the type of services and products sold by our company. The use of different estimates and assumptions could result in the recognition of a provision for impairment losses for the entire or a significant portion of the deferred tax assets.

Employee Benefits

We record liabilities for employee benefits based on actuarial valuations which are calculated based on assumptions and estimates regarding discount rates, investment returns, inflation rates for future periods, mortality indices and projected employment levels relating to pension fund benefit liabilities. The accuracy of these assumptions and estimates will determine whether we have created sufficient reserves for the costs of accumulated pensions and healthcare plans, and the amount we are required to disburse each year to fund pension benefits. These assumptions and estimates are subject to significant fluctuations due to different external and internal factors, such as economic trends, social indicators, our capacity to create new jobs and our ability to retain our employees. All of these assumptions are reviewed at the end of each reporting period. If these assumptions and estimates are not accurate, we may be required to revise our reserves for pension benefits, which could materially impact our results of operations.

Principal Factors Affecting Our Financial Condition and Results of Operations

Effects of Our Declining Liquidity

As of December 31, 2015, our consolidated cash and cash equivalents and short-term cash investments amounted to R$16,700 million. We expect to use our cash and cash equivalents and short-term cash investments, and financing for which we have commitments under facilities from CDB and BNB, to fund our operations, investments, debt service obligations and working capital requirements during the period in which our operating cash flows are insufficient to fund these cash requirements.

On March 9, 2016, we announced that we had retained PJT Partners as our financial advisor to assist us in evaluating financial and strategic alternatives to optimize our liquidity and debt profile. On April 25, 2016, we entered into a customary non-disclosure agreement with Moelis & Company, who acts as advisor for a diverse ad hoc group of holders of the bonds issued by Oi and its subsidiaries, as an initial step towards discussions of a potential restructuring of its indebtedness.

Our financial statements for the year ended December 31, 2015 have been prepared assuming that we will continue as a going concern, based on our cash flow projections. Our projections depend on factors such as attainment of traffic volume targets, customer base, launching of bundled products attractive to customers, service sales prices, foreign exchange fluctuation and the success of the efforts to identify and implement financial and strategic alternatives to optimize the liquidity and debt profile.

 

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Should one or more of the assumptions underlying our cash flow projections and other forecasts or the outcome of the efforts to identify and implement financial and strategic alternatives to optimize our liquidity and debt profile not be met, our cash and cash equivalents and short-term cash investments, together with our committed financing, may not be sufficient to meet our contractual obligations and commitments during 2016. If we are unable to successfully restructure our debt on terms satisfactory to our company, we may not be able to execute our business plan or meet our obligations. If we become unable to meet our obligations, we may seek the protection of the courts through a judicially supervised reorganization (recuperação judicial) proceeding in Brazil.

Effects of Investment in and Disposal of Portuguese Business of PT Portugal

On May 5, 2014, we concluded the Oi capital increase in which we issued (1) 121,674,063 of our common shares and 280,483,641 of our preferred shares for an aggregate amount of R$8,250 million in cash, and (2) 104,580,393 of our common shares and 172,025,273 of our preferred shares to Pharol in exchange for the contribution by Pharol to our company of all of the shares of its subsidiary PT Portugal. PT Portugal provides a broad range of telecommunications services in Portugal and owned significant interests in telecommunications companies in Angola, Cape Verde, Namibia, and São Tomé and Principe in Africa and Timor-Leste in Asia.

On June 2, 2015, we sold all of the share capital of PT Portugal to Altice Portugal for a purchase price equal to the enterprise value of PT Portugal of €6,900 million, subject to adjustments based on the financial debt, cash and working capital of PT Portugal on the closing date, plus an additional earn-out amount of €500 million in the event that the consolidated revenues of PT Portugal and its subsidiaries (as of the closing date) for any single year between the year ending December 31, 2015 and the year ending December 31, 2019 is equal to or exceeds €2,750 million.

In connection with the closing, Altice Portugal disbursed €5,789 million, of which €869 million was utilized by PT Portugal to prepay outstanding indebtedness in that amount, and €4,920 million were paid to our company in cash. As of December 31, 2015, we had used R$8,682 million of the net cash proceeds of the PT Portugal Disposition for the prepayment of indebtedness of our company, and as of the date of this annual report have used an additional R$5,350 million of these net cash proceeds for the prepayment and repayment of indebtedness of our company. We expect to use the remainder of these net cash proceeds for the repayment of indebtedness of our company.

In anticipation of the PT Portugal Disposition, PT Portugal transferred Portugal Telecom International Finance B.V., or PTIF, its wholly-owned finance subsidiary, to Oi. As a result of the completion of the PT Portugal Disposition, the indebtedness of PTIF, which had previously been classified as liabilities associated with assets held for sale in our consolidated financial statements, was reclassified as indebtedness of our company. In addition, in connection with the PT Portugal Disposition, PTIF assumed all obligations under PT Portugal’s outstanding 6.25% Notes due 2016.

In addition, PT Portugal transferred to Oi all of the outstanding share capital of PT Participações, SGPS, S.A., or PT Participações, which holds:

 

    our 75% interest in Africatel Holding B.V., or Africatel, which holds our interests in telecommunications companies in Africa, including telecommunications companies in Angola, Cape Verde, Namibia, and São Tomé and Principe; and

 

    our interests in TPT, which provides telecommunications, multimedia and IT services in Timor Leste.

We have accounted for the acquisition of all of the shares of PT Portugal by our company in exchange for our common shares and preferred shares in the Oi capital increase under the purchase method of accounting as a result of which we have recorded the assets and liabilities of PT Portugal on our balance sheet based on the fair value of the identifiable assets acquired and liabilities assumed. We have prepared a purchase price allocation under which we adjusted the carrying values of certain of the assets and liabilities of PT Portugal.

The following table sets forth the adjustments to market value made in the context of the allocation of the fair values of identifiable assets and liabilities of PT Portugal.

 

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     Carrying
Value
     Adjustments
to market
value
     Fair Value  
     (in millions of reais)  

List of residential segment customers

   R$ 40       R$ 738       R$ 778   

List of personal mobile segment customers

     94         1,642         1,736   

List of corporate segment customers

     37         665         701   

Mobile licenses of the operations in Portugal

     1,037         103         1,140   
  

 

 

    

 

 

    

 

 

 

Adjustments of intangible assets to market value

   R$ 1,208         3,147       R$ 4,355   

Property, plant and equipment of operations in Portugal

        608      
     

 

 

    

Adjustments to market value before taxes

        3,755      

Effects of taxation

        (1,012   
     

 

 

    

Total adjustments to market value net of taxes

      R$ 2,743      
     

 

 

    

The following table shows the total acquisition price for, and the goodwill arising on, the acquisition of PT Portugal.

 

     (in millions of
reais)
 

Equity instruments issued

   R$ 5,710   

Fair value of the stake previously held by our company in Portugal Telecom

     571   

Non-controlling interests

     1,478   

Less: fair value of assets acquired and liabilities assumed

     (2,816
  

 

 

 

Goodwill determined on May 5, 2014

   R$ 10,575   
  

 

 

 

As a result of our decision to sell PT Portugal, the revenue and expenses of PT Portugal are presented in our income statement as discontinued operations. In addition, as a result of our decision to sell PT Portugal and its subsidiary Africatel, the assets and liabilities related to PT Portugal and Africatel were classified in our balance sheet as assets held for sale and liabilities of assets held for sale, respectively.

We recorded a loss from discontinued operations for 2014 of R$4,415 million, consisting of a loss from discontinued operations of R$250 million and an allowance for impairment loss at fair value of the PT Portugal investment and divesture-related expenses of R$4,164 million.

We recorded net operating revenue of discontinued operations of R$5,082 million for the period from our acquisition of PT Portugal on May 5, 2014 through December 31, 2014. Our profit on discontinued operations before financial expenses and taxes was R$390 million, or 7.7% of net operating revenue of discontinued operations. Financial expenses of our discontinued operations were R$694 million and we recorded an income tax and social contribution benefit on our discontinued operations was R$54 million. As a result, the loss for our discontinued operations for the year ended December 31, 2014 was R$250 million, or 4.9% of net operating revenue of discontinued operations.

In connection with the reclassification of the assets and liabilities related to PT Portugal and Africatel, we recorded an impairment loss as part of our loss from discontinued operations for 2014 on the investment in PT Portugal, in the amount of R$4,164 million resulting from the recognition of this asset at its fair value less expenses to sell. The sale price used to determine the impairment loss allowance corresponds to the unadjusted purchase price of R$22,267 million (€6,900 million) and liabilities on retirement and other benefits assumed by PT Portugal, amounting to R$3,872 million (€1,200 million).

 

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We recorded loss from discontinued operations for 2015 of R$867 million, consisting of comprehensive income transferred to our income statement of R$226 million, principally consisting of the cumulative foreign exchange differences related to PT Portugal, and a loss on the sale of PT Portugal and divestiture related expenses of R$625 million.

Our R$625 million loss in connection with the sale of PT Portugal consisted of (1) the derecognized investment cost that includes goodwill arising on the business combination between our company and PT Portugal and selling expenses totaling R$1,308 million, and (2) the R$683 million revenue related to cash proceeds received directly by our company.

Effects of Investment in Rio Forte Commercial Paper and PT Exchange

In preparing the purchase price allocation with respect to our acquisition of PT Portugal, we recognized the write-off of all commercial paper of Rio Forte owned by PT Portugal and PTIF on the date of acquisition and recorded as other assets a right to compensation receivable of R$2,763 million from Pharol, reflecting the face value of this commercial paper.

On July 15 and 17, 2014, Rio Forte defaulted on the commercial paper held by PTIF and PT Portugal. On September 8, 2014, we, TmarPart, Pharol and our subsidiaries PT Portugal and PTIF, entered into the PT Exchange Agreement and the PT Option Agreement. On March 24, 2015, PT Portugal assigned its rights under the PT Exchange Agreement and the PT Option Agreement to PTIF. On March 27, 2015, PT Portugal assigned all of its rights and obligations under the Rio Forte commercial paper that it owned to PTIF. On March 30, 2015, the transactions contemplated by the PT Exchange Agreement were completed through the transfer of Rio Forte commercial paper in the aggregate amount of €897 million to Pharol in exchange for 47,434,872 of our common shares and 94,869,744 of our preferred shares.

As of December 31, 2014, we had the right to compensation from Pharol related to its subscription in the Oi capital increase in the amount of R$2,895 million (equivalent to €897 million) and had an obligation to acquire 47,434,872 of our common shares and 94,869,744 of our preferred shares from Pharol in exchange for this amount under the PT Exchange Agreement, subject to approval by our shareholders at a meeting scheduled for March 26, 2015. Considering that this asset and liability were for the same amount and could be settled with the same entity and at the same time, we stated them on our balance sheet as of December 31, 2014 on a net basis.

Under the PT Exchange Agreement, on March 30, 2015 we complete the share exchange under which Pharol delivered 47,434,872 of our common shares and 94,869,744 of our preferred shares to PTIF and we delivered Rio Forte securities to Pharol in the total principal amount of R$3,163 million (€897 million).

Rate of Growth of Brazil’s Gross Domestic Product and Demand for Telecommunications Services

As a Brazilian company with a substantial portion of our operations in Brazil, we are affected by economic conditions in Brazil. Brazilian GDP declined by an estimated 3.8% in 2015, grew by 0.1% in 2014, and grew by 2.3% in 2013. While we believe that growth in Brazil’s GDP stimulates demand for telecommunications services, we believe that demand for telecommunications services is relatively inelastic in periods of economic stagnation and that the effect on our revenues of low growth or a recession in Brazil would not be material under foreseeable scenarios. However, a substantial and prolonged deterioration of economic conditions in Brazil could have a material adverse effect on the number of subscribers to our services and the volume of usage of our services by our subscribers and, as a result, our net operating revenue.

Based on information available from ANATEL, the number of fixed lines in service in Brazil increased from 39.8 million as of December 31, 2005 to 43.6 million as of December 31, 2015, the latest date for which such information has been made available by ANATEL, and the number of mobile subscribers in Brazil increased from 86.2 million as of December 31, 2005 to 257.8 million as of December 31, 2015. Although the demand for

 

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telecommunications services has increased substantially during the past ten years, the tastes and preferences of Brazilian consumers of these services have shifted.

During the three-year period ended December 31, 2015, the number of mobile subscribers in Brazil has declined at an average rate of 4.3% per year, while the number of fixed lines in service in Brazil during the three-year period ended December 31, 2015 has declined at an average rate of 6.3% per year. As the incumbent provider of fixed-line services and a provider of mobile services in our service areas, we are both a principal target and a beneficiary of this trend. During the three-year period ended December 31, 2015, the number of our mobile subscribers has decreased at an average rate of 1% per year from 49.2 million at December 31, 2012 to 48 million at December 31, 2015, while the number of our fixed lines in service has declined by an average rate of 6% per year from 18.5 million at December 31, 2012 to 14.9 million at December 31, 2015.

Demand for Our Telecommunications Services

Demand for Our Residential Services

Because the number of our customers terminating their residential services has exceeded new activations between December 31, 2012 and December 31, 2015, the number of our fixed lines in service declined by 19.1%, or 3.5 million, during this period, according to ANATEL. As part of the Transformation Plan, we are focusing on offering more and higher-value added services to new and existing customers by combining upselling and cross selling initiatives, thereby increasing the ARPU of our Residential Services business. We believe that through our sales of bundles consisting of more than one service, we improve customer profitability and enhance loyalty, while also increasing ARPU and minimizing churn rates. Primarily as a result of these initiatives, the ARPU of our residential services grew by 5.8% to R$79.6 during 2015 from R$75.2 during 2014. We believe that our renewed focus on the sale of bundled services is the principal reason for the increase in the percentage of our customers that subscribe to more than one of our residential services from 61.6% as of December 31, 2014 to 63.3% as of December 31, 2015.

We are required under ANATEL regulations and our concession contracts to offer a basic service plan to our residential customers that permits 200 minutes of usage of our fixed-line network to make local calls. We also offer alternative residential plans that include significantly larger numbers of minutes and charge higher monthly fees for these plans. Over the past three years, the percentage of our customers selecting these alternative plans has grown significantly. Subscribers to our alternative residential plans, including our bundled service plans, represented 86.4% of our residential customers as of December 31, 2015 as compared to 82% of our residential customers as of December 31, 2012. We believe that our alternative residential plans contribute to a net increase in our residential services revenue as many subscribers of our alternative residential plans do not use their full monthly allocations of local minutes.

We have sought to combat the general trend in the Brazilian telecommunications industry of substitution of mobile services in place of local fixed-line services by offering a variety of bundled plans that include mobile services, broadband services and Oi TV subscriptions to our fixed-line customers. As a result of these service offerings, the monthly disconnections of our fixed lines in service have declined. As of December 31, 2015:

 

    11.7% of our residential customers subscribed for bundled service packages, which accounted for 28.6% of our post-paid mobile subscribers as each fixed-line subscriber may include multiple mobile devices in a bundled plan, a decrease of 0.6% from the 29.2% of subscribers as of December 31, 2014;

 

    51.0% of our residential customers subscribed for broadband services (whether separately or as part of a bundled service plan), an improvement of 3.0% from the 48.0% of subscribers as of December 31, 2014; and

 

    11.7% of our residential customers subscribed for Pay TV services (whether separately or as part of a bundled service plan), an improvement of 0.3% from the 11.4% of subscribers as of December 31, 2014.

 

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The substantial increase in the number of mobile service users in Brazil has also negatively impacted the use of our public telephones. As the incumbent local fixed-line service provider in Region I and Region II, we are required under ANATEL regulations and our concession contracts to meet specified targets with respect to the availability of public telephones throughout our concession area. However, as a larger portion of the population of Region I and Region II uses mobile handsets to make calls when not in proximity to a fixed-line telephone, revenue from the use of our public telephones declined by 85.7% from 2012 to 2015.

Demand for Our Personal Mobility Services

Our customer base for mobility services (including customers in our Personal Mobility Services and SME and Corporate Services) has declined from 49.2 million at December 31, 2012 to 48.1 million at December 31, 2015, according to ANATEL. We believe that the primary reason for the decline in our Personal Mobility customer base is the reduction in the total number of mobile accesses in Brazil, especially in the second half of 2015. We believe this market shift reflects the trend to consolidate mobile use into a single SIM card, following the launch of new all-net plans and the structural market migration from voice to data in response to the offering of more robust data packages. Additionally, in the second half of 2015, operators in the Brazilian telecommunication sector (including our company) implemented a more intensive policy of disconnecting inactive users (access clean up). As a result, operators reduced regulated costs associated with the maintenance of active accesses for devices that do not generate revenue.

The market for mobile services is extremely competitive in each of the regions that we serve. As a result, (1) we incur selling expenses in connection with marketing and sales efforts designed to retain existing mobile customers and attract new mobile customers, and (2) from time to time the discounts that we offer in connection with our promotional activities lead to charges against our gross operating revenue from mobile services. In addition, competitive pressures have in the past required us to introduce service plans under which the monthly and per-minute rates that we charge our mobile customers are lowered, reducing our personal mobility ARPU. During 2015, the average monthly churn rate of our Personal Mobility Services business was 12.4% per month.

Our new service offerings have had strong performances in the first months following their releases in late 2015. As of December 31, 2015, Oi Livre has acquired 6.2 million customers, corresponding to 15.9% of our total pre-paid base. We have also been increasing our market share in the pre-paid segment, with a market share of 21.3% as of December 31, 2015, a 1.7% increase compared to December 31, 2014.

We expect our overall mobile services business to continue to grow in terms of its market share, traffic volumes and revenues from value-added services. However, due to market saturation, the current macroeconomic situation and the trend in SIM card consolidation, we expect future growth in our mobile services business to occur at lower rates than we have historically achieved.

Demand for Our SME and Corporate Services

The number of our customers for SME and Corporate Services has declined from 8.9 million as of December 31, 2012 to 7.2 million as of December 31, 2015. We believe that the primary reason for the decline in our SME and Corporate Services customer base is the declining macroeconomic conditions in Brazil, which has caused many of our SME customers to cease operations. Our corporate customers, while better able to survive the current economic instability, often respond by reducing their economic activity and their spending for telecommunications products and services. In addition, provided that our SME and corporate customers also purchase the core fixed-line and mobile services offered to our Residential and Personal Mobility Services customers, demand for our SME and Corporate Services is subject to some of the same conditions that affect our Residential and Personal Mobility Services, including reductions in interconnection tariffs, which have led to more robust mobile package offerings and driven the traffic migration trend of fixed-to-mobile substitution.

Effects of Expansion of Mobile Data Transmission Services

We have authorizations and radio frequency licenses necessary for us to provide 2G, 3G and 4G services throughout Brazil. During 2015, 2014 and 2013, Oi Mobile undertook extensive capital expenditure projects to

 

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install the network equipment necessary to expand our offerings of these services, investing R$1,151 million, R$1,923 million and R$2,241 million, respectively, which has increased in our depreciation expenses. We financed the purchase and installation of our network equipment through loans and vendor financing.

In 2015, our mobile data transmission services, consisting of 2G, 3G and 4G services to mobile handsets and mini-modems, captured approximately 2,857 net disconnections (calculated based on the number of subscribers at the end of a period less the number of subscribers at the beginning of that period). We increased the number of municipalities in which we offered 4G services to 133, covering 51.4% of the urban population of Brazil, as of December 31, 2015 from 45 municipalities, covering 30.6% of the population of Brazil, as of December 31, 2014, and we increased the number of municipalities in which we offered 3G services to 1,288, covering 78.8% of the urban population of Brazil, as of December 31, 2015 from 1,011 as of December 31, 2014. We expect that these services will generate significant additions to our mobile customer base and lead to long-term increases in our revenues and operating income before financial income (expenses) and taxes.

The aggregate cost of our 3G authorizations and radio frequency licenses and our 2G authorizations and radio frequency licenses in Region III was R$3,129 million; we are obligated to pay the remaining balance of R$919 million to ANATEL in installments through 2019. The cost of our 4G authorizations and radio frequency licenses was R$368 million, which has been paid in full.

Under our 3G radio frequency licenses, we are required to meet certain service expansion obligations that will require capital expenditures through 2016. Under our 4G radio frequency licenses, we are required to meet certain service expansion obligations that will require capital expenditures through 2019. If we are unable to fund these capital expenditures through our operating cash flows, or incur additional indebtedness or vendor financing obligations to make these capital expenditures, we may be required to default on our obligations under these licenses, which could result in requirements to provide completion guarantees and administrative proceedings by the respective regulatory bodies, which could result in fines.

Effects of Divestment of Non-Core Assets

Beginning in 2012, we entered into various transactions to monetize non-essential assets and acquire the services related to these assets at more favorable financial terms, with an aim to reduce future capital expenditures and maintenance expenses.

In August 2013, we completed the assignment of the right to use 4,226 fixed-line communications towers that formed part of our infrastructure for commercial operations by companies whose core operations consist of providing transmission tower and radiofrequency management and maintenance services. Upon the completion of these assignments, we received proceeds of approximately R$1,087 million. We have entered into agreements to lease the communications towers from the assignees for 20-year terms (renewable for another 20 years), effective upon completion of the assignments.

In November 2013, we completed the assignment of the right to use 2,113 fixed-line communications towers that formed part of our infrastructure for commercial operations by companies whose core operations consist of providing transmission tower and radiofrequency management and maintenance services. Upon the completion of these assignments, we received proceeds of approximately R$687 million. We have entered into agreements to lease the communications towers from the assignees for 20-year terms (renewable for another 20 years), effective upon completion of the assignments.

In December 2013, we and our subsidiary BrTI sold all of our equity interests in GlobeNet (other than Brasil Telecom de Venezuela S.A.) to BTG Pactual YS Empreendimentos e Participações. On January 17, 2014, the sale was concluded for an aggregate amount of R$1,779 million (based on the U.S. dollar-real exchange rate on January 15, 2014), resulting in a gain of approximately R$1,497 million after deducting the book value of the assets and related costs of approximately R$1,497 million. GlobeNet’s principal assets consist of 22,500 kilometers of fiber optic submarine cables, composed of two rings of protected submarine cables, linking connection points between the United States, Bermuda, Colombia and Brazil. As part of this transaction, GlobeNet will supply guaranteed submarine cable capacity to us and our subsidiaries at a fixed price for a term of 13 years.

 

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In March 2014, we sold all of our equity interests in Caryopoceae, our wholly-owned subsidiary, to SBA Torres Brasil, Ltda. for R$1,525 million. Caryopoceae owned 2,007 mobile telecommunications towers and rooftop antennae used in our mobile services business. Contemporaneously with the sale of this subsidiary, we entered into an operating lease with a 15-year term (renewable for another five years) with Caryopoceae permitting us to continue to use space on these communications towers for our mobile services business.

In December 2014, we sold all of our equity interests in Tupã Torres, our wholly-owned subsidiary, to SBA Torres Brasil, Ltda. for R$1,172 million. Tupã Torres owned 1,641 mobile telecommunications towers and rooftop antennae used in our mobile services business. Contemporaneously with the sale of Tupã Torres, we entered into an operating lease with a 15-year term (renewable for another five years) with Tupã Torres permitting us to continue to use space on these communications towers for our mobile services business.

As a result of these transactions, we have received cash related to these transactions and recorded gains on disposals of these assets of R$2,399 million during 2014 and R$1,497 million during 2013. As a result of these transactions, the amount of property and equipment that we record has been reduced, and consequently we will no longer record depreciation and amortization expenses relating to these assets, nor will we be required to maintain these assets. As a result of our entering lease and other agreements to continue to use these assets in the provision of our services, our expenses and commitments relating to operating leases have increased.

Effects of Investments in Africatel

At the time of our acquisition of PT Portugal, PT Portugal held indirectly 75% of the outstanding share capital of Africatel which held 25% of the outstanding share capital of Unitel. Our management considers this a non-controlling stake in Unitel which does not grant our company significant influence over the financial, operating and strategic policies of Unitel since we do not elect enough members of the board of directors of Unitel to allow us to be involved in the decision-making process of these policies, including decisions on dividend and other distributions, material business relations, appointment of officers or managers, or the provision of key technical information. Accordingly, upon the acquisition of PT Portugal, we recognized this investment as an available-for-sale financial asset recognized at fair value. The fair value of the investment in Unitel of R$4,089 million was determined based on the valuation report prepared by Banco Santander on the valuation of Pharol’s operating assets that was used as the basis for the valuation of PT Portugal as part of the Oi capital increase using a series of estimates and assumptions, including the cash flows projections for a four-year period, the choice of a growth rate to extrapolate the cash flows projections, and definition of appropriate discount rates.

As a result of our decision to sell Africatel, the assets and liabilities related to Africatel, including its investment in Unitel and the accounts receivable relating to declared and unpaid dividends of Unitel, were classified in our balance sheet as assets held for sale and liabilities of assets held for sale, respectively.

As of December 31, 2015, as a result of our updating the main assumptions and material estimates used in the fair value measurement of our investment in Unitel, taking into consideration in this assessment possible impacts of actual events related to the investment, notably the lawsuits filed against Unitel and its shareholders in 2015, we determined a fair value of the investment in Unitel of R$3,436 million and recognized a loss of R$408 million.

Effects of Adjustments to Our Regulated Rates

Telecommunications services rates are subject to comprehensive regulation by ANATEL. Our rates for local fixed-line services, domestic long-distance services, mobile services, interconnection to our fixed-line network, and EILD and SLD services are subject to regulation by ANATEL.

In July 2014, ANATEL approved rules under which interconnection rates charged by our company for the use of our fixed-line and mobile networks would be reduced over a period of years until they were set at rates based on a long-run incremental cost methodology. As a result, the mobile interconnection rates for Regions I, II and III declined by 25% each in February 2014, 33.3% each in February 2015 and 40.0%, 35.2% and 27.6%, respectively, in February 2016, with additional cuts approved through 2019. In addition, ANATEL approved cuts for most of our fixed interconnection rates ranging from 9.1% and 20.0 in February 2016, with additional cuts approved through 2019. In addition, ANATEL has reduced the substantially reduced our VC Rates during 2013 and 2015, as described

 

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under the caption “Item 4. Information on the Company—Operations in Brazil—Rates.” These rate reductions have been a primary reason for the decline in our mobile interconnection revenue to R$889 million during 2015 from R$1,399 million during 2014 and R$2,147 million during 2013, and the decline in our fixed-line interconnection revenue to R$316 million during 2015 from R$354 million during 2014 and R$388 million during 2013. However, these rate reductions have also led to a substantial reduction of our interconnection costs, which have declined to R$1,809 million during 2015 from R$2,690 million during 2014 and R$3,966 million during 2013. As a result of the substantial reductions in our interconnection costs, and in keeping with our strategy of simplifying our portfolios to enhance the customer experience, in 2015 we launched several fixed-line and mobile plans that allow all-net calls for a flat fee.

We are required to obtain ANATEL approval prior to offering new alternative fixed-line or mobile plans. The rates established or approved by ANATEL for our services act as caps on the prices that we charge for these services, and we are permitted to offer these services at a discount from the rates approved by ANATEL. After ANATEL establishes or approves rate caps for these services, these rate caps are subject to annual adjustment based on the rate of inflation, as measured by the IST. Rate caps for local fixed-line plans are adjusted by inflation, as measured by the IST, less an amount that serves as a proxy for productivity gains achieved by our company and the local fixed-line services industry as a whole.

Effects of Claims by ANATEL that Our Company Has Not Fully Complied with Our Quality of Service and Other Obligations

As a fixed-line service provider, we must comply with the provisions of the General Plan on Quality Goals. As a public regime service provider, we must comply with the network expansion and modernization obligations under the General Plan on Universal Service Goals and our concession agreements. Our personal mobile services authorizations set forth certain network expansion obligations and targets and impose obligations on us to meet quality of service standards. In addition, we must comply with regulations of general applicability promulgated by ANATEL, which generally relate to quality of service measures.

If we fail to meet quality goals established by ANATEL under the General Plan on Quality Goals, fail to meet the network expansion and modernization targets established by ANATEL under the General Plan on Universal Service Goals and our concession agreements, fail to comply with our obligations under our personal mobile services authorizations or fail to comply with our obligations under other ANATEL regulations, we may be subject to warnings, fines, intervention by ANATEL, temporary suspensions of service or cancellation of our concessions and authorizations.

On an almost weekly basis, we receive inquiries from ANATEL requiring information from us on our compliance with the various service obligations imposed on us by our concession agreements. If we are unable to respond satisfactorily to those inquiries or comply with our service obligations under our concession agreements, ANATEL may commence administrative proceedings in connection with such noncompliance. We have received numerous notices of commencement of administrative proceedings from ANATEL, mostly due to our inability to achieve certain targets established in the General Plan on Quality Goals and the General Plan on Universal Service Goals.

At the time that ANATEL notifies us it believes that we have failed to comply with our obligations, we evaluate the claim and, based on our assessment of the probability of loss relating to that claim, may establish a provision. We vigorously contest a substantial number of the assessments made against us. As of December 31, 2015, the total estimated contingency in connection with all pending administrative proceedings brought by ANATEL against us in which we deemed the risk of loss as probable totaled R$1,149 million, including fines which we are contesting through judicial proceedings, and we had recorded an aggregate provision related to these proceedings in the same amount. In the event that we are unsuccessful in obtaining final approval of the inclusion of the R$5 billion of fines and claims we have proposed to be included in the TAC program, we could be required to constitute an additional provision of the portion of these fines and claims for which we have not previously established a provision.

In December 2013, ANATEL approved Resolution No. 629/2013 under which a TAC was adopted permitting telecommunications concessionaires to request that their obligations to pay fines to ANATEL for non-compliance with certain service requirements be satisfied through capital expenditure investments in their networks. Under this

 

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regulation, Oi is currently negotiating several TACs with ANATEL related to fines in an aggregate amount of approximately R$5 billion, which can be classified into four categories of non-compliance: (1) universalization and quality, (2) systemic interruptions and external network, (3) consumer rights and general obligations, and (4) fiscalization.

On January 5, 2016, ANATEL published a decision defining the priority projects in case of TACs executed by any operator and ANATEL. ANATEL will accept projects related to: (1) transport infrastructure based on fiber to the municipal capital; (2) transport infrastructure through high capacity digital radio to the municipal capital; (3) deployment of mobile personal service to provide 3G technology in cities that currently do not have such service; (4) deployment of mobile personal service to provide 4G technology in cities with more than 30,000 inhabitants that currently lack such service; and (5) copper network shortening through FTTC technology in order to provide broadband service. ANATEL also published the factor of regional inequalities to stimulate the implementation of these projects in less developed areas.

If we execute a TAC with ANATEL, then we will be subject to the terms and conditions set forth in the TAC, including any penalties for non-compliance provided therein (in lieu of those set forth in the regulations) for the life of the TAC. We will be required to comply with the regulatory requirements only upon the expiration of the relevant TAC.

During 2015, we recorded provisions related to administrative proceedings brought by ANATEL in the amount of R$44.6 million. Our provisions related to administrative proceedings brought by ANATEL generally have been sufficient to pay all amounts that we were ultimately required to pay with respect to claims brought by ANATEL.

Effects of Inflation

After several years of relatively modest inflation in Brazil, inflation rates increased substantially during 2015 to annual rates of 10.7% as measured by the IGP-DI and the IBGE. Because substantially all of our cost of services and operating expenses are incurred in reais in Brazil, this increase in inflation has the effect of increasing our operating expenses and reducing our margins. Although we have taken significant measures to control and reduce operating expenses during 2015, the benefits of these measures have been weakened as a result of the countervailing impact of Brazilian inflation. Although our regulated rates are subject to annual adjustment based on the rate of inflation as measured by the IST, the majority of our revenue is generated from services delivered at rates that are not regulated or that are provided at a discount to the regulated rates as a result of competitive pressures in the market. As a result, we may not be able to pass our increased operat