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-2.3 d583119dex23.htm
EX-2.4 d583119dex24.htm
EX-4.16 d583119dex416.htm
EX-4.17 d583119dex417.htm
EX-8.1 d583119dex81.htm
EX-12.1 d583119dex121.htm
EX-12.2 d583119dex122.htm
EX-13.1 d583119dex131.htm

OI Earnings 2017-12-31

Balance SheetIncome StatementCash Flow

20-F 1 d583119d20f.htm FORM 20-F Form 20-F
Table of Contents

As filed with the Securities and Exchange Commission on May 16, 2018

 

 

 

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

 

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

FOR THE FISCAL YEARS ENDED DECEMBER 31, 2017 AND DECEMBER 31, 2016

OR

 

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

OR

 

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

Commission file number: 001-15256

 

 

Oi S.A. – In Judicial Reorganization

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

N/A   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)

Carlos Augusto Machado Pereira de Almeida Brandão

Investor Relations Officer

Rua Humberto de Campos, 425

8º andar

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

Tel: +55 21 3131-2918

invest@oi.net.br

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to section 12(b) of the Act:

 

Title of Each Class

 

Name of Each Exchange on which Registered

Common 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: Preferred Shares, without par value, each represented by American Depositary Shares

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

The total number of issued and outstanding shares of each class of stock of Oi S.A. – In Judicial Reorganization as of December 31, 2017 was:

519,751,661 common shares, without par value

155,915,486 preferred shares, without par value

 

 

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

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes  ☐    No  ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☐    No  ☒

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  ☒                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  ☒

    

International Financial Reporting Standards as issued

by the International Accounting Standards Board  ☐

   Other  ☐

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.    ☐  Item 17    ☐  Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to distribution of securities under a plan confirmed by a court.    Yes  ☐    No  ☐

 

 

 

 


Table of Contents

EXPLANATORY NOTE

Oi S.A. – In Judicial Reorganization (“Oi”) is filing this Comprehensive Annual Report on Form 20-F for the fiscal years ended December 31, 2017 and 2016 (the “Comprehensive Form 20-F”) as part of its efforts to become current in its filing obligations under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). As described more fully in “Item 4. Information on the Company—Our Recent History and Development—Our Judicial Reorganization Proceedings,” on June 20, 2016, Oi and six of its wholly-owned direct or indirect subsidiaries filed a joint voluntary petition for judicial reorganization (recuperação judicial) pursuant to the Brazilian Bankruptcy Law with the 7th Corporate Court of the Judicial District of the State Capital of Rio de Janeiro (the “RJ Court”). On June 29, 2016, the RJ Court granted the processing of this judicial reorganization. On December 19 and 20, 2017, a general creditors meeting (the “GCM”) was held to consider approval of the most recently filed judicial reorganization plan. The GCM concluded on December 20, 2017 following the approval of a judicial reorganization plan reflecting amendments to the judicial reorganization plan presented at the GCM as negotiated during the course of the GCM (the “RJ Plan”). On January 8, 2018, the RJ Court entered an order ratifying and confirming the RJ Plan, according to its terms, but modifying certain provisions of the RJ Plan (the “Brazilian Confirmation Order”). The RJ Plan became effective on February 5, 2018 upon the publication of the Brazilian Confirmation Order in the Official Gazette of the State of Rio de Janeiro (Diário Oficial do Estado do Rio de Janeiro).

The completion of the preparation of Oi’s financial statements under U.S. GAAP as of and for the year ended December 31, 2016 required that Oi determine whether the use of a going concern assumption as a basis for the preparation of those financial statements was appropriate, and the effects on the balances of assets, liabilities and on items comprising the statements of income, comprehensive income, changes in shareholders’ equity and cash flows if those financial statements were not prepared under this assumption. Oi’s management was not able to complete the asset impairment testing required under U.S. GAAP and was unable to do so prior to the approval of the RJ Plan on December 20, 2017 as this impairment testing required that Oi’s management complete an enterprise valuation of Oi and its consolidated subsidiaries. Given the ongoing negotiations between Oi and its creditors with respect to the terms of the RJ Plan, Oi’s management was been unable to determine a set of assumptions that were reasonably reliable upon which to prepare an enterprise valuation to support the required impairment testing.

As a result, Oi was unable to determine whether there would be any need to make adjustments in the balances of non-financial assets of Oi and its consolidated subsidiaries as of December 31, 2016, as well as in the items of the statements of income, comprehensive income, changes in shareholders’ equity and cash flows for the year then ended, and consequently, Oi’s auditor was unable to express an opinion on those financial statements.

As a result of the approval of the RJ Plan and the subsequent confirmation and ratification of the RJ Plan by the RJ Court, Oi’s management has been able to complete an enterprise valuation of Oi and its consolidated subsidiaries, complete the asset impairment testing required under U.S. GAAP, and determine the adjustments in the balances of non-financial assets of Oi and its consolidated subsidiaries as of December 31, 2016, as well as in the items of the statements of income, comprehensive income, changes in shareholders’ equity and cash flows for the year then ended.

The RJ Proceedings prompted us to perform a detailed analysis on the completeness and the accuracy of the judicial deposits and accounting balances of the other assets of the RJ Debtors. As a result, we identified weaknesses in some of our operational and financial reporting controls and procedures. For more information with respect to the identified material weaknesses in Oi’s internal control over financial reporting and the steps that Oi has undertaken to remediate these material weaknesses, see “Item 15. Controls and Procedures.”

Additionally, we determined the need to restate previously issued financial statements and related disclosures to correct errors. Accordingly, we are restating our consolidated financial statements for the year ended December 31, 2015. Restatement adjustments attributable to fiscal year 2014 and previous fiscal years are reflected as a net adjustment to retained earnings as of January 1, 2015

The errors detected and corrected in Oi’s financial statements related to its judicial deposits, its provisions for contingencies, intragroup balances, tax credits and estimates of revenue from services rendered and not yet billed to customers, as described in “Item 5. Operating and Financial Review and Prospects—Financial Presentation and Accounting Policies—Restatement of 2015 Financial Statements” and note 2 of our consolidated financial statements.

In connection with the presentation of financial information as of December 31, 2015, 2014 and 2013 and for the years ended December 31, 2014 and 2013, Oi has restated the financial statements related to those dates and periods to correct the errors included in these previously issued financial statements.

The Comprehensive Form 20-F is Oi’s first annual report filed with the Securities and Exchange Commission (the “SEC”) since the filing of its Annual Report on Form 20-F for the fiscal year ended December 31, 2015. Included in this Comprehensive Form 20-F are Oi’s audited consolidated financial statements as of and for the years ended December 31, 2017 and 2016, which have not been previously filed with the SEC.

 


Table of Contents

TABLE OF CONTENTS

 

    Page  
 

PRESENTATION OF FINANCIAL AND OTHER INFORMATION

    1  

CAUTIONARY STATEMENT WITH RESPECT TO FORWARD-LOOKING STATEMENTS

    7  

PART I

   

Item 1.

 

Identity of Directors, Senior Management and Advisers

    8  

Item 2.

 

Offer Statistics and Expected Timetable

    8  

Item 3.

 

Key Information

    8  

Item 4.

 

Information on the Company

    42  

Item 4A.

 

Unresolved Staff Comments

    108  

Item 5.

 

Operating and Financial Review and Prospects

    108  

Item 6.

 

Directors, Senior Management and Employees

    163  

Item 7.

 

Major Shareholders and Related Party Transactions

    179  

Item 8.

 

Financial Information

    188  

Item 9.

 

The Offer and Listing

    199  

Item 10.

 

Additional Information

    204  

Item 11.

 

Quantitative and Qualitative Disclosures about Market Risk

    226  

Item 12.

 

Description of Securities Other Than Equity Securities

    228  
PART II    

Item 13.

 

Defaults, Dividend Arrearages and Delinquencies

    229  

Item 14.

 

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

    229  

Item 15.

 

Controls and Procedures

    229  

Item 16A.

 

Audit Committee Financial Expert

    232  

Item 16B.

 

Code of Ethics

    232  

Item 16C.

 

Principal Accountant Fees and Services

    232  

Item 16D.

 

Exemptions from the Listing Standards for Audit Committees

    233  

Item 16E.

 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

    233  

Item 16F.

 

Change in Registrant’s Certifying Accountant

    233  

Item 16G.

 

Corporate Governance

    233  

Item 16H.

 

Mine Safety Disclosure

    236  
PART III    

Item 17.

 

Financial Statements

    237  

Item 18.

 

Financial Statements

    237  

Item 19.

 

Exhibits

    237  
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 10, 2018, the exchange rate for reais into U.S. dollars was R$3.5566 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$3.3080 to US$1.00 on December 31, 2017, R$3.2591 to US$1.00 on December 31, 2016 and R$3.9048 to US$1.00 on December 31, 2015, 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 10, 2018 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, 2013.

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, 2017 of R$3.3080 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, 2017 and 2016 and for the years ended December 31, 2017, 2016 and 2015 are included in this annual report.

We have prepared our consolidated financial statements as of December 31, 2017 and 2016 and for the years ended December 31, 2017, 2016 and 2015 in accordance with United States generally accepted accounting principles, or U.S. GAAP, under the assumption that we will continue as a going concern.

Under U.S. GAAP, our management is required to assess whether there are conditions or events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after our financial statements are issued. Our management’s assessment of our ability to continue as a going concern is discussed in note 1 to our consolidated financial statements. As of December 31, 2017, our management had taken relevant steps in the RJ Process, particularly the preparation, presentation and approval of the RJ Plan, which allows our viability and continuity, and the approval of the RJ Plan by our creditors. Since December 31 2017, our management has been making the necessary efforts to implement and monitor the RJ Plan based on the understanding that our financial statements were prepared with a going concern assumption.

As a result of the RJ Proceedings (which are considered to be similar in all substantive respects to proceedings under Chapter 11 of the U.S. Bankruptcy Code of 1986, as amended, which we refer to as the U.S. Bankruptcy Code), we have applied Financial Accounting Standards Board Accounting Standards Codification 852 “Reorganizations”, or ASC 852, in preparing our consolidated financial statements. ASC 852 requires that financial statements separately disclose and distinguish transactions and events that are directly associated with our reorganization from transactions and events that are associated with the ongoing operations of our business. Accordingly, expenses, gains, losses and provisions for losses that are realized or incurred in the RJ Proceedings have been recorded under the classification “Restructuring expenses” in our consolidated statements of operations. In addition, our prepetition obligations that may be impacted by the RJ Proceedings based on our assessment of these obligations following the guidance of ASC 852 have been classified on our balance sheet as “Liabilities subject to compromise.” Prepetition liabilities subject to compromise are required to be reported at the amount allowed as a claim by the RJ Court, regardless of whether they may be settled for lesser amounts and remain subject to future adjustments based on negotiated settlements with claimants, actions of the RJ Court or other events.

The RJ Proceedings prompted us to perform a detailed analysis on the completeness and the accuracy of the judicial deposits and accounting balances of the other assets of the RJ Debtors. As a result, we identified weaknesses in some of our operational and financial reporting controls and procedures. For more information with respect to the identified material weaknesses in Oi’s internal control over financial reporting and the steps that Oi has undertaken to remediate these material weaknesses, see “Item 15. Controls and Procedures.”.

Additionally, we determined the need to restate previously issued financial statements and related disclosures to correct errors. Accordingly, we are restating our consolidated financial statements for the year ended December 31, 2015. Restatement adjustments attributable to fiscal year 2014 and previous fiscal years are reflected as a net adjustment to retained earnings as of January 1, 2015.

The errors detected and corrected in our financial statements related to our judicial deposits, our provisions for contingencies, intragroup balances, tax credits and estimates of revenue from services rendered and not yet billed to customers, as described in “Item 5. Operating and Financial Review and Prospects—Financial Presentation and Accounting Policies—Restatement” and note 2 to our consolidated financial statements included in this annual report.

 

 

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

 

    the Brazilian Corporate Law (as defined below);

 

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

 

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

Certain Defined Terms

General

Unless otherwise indicated or the context otherwise requires, all references to:

 

    “our company,” “we,” “our,” “ours,” “us” or similar terms are to Oi and its consolidated subsidiaries;

 

    “Brazil” are to the Federative Republic of Brazil;

 

    “Brazilian Corporate Law” are to, collectively, Brazilian Law No. 6,404/76, as amended by Brazilian Law No. 9,457/97, Brazilian Law No. 10,303/01, and Brazilian Law No. 11,638/07;

 

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

 

    “Copart 4” are to Copart 4 Participações S.A. – In Judicial Reorganization, an indirect wholly-owned subsidiary of Oi;

 

    “Copart 5” are to Copart 5 Participações S.A. – In Judicial Reorganization, a direct wholly-owned subsidiary of Oi;

 

    “Oi” are to Oi S.A. – In Judicial Reorganization;

 

    “Oi’s ADSs” are to Oi’s Common ADSs and Preferred ADSs;

 

    “Oi’s Common ADSs” are to American Depositary Shares, each representing five common shares of Oi;

 

    “Oi Coop” are to Oi Brasil Holdings Coöperatief U.A. – In Judicial Reorganization, a direct wholly-owned subsidiary of Oi;

 

    “Oi Mobile” are to Oi Móvel S.A. – In Judicial Reorganization, an indirect wholly-owned subsidiary of Oi;

 

    “Oi’s Preferred ADSs” are to American Depositary Shares, each representing one preferred share of Oi;

 

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

 

    “PTIF” are to Portugal Telecom International Finance B.V. – In Judicial Reorganization, a direct wholly-owned subsidiary of Oi, which PT Portugal transferred to us in anticipation of our sale of PT Portugal in 2015;

 

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

 

    “Telemar” are to Telemar Norte Leste S.A. – In Judicial Reorganization, a direct wholly-owned subsidiary of Oi; and

 

    “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.

Judicial Reorganization

The following defined terms relate to our global judicial reorganization. For more information, see “Presentation of Financial and Other Information—Financial Restructuring,” and “Item 4. Information on the Company—Our Recent History and Development—Our Judicial Reorganization Proceedings.” Unless otherwise indicated or the context otherwise requires, all references to:

 

    “Ad Hoc Group” are to a diverse ad hoc group of holders of the bonds issued by Oi, Oi Coop and PTIF;

 

    “Bondholder” are each holder of beneficial interests in the bonds issued by Oi, Oi Coop and PTIF;

 

    “Bondholder Credits” are to unsecured a claim held by a creditor pursuant to the RJ Plan evidenced by bonds issued by Oi, Oi Coop and PTIF;

 

    “Brazilian Bankruptcy Law” are to Brazilian Law No. 11,101 of June 9, 2005;

 

    “Brazilian Confirmation Date” are to February 5, 2018, the date in which the Brazilian Confirmation Order was published in the Official Gazette of the State of Rio de Janeiro (Diário Oficial do Estado do Rio de Janeiro);

 

 

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    “Brazilian Confirmation Order” are to the order entered by the RJ Court on January 8, 2018, ratifying and confirming the RJ Plan, but modifying certain provisions of the RJ Plan;

 

    “Capitalization of Credits Capital Increase” are to the capital increase of between R$$11,765,562,892.10 and R$12,292,379,141.00 through the issuance of up to 1,756,054,163 New Shares, paid for by conversion of claims of Qualified Bondholders into New Shares, pursuant to Section 4.3.3.5 of the RJ Plan;

 

    “Cash Capital Increase” are to the cash capital increase of R$4 billion provided for under Section 6 of the RJ Plan;

 

    “Chapter 15 Debtors” are to Oi, Telemar, Oi Coop and Oi Mobile;

 

    “Commitment Agreement” are to that certain commitment agreement, which we negotiated with members of the Ad Hoc Group, the IBC and certain other unaffiliated bondholders as part of the RJ Plan, under which such bondholders agreed to backstop an eventual cash capital increase by our company, which will be commenced following the full implementation of the RJ Plan;

 

    “Default Recovery” are to the general treatment provided for unsecured credits under the RJ Plan. Under the RJ Plan, Bondholders that were not Eligible Bondholders, did not make a valid election of the form of recovery for their Bondholder Credits, or do not participate in the settlement procedures will only be entitled to the Default Recovery with respect to the Bondholder Credits represented by their Bonds.

 

    “Dutch District Court” are to the District Court of Amsterdam;

 

    “Eligible Bondholders” are to every Bondholder that individualized its Bondholder Credits in accordance with the procedures established in the RJ Plan and by the RJ Court;

 

    “GCM” are to a General Creditors’ Meeting of creditors of our company recognized by the RJ Court. A GMC was held on December 19 and 20, 2017 to consider and vote on the RJ Plan;

 

    “IBC” means the International Bondholder Committee, a group of creditors in the Netherlands;

 

    “Judicial Ratification of the RJ Plan” are to the confirmation of the RJ Plan by the RJ Court. As used in this annual report, the date of the Judicial Ratification of the RJ Plan means February 5, 2018 (i.e., the Brazilian Confirmation Date); provided that (1) in the event that any appeal of the Brazilian Confirmation Order is filed and a stay on the effectiveness of the Brazilian Confirmation Order is granted, the Brazilian Confirmation Date shall be deemed to occur the date on which such appeal is resolved; and (2) in the event that any appeal of the Brazilian Confirmation Order results in in an appellate court overturning or modifying the Brazilian Confirmation Order, the Brazilian Confirmation Date shall be deemed to occur on the date on which the eventual appellate court’s decision, or that of a higher court (if further appeals of the appellate court’s decision are made), is published in such court’s official gazette. For more information about the appeals and motions for clarification filed with respect to the Brazilian Confirmation Order, see “Item 4. Information on the Company—Our Recent History and Development—Our Judicial Reorganization Proceedings—Confirmation of Judicial Reorganization Plan by RJ Court;”

 

    “New Notes” are to senior unsecured notes of Oi to be issued in accordance with the terms of Section 4.3.3.3 of the RJ Plan and Exhibit 4.3.3.3(f) thereto, in connection with the Capitalization of Credits Capital Increase;

 

    “New Shares” are to newly issued common shares of Oi, which are expected to be issued in the form of ADSs, in connection with the Capitalization of Credits Capital Increase;

 

    “Non-Qualified Bondholders” are to Eligible Bondholders with Bondholder Credits equal to or less than USD $750,000.00 (or the equivalent in other currencies);

 

    “Non-Qualified Credit Agreement” are to a credit agreement to be entered into between the RJ Debtors and an administrative agent, in accordance with the terms of Section 4.3.3.1 of the RJ Plan and Exhibit 4.3.3.1(f) thereto;

 

    “Non-Qualified Recovery” are to the entitlement of certain Non-Qualified Bondholders to elect to have their Bondholder Credits Satisfied through the distribution to such Non-Qualified Bondholders of a participation interest in the Non-Qualified Credit Agreement;

 

    “Non-Qualified Recovery Settlement Procedure” are to the procedure to settle the Non-Qualified Recovery to which Non-Qualified Bondholders that have made valid recovery elections pursuant to the RJ Plan are entitled;

 

    “Oi Coop Composition Plan” are to the composition plan for Oi Coop providing for the restructuring of the claims against Oi Coop in the Netherlands in substantially the same terms and conditions as the RJ Plan;

 

    “PTIF Composition Plan” are to the composition plan for PTIF providing for the restructuring of the claims against PTIF in the Netherlands in substantially the same terms and conditions as the RJ Plan;

 

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    “PTIF Shares” are to common shares of Oi currently held by PTIF, which may be issued in the form of ADRs;

 

    “Qualified Bondholders” are to Eligible Bondholders with Bondholder Credits greater than US$750,000.00 (or the equivalent in other currencies);

 

    “Qualified Recovery” are to the entitlement of certain Qualified Bondholders to elect to have their Bondholder Credits satisfied through the distribution to such Qualified Bondholders of a combination of New Notes, New Shares, PTIF Shares and Warrants in amounts determined based on the Bondholder Credits evidenced by the Bonds of each series held by a Bondholder, in accordance with Section 4.3.3.2 of the RJ Plan;

 

    “Qualified Recovery Settlement Procedure” are to the procedure to settle the Qualified Recovery to which Qualified Bondholders that have made valid recovery elections pursuant to the RJ Plan are entitled;

 

    “RJ Court” are to the 7th Commercial Court of the Judicial District of the State Capital of Rio de Janeiro. The RJ Court is adjudicating the judicial reorganization proceedings in Brazil involving the RJ Debtors.

 

    “RJ Debtors” are to Oi, Telemar, Oi Mobile, Oi Coop, PTIF, Copart 4 and Copart 5;

 

    “RJ Plan” are to the judicial reorganization plan, as amended, of the RJ Debtors that was filed with the RJ Court and, on December 20, 2017, approved by a significant majority of creditors of each class present at the GCM held on December 19 and 20, 2017;

 

    “RJ Proceedings” are to the Brazilian proceedings for judicial reorganization (recuperação judicial) involving the RJ Debtors that are being adjudicated by the RJ Court, pursuant to a joint voluntary petition for judicial reorganization pursuant to the Brazilian Bankruptcy Law filed by the RJ Debtors with the RJ Court initially on June 20, 2016. On June 29, 2016, the RJ Court granted the processing of the RJ Proceedings of the RJ Debtors;

 

    “U.K. Recognition Orders” are to the orders granted by the High Court of Justice of England and Wales on Jun 23, 2016 recognizing the RJ Proceedings as a foreign main proceedings under the Cross-Border Insolvency Regulations 2006, which implements the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross-Border Insolvency in Great Britain, in relation to Oi, Telemar and Oi Mobile;

 

    “U.S. Bankruptcy Court” are to the United States Bankruptcy Court for the Southern District of New York;

 

    “U.S. Recognition Order” are to the order granted by the U.S. Bankruptcy Court on July 22, 2016 recognizing the RJ Proceedings as the foreign main proceedings in respect of each of the Chapter 15 Debtors; and

 

    “Warrants” are to warrants (bonus de subscrição) to acquire newly issued common shares of Oi, which Warrants may distributed in the form of American Depository Warrants, as further described in Section 4.3.3.6 of the RJ Plan.

Disposition of PT Portugal

On December 9, 2014, we entered into a share purchase agreement, or the PTP Share Purchase Agreement, with Altice Portugal S.A., or Altice Portugal, and Altice S.A. pursuant to which we agreed to sell 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. We refer to this transaction as the PT Portugal Disposition. The PT Portugal Disposition closed on June 2, 2015.

In connection with the closing of the PT Portugal Disposition, Altice Portugal disbursed €5,789 million, of which €869 million was used by PT Portugal to prepay outstanding indebtedness, and €4,920 million was paid to our company in cash. We used a portion of the net cash proceeds of the PT Portugal Disposition for the prepayment and repayment at maturity of indebtedness of our company.

In anticipation of the PT Portugal Disposition, PT Portugal transferred PTIF, its wholly-owned finance subsidiary, to us. As a result of this transfer, 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.

 

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In addition, PT Portugal transferred to us all of the outstanding share capital of CVTEL B.V. and Carrigans Finance S.à r.l, as well as of PT Participações, SGPS, S.A., or PT Participações, which currently holds:

 

    our 86% interest in Africatel Holding B.V., or Africatel, which holds our interests in telecommunications companies in Africa, including telecommunications companies in Angola, Cape Verde 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 in Asia.

Financial Restructuring

On March 9, 2016, following the notification of our company on February 25, 2016 that LetterOne Technology (UK) LLP, or LetterOne, that it could not proceed with a potential transaction in which LetterOne would make a capital contribution of up to US$4.0 billion in our company, contingent on the completion of a potential business combination with TIM Participações S.A., or TIM, we retained PJT Partners as our financial advisor to assist us in evaluating financial and strategic alternatives to optimize our liquidity and debt profile.

Although we engaged in negotiations with a the Ad Hoc Group seeking mutual agreement as to the consensual restructuring of the indebtedness of our company, after considering the challenges of our economic and financial situation in connection with the maturity schedule of our financial debts, the threats to our assets represented by imminent attachments or freezings in judicial lawsuits and the urgent need to adopt measures that protect our company, we concluded that filing for judicial reorganization (recuperação judicial) in Brazil would be the most appropriate course of action.

On June 20, 2016, Oi, together with the other RJ Debtors, filed a joint voluntary petition for judicial reorganization pursuant to the Brazilian Bankruptcy Law with the RJ Court, pursuant to an urgent measure approved by our board of directors.

The filing of the petition that commenced the RJ Proceedings was a step towards our financial restructuring. During the RJ Proceedings we have, and expect to continue (1) to work to secure new customers while maintaining our service and product sales to all market segments, in all of our distribution and customer service channels, (2) to perform installation, maintenance and repair activities on a timely basis, (3) to use our workforce as usual, including to perform sales, operating and administrative activities, and (4) to focus on our investments in structuring projects aimed at promoting the improvement of service quality and continuing to bring technologic advances, high service standards, and innovation to our customers. On June 29, 2016, the RJ Court granted the processing of the RJ Proceedings of the RJ Debtors.

On December 19 and 20, 2017, the GCM was held to consider approval of the most recently filed judicial reorganization plan. The GCM concluded on December 20, 2017 following the approval of the RJ Plan reflecting amendments to the judicial reorganization plan presented at the GCM as negotiated during the course of the GCM.

On January 8, 2018, the RJ Court entered the Brazilian Confirmation Order, ratifying and confirming the RJ Plan, according to its terms, but modifying certain provisions of the RJ Plan. The Brazilian Confirmation Order was published in the Official Gazette of the State of Rio de Janeiro on February 5, 2018, the Brazilian Confirmation Date.

The Brazilian Confirmation Order, according to its terms, is binding on all parties as long as its effects are not stayed. By operation of the RJ Plan and the Brazilian Confirmation Order (provided that no stay or appeal of the Brazilian Confirmation Order results in a change of the Brazilian Confirmation Date), the unsecured claims against the RJ Debtors have been novated and discharged under Brazilian law and holders of such claims are entitled only to receive the recoveries set forth in the RJ Plan in exchange for their claims in accordance with the terms and conditions of the RJ Plan.

In the context of the RJ Proceedings, certain balances of consolidated assets and liabilities increased as a result of the inclusion of the RJ Debtors in RJ Proceedings and the resulting suspension of the payment of certain assumed liabilities. The main balances of consolidated assets and liabilities affected were cash, cash equivalents, cash investments, receivables from reciprocal services provided to telecom carriers, trade payables, and borrowings and financing.

We are in the process of implementing the RJ Plan. For more information regarding the RJ Proceedings, see “Item 4. Information on the Company—Our Recent History and Development—Our Judicial Reorganization Proceedings.” For more information regarding the financial terms of the RJ Plan, see “Item 5. Operating and Financial Review and Prospects—Liability Subject to Compromise.”

 

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Share Splits

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

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

Market Share and Other Information

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

Rounding

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

 

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CAUTIONARY STATEMENT WITH RESPECT TO FORWARD-LOOKING STATEMENTS

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

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

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

 

    our failure to implement the RJ Plan, including the Capitalization of Credits Capital Increase and the New Funds Capital Increase, and continue as a going concern;

 

    a stay of the effects of the Brazilian Confirmation Order;

 

    our failure to obtain an order from the U.S. Bankruptcy Court giving full force and effect to the RJ Plan and the Brazilian Confirmation Order;

 

    failure by the creditors of PTIF and Oi Coop to approve the PTIF Composition Plan and the Oi Coop Composition Plan, respectively;

 

    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, notably with respect to inflation, exchange rate fluctuation of the real, interest rates fluctuation and the political environment in Brazil;

 

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

 

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

 

    the disposal of our international investments; and

 

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

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

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

 

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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, 2017 and 2016 and for the years ended December 31, 2017, 2016 and 2015 have been derived from our audited consolidated financial statements included in this annual report. The selected financial data as of December 31, 2015, 2014 and 2013 and for the years ended December 31, 2014 and 2013 have been derived from our consolidated financial statements that are not included in this annual report.

The RJ Proceedings prompted us to perform a detailed analysis on the completeness and the accuracy of the judicial deposits and accounting balances of the other assets of the RJ Debtors. As a result, we identified weaknesses in some of our operational and financial reporting controls and procedures. For more information with respect to the identified material weaknesses in Oi’s internal control over financial reporting and the steps that Oi has undertaken to remediate these material weaknesses, see “Item 15. Controls and Procedures.”

Additionally, we determined the need to restate previously issued financial statements and related disclosures to correct errors. Accordingly, we are restating our consolidated financial statements for the year ended December 31, 2015. Restatement adjustments attributable to fiscal year 2014 and previous fiscal years are reflected as a net adjustment to retained earnings as of January 1, 2015.

The errors detected and corrected in our financial statements related to our judicial deposits, our provisions for contingencies, intragroup balances, tax credits and estimates of revenue from services rendered and not yet billed to customers, as described in “Item 5. Operating and Financial Review and Prospects—Financial Presentation and Accounting Policies—Restatement” and note 2 to our consolidated financial statements included in this annual report.

In connection with the presentation of financial information as of December 31, 2015, 2014 and 2013 and for the years ended December 31, 2014 and 2013, Oi has restated the financial statements related to those dates and periods to correct the errors included in these previously issued financial statements.

We have included information with respect to the dividends and/or interest attributable to shareholders’ equity paid to holders of Oi’s common shares and preferred shares since January 1, 2013 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.”

 

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     For the Year Ended December 31,  
     2017(1)     2017     2016     2015(2)     2014(2)     2013(2)  
                       (restated)     (restated)     (restated)  
     (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$ 7,192     R$ 23,790     R$ 25,996     R$ 27,354     R$ 28,247     R$ 28,422  

Cost of sales and services

     (4,739     (15,676     (16,742     (16,250     (16,257     (16,467
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     2,453       8,114       9,254       11,104       11,990       11,955  

Selling expenses

     (1,330     (4,400     (4,383     (4,720     (5,566     (5,532

General and administrative expenses

     (926     (3,064     (3,688     (3,912     (3,835     (3,683

Other operating income (expenses), net

     (316     (1,044     (1,237     (2,295     1,758       735  

Reorganization items, net

     (717     (2,372     (9,006     —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (836     (2,766     (9,060     178       4,347       3,475  

Financial expenses, net

     (487     (1,612     (4,375     (6,724     (4,688     (3,429
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) of continuing operations before taxes

     (1,323     (4,378     (13,435     (6,546     (342     46  

Income tax and social contribution

     106       351       (2,245     (3,380     (758     (77
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) of continuing operations

     (1,217     (4,027     (15,680     (9,926     (1,100     (31

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

     —         —         —         (867     (4,086     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (1,217     (4,027     (15,680     (10,793     (5,186     (31

Other comprehensive income (loss)

     (93     (307     (687     (647     (14     34  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   US$ (1,310   R$ (4,334   R$ (16,367   R$ (11,440   R$ (5,200   R$ 3  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
            

Net income (loss) attributable to controlling shareholders

     (1,129     (3,736     (15,502     (10,380     (5,187     (31

Net income (loss) attributable to non-controlling shareholders

     (88     (291     (178     (413     1       —    

Net income (loss) applicable to each class of shares (3):

            

Common shares basic and diluted

     (869     (2,874     (11,925     (4,473     (1,702     (10

Preferred shares and ADSs basic and diluted

     (261     (862     (3,577     (5,907     (3,485     (21

Net income (loss) per share:

            

Common shares – basic and diluted

     (1.67     (5.53     (22.94     (14.22     (8.41     (0.19

Common ADSs – basic and diluted

     (8.36     (27.65     (114.72     (71.11     (42.06     (0.97

Preferred shares and ADSs – basic and diluted

     (1.67     (5.53     (22.94     (14.22     (8.41     (0.19

Net income (loss) per share from continuing operations:

            

Common shares – basic and diluted

     (1.67     (5.53     (22.94     (14.22     (8.41     (0.19

Common ADSs – basic and diluted

     (8.36     (27.65     (114.72     (71.11     (42.06     (0.97

Preferred shares and ADSs – basic and diluted

     (1.67     (5.53     (22.94     (14.22     (8.41     (0.19

Net income (loss) per share from discontinued operations:

            

Common shares – basic and diluted

     —         —         —         (1.19     (6.63     —    

Common ADSs – basic and diluted

     —         —         —         (5.94     (33.14     —    

Preferred shares and ADSs – basic and diluted

     —         —         —         (1.19     (6.63     —    

Weighted average shares outstanding (in thousands):

            

Common shares – basic

       519,752       519,752       314,518       202,312       51,476  

Common shares – diluted

       519,752       519,752       314,518       202,312       51,476  

Preferred shares and ADSs – basic

       155,915       155,915       415,321       414,200       112,527  

Preferred shares and ADSs – diluted

       155,915       155,915       415,321       414,200       112,527  

 

(1) Translated for convenience only using the selling rate as reported by the Brazilian Central Bank on December 31, 2017 for reais into U.S. dollars of R$3.3080=US$1.00.
(2) Derived from our restated consolidated statements of operations for the years ended December 31, 2015, 2014 and 2013, which have been restated to correct certain errors to our previously issued financial statements and related disclosures. For more information, see “Item 5. Operating and Financial Review and Prospects—Financial Presentation and Accounting Policies—Restatement” and note 2 to our audited consolidated financial statements included in this annual report.
(3) In accordance with ASC 260, basic and diluted earnings per share have been calculated using the “two class method.” See note 21(g) to our audited consolidated financial statements included in this annual report.

 

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     As of December 31,  
     2017(1)     2017     2016     2015(2)      2014(2)      2013(2)  
                       (restated)      (restated)      (restated)  
     (in millions
of US$)
    (in millions of reais)  

Balance Sheet Data:

              

Cash and cash equivalents

   US$ 2,075     R$ 6,863     R$ 7,563     R$ 14,898      R$ 2,449      R$ 2,425  

Short-term investments

     6       21       117       1,802        171        493  

Trade accounts receivable, less allowance for doubtful accounts

     2,227       7,367       7,891       8,010        7,092        6,750  

Assets held for sale

     1,413       4,675       5,404       7,686        34,255        —    

Total current assets

     7,103       23,498       26,212       37,645        50,797        17,554  

Property, plant and equipment, net

     8,187       27,083       26,080       25,818        26,244        25,725  

Non-current judicial deposits

     2,506       8,290       8,388       8,953        9,127        8,167  

Intangible assets, net

     2,798       9,255       10,511       11,780        13,554        14,666  

Total assets

     21,459       70,987       74,047       94,545        106,999        75,244  

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

     16       54       55       11,810        4,464        4,159  

Trade payables

     1,563       5,171       4,116       5,253        4,359        4,763  

Liabilities of assets held for sale (3)

     107       354       545       745        27,178        —    

Total current liabilities

     2,972       9,831       9,444       26,142        42,752        15,700  

Long-term loans and financings

     —         —         —         48,048        31,386        31,695  

Liabilities subject to compromise

     19,691       65,139       63,746       —          —          —    

Total liabilities

     24,387       80,671       79,396       83,528        84,253        59,233  

Share capital

     6,481       21,438       21,438       21,438        21,438        7,471  

Shareholders’ equity

     (2,927     (9,684     (5,349     11,017        22,746        16,011  

 

(1) Translated for convenience only using the selling rate as reported by the Brazilian Central Bank on December 31, 2017 for reais into U.S. dollars of R$3.3080=US$1.00.
(2) Derived from our restated consolidated balance sheets as of December 31, 2015, 2014 and 2013, which have been restated to correct certain errors to our previously issued financial statements and related disclosures. For more information, see “Item 5: Operating and Financial Review and Prospects—Financial Presentation and Accounting Policies—Restatement” and note 2 to our audited consolidated financial statements included in this annual report.
(3) 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.

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.”

 

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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
 

2013

   R$ 2.446      R$ 1.953      R$ 2.161      R$ 2.343  

2014

     2.740        2.197        2.354        2.656  

2015

     4.195        2.575        3.339        3.905  

2016

     4.156        3.119        3.483        3.259  

2017

     3.381        3.051        3.193        3.308  

 

     Reais per
U.S. Dollar
 

Month

   High      Low  

November 2017

     3.292        3.214  

December 2017

     3.333        3.232  

January 2018

     3.270        3.139  

February 2018

     3.282        3.173  

March 2018

     3.338        3.225  

April 2018

     3.504        3.310  

May 2018 (1)

     3.594        3.531  

 

(1) Through May 10, 2018.
Source: Brazilian Central Bank

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.

Risks Relating to Our Financial Restructuring

If we fail to comply with certain conditions subsequent set forth in the RJ Plan, the RJ Plan may terminate and we may be declared bankrupt under Brazilian law and liquidated.

On June 20, 2016, Oi, together with the other RJ Debtors, filed a joint voluntary petition for judicial reorganization pursuant to the Brazilian Bankruptcy Law with the RJ Court, pursuant to an urgent measure approved by our board of directors. On December 19 and 20, 2017, the GCM was held to consider approval of the most recently filed judicial reorganization plan. The GCM concluded on December 20, 2017 following the approval of the RJ Plan reflecting amendments to the judicial reorganization plan presented at the GCM as negotiated during the course of the GCM. On January 8, 2018, the RJ Court entered the Brazilian Confirmation Order, ratifying and confirming the RJ Plan, according to its terms, but modifying certain provisions of the RJ Plan. The Brazilian Confirmation Order was published in the Official Gazette of the State of Rio de Janeiro on February 5, 2018, the Brazilian Confirmation Date. For more information with respect to the RJ Proceedings, see “Item 4. Information on the Company—Our Recent History and Development—Our Judicial Reorganization Proceedings.”

 

 

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The Brazilian Confirmation Order, according to its terms, is binding on all parties as long as its effects are not stayed. By operation of the RJ Plan and the Brazilian Confirmation Order (provided that no stay or appeal of the Brazilian Confirmation Order results in a change of the Brazilian Confirmation Date), the unsecured claims against the RJ Debtors have been novated and discharged under Brazilian law and holders of such claims are entitled only to receive the recoveries set forth in the RJ Plan in exchange for their claims in accordance with the terms and conditions of the RJ Plan. As of the date of this annual report, there is no pending stay of the Brazilian Confirmation Order, and there are several appeals of the Brazilian Confirmation Order pending (see “Item 4. Information on the Company—Our Recent History and Development—Our Judicial Reorganization Proceedings— Confirmation of Judicial Reorganization Plan by RJ Court”). We do not believe that the outcome of any of these pending appeals will result in a change of the Brazilian Confirmation Date. For more information with respect to the recoveries available with respect to claims against the RJ Debtors provided for in the RJ Plan, see “Item 5. Operating and Financial Review and Prospects—Liabilities Subject to Compromise.”

Under the terms of the RJ Plan, in the event that (1) the Qualified Recovery Settlement Procedure, including the issuance of new common shares as part of the recovery of Eligible Bondholders, does not occur on or prior to July 31, 2018, (2) or the Cash Capital Increase does not occur on or prior to February 28, 2019, the RJ Plan will automatically terminate and the rights and guarantees of the creditors appearing on the Second Creditors List will be restored under the original terms as if the RJ Plan had never been approved, unless creditors appearing on the Second Creditors List agree by a simple majority vote of the amount of claims present or represented at a meeting of creditors called for that purpose to the total or partial waiver or modification of the conditions described above. If the RJ Plan is terminated, creditors appearing on the Second Creditors List will be entitled to (1) approve a modification to the RJ Plan at a meeting of creditors complying with the quorum requirements established in the Brazilian Bankruptcy Law, or (2) seek to have the RJ Debtors adjudicated as bankrupt by the RJ Court.

We cannot assure you that the settlement of the Qualified Recovery will occur on or prior to July 31, 2018, that the Cash Capital Increase will occur on or prior to February 28, 2019, or that our creditors will agree to a waiver of these conditions in the event that these transactions do not occur on a timely basis. As a result, the RJ Plan may automatically terminate. In the event that the RJ Plan terminates, we cannot predict (1) whether our creditors will be able to agree on a modification to the RJ Plan that will garner sufficient support to be approved by our creditors and confirmed by the RJ Court, (2) what modifications of the RJ Plan could be adopted and the impact of these modifications on our company, or (3) whether our creditors would seek to have the RJ Debtors adjudicated as bankrupt by the RJ Court, which under Brazilian law is generally followed by a liquidation of the debtors. The termination of the RJ Plan and the occurrence of any of these events subsequent to such termination is likely to have a material adverse effect on our business, financial condition, results of operations and ability to continue as a going concern.

 

 

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If the U.S. Bankruptcy Court does not grant an Order giving full force and effect to the RJ Plan and the Brazilian Confirmation Order, we may be unable to complete the Qualified Recovery Settlement Procedure and the Non-Qualified Recovery Settlement Procedure, which could result in the termination of the RJ Plan.

Among the claims appearing on the Second Creditors List are claims governed by the laws of New York and other jurisdictions within the United States, including obligations under six series of bonds in the aggregate principal amount of R$16,926 million. By operation of the RJ Plan and the Brazilian Confirmation Order (provided that no stay or appeal of the Brazilian Confirmation Order results in a change of the Brazilian Confirmation Date), the claims with respect to these bonds have been novated and discharged under Brazilian law and the holders of these bonds are entitled only to receive the recovery set forth in the RJ Plan in exchange for the claims represented by these bonds in accordance with the terms and conditions of the RJ Plan. However, under New York law, the RJ Plan and the Brazilian Confirmation Order are ineffective by their terms to novate these bonds and extinguish the obligations represented by these bonds.

In connection with the commencement of the RJ Proceedings, on June 21, 2016, the Chapter 15 Debtors, including the issuers and guarantors of our bonds that are governed under New York law, sought relief under Chapter 15 of the United States Bankruptcy Code. On July 22, 2016, the U.S. Bankruptcy Court granted the U.S. Recognition Order, as a result of which a stay was automatically applied, preventing (1) the filing, in the United States, of any actions against the Chapter 15 Debtors or their properties located within the territorial jurisdiction of the United States, and (2) parties from terminating their existing U.S. contracts with the Chapter 15 Debtors. For more information with respect to the Chapter 15 Proceedings, see “Item 4. Information on the Company—Our Recent History and Development—Recognition Proceedings in the United States.”

On April 17, 2018, the foreign representative for the Chapter 15 Debtors filed a motion with the U.S. Bankruptcy Court seeking an order of that court granting, among other things, full force and effect to the RJ Plan and the Brazilian Confirmation Order in the United States. The deadline for objections to the proposed order set by the U.S. Bankruptcy Court was May 11, 2018. As of that date, Pharol, Bratel B.V. and Bratel S.à r.l. filed an objection to that motion in which they argued that the motion should be denied without prejudice or deferred consideration until after certain appellate proceedings, arbitration and mediation have been concluded in Brazil. Additionally, The Bank of New York Mellon filed a limited objection requesting to revise certain portions of the proposed order, but did not object to the motion itself. The U.S. Bankruptcy Court has scheduled a hearing on the objections to the proposed order on May 29, 2018. If the U.S. Bankruptcy Court grants the requested order, the claims with respect to our bonds issued under indentures governed by New York law will be novated and discharged under New York law and the holders of these bonds will be entitled only to receive the recovery set forth in the RJ Plan in exchange for the claims represented by these bonds.

We are constrained from implementing the Qualified Recovery Settlement Procedure and the Non-Qualified Recovery Settlement Procedure prior to the date on which the U.S. Bankruptcy Court grants the requested order because, although we would be able to cancel the bonds surrendered by holders that had made valid recovery elections and are entitled to receive the Qualified Recovery and the Non-Qualified Recovery, we would be unable to cancel the remaining bonds issued under our indentures governed by New York law and holders of these bonds could take action in the United States to recover the full principal amount of these bonds. Should holders take such actions successfully, we are unlikely to be able to fund the payment of such judgments, which would have a material adverse effect on our business, financial condition, results of operations and ability to continue as a going concern.

If the U.S. Bankruptcy Court does not grant the requested order or if the order is granted, but there is not sufficient time for us to complete the Qualified Recovery Settlement Procedure prior to July 31, 2018, the RJ Plan may terminate. The termination of the RJ Plan and the occurrence of events subsequent to such termination is likely to have a material adverse effect on our business, financial condition, results of operations and ability to continue as a going concern.

If we fail to meet the conditions set forth in the RJ Plan for the issuance of new common shares as part of the Qualified Recovery, and these conditions are not waived, we may be unable to complete the Qualified Recovery Settlement Procedure, which could result in the termination of the RJ Plan.

The terms of the RJ Plan require that we satisfy certain conditions precedent prior to issuing new common shares as part of the Qualified Recovery Settlement Procedure, including the requirements that (1) the claims of ANATEL are novated and restructured under the RJ Plan, (2) ANATEL has not submitted new answers or appeals in court nor insisted on answers or appeals in court existing on the date of the approval of the RJ Plan in relation to the RJ Plan, including the novation and/or restructuring of its claims, and (3) ANATEL has granted all regulatory necessary authorizations for the implementation of the issuance of new common shares as part of the Qualified Recovery Settlement Procedure. The RJ Plan provides that if these conditions are not satisfied, they may be waived by a majority of the claims of Qualified Bondholders present at a meeting called for that purpose.

 

 

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We cannot assure you that each of the conditions to the issuance of new common shares as part of the Qualified Recovery Settlement Procedure will be satisfied or waived with sufficient time for us to complete the Qualified Recovery Settlement Procedure prior to July 31, 2018, or at all. In the event that these conditions are not satisfied or waived in a timely manner and we are unable to complete the Qualified Recovery Settlement Procedure prior to July 31, 2018, the RJ Plan may terminate. The termination of the RJ Plan and the occurrence of events subsequent to such termination is likely to have a material adverse effect on our business, financial condition, results of operations and ability to continue as a going concern.

If the creditors of PTIF do not vote to approve the PTIF Composition Plan, we expect that PTIF will be liquidated, which could have a material adverse effect on our financial condition and liquidity.

Although the RJ Proceedings have been recognized in the United States, England and Wales and Portugal, the laws of The Netherlands do not provide for the recognition of the RJ Proceedings. PTIF is organized under the laws of The Netherlands. On April 19, 2017, a pending suspension of payments proceeding in respect of PTIF was converted into a Dutch bankruptcy proceeding. For more information with respect to PTIF’s Dutch bankruptcy proceeding, see “Item 4. Information on the Company—Our Recent History and Development—Our Judicial Reorganization Proceedings—Restructuring of Dutch Finance Subsidiaries.”

On April 10, 2018, PTIF deposited a draft of the PTIF Composition Plan with the Dutch Court. The PTIF Composition Plan provides for the restructuring of the claims against PTIF on substantially the same terms and conditions as the RJ Plan. On April 10, 2018, Oi launched an English law consent solicitation to the holders of the seven series of bonds issued by PTIF seeking their votes to approve extraordinary resolutions: (a) releasing of Oi’s guarantee of the relevant series of bonds, (b) authorizing and instructing the trustee of the PTIF bonds to submit a claim on behalf of all the outstanding PTIF bonds and vote in favor of the PTIF Composition Plan on behalf of the PTIF bondholders and (c) authorizing the trustee of the PTIF bonds to request the PTIF Bankruptcy Trustee vote in favor of the Oi Coop Composition Plan in respect of its vote in respect of the PTIF intercompany claim owed by Oi Coop to PTIF.

Under the documents governing the bonds issued by PTIF, these actions may be taken at a meeting of holders of each series of bonds at which at least two-thirds of the principal amount of the applicable bonds are represented in person or by proxy. In the event that quorum is not obtained at any such initial meeting, these actions may be taken at an adjourned meeting of holders of the applicable series of bonds at which at least one-third of the principal amount of the applicable bonds are represented in person or by proxy. In either case, the proposed extraordinary resolutions may be passed by the vote of not less than 75% of the principal amount of the applicable bonds represented in the meeting.

The voting deadline in relation to this consent solicitation was April 27, 2018 for one of these series of bonds and April 30, 2018 for the other six series of bonds. Bondholder meetings of each of these series of bonds were held on May 2, 2018, however, quorum was not achieved for any of these series of bonds. As a result, on May 3, 2018, Oi published notices to convene adjourned meetings of each of these series of bonds on May 17, 2018 and establishing a new voting deadline of May 14, 2018. Based on the votes received as of the second voting deadline, we believe that each of the extraordinary resolutions will be passed and that each of these series of bands will vote to approve the PTIF Composition Plan.

A meeting of the creditors of PTIF has been scheduled for June 1, 2018 in the Netherlands in respect of the PTIF Composition Plan at which the creditors of PTIF will consider the PTIF Composition Plan and vote whether to approve it. If the extraordinary resolutions have been passed by each series of the bonds, the trustee of the bonds will vote on behalf of the PTIF bonds at the creditors meeting. The PTIF Composition Plan will be approved if a majority in number and value of its creditors vote in its favor. We expect that the creditors of PTIF will approve the PTIF Composition Plan, however we cannot assure you that procedural matters will not be raised at this meeting of creditors that will result in the failure of the creditors to approve the PTIF Composition Plan.

If the PTIF Composition Plan is approved at the meeting of the creditors of PTIF, the Dutch Court will schedule a hearing on or prior to June 15, 2018 to rule on the homologation of the PTIF Composition Plan. Although we expect that the Dutch Court will homologate the PTIF Composition Plan at that hearing, we cannot assure you that procedural matters will not be raised at this hearing that will result in the failure of the Dutch Court to homologate the PTIF Composition Plan. If the PTIF Composition Plan is homologated, the PTIF Composition Plan will be given full force and effect and recognized in the European Union under the European Insolvency Regulation 2015/848, including in England and Wales.

In the event that the PTIF Composition Plan is not approved at the meeting of the creditors of PTIF or the Dutch Court fails to homologate the PTIF Composition Plan, we expect that the Dutch Court will order the liquidation of PTIF. In the event of the liquidation of PTIF, we expect that the PTIF Bankruptcy Trustee will seek to collect on PTIF’s assets, a substantial portion of which consists of intercompany loans made to Oi Coop that have been discharged under the RJ Plan, and distribute the proceeds to the creditors of PTIF.

 

 

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In the event that the extraordinary resolutions are not passed by each series of PTIF bonds, the guarantee granted by Oi in respect of the PTIF bonds will remain in place. If the indebtedness of PTIF is not discharged under the PTIF Composition Plan, holders of bonds issued by PTIF that are eligible to participate in the Qualified Recovery Settlement Procedure and the Non-Qualified Recovery Settlement Procedure may not surrender these bonds and such holders, together with other holders of these bonds that are not eligible to participate in the Qualified Recovery Settlement Procedure or the Non-Qualified Recovery Settlement Procedure, may seek to enforce Oi’s guarantee, which would have a material adverse effect on our financial condition, results of operations and ability to continue as a going concern.

If the creditors of Oi Coop do not vote to approve the Oi Coop Composition Plan, we expect that Oi Coop will be liquidated, which could have a material adverse effect on our financial condition and liquidity.

Although the RJ Proceedings have been recognized in the United States, England and Wales and Portugal, the laws of The Netherlands do not provide for the recognition of the RJ Proceedings. Oi Coop is organized under the laws of The Netherlands. On April 19, 2017, a pending suspension of payments proceeding in respect of Oi Coop was converted into a Dutch bankruptcy proceeding. For more information with respect to Oi Coop’s Dutch bankruptcy proceeding, see “Item 4. Information on the Company—Our Recent History and Development—Our Judicial Reorganization Proceedings—Restructuring of Dutch Finance Subsidiaries.”

On April 10, 2018, Oi Coop deposited a draft of the Oi Coop Composition Plan with the Dutch Court. The Oi Coop Composition Plan provides for the restructuring of the claims against Oi Coop on substantially the same terms and conditions as the RJ Plan. On April 10, 2018, Oi Coop issued an information memorandum to the holders of the two series of bonds issued by Oi Coop in relation to the Oi Coop Composition Plan. The voting deadline in relation to the information memorandum was May 15, 2018. As of the voting deadline, the tabulation is in the process of being finalized.

A meeting of the creditors of Oi Coop has been scheduled for June 1, 2018 in the Netherlands at which the creditors of Oi Coop will consider the Oi Coop Composition Plan and vote whether to approve it. The votes submitted by holders of the Oi Coop bonds pursuant to the information memorandum shall be applied in this vote and it is expected the PTIF Bankruptcy Trustee will also vote in favor of the Oi Coop Composition Plan in relation to an intercompany loan made by PTIF to Oi Coop. The Oi Coop Composition Plan will be approved if a majority in number and value of its creditors vote in its favor. Based on the preliminary results of the voting solicitation and if the PTIF Bankruptcy Trustee votes in favor of the Oi Coop composition, we expect Oi Coop Composition Plan will be approved, however we cannot assure you that procedural matters will not be raised at this meeting of creditors that will result in the failure of the creditors to approve the Oi Coop Composition Plan. If the extraordinary resolutions of the PTIF bonds are not passed by all series of PTIF bonds, we cannot assure you as to how the PTIF Bankruptcy Trustee will vote the claim represented by an intercompany loan made by PTIF to Oi Coop, and if the PTIF Bankruptcy Trustee vote this claim against approval of the Oi Coop Composition Plan, we expect the Oi Coop Composition Plan will not be approved.

If the Oi Coop Composition Plan is approved at the meeting of the creditors of Oi Coop, the Dutch Court will schedule a hearing on or prior to June 15, 2018 to rule on the homologation of the Oi Coop Composition Plan. Although we expect that the Dutch Court will homologate the Oi Coop Composition Plan at that hearing, we cannot assure you that procedural matters will not be raised at this hearing that will result in the failure of the Dutch Court to homologate the Oi Coop Composition Plan.

In the event that the Oi Coop Composition Plan is not approved at the meeting of the creditors of Oi Coop or the Dutch Court fails to homologate the Oi Coop Composition Plan, we expect that the Dutch Court will order the liquidation of Oi Coop. In the event of the liquidation of Oi Coop, we expect that the Oi Coop Bankruptcy Trustee will seek to collect on Oi Coop’s assets, a substantial portion of which consists of intercompany loans made to Oi Mobile that have been discharged under the RJ Plan, and distribute the proceeds to the creditors of Oi Coop.

The bonds issued by Oi Coop are guaranteed by Oi. If the indebtedness of Oi Coop is not discharged under the Oi Coop Composition Plan and the U.S. Bankruptcy Court does not grant the order requesting that full force and effect be given to the RJ Plan and the Brazilian Confirmation Order in the United States, holders of bonds issued by Oi Coop that are eligible to participate in the Qualified Recovery Settlement Procedure and the Non-Qualified Recovery Settlement Procedure may not surrender these bonds and such holders, together with other holders of these bonds that are not eligible to participate in the Qualified Recovery Settlement Procedure or the Non-Qualified Recovery Settlement Procedure, may seek to enforce Oi’s guarantee, which would have a material adverse effect on our financial condition, results of operations and ability to continue as a going concern.

 

 

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If the indebtedness of Oi Coop is not discharged under the Oi Coop Composition Plan and the U.S. Bankruptcy Court grants the order requesting that full force and effect be given to the RJ Plan and the Brazilian Confirmation Order in the United States, holders of bonds issued by Oi Coop that are eligible to participate in the Qualified Recovery Settlement Procedure and the Non-Qualified Recovery Settlement Procedure may not surrender these bonds and such holders, together with other holders of these bonds that are not eligible to participate in the Qualified Recovery Settlement Procedure or the Non-Qualified Recovery Settlement Procedure, may seek to enforce Oi’s guarantee in The Netherlands, notwithstanding any discharge of this guarantee under New York law as a result of an order of the U.S. Bankruptcy Court. We cannot assure you regarding the results of any such action, or the effect of demands on our management’s time in defending any such action on management’s ability to devote its attention to our business, either of which could result in a material adverse effect on our business and results of operations.

Following the implementation of the RJ Plan, our debt instruments will contain covenants that could restrict our financing and operating flexibility and have other adverse consequences.

As of December 31, 2017, we had loans and financings of R$49,130 million classified as liabilities subject to compromise. Following the implementation of the RJ Plan, the outstanding amount of our loans and financings will be substantially reduced, however we will be subject to certain financial covenants under the instruments that govern our indebtedness that limit our ability to incur additional debt. The level of our consolidated indebtedness and the requirements and limitations imposed by these debt instruments could adversely affect our financial condition or results of operations. In particular, the terms of some of these debt instruments restrict our ability, and the ability of our subsidiaries, to:

 

    incur additional debt;

 

    grant liens;

 

    pledge assets;

 

    sell or dispose of assets; and

 

    make certain acquisitions, mergers and consolidations.

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.

Under the RJ Plan, until the fifth anniversary of the Brazilian Confirmation Date, we are required to apply an amount equivalent to 100% of the net revenue from our sale of assets in excess of US$200 million to investments in our activities. Beginning on the sixth anniversary of the Brazilian Confirmation Date, we are required to allocate to the repayment of debt instruments representing recoveries under the RJ Plan on an annual basis an amount equivalent to 70% of the amount by which (1) our cash and cash equivalents and financial investments at the end of each fiscal year exceeds (2) the greater of (a) 25% of our operating expenses and capital expenses for that fiscal year, and (b) R$5,000 million, subject to adjustment in the event that we conclude any capital increases. The cash required to make these repayments will reduce the amount available to us to make capital expenditures.

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.

For more information regarding the debt instruments that we expect will obligate our company following the implementation of the RJ Pan, see “Item 5. Operating and Financial Review and Prospects—Liabilities Subject to Compromise.”

We may not be able to successfully implement the Cash Capital Increase, which could impair our ability to implement the capital expenditures contemplated by our business plan and could result in the termination of the RJ Plan.

Under the terms of the RJ Plan, we are required to implement the Cash Capital Increase on or prior to February 28, 2019. In the event that the Cash Capital Increase does not occur on or prior to February 28, 2019, the RJ Plan will automatically terminate and the rights and guarantees of the creditors appearing on the Second Creditors List will be restored under the original terms as if the RJ Plan had never been approved, unless creditors appearing on the Second Creditors List agree by a simple majority vote of the amount of claims present or represented at a meeting of creditors called for that purpose to the total or partial waiver or modification of the conditions described above.

 

 

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As part of the RJ Plan, we negotiated the terms of the Commitment Agreement with members of the Ad Hoc Group, the IBC and certain other unaffiliated bondholders under which such bondholders agreed to backstop the Cash Capital Increase. The commitments of these parties are subject to our satisfaction of certain conditions, including, among others, our compliance with the terms of the RJ Plan, the distribution of our shares currently held by PTIF, the completion of the Qualified Recovery Settlement Procedures, the homologation of the Oi Coop Composition Plan and the PTIF Composition Plan, the issuance of the requested order by the U.S. Bankruptcy Court, and the adoption by ANATEL of a new General Plan of Universal Access Targets reducing the universal access targets applicable to our company. We cannot assure you that each of these conditions will be met or waived by the parties to the Commitment Agreement in a timely fashion so as to permit the conclusion of the Cash Capital Increase on or prior to February 28, 2019.

In the event that we are unable to implement the Cash Capital Increase, either directly or through the exercise of our rights under the Commitment Agreement, we may be unable to fund the capital expenditures included in our business plan, which are necessary for us to modernize our infrastructure in order to successfully compete in the Brazilian telecommunications sectors. Our failure to do so is likely to have a material adverse effect on our business, financial condition, results of operations and ability to continue as a going concern.

In addition, our failure to implement the Cash Capital Increase on or prior to February 28, 2019 could result in the termination of the RJ Plan, and the occurrence of events subsequent to such termination is likely to have a material adverse effect on our business, financial condition, results of operations and ability to continue as a going concern.

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. In addition, personal mobility service providers in Brazil are experiencing increasing competition from over-the-top, or OTT, providers, which provide content (such as WhatsApp, Skype and YouTube) over an internet connection rather than through a service provider’s network. OTT providers are becoming increasingly competitive as customers shift from mobile voice and SMS communications to internet-based voice and data communications through computers and smartphone or tablet applications. 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 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.

 

 

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Our business is dependent on our ability to expand our services and to maintain the quality of the services provided.

Our business as a telecommunications services provider depends on our ability to maintain and expand our telecommunications services network. We believe that our expected growth will require, among other things:

 

    continuous development of our operational and administrative systems;

 

    increasing marketing activities;

 

    improving our understanding of customer wants and needs;

 

    continuous attention to service quality; and

 

    attracting, training and retaining qualified management, technical, customer relations, and sales personnel.

We believe that these requirements will place significant demand on our managerial, operational and financial resources. Failure to manage successfully our expected growth could reduce the quality of our services, with adverse effects on our business, financial condition and results of operations.

Our operations are also dependent upon our ability to maintain and protect our network. 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.

We face various cyber-security risks that, if not adequately addressed, could have an adverse effect on our business.

We face various cyber-security risks that could result in business losses, including but not limited to contamination (whether intentional or accidental) of our networks and systems by third parties with whom we exchange data, equipment failures, unauthorized access to and loss of confidential customer, employee and/or proprietary data by persons inside or outside of our organization, cyber attacks causing systems degradation or service unavailability, the penetration of our information technology systems and platforms by ill-intentioned third parties, and infiltration of malware (such as computer viruses) into our systems. Cyber attacks against companies have increased in frequency, scope and potential harm in recent years. Further, the perpetrators of cyber attacks are not restricted to particular groups or persons. These attacks may be committed by company employees or third parties operating in any region, including jurisdictions where law enforcement measures to address such attacks are unavailable or ineffective We may not be able to successfully protect our operational and information technology systems and platforms against such threats. Further, as cyber attacks continue to evolve, we may incur significant costs in the attempt to modify or enhance our protective measures or investigate or remediate any vulnerability. The inability to operate our networks and systems as a result of cyber attacks, even for a limited period of time, may result in significant expenses to us and/or a loss of market share to other communications providers. The costs associated with a major cyber attack could include expensive incentives offered to existing customers and business partners to retain their business, increased expenditures on cyber-security measures and the use of alternate resources, lost revenues from business interruption and litigation. If we are unable to adequately address these cyber-security risks, or operating network and information systems could be compromised, which would have an adverse effect on our business, financial condition and results of operations.

The mobile telecommunications industry and participants in this industry, including us, may be required to adopt an extensive program of field measurements of radio frequency emissions and be subject to further regulation and/or claims based on concerns regarding potential health problems and interfere with medical devices.

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

 

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In July 2002, ANATEL enacted regulations that limit emission and exposure for fields with frequencies between 9 kHz and 300 GHz. In May 2009, Law No. 11,934 was enacted, which established the need for field measurements by telecommunications service providers of all radio-communication transmitting stations every five years with respect to emission and exposure to these fields. In October 2017, ANATEL published new regulations which provide for the reevaluation of regulations regarding human exposure to radiofrequency electromagnetic fields and the form of the field measurements mandated by Law No. 11,934. ANATEL is in the process of creating a working group, without the participation of the telecommunications service providers, to analyze the impact of these new regulations. We expect that this working group will be created in the first half of 2018. We cannot predict the scope of the technical and financial impact of these new regulations on our company. 

Risks Relating to Our Company

We have identified various material weaknesses in our internal control over financial reporting which have materially adversely affected our ability to timely and accurately report our results of operations and financial condition. These material weaknesses may not have been fully remediated as of the filing date of this annual report and we cannot assure you that other material weaknesses will not be identified in the future.

Under the supervision and with the participation of our chief executive officer and our chief financial officer, our management conducted an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2017 based on the criteria established in “Internal Control—Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, our management concluded that as of December 31, 2017, our internal control over financial reporting was not effective because material weaknesses existed. A material weakness is a control deficiency, or combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the annual consolidated financial statements will not be prevented or detected on a timely basis. These deficiencies resulted in material misstatements to the Company’s financial statements for 2015 and previous years, which were corrected through restatement of those periods, and to the preliminary 2016 and 2017 financial statements, which were corrected prior to issuance. For more information about these material weaknesses, see “Item 15. Controls and Procedures.”

Although we have implemented and continue to implement measures designed to remediate these material weaknesses and, in the short term, to mitigate the potential adverse effects of these material weaknesses, our assessment of the impact of these measures has not been completed as of the filing date of this annual report and we cannot assure you that these measures are adequate. Moreover, we cannot assure you that additional material weaknesses in our internal control over financial reporting will not arise or be identified in the future.

As a result, we must continue our remediation activities and must also continue to improve our operational, information technology, and financial systems, infrastructure, procedures, and controls, as well as continue to expand, train, retain, and manage our employee base. Any failure to do so, or any difficulties we encounter during implementation, could result in additional material weaknesses or in material misstatements in our financial statements. These misstatements could result in a future restatement of our financial statements, could cause us to fail to meet our reporting obligations, or could cause investors to lose confidence in our reported financial information, which could materially adversely affect our business, financial condition and results of operations and may generate negative market reactions, potentially leading to a decline in the price of Oi’s common shares, preferred shares or ADSs.

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

We rely on a few strategic suppliers of equipment and materials, including Huawei do Brasil Telecomunicações Ltda. and Ericsson Telecomunicações S.A., to provide us with equipment and materials that we need in order to expand and to operate our business in Brazil. In addition, we rely on a third-party provider of network maintenance services in certain regions were we operate. There are a limited number of suppliers with the capability of providing the mobile network equipment and fixed-line network platforms that our operations and expansion plans require or the services that we require to maintain our networks. In addition, because the supply of mobile network equipment and fixed-line network platforms requires detailed supply planning and this equipment is technologically complex, it would be difficult for our company to replace the suppliers of this equipment. Suppliers of cables that we need to extend and maintain our networks may suffer capacity constraints or difficulties in obtaining the raw materials required to manufacture these cables. As a result, we are exposed to risks associated with these suppliers, including restrictions of production capacity for equipment and materials, availability of equipment and materials, delays in delivery of equipment, materials or services, and price increases. If these suppliers or vendors fail to provide equipment, materials or services to us on a timely basis or otherwise in compliance with the terms of our contracts with these suppliers, we could experience disruptions or declines in the quality of our services, which could have an adverse effect on our revenues and results of operations, and we might be unable to satisfy the requirements contained in our concession and authorization agreements.

 

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

We are subject to numerous legal and administrative proceedings. It is difficult to quantify the potential impact of these legal and administrative proceedings. We classify our risk of loss from legal and administrative proceedings as “probable,” “possible” or “remote.” We make provisions for probable losses but do not make provisions for possible and remote losses.

As a result of the RJ Proceedings, we have applied ASC 852 in preparing our consolidated financial statements. ASC 852 requires that financial statements separately disclose and distinguish transactions and events that are directly associated with our reorganization from the transactions and events that are associated with the ongoing operations of our business. Accordingly, our prepetition obligations, including certain of our legal contingencies, that may be impacted by the RJ Proceedings based on our assessment of these obligations following the guidance of ASC 852 have been classified on our balance sheet as “Liabilities subject to compromise.” Prepetition liabilities subject to compromise are required to be reported at the amount allowed as a claim by the RJ Court, regardless of whether they may be settled for lesser amounts and remain subject to future adjustments based on negotiated settlements with claimants, actions of the RJ Court or other events. As of December 31, 2017 and 2016, the aggregate amount of legal contingencies recognized by the RJ Court was R$13,162 million and R$11,614 million, respectively. For more information about the impact of the RJ Proceedings on our legal proceedings, see “Item 5. Operating and Financial Review and Prospects—Liabilities Subject to Compromise—Labor Contingencies,” “—Civil Contingencies – ANATEL,” and “—Civil Contingencies – Other Claims” and note 28 to our consolidated financial statements included in this annual report.

In addition, as of December 31, 2017 and 2016, the total estimated amount in controversy for those proceedings not subject to the RJ Plan in respect of which the risk of loss was deemed probable or possible totaled approximately R$27,789 million and R$27,299 million, respectively, and we had established provisions of $1,368 million and R$1,129 million, respectively, relating to these proceedings. Our provisions for legal contingencies are subject to monthly monetary adjustments. For a detailed description of our provisions for contingencies, see note 18 to our consolidated financial statements included in this annual report.

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

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

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

In the exchange agreement, or the PT Exchange Agreement, that we entered into with Pharol under which we transferred defaulted commercial paper of Rio Forte Investments S.A., or Rio Forte, to Pharol in exchange for the delivery to our company of Oi’s common shares and preferred shares as described under “Item 7. Major Shareholders and Related Party Transactions—Major Shareholders—PT Option Agreement,” we agreed to indemnify Pharol against any loss arising from (1) Pharol’s contingent or absolute tax or anti-trust obligations in relation to the assets contributed to our company in the Oi capital increase in connection with which we acquired PT Portugal from Pharol in May 2014 and (2) Pharol’s management activities, with reference to acts or triggering events occurring on or prior to May 5, 2014, excluding any losses incurred by Pharol as a result of the financial investments in the Rio Forte commercial paper and the acquisition of the Rio Forte commercial paper from Oi under the PT Exchange Agreement.

In the PTP Share Purchase Agreement under which we sold PT Portugal in the PT Portugal Disposition, we agreed to indemnify Altice Portugal for breaches of our representations and warranties under the PTP Share Purchase Agreement, subject to certain customary procedural and financial limitations. There can be no assurance that we will not be subject to significant claims under these indemnification provisions and if we are subject to such 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 2017, we recorded provisions for doubtful accounts in the amount of R$692 million, or 2.9% of our net operating revenue, primarily due to subscribers’ delinquencies. During 2016, we recorded provisions for doubtful accounts in the amount of R$643 million, or 2.5% of our net operating revenue, primarily due to subscribers’ delinquencies. As of December 31, 2017 and 2016, our provision for doubtful accounts was R$1,085 million and R$1,342 million, respectively.

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.

We are dependent on key personnel and the ability to hire and retain additional personnel.

We believe that our success will depend on the continued services of our senior management team and other key personnel. Our management team is comprised of highly qualified professionals, with extensive experience in the telecommunications industry. The loss of the services of any of our senior management team or other key employees could adversely affect our business, financial condition and results of operations. We also depend on the ability of our senior management and key personnel to work effectively as a team.

Our future success also depends on our ability to identify, attract, hire, train, retain and motivate highly skilled technical, managerial, sales and marketing personnel. Competition for such personnel is intense, and we cannot guarantee that we will successfully attract, assimilate or retain a sufficient number of qualified personnel. Failure to retain and attract the necessary technical, managerial, sales and marketing and administrative personnel could adversely affect our business, financial condition and results of operations.

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 (1) Claro S.A. (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 Claro, which markets its fixed-line voice services under the brand name “Embratel,” and (2) Telefônica Brasil S.A. (a subsidiary of Telefónica S.A.), or Telefônica Brasil, the largest telecommunications operator in Brazil);

 

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    other broadband service providers, including (1) Claro, which markets its broadband services under the brand name “Net,” (2) Telefônica Brasil, and (3) smaller regional broadband services provider including Companhia Paranense de Energia – Copel and Companhia Energética de Minas Gerais – CEMIG; and

 

    other Pay-TV service providers, including our primary competitors (1) SKY Brasil Serviços Ltda., or SKY, and (2) Claro, which markets its Pay-TV services under the “Claro TV” and “Net” brands.

Based on information available from ANATEL, from December 31, 2012 to December 31, 2017, the number of fixed lines in service (including the number fixed lines provided to our Business-to-Business, or B2B, customers) in our service areas (all of Brazil other than the state of São Paulo) declined from 27.7 million to 12.9 million. As of December 31, 2017, based on information available from ANATEL, (1) we had a market share of 54.1% of the total fixed lines in service in Region I of Brazil and a market share of 50.1% of the total fixed lines in service in Region II of Brazil (in each case, including the fixed lines provided to our B2B customers); (2) Claro had a market share of 24.9% of the total fixed lines in service in Region I and a market share of 19.2% of the total fixed lines in service in Region II; and (3) Telefônica Brasil had a market share of 13.7% of the total fixed lines in service in Region I and a market share of 25.7% 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. Despite the recent deceleration of fixed line disconnections, 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 Claro and Telefônica Brasil, which had market shares of 24.4% and 16.7%, respectively, for broadband services in Regions I and II of Brazil as of December 31, 2017, according to data from ANATEL. As of December 31, 2017, we had a market share of 33.4% for broadband services in Regions I and II of Brazil, according to data from ANATEL. Claro provides local fixed-line services to residential customers through its cable network in the portions of Regions I and II where it provides cable television and broadband services under the “Net” brand. Telefônica Brasil provides local fixed-line services through its own network and the assets it acquired from Vivendi S.A. when it acquired GVT Participações S.A. in 2015. The primary drivers of competition in the broadband industry are speed and price, with discounts typically offered in the form of bundled services. Claro and Telefônica Brasil each offer broadband services at higher speeds than ours and both offer integrated voice, broadband and subscription television services, typically as bundles, to the residential services market through a 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 Claro, which provides DTH service under the “Claro TV” brand and Pay-TV services using coaxial cable under the “Net” brand. 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, Claro 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 more information about 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) Claro and (3) Telefônica Brasil, which markets its mobile services under the brand name “Vivo.” As of December 31, 2017, based on information regarding the total number of subscribers as of that date available from ANATEL, we had a market share of 16.5% of the total number of mobile subscribers (including subscribers in our B2B Services business), ranking behind Telefônica Brasil with 31.7%, Claro with 25.0% and TIM with 24.8%. Telefônica Brasil, Claro and TIM 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.

 

 

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Our ability to generate revenues from our Personal Mobility Services business depends on our ability to continue to maintain or increase the average revenue per unit, or 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 UMTS (Universal Mobile Telecommunications System), or 3G, and our LTE (Long Term Evolution), or 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 2017 and 2016, the average monthly churn rate of our Personal Mobility Services business was 4.1% and 4.4% per month, respectively.

We have experienced increased pressure to reduce our mobile rates in response to pricing competition. This pricing competition has taken the form unlimited voice plans or special promotional packages, which may include, among other things, 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 results 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 profitability. For more information about our competition in the personal mobility services market in Brazil, see “Item 4: Information on the Company—Competition—Personal Mobility Services.”

Our B2B Services business faces strong competition from other mobile, fixed-line and information technology services providers, which may adversely affect our revenues and margins.

Our B2B 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, customers and our corporate (including government) customers, as well as interconnection, network usage and traffic transportation services to other telecommunications providers, which we refer to as our wholesale business. 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 B2B Services business, the loss of a significant number of SME and corporate customers would adversely affect our net operating revenue and may adversely affect our results of operations. For more information about our competition in the B2B market in Brazil, see “Item 4: Information on the Company—Operations in Brazil—Competition—B2B 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.

 

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The Brazilian telecommunications industry is highly regulated. Changes to these regulations have and may continue to adversely impact our business.

The Brazilian telecommunications industry is highly regulated by ANATEL. ANATEL regulates, among other things, rates, quality of service and universal service goals, as well as competition among telecommunications service providers. Changes in laws and regulations, grants of new concessions, authorizations or licenses or the imposition of additional universal service obligations, among other factors, may adversely affect our business, financial condition and results of operations. For more information, see “Item 4. Regulation of the Brazilian Telecommunications Industry.”

For example, in November 2012, ANATEL approved the General Plan on Competition Targets (Plano Geral de Metas de Competição), which includes 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 public regime service providers. For more information, see “Item 4. Information on the Company—Regulation of the Brazilian Telecommunications Industry—Other Regulatory Matters—General Plan on Competition Targets.” We have been classified by ANATEL as a company with significant market power in certain markets, as a result of which we are subject to increased regulation in areas such as fixed-line and mobile infrastructure sharing and mobile interconnection rates. In 2014 ANATEL approved rules under which interconnection rates we are able to charge for the use of our mobile networks would be reduced between 2016 and 2019. As a result, the mobile interconnection rates for Regions I, II and III declined by 47.1%, 47.7% and 39.2%, respectively, in each of February 2017 and 2018, and they will decline by the same percentages in February 2019. ANATEL has also set the interconnections rates we are able to charge for the use of our fixed-line networks, which have declined between 20.9% and 57.3% in each of February 2017 and 2018 and will continue to decline by the same percentages in February 2019. For more information, see “Item 4. Information on the Company—Rates—Network Usage (Interconnection) Rates.” These regulations have had and will continue to 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.

In December 2016, legislation was introduced in the Brazilian Congress, which we refer to as PLC 79, to substantially amend certain features of the current regulatory framework of the Brazilian telecommunications industry. For more information about PLC 79, see “Item 4. Information on the Company—Regulation of the Brazilian Telecommunications Industry—Concessions and Authorizations—Other Regulatory Matters—New Regulatory Framework.” PLC 79 has faced political gridlock in the Brazilian Congress and has not yet been passed, and we cannot predict whether this legislation will ultimately be adopted by the Brazilian Congress and executed by the President or will be adopted as proposed. Furthermore, should this legislation be adopted, many of its provisions would only have effects on our business following a rule-making procedure by ANATEL to implement the modifications to the regulatory scheme. We cannot predict the form of these new regulations or the time required for ANATEL to propose or adopt these regulations. Therefore, we unable to predict with any certainty the effects of this legislation on our company, if adopted.

We cannot predict whether ANATEL, the Brazilian Ministry of Communications (Ministério das Comunicações) or the Brazilian government will adopt these or other telecommunications sector policies in the future or the consequences of such policies on our business or the business of our competitors. In the event that any modification of the regulatory scheme or new regulations applicable to our company are adopted that increase the costs of compliance to our company, whether through capital expenditure requirements, increased service requirements, increased costs for renewal of our authorizations and licenses, increased exposure to regulatory penalties or otherwise, these modifications and regulations could have a material adverse effect on our business, financial condition and results of operations.

Our 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.

 

 

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Our obligations under our concession agreements may be subject to revision in connection with each future amendment. Our concession agreements were last amended in 2011. In 2014, ANATEL held a public comment period for the 2015 revision of the terms of our concession agreements and met regularly with us throughout 2015 to discuss possible amendments, and in 2016 the Brazilian Ministry of Communications issued a decree addressing guidelines for the establishment of a new regulatory framework for telecommunications, in line with the provisions of PLC 79. Despite these efforts, our concession agreements have not yet been amended, as a result of the Brazilian Congress’s failure to date to pass PLC 79, passage of which is required to provide the necessary legal authority for ANATEL to implement the proposed changes to our concession agreements. Further discussions regarding amendments to our concession agreements have halted pending resolution of PLC 79. Under their existing terms, our concession agreements may be amended by December 2020 at the latest. If PLC 79 is not passed, our concession agreements will expire in 2025 without the possibility of renewal. For more information about our concession agreements, see “Item 4. Information on the Company—Concessions, Authorizations and Licenses—Fixed-Line and Domestic Long-Distance Services Concession Agreements.”

In connection with the consideration of revisions to the concession agreements under the public regime, in January 2017, ANATEL proposed revisions to the terms of the General Plan of Grants (Plano Geral de Outorgas), in line with the provisions of PLC 79. However, as a result of the legislative gridlock faced by PLC 79, ANATEL has halted implementation of the General Plan of Grants. For more information about PLC 79 and ANATEL’s proposed revisions to the terms of the General Plan of Grants, see “Item 4. Information on the Company—Regulation of the Brazilian Telecommunications Industry—Other Regulatory Matters—New Regulatory Framework.”

We cannot assure you that any future amendments to our concession agreements or the General Plan of Grants 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 the terms of these concessions will be extended, investors may be unwilling to make investments in our company on terms that are attractive to our company, or at all. Our inability to raise capital in the equity or debt markets on favorable terms, or at all, could have a materially adverse effect on our business, financial condition and results of operations.

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.”

In addition, our authorizations to provide personal mobile services contain certain obligations requiring us to meet network scope and quality of service targets. If we fail to meet these obligations, we may be fined by ANATEL until we are in full compliance with our obligations and, in extreme circumstances, our authorizations could be revoked by ANATEL. See “Item 4. Information on the Company—Regulation of the Brazilian Telecommunications Industry—Regulation of Mobile Services—Obligations of Personal Mobile Services Providers.”

 

 

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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 a result of the commencement of the RJ Proceedings, our contingencies related to claims of ANATEL were reclassified liabilities subject to compromise and were measure as required by ASC 852. As of December 31, 2017 our prepetition liabilities subject to compromise included R$9,334 million related with claims of ANATEL. By operation of the RJ Plan and the Brazilian Confirmation Order (provided that no stay or appeal of the Brazilian Confirmation Order results in a change of the Brazilian Confirmation Date), the claim for these contingent obligations has been novated and discharged under Brazilian law and ANATEL is entitled only to receive the recovery set forth in the RJ Plan in exchange for these contingent claims in accordance with the terms and conditions of the RJ Plan. For more information regarding the recoveries to which ANATEL is entitled under the RJ Plan, see “Item 5. Operating and Financial Review and Prospects—Liabilities Subject to Compromise—Civil Contingencies – ANATEL.”

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;

 

    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.

Certain key inputs are subject to risks related to importation, and we acquire other key inputs from a limited number of domestic suppliers, which may further limit our ability to acquire such inputs in a timely and cost effective manner.

The high growth in data markets in general and broadband in particular may result in a limited supply of equipment essential for the provision of such services, such as data transmission equipment and modems. The restrictions on the number of manufacturers imposed by the Brazilian government for certain inputs, mainly data transmission equipment and modems, and the geographical locations of non-Brazilian manufacturers of these inputs, pose certain risks, including:

 

    vulnerability to currency fluctuations in cases where inputs are imported and paid for with U.S. dollars, Euros or other non-Brazilian currency;

 

    difficulties in managing inventory due to an inability to accurately forecast the domestic availability of certain inputs; and

 

    the imposition of customs or other duties on key inputs that are imported.

If any of these risks materialize, they may result in our inability to provide services to our customers in a timely manner or may affect the prices of our services, which may have an adverse effect on our business, financial condition and results of operations.

 

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We make investments based on demand forecasts that may become inaccurate due to economic volatility and may result in revenues that lower than expected.

We make certain investments, such as the procurement of materials and the development of physical sites, based on our forecasts of the amount of demand that customers will have for our services at a later date (generally several months later). However, any major changes in the Brazilian economic scenario may affect this demand and therefore our forecasts may turn out to be inaccurate. For example, economic crises may restrict credit to the population, and uncertainties relating to employment may result in a delay in the decision to acquire new products or services. As a result, it is possible that we may make larger investments based on demand forecasts than were necessary given actual demand at the relevant time, which may directly affect our cash flow.

Furthermore, improvements in economic conditions may have the opposite effect. For example, an increase in demand not accompanied by our investment in improved infrastructure may result in a possible loss of opportunity to increase our revenue or result in the degradation of the quality of our services.

We may be unable to respond to the recent trend towards consolidation in the Brazilian telecommunications market.

The Brazilian telecommunications market has been subject to consolidation. Mergers and acquisitions may change market dynamics, create competitive pressures, force small competitors to find partners and impact our financial condition; and may require us to adjust our operations, marketing strategies (including promotions), and product portfolio. For example, in March 2015, Telefónica S.A. acquired from Vivendi S.A., all of the shares of GVT Participações S.A., the controlling shareholder of Global Village Telecom S.A. This acquisition increased Telefónica’s share of the Brazilian telecommunications market, and we believe such trend is likely to continue in the industry as players continue to consolidate. Additional joint ventures, mergers and acquisitions among telecommunications service providers are possible in the future. If such consolidation occurs, it may result in increased competition within our market. We may be unable to adequately respond to pricing pressures resulting from consolidation in our market, adversely affecting our business, financial condition and results of operations. We may also consider engaging in merger or acquisition activity in response to changes in the competitive environment, which could divert resources away from other aspects of our business.

Companies in the Brazilian telecommunication industry, including us, may be harmed by restrictions regarding the installation of new antennas for mobile services.

Currently, there are approximately 250 municipal laws in Brazil that limit the installation of new antennas for mobile service, which has been a barrier to the expansion of mobile networks. Those laws are meant to regulate issues related to zoning and the alleged effects of the radiation and radiofrequencies of the antennas. The federal law, that establishes new guidelines to create a consolidated plan for the installation of antennas was approved in 2015, however, it is still pending specific regulation. Despite the federal initiative, as long as the municipal laws remain unchanged, the risk of noncompliance with regulations and of having services of limited quality in certain areas continues to exist, which could materially and adversely affect our business, results of operations and financial condition.

Additional antenna installation is also limited as a result of concerns that radio frequency emissions from base stations may cause health problems. See “—Risk Factors Relating to the Telecommunications Industry—The mobile telecommunications industry and participants in this industry, including us, may be required to adopt an extensive program of field measurements of radio frequency emissions and be subject to further regulation and/or claims based on concerns regarding potential health problems and interfere with medical devices.

 

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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, 2017 and 2016, our Brazilian pension benefit plans had an aggregate deficit of R$632 million and R$560 million, respectively. Our commitment to meet these deficit obligations may be higher than we currently anticipate, and we may be required to make additional contributions or record liabilities or expenses that are higher than we currently record, which may adversely affect our financial results. If the life expectancy of the beneficiaries should exceed the life expectancies included in the actuarial models, the level of our contributions to these plans could increase. If the managers of these plans should suffer losses on the investments of the assets of these plans, we would be required to make additional contributions to these plans in order for these plans to be able to provide the agreed benefits. Any increase in the level of our contributions to these plans as a result of an increase in life expectancy or a decline in investment returns could have a material adverse effect on our financial condition or results of operations. For a more detailed description of our Brazilian pension plans, see “Item 6. Directors, Senior Management and Employees—Employees—Employee Benefits—Pension Benefit Plans.”

As a result of the RJ Proceedings, certain of our unfunded obligations under our post-retirement plans have been classified on our balance sheet as “Liabilities subject to compromise.” As of each of December 31, 2017 and 2016, the aggregate amount of our unfunded obligations under our post-retirement defined benefit plans recognized by the RJ Court was R$560 million, all of which related to claims of FATL. For more information, see “Item 5. Operating and Financial Review and Prospects—Liabilities Subject to Compromise—Pension Plans,” “Item 6. Directors, Senior Management and Employees—Employees—Employee Benefits—Pension Benefit Plans—Fundação Atlântico de Seguridade Social—BrTPREV Plan” and note 28 to our consolidated financial statements included in this annual report.

Risks Relating to Our African and Asian Operations

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.

As of December 31, 2017 and 2016, we recorded in our consolidated financial statements as assets held for sale of R$4,675 million and R$5,404 million, respectively, mainly relating to our interest in Unitel, including R$2,012 million and R$2,009 million, respectively, of accrued dividends owed to our company by Unitel and R$1,920 million and R$1,995 million, respectively, 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$354 million and R$545 million, respectively, mainly relating to our interest in Unitel.

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. We recorded losses of R$267 million and R$1,090 million for the years ended December 31, 2017 and 2016, respectively, 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 results of operations.

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

Since November 2012, PT Ventures has not received any payments for outstanding amounts owed to it by Unitel with respect to dividends declared by Unitel for the fiscal years ended December 31, 2014, 2013, 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 US$112.5 million (R$478.4 million) with respect to fiscal year 2014, 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 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, 2013 or 2014.

 

 

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In addition, 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. PT Ventures has received a copy of the minutes of this meeting, which 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).

On June 12, 2015, PT Ventures filed a suit in the Provincial Courts of Luanda requesting the court to require Unitel to produce the final minutes of the May 13, 2015 general shareholders’ meeting and to annul all resolutions purportedly made at this meeting. Unitel filed its defense and a motion to dismiss this action on November 23, 2015, and PT Ventures filed its answer to Unitel’s motion on December 7, 2015. A preparatory hearing took place before the Civil and Administrative Division of the Luanda Provincial Court on May 30, 2016, in order to allow the parties to try and reach an immediate agreement. However, both parties reiterated their respective positions during the hearing and no settlement agreement was reached. On April 5, 2017, the court rendered its decision and voided all the resolutions taken during the May 13, 2015 Unitel General Meeting. At a general meeting of the shareholders of Unitel held on August 16, 2017, the other shareholders reapproved all the resolutions that had been declared null and void by the Angolan court, with the dissenting vote of PT Ventures.

At a general meeting of the shareholders of Unitel held on July 26, 2017, the other shareholders of Unitel approved the allocation of the 2015 profits to free reserve and retained earnings accounts, with the dissenting vote of PT Ventures.

On August 16, 2017, a general meeting of shareholders of Unitel was convened to resolve upon the allocation of the 2016 profits, among other issues. The management proposed not to pay any dividends to shareholders again. However, PT Ventures’ representative at the meeting claimed that, since the management proposal had not been disclosed to the shareholders in advance, the shareholders had not had the opportunity to properly assess the proposal and therefore any resolution about the subject would end up being null and void. The meeting was therefore suspended for a period of 45 days, but it has not been resumed as of the date of this annual report.

Another general meeting of shareholders of Unitel has been called for May 29, 2018 to resume the discussions of some of the pending items in the agenda of the general meeting of August 16, 2017, including the allocation of the 2016 profits, as well as to resolve upon the financial statements for the fiscal year ended December 31, 2017 and the allocation of the 2017 profits, among other issues. Unitel’s management once again proposed not to pay any dividends to shareholders.

On several occasions, PT Ventures has requested an explanation from Unitel about its failure to pay to PT Ventures its share of the declared dividends. As of the date of this annual report, PT Ventures has not received a satisfactory explanation regarding this failure to pay, nor has PT Ventures received reliable indications as to the expected timing of the payment of the accrued dividends. As a result, on October 20, 2015, PT Ventures filed a suit in the Provincial Courts of Luanda seeking payment of outstanding dividends for the fiscal years 2010 through 2013, together with interest thereon. As a result of our institution of this suit, in 2017 and 2016 we recognized provisions with respect to the unpaid dividends of US$45 million (R$150 million) and US$14 million (R$44 million), respectively.

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

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.

 

 

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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 initiated by PT Ventures on October 13, 2015, but then withdrew that counterclaim. The arbitral tribunal was constituted on April 14, 2016. On May 19, 2016, the arbitration proceeding against PT Ventures initiated by the other shareholders of Unitel was consolidated with the arbitration initiated by PT Ventures on October 13, 2015. PT Ventures presented its statement of claim on October 14, 2016 and the other shareholders of Unitel presented their statement of defense and counterclaim on February 28, 2017. A hearing in the arbitration was held from February 7 to 16, 2018, where each party presented its arguments and the factual witnesses and experts from each side were heard. We cannot predict the outcome of this proceeding. An adverse outcome in this proceeding could have a material adverse impact on our financial condition and results of operations.

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. We have been defending against the allegation by 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 shareholders, 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.

For more information about this proceeding, see “Item 8. Financial Information—Legal Proceedings—Legal Proceedings Relating to Our Interest in Unitel.”

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.

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 January 14, 2015, PT Ventures filed a petition against Unitel before the Provincial Courts of Luanda, seeking to challenge resolutions purportedly made in Unitel’s General Meeting on December 15, 2014.

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. The arbitral tribunal was constituted on April 14, 2016. PT Ventures presented its statement of claim on October 14, 2016 and the other shareholders of Unitel presented their statement of defense and counterclaim on February 28, 2017. A hearing in the arbitration was held from February 7 to 16, 2018, where each party presented its arguments and the factual witnesses and experts from each side were heard. We cannot predict the outcome of this proceeding. An adverse outcome in this proceeding could have a material adverse impact on our financial condition and results of operations. For more information about this proceeding, see “Item 8. Financial Information—Legal Proceedings—Legal Proceedings Relating to Our Interest in Unitel.”

 

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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., or Unitel Holdings, 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 Holdings. Unitel Holdings is owned by Mrs. Isabel dos Santos, an indirect shareholder of Unitel and a member of the board of directors of Unitel.

In September 2015, PT Ventures commenced litigation in the British Virgin Islands, or the BVI, against Vidatel, one of the other shareholders of Unitel, seeking a worldwide freezing order against Vidatel (prohibiting Vidatel from disposing of, dealing or diminishing the value of any of its assets (whether in the BVI or elsewhere)). In February 2016, the BVI court issued a judgment granting this freezing order against Vidatel pending the conclusion of the ICC arbitration brought by PT Ventures. In March 2018, the BVI court denied an application by Vidatel to set aside the worldwide freezing order.

In March 2016, PT Ventures commenced litigation in the Netherlands against Unitel Holdings, Isabel dos Santos, Tokeyna Management Limited and Unitel’s chief executive officer as defendants, claiming that each of the defendants cooperated with and/or benefited from the misappropriation of funds from Unitel. The defendants in the Dutch litigation challenged the jurisdiction of the court, and in May 2017 the Dutch court denied the defendants’ objection and affirmed jurisdiction. The defendants have appealed that ruling and the matter is now before the Dutch court of appeal.

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 arbitral tribunal was constituted on April 14, 2016. PT Ventures presented its statement of claim on October 14, 2016 and the other shareholders of Unitel presented their statement of defense and counterclaim on February 28, 2017. A hearing in the arbitration was held from February 7 to 16, 2018, where each party presented its arguments and the factual witnesses and experts from each side were heard. We cannot predict the outcome of this proceeding. An adverse outcome in this proceeding could have a material adverse impact on our financial condition and results of operations. For more information about this proceeding, see “Item 8. Financial Information—Legal Proceedings—Legal Proceedings Relating to Our Interest in Unitel.”

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.

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.

 

 

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On January 14, 2015, PT Ventures filed a suit in the Provincial Courts of Luanda to annul all resolutions taken during the December 15, 2014 general shareholders’ meeting, including the approval of the Unitel capital increase, the approval of investments by Unitel in Zimbabwe, and a study in order to implement a corporate reorganization of Unitel. On March 24, 2016, the Civil and Administrative Division of the Luanda Provincial Court notified PT Ventures to attach new exhibits, which PT Ventures did May 5, 2016.

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.

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.

Oi is 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;

 

    energy shortages;

 

    exchange controls;

 

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    changes to the regulatory framework governing our industry;

 

    monetary policy;

 

    tax policy; and

 

    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 Senate voted to begin its review of the impeachment proceedings against President Dilma Rousseff, who was suspended from office. After the legal and administrative process for the impeachment, Brazil’s Senate removed President Dilma Rousseff from office on August 31, 2016 for infringing budgetary laws. Michel Temer, the former vice president, who had been acting President of Brazil following Ms. Rousseff’s suspension in May 2016, was sworn in by Senate to serve out the remainder of the presidential term until 2018. There was an ongoing proceeding before the Brazilian Higher Electoral Court (Tribunal Superior Eleitoral) alleging that the electoral alliance between Ms. Rousseff and Mr. Temer in the 2014 general election had violated campaign finance laws. On June 9, 2017, the Brazilian Higher Electoral Court absolved the electoral alliance, including President Temer of wrongdoing; however, he remains subject to heightened scrutiny due to the ongoing Lava Jato investigations. The resolution of the political and economic crisis in Brazil still depends on the outcome of the Lava Jato investigation and proceedings and approval of reforms that are expected to be promoted by the new president. In addition, the presidential election in Brazil is expected to occur in October 2018. The election may change government political policies and the elected administration may implement new policies. We cannot predict which policies the Brazilian government may adopt or change or the effect that any such policies might have on our business and on the Brazilian economy. Any such new policies or changes to current policies may have a material adverse effect on our business, results of operations and financial condition.

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 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, appreciated by 16.5% in 2016 and depreciated by 1.5% in 2017. In addition, the real depreciated by 10.7% against the Euro during 2012, by 19.7% during 2013, was substantially unchanged during 2014, depreciated by 31.7% in 2015, appreciated by 19.1% in 2016 and depreciated by 15.4% in 2017.

 

 

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As of December 31, 2017 and 2016, R$36,557 million and R$36,693 million, respectively, of our loans and financing classified as liabilities subject to compromise was denominated in currencies other than the real, representing 74.4% and 74.5%, respectively, of our consolidated financial indebtedness. As a result of the commencement of the RJ Proceedings, we ceased recording exchange rate gains and losses with respect to these loans and financings. Following the implementation of the RJ Plan, we expect that our obligations under (1) our New Notes that will be issued to holders of bonds issued by Oi, Oi Coop and PTIF that are entitled to receive the Qualified Recovery described under “—Liabilities Subject to Compromise—Loans and Financing—Fixed Rate Notes,” (2) participations under the Non-Qualified Credit Agreement that will be available to holders of bonds issued by Oi, Oi Coop and PTIF that are entitled to receive the Non-Qualified Recovery described under “Item 5. Operating and Financial Review and Prospects—Liabilities Subject to Compromise—Loans and Financing—Fixed Rate Notes,” (3) recoveries of creditors under our export credit agreements, and (4) recoveries under our bonds issued by Oi, Oi Coop and PTIF to holders of our U.S. dollar-denominated bonds issued by Oi and Oi Coop that are not entitled to receive the Qualified Recovery or the Non-Qualified Recovery, will be denominated in U.S. dollars and will accrue interest at fixed-rates in U.S. dollars.

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 2017 and 2016, in connection with our consideration of potential plans to restructure our indebtedness, we did not roll over our non-deliverable forwards and selectively settled several of our long-term currency swaps. As a result, our exposure to foreign currency fluctuations has increased substantially. As an effect of the approval and confirmation of the RJ Plan, we expect to restructure our indebtedness in a manner that 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 exposures relating to our capital expenditures or operating expenses against risks related to movements of the real against foreign currencies. To the extent that the value of the real decreases relative to the U.S. dollar 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 5.5% in 2013, 3.8% in 2014, 10.7% in 2015, 7.2% in 2016 and (0.42)% in 2017. 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 5.9% in 2013, 6.4% in 2014, 10.7% in 2015, 6.3% in 2016 and 3.0% in 2017.

 

 

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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 each of December 31, 2017 and 2016, we had, among other consolidated debt obligations, R$15,870 million of loans and financings that were subject to variable interest rates, including: (1) R$4,982 million of loans and financings that were subject to the London Interbank Offered Rate, or LIBOR; (2) R$6,388 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; (3) R$2,927 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 (4) R$1,573 million of loans and financings that were subject to the IPCA rate, an inflation index.

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 9.77% per annum as of December 31, 2013 to 11.57% per annum as of December 31, 2014, increased to 14.13% per annum as of December 31, 2015, decreased to 13.63% per annum as of December 31, 2016 and decreased to 6.89% per annum as of December 31, 2017.

As a result of the commencement of the RJ Proceedings, we ceased recording interest expenses on these loans and financings. By operation of the RJ Plan and the Brazilian Confirmation Order (provided that no stay or appeal of the Brazilian Confirmation Order results in a change of the Brazilian Confirmation Date), these loans and loans and financings have been novated and discharged under Brazilian law and creditors under these loans and financings are entitled only to receive the recoveries set forth in the RJ Plan in exchange for their claims in accordance with the terms and conditions of the RJ Plan. For more information regarding the recoveries to which creditors under our loans and financings are entitled under the RJ Plan, see “Item 5. Operating and Financial Review and Prospects—Liabilities Subject to Compromise—Loans and Financing.”

Following the implementation of the RJ Plan, we expect that recoveries of creditors under our debentures, unsecured lines of credit and lessors under the lease contracts of Oi and Telemar relating to real property owned by Copart 4 and Copart 5 will accrue interest based on the CDI rate. As a result, following the implementation of the RJ Plan, inflation will increase our interest expenses and debt service obligations with respect to these recoveries. In addition, the RJ Plan permits us to seek to raise up to R$2.5 billion in the capital markets and seek to borrow up to R$2 billion under new export credit facilities, as described under “—Liquidity and Capital Resources.” This debt may accrue interest at floating rates in foreign currencies. Accordingly, we may incur interest expenses and foreign exchange gains and losses in connection with this new debt. A significant increase in any of these interest rates could adversely affect our financial expenses and negatively affect our overall financial performance.

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 Oi’s common shares, preferred shares and ADSs and may restrict our access to international capital markets.

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

 

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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.

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, 2017 and 2016, our foreign-currency denominated debt was R$36,557 million and R$36,693 million, respectively, and represented 74.4% and 74.5%, respectively, of our consolidated indebtedness. If we fail to make payments under any of these restructured debt obligations, we will be in default under those obligations, which could reduce our liquidity as well as the market price of Oi’s 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 Oi’s ADSs or holders who have exchanged Oi’s 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 Oi’s common shares and preferred shares will hold the reais that it cannot convert for the account of holders of Oi’s ADSs who have not been paid. Neither the custodian nor The Bank of New York Mellon, as depositary of Oi’s 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 Oi’s Common Shares, Preferred Shares and ADSs

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

According to Oi’s by-laws and the Brazilian Corporate Law, Oi must generally pay its shareholders at least 25% of Oi’s consolidated 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 Oi’s 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 Oi’s preferred shares. Additionally, the Brazilian Corporate Law allows a publicly traded company like Oi to suspend the mandatory distribution of dividends in any particular year if Oi’s board of directors informs Oi’s shareholders that such distributions would be inadvisable in view of Oi’s financial condition or cash availability. Holders of Oi’s preferred shares or Preferred ADSs may not receive any dividends or interest on shareholders’ equity in any given year if Oi’s board of directors makes such a determination or if our operations fail to generate net income. Holders of Oi’s preferred shares and preferred ADSs have not received dividend payments since October 11, 2013. Under the RJ Plan, Oi and the other RJ Debtors are prohibited from declaring or paying dividends, interest on shareholders’ equity or other forms of return on capital or making any other payment or distribution on or related to their shares (including any payment related to a merger or consolidation) until the sixth anniversary of the date of the Judicial Ratification of the RJ Plan, subject to certain exceptions, as described under “Item 8. Financial Information—Dividends and Dividend Policy.”

 

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

Under Brazilian law, only shareholders registered as such in Oi’s corporate books may attend Oi’s shareholders’ meetings. All common shares and preferred shares underlying Oi’s ADSs are registered in the name of the depositary. ADS holders may exercise the voting rights with respect to Oi’s common shares and the limited voting rights with respect to Oi’s preferred shares represented by Oi’s ADSs only in accordance with the deposit agreements relating to Oi’s 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, Oi is required to publish a notice of Oi’s shareholders’ meetings in certain newspapers in Brazil. To the extent that holders of Oi’s 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 Oi notifies the depositary of the shareholders’ 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 Oi’s common shares or preferred shares. If the depositary fails to receive timely voting instructions for all or part of Oi’s 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 Oi’s ADSs have voting rights, they may not receive the voting materials in time to instruct the depositary to vote Oi’s 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 Oi’s ADSs or for the manner of carrying out those voting instructions. Accordingly, holders of Oi’s 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 Oi’s 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 Oi issues new shares in exchange for cash or assets as part of a capital increase, subject to certain exceptions, Oi must grant its shareholders preemptive rights at the time of the subscription of shares, corresponding to their respective interest in Oi’s share capital, allowing them to maintain their existing shareholding percentage. Oi may not legally be permitted to allow holders of its common shares, preferred shares or ADSs in the United States to exercise any preemptive rights in any future capital increase unless (1) Oi files 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, Oi 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 Oi considers important in determining whether to file such a registration statement. Oi cannot assure the holders of Oi’s common shares, preferred shares or ADSs in the United States that Oi will file a registration statement with the SEC to allow them to participate in any of Oi’s capital increases. As a result, the equity interest of such holders in Oi may be diluted.

If holders of Oi’s 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 Oi’s 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 Oi’s 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 Oi’s ADSs that exchange Oi’s ADSs for Oi’s 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, Oi’s 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 Oi’s ADSs may face difficulties in protecting their interests because, as a Brazilian company, Oi is subject to different corporate rules and regulations, and Oi’s shareholders may have fewer and less well-defined rights.

Holders of Oi’s ADSs are not direct shareholders of Oi and are unable to enforce the rights of shareholders under Oi’s by-laws and the Brazilian Corporate Law.

Oi’s corporate affairs are governed by Oi’s by-laws and the Brazilian Corporate Law, which differ from the legal principles that would apply if Oi 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 Oi’s ADSs surrenders its ADSs and becomes a direct shareholder, its rights as a holder of Oi’s common shares or preferred shares under the Brazilian Corporate Law to protect its interests relative to actions by Oi’s 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 Oi’s 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.

Oi is exempt from some of the corporate governance requirements of the New York Stock Exchange.

Oi is a foreign private issuer, as defined by the SEC for purposes of the Exchange Act. As a result, for so long as Oi remains a foreign private issuer, Oi 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. Oi is permitted to follow practice in Brazil in lieu of the provisions of the NYSE’s corporate governance rules, except that:

 

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

 

    Oi is required to disclose any significant ways in which Oi’s corporate governance practices differ from those followed by domestic companies under NYSE listing standards;

 

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

 

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

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

 

    have a majority of independent members of Oi’s board of directors;

 

    have a compensation committee or a nominating or corporate governance committee of Oi’s 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.

Oi intends 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 anti-corruption laws and regulations.

We are required to comply with Brazilian anti-corruption laws and regulations, including Law No. 12,846/2013, or the Brazilian Anti-Corruption Law, as well as anti-corruption laws and regulations in other jurisdictions, including the U.S. Foreign Corrupt Practices Act of 1977, or the FCPA.

 

 

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

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

Oi is organized under the laws of Brazil, and all of the members of Oi’s board of directors, Oi’s executive officers and Oi’s independent registered public accountants reside or are based in Brazil. The vast majority of Oi’s assets and those of these other persons are located in Brazil. As a result, it may not be possible for holders of Oi’s ADSs to effect service of process upon Oi or these other persons within the United States or other jurisdictions outside Brazil or to enforce against Oi or these other persons judgments obtained in the United States or other jurisdictions outside Brazil. In addition, because substantially all of Oi’s assets and all of Oi’s directors and officers reside outside the United States, any judgment obtained in the United States against Oi 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 Oi’s board of directors or executive officers than would shareholders of a U.S. corporation.

Brazilian tax laws may have an adverse impact on the taxes applicable to the disposition of Oi’s 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 Oi’s 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 Oi’s 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, Oi is unable to predict whether an interpretation applying such tax laws to dispositions of Oi’s ADSs between nonresidents could ultimately prevail in Brazilian courts. See “Item 10. Additional Information—Taxation—Brazilian Tax Considerations.”

 

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If Oi is characterized as a passive foreign investment company in any taxable year, certain adverse U.S. federal income tax consequences could apply to a U.S. investor who holds Oi’s common shares, preferred shares or ADSs during such year.

Oi will be classified as a passive foreign investment company, or PFIC, in any taxable year if either: (1) 50% or more of the fair market value of our gross assets (determined on the basis of a quarterly average) for the taxable year produce passive income or are held for the production of passive income, or (2) 75% or more of our gross income for the taxable year is passive income. As a publicly traded foreign corporation Oi intends for this purpose to treat the aggregate fair market value of our gross assets as being equal to the aggregate value of our outstanding stock plus the total amount of our liabilities (“Market Capitalization”) and to treat the excess of the fair market value of our assets over their book value as a nonpassive asset to the extent attributable to our nonpassive income. Based on the market price of Oi’s common shares and preferred shares and the composition of Oi’s assets, Oi believes that it was not a PFIC for U.S. federal income tax purposes either of Oi’s taxable years ended December 31, 2016 or December 31, 2017. Nevertheless, because PFIC status is determined annually based on Oi’s income, assets and activities for the entire taxable year, it is not possible to determine whether Oi will be characterized as a PFIC for the taxable year ending December 31, 2018, or for any subsequent year, until after the close of the year. Furthermore, because Oi determines the value of its gross assets based on the Market Capitalization test, a decline in the value of its ordinary shares and preferred shares may result in Oi becoming a PFIC. Accordingly, there can be no assurance that Oi will not be considered a PFIC for any taxable year.

If Oi is characterized as a PFIC, certain adverse U.S. federal income tax consequences could apply to a U.S. investor who holds Oi’s common shares, preferred shares or ADSs during such year with respect to any “excess distribution” received from Oi and any gain from a sale or other disposition of Oi’s common shares, preferred shares or ADSs, and U.S. investors also may be subject to additional reporting obligations with respect to Oi’s common shares, preferred shares or ADSs. Oi does not intend to provide the information necessary for the U.S. investor to make a qualified electing fund election with respect to Oi’s common shares, preferred shares or ADSs. See “Item 10. Additional Information—Taxation – U.S. Federal Income Tax Considerations – Passive Foreign Investment Company Rules.”

If a United States person is treated as owning at least 10% of Oi’s shares, such holder may be subject to adverse U.S. federal income tax consequences.

If a United States person is treated as owning (directly, indirectly or constructively) at least 10% of the value or voting power of Oi’s shares, such person may be treated as a “United States shareholder” with respect to each “controlled foreign corporation” in our group (if any). If United States shareholders own (or are treated as owning) more than 50% of the value or voting power of Oi’s shares, Oi would (and our non-U.S. subsidiaries could) be treated as controlled foreign corporations. In addition, if our group includes one or more U.S. subsidiaries, certain of our non-U.S. subsidiaries could be treated as controlled foreign corporations (regardless of whether we are treated as a controlled foreign corporation). A United States shareholder of a controlled foreign corporation may be required to report annually and include in its U.S. taxable income its pro rata share of “Subpart F income,” “global intangible low-taxed income” and investments in U.S. property by controlled foreign corporations, regardless of whether we make any distributions. An individual that is a United States shareholder with respect to a controlled foreign corporation generally would not be allowed certain tax deductions or foreign tax credits that would be allowed to a United States shareholder that is a U.S. corporation. Failure to comply with these reporting obligations may subject you to significant monetary penalties and may prevent the statute of limitations with respect to your U.S. federal income tax return for the year for which reporting was due from starting. We cannot provide any assurances that we will assist investors in determining whether any of our non-U.S. subsidiaries are treated as a controlled foreign corporation or whether such investor is treated as a United States shareholder with respect to any of such controlled foreign corporations or furnish to any United States shareholders information that may be necessary to comply with the aforementioned reporting and tax paying obligations. Certain of our shareholders may be United States shareholders. The determination of controlled foreign corporation status is complex and includes attribution rules, the application of which is not entirely certain. A United States investor should consult its advisors regarding the potential application of these rules to an investment in Oi’s common shares, preferred shares or ADSs.

 

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The relative volatility and illiquidity of the Brazilian securities markets may adversely affect holders of Oi’s common shares and Common ADSs.

The Brazilian securities markets are substantially smaller, less liquid and more volatile than major securities markets in the United States. The B3 S.A. – Brasil, Bolsa, Balcão (formerly BM&FBOVESPA), or B3, which is the principal Brazilian stock exchange, had a market capitalization of R$3.2 trillion (US$955.6 billion) as of December 31, 2017 and an average daily trading volume of R$8.7 billion (US$2.6 billion) for 2017. In comparison, aggregate market capitalization of the companies (including U.S. and non-U.S. companies) listed on the NYSE was US$22.1 trillion as of December 31, 2017 and the NYSE recorded an average daily trading volume of US$58.2 billion for 2017. There is also significant concentration in the Brazilian securities markets. The ten largest companies in terms of market capitalization represented approximately 53% of the aggregate market capitalization of the B3 as of December 31, 2017. The ten most widely traded stocks in terms of trading volume accounted for approximately 39% of all shares traded on the B3 in 2017. These market characteristics may substantially limit the ability of holders of Oi’s Common ADSs to sell the common shares underlying Oi’s Common 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 Oi’s Common ADSs themselves.

Trading on over-the-counter markets may be volatile and sporadic, which could depress the market price of Oi’s Preferred ADS and make it difficult for holders to resell Oi’s Preferred ADSs.

On June 21, 2016, the NYSE determined that Oi’s Preferred ADSs should be suspended immediately from trading and commenced procedures to remove Oi’s Preferred ADSs from listing and registration on the NYSE based on the “abnormally low” trading price of the Preferred ADSs. On June 23, 2016, the OTC Markets Group, Inc. began publishing quotations for Oi’s Preferred ADS in the “pink sheets” under the trading symbol OIBRQ. Trading in stock quoted on over the counter markets is often thin, volatile, and characterized by wide fluctuations in trading prices due to many factors that may have little to do with our operations or business prospects. This volatility could depress the market price of Oi’s Preferred ADSs for reasons unrelated to operating performance. Moreover, the over the counter markets are not a stock exchange, and trading of securities on the over the counter markets is often more sporadic than the trading of securities listed on other stock exchanges such as the NASDAQ Stock Market, New York Stock Exchange or American Stock Exchange. Accordingly, holders of Oi’s Preferred ADSs may have difficulty reselling such securities.

The imposition of IOF taxes may indirectly influence the price and volatility of Oi’s 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 Oi, due to higher transaction costs, and may negatively impact the price and volatility of Oi’s ADSs and common shares on the NYSE and the B3.

 

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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 59.7 million revenue generating units, or RGUs, as of December 31, 2017. 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 355,273 kilometers of installed fiber optic cable, distributed throughout Brazil. Our mobile network covers areas in which approximately 90.2% of the Brazilian population lives and works. According to ANATEL, as of December 31, 2017, we had a 16.5% market share of the Brazilian mobile telecommunications market and a 33.1% market share of the Brazilian fixed-line market.

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 company in Brazil in terms of total number of lines in service as of December 31, 2017. 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 12.9 million fixed lines in service as of December 31, 2017, with a market share of 52.5% of the total fixed lines in service in our service areas as of December 31, 2017.

We offer a variety of high-speed broadband services in our fixed-line service areas, including services offered by our subsidiaries Oi Mobile and Brasil Telecom Comunicação Multimídia Ltda. Our broadband services primarily utilize Asymmetric Digital Subscriber Line, or ADSL, technology. As of December 31, 2017, we had 5.9 million ADSL subscribers, representing 46% 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 39.0 million mobile subscribers as of December 31, 2017, 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, 2017 our market share was 16.5% of the total number of mobile subscribers in Brazil.

Our B2B Services business provides voice, data and Pay TV services to our SME and corporate (including government) customers throughout Brazil. We also provide wholesale interconnection, network usage and traffic transportation services to other telecommunications providers.

We also hold significant interests in telecommunications companies in Angola, Cape Verde, and 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 an 86% 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, 2015, 2016 and 2017, 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.

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.

 

 

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Our Recent History and Development

Our Judicial Reorganization Proceedings

Background of Judicial Reorganization Proceedings

On March 9, 2016, following the notification of our company on February 25, 2016 by LetterOne Technology (UK) LLP, or LetterOne, that it could not proceed with a potential transaction in which LetterOne would make a capital contribution of up to US$4.0 billion in our company, contingent on the completion of a potential business combination with TIM, we 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 15, 2016, meetings of holders of our 5th Issue of Unsecured, Nonconvertible Public Debentures, or the 5th issue, and our 9th Issue of Simple, Unsecured, Nonconvertible Debentures in up to Two Series, for Public Distribution, or the 9th series, were held as a result of our failure to comply with certain financial ratios set forth in the instruments governing the 5th issue and the 9th issue. These defaults were not waived by the holders of these instruments, payments under these instruments were accelerated and in April 2016, the outstanding amount due under the 5th issue of R$1.5 million and the outstanding amount due under the 9th issue of R$21.5 million were repaid. These accelerations and repayments did not result in the accelerated maturity of any of our other indebtedness.

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, or the Ad Hoc Group, as an initial step towards discussions of a potential restructuring of our indebtedness.

Although we engaged in negotiations with the Ad Hoc Group seeking mutual agreement as to the basis for a consensual restructuring of the indebtedness of our company, after considering the challenges arising from our economic and financial situation in connection with the maturity schedule of our financial debts, the threats to our cash flows represented by imminent attachments or freezing of assets in judicial lawsuits, and the urgent need to adopt measures that protect our company, we concluded that filing of a request for judicial reorganization (recuperação judicial) in Brazil would be the most appropriate course of action (1) to preserve the continuity of our offering of quality services to our customers, within the rules and commitments undertaken with ANATEL, (2) to preserve the value of our company, (3) to maintain the continuity of our operations and corporate activities in an organized manner that protects the interests of our company, customers, shareholders and other stakeholders, and (4) to protect our cash and cash equivalents.

Judicial Reorganization Proceedings

On June 20, 2016, Oi, together with the other RJ debtors, filed a joint voluntary petition for judicial reorganization pursuant to the Brazilian Bankruptcy Law with the RJ Court, pursuant an urgent measure approved by our board of directors.

The filing of the petition that commenced the RJ Proceedings was a step towards our financial restructuring. During the RJ Proceedings, we have, and expect to continue (1) to work to secure new customers while maintaining our service and product sales to all market segments, in all of our distribution and customer service channels, (2) to perform installation, maintenance and repair activities on a timely basis, (3) to use our workforce as usual, including to perform sales, operating and administrative activities, and (4) to focus on our investments in structuring projects aimed at promoting the improvement of service quality and continuing to bring technologic advances, high service standards, and innovation to our customers.

On June 29, 2016, the RJ Court granted the processing of the RJ Proceedings of the RJ Debtors. The order of the RJ court granting this processing included, among other things, (1) a decision to grant an emergency measure regarding the suspension of all lawsuits and execution actions against the RJ Debtors for 180 business days, (2) the suspension of the effectiveness of clauses of contracts executed by the RJ Debtors that cause the termination of such contracts due to the request for judicial reorganization, (3) the requirement that the RJ Debtors add “in judicial reorganization” after their respective business names, and (4) the requirement that the RJ Debtors present monthly statements of accounts throughout the RJ Proceedings.

 

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On July 22, 2016:

 

    the request for judicial reorganization was ratified by the shareholders of Oi at an extraordinary shareholders’ meeting.

 

    the RJ Court appointed PricewaterhouseCoopers Assessoria Empresarial Ltda. as the judicial administrator of the RJ Debtors responsible for verification of claims and opinions on financial matters, and appointed Escritório de Advocacia Arnoldo Wald e Advogados Associados to act as the judicial administrator of the RJ Debtors responsible for opinions on legal matters and verification of claims. We refer to the judicial administrators of the RJ Debtors in Brazil singly and collectively as the Judicial Administrator.

On September 5, 2016, the RJ Debtors filed an initial judicial reorganization plan with the RJ Court, which we refer to as the Initial RJ Plan, proposing the terms and conditions for the restructuring of the debt of the RJ Debtors, and proposing actions that could be adopted to overcome the financial distress of the RJ Debtors and ensure their continuity as going concerns, including (1) restructuring and balancing their liabilities; (2) actions during the RJ Proceedings designed to obtain new funds; and (3) the potential sale of capital assets. Under the Initial RJ Plan, the creditors of the RJ Debtors were classified in four separate classes: (1) labor claims, (2) secured claims, (3) unsecured claims (excluding claims of micro-business owners and small businesses), and (4) claims of microbusiness owners and small businesses.

Under Brazilian law, the RJ Debtors were required to submit to the RJ Court a list of their creditors for publication, which we refer to as the First List of Creditors. The First List of Creditors submitted by the RJ Debtors to the RJ Court was published in the Official Gazette of the State of Rio de Janeiro on September 20, 2016. The total amount payable to parties not controlled by the RJ Debtors included in the First List of Creditors was approximately R$65.1 billion. Following the date of publication of the First List of Creditors, persons claiming to be creditors of the RJ Debtors were required to file with the Judicial Administrator on or prior to October 11, 2016 (1) a proof of claim, if the amounts claimed to be owed to them were not included in the First List of Creditors, or (2) a statement of discrepancy if the creditor disputed the amount or classification of the amount claimed to be owed to it that was included in the First List of Creditors. Under Brazilian law, following the expiration of the period to file proofs of claim and statements of discrepancies, the Judicial Administrator of the RJ Debtors were required to submit to the RJ Court a revised list of creditors for publication, which we refer to as the Second List of Creditors. Under Brazilian law, only creditors with claims against the RJ Debtors, as verified through their inclusion in the Second List of Creditors, were entitled to vote at the GCM.

On October 4, 2016, the RJ Court rendered a decision recognizing that the holders of beneficial interests in bonds issued by Oi, Oi Coop and PTIF had the right under the Brazilian Bankruptcy Law to individualize claims represented by their beneficial interests in those bonds and to vote in the GCM, but ruling that the trustees under the instruments under which such bonds were issued would be granted the right to represent and vote on behalf of holders of beneficial interests in those bonds that did not individualize their claims and therefore would be otherwise unable to vote in the GCM, or the Trustee Voting Decision. The Trustee Voting Decision was appealed by the RJ Debtors, and on October 31, 2017, the Brazilian Court of Appeals denied the appeal filed by the RJ Debtors, confirming the Trustee Voting Decision and allowing the trustees under the instruments under which such bonds were issued to represent and vote in the GCM on behalf of holders of beneficial interests in those bonds that did not individualize their claims.

On November 21, 2016, we engaged Laplace Finanças Empreendimentos e Participações Ltda. as our financial advisor with respect to the RJ proceeding and related matters, replacing PJT Partners.

 

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On March 22, 2017, Oi’s board of directors approved an adjustment of the basic financial conditions presented in the Initial RJ Plan and authorized Oi’s executive officers and advisors to present to the RJ Court an amendment to the Initial RJ Plan as soon as possible. These adjustments were formulated on the basis of (1) more than 50 face-to-face meetings in Brazil and abroad with various creditors of the RJ Debtors, including national and international banks, development institutions and bondholders, as well as their respective advisors, and (2) other meetings with suppliers, ANATEL and small creditors. On March 28, 2017, the Company presented to the RJ Court information about the adjustment of the basic financial conditions presented in the Initial RJ Plan.

On March 31, 2017, the RJ Court removed PricewaterhouseCoopers Assessoria Empresarial Ltda. from its role as Judicial Administrator, and on April 10, 2017 the RJ Court appointed Escritório de Advocacia Arnoldo Wald e Advogados Associados as the sole Judicial Administrator in the RJ Proceedings.

On May 15, 2017, the RJ Court granted an extension of the stay period under the RJ Proceedings until the earliest of (1) the 180th business days following the date of the extension, or (2) the date on which the GCM was convened (whether on first call or second call).

On May 29, 2017, following the review by the Judicial Administrator of all proofs of claim and statements of discrepancy, and the completion of necessary revisions, the Second List of Creditors was published in the Official Gazette of the State of Rio de Janeiro. Following the publication of the Second List of Creditors, persons claiming to be creditors of the RJ Debtors were permitted to file challenges to the Second List of Creditors with the RJ Court on or prior to the 10th business day following publication. In addition, creditors recognized in the Second List of Creditors were permitted to file objections to the Initial RJ Plan filed by the RJ Debtors with the RJ Court on or prior to the 30th business day following publication.

On July 19, 2017, based on our progress in our discussions with various creditors, our board of directors authorized our executive officers to discuss with our creditors, potential investors and our shareholders potential changes to the Initial RJ Plan relating to our capital structure, potential alternative judicial reorganization plans, and a potential cash infusion in our company through a capital increase.

On August 21, 2017, the RJ Court ruled that the RJ Debtors should be substantively consolidated in the RJ Proceeding, effectively requiring pooling the assets and liabilities of the RJ Debtors for purposes of distributions to creditors under a judicial reorganization plan and the creditors for purposes of voting on the any judicial reorganization plan, which we refer to as the Substantive Consolidation Decision. The Substantive Consolidation Decision was appealed by several creditors of the RJ Debtors, by Mr. Berkenbosch, in his capacity as Oi Coop’s bankruptcy trustee in the Netherlands, and by Mr. Groenewegen, in his capacity as PTIF’s bankruptcy trustee in the Netherlands, and on September 22, 2017, the Brazilian Court of Appeals rendered preliminary decisions staying the effects of the Substantive Consolidation Decision, ruling that (1) the Judicial Administrator was required to present segregated lists of creditors for each of the RJ Debtors and provide any relevant information to adequately assess each of the RJ Debtors independently, and (2) the GCM would be required to hold a vote on the issue of substantive consolidation separately from a vote on the any judicial reorganization plan. The Brazilian Court of Appeals ruled that the creditors’ vote would determine whether to substantively consolidate the RJ Debtors unless the Brazilian Court of Appeals ruled otherwise in the trial of the appeals.

On August 23, 2017, following the expiration of the period for creditors to object to the Initial RJ Plan, the RJ Court scheduled the dates for the GCM. The GCM was scheduled to take place on first call on October 9, 2017. If the quorum requirements of this meeting were not met, the GCM was scheduled to take place on second call (with no quorum requirement) on October 23, 2017.

On August 30, 2017, based on our progress in its discussions with certain holders of bonds issued by Oi, Oi Coop and PTIF, we entered into non-disclosure agreements with certain holders of these bonds, which we refer to as the unaffiliated bondholders, to facilitate discussions and negotiations concerning our capital structure, potential alternative judicial reorganization plans, and a potential cash infusion in our company through a capital increase. We, together with our financial and legal advisors, met with these bondholders and their financial and legal advisors, on multiple occasions in August, September and October 2017 to discuss the terms of potential revisions to the Initial RJ Plan and related transactions.

 

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On September 27, 2017, the RJ Debtors requested that the RJ Court postpone the GCM by 15 days so that the GCM scheduled on first call would take place on October 23, 2017, and the GCM on second call would take place November 27, 2017. The RJ Court approved this request on the same day.

On October 10, 2017, based on our progress in its discussions with certain holders of bonds issued by Oi, Oi Coop and PTIF, we entered into non-disclosure agreements with the certain holders of bonds that are members of the steering committee of the Ad Hoc Group, as well as certain holders of bonds that are members of the steering committee of the IBC to facilitate potential discussions and negotiations concerning potential revisions to the Initial RJ Plan and related transactions. We, together with our financial and legal advisors, met with these bondholders and their financial and legal advisors, as well as representatives of certain export credit agencies that are creditors of some of the RJ Debtors and their financial and legal advisors, on multiple occasions in October, November and December 2017 to discuss the terms of potential revisions to the Initial RJ Plan, subsequent judicial reorganization plans, and related transactions.

Also on October 10, 2017, our board of directors approved a revised judicial reorganization plan, or the Second RJ Plan, which was filed with the RJ Court on October 11, 2017.

On October 11, 2017, we and our financial and legal advisors met with the unaffiliated bondholders and their financial and legal advisors to discuss and negotiate a draft written restructuring term sheet representing the terms of a potential judicial reorganization plan contemplating, among other things, the terms of a potential capital increase, and a draft form of plan support agreement.

On October 20, 2017, in response to the requests made by certain creditors of the RJ Debtors, the RJ Court postponed the GCM scheduled on first call by 14 days until November 6, 2017; the GCM on second call was not postponed and continued to be scheduled for November 27, 2017.

On October 23, 2017, in response to a request from the Judicial Administrator, the RJ Court postponed the GCM scheduled on first call by four days until November 10, 2017; the GCM on second call was not postponed and continued to be scheduled for November 27, 2017.

On November 3, 2017, our board of directors resolved to approve the final terms of a plan support agreement negotiated with the unaffiliated bondholders to be offered to all holders of bonds issued by Oi, Oi Coop and PTIF, and to authorize us to file an amendment to the Second RJ Plan with the RJ Court, contemplating the final terms of the plan support agreement.

On November 6, 2017, ANATEL ordered us to, among other things, (1) formally submit to ANATEL the draft plan support agreement approved by Oi’s board of directors on November 3, 2017, and (2) refrain from signing the plan support agreement prior to its review by ANATEL.

On November 9, 2017, in response to new requests made by certain creditors of the RJ Debtors, the RJ Court postponed the GCM so that the GCM scheduled on first call would take place on December 7, 2017 (continuing on December 8, 2017, if necessary), and the GCM on second call would take place February 1, 2018 (continuing on February 2, 2018, if necessary).

On November 17, 2017, the RJ Court ordered that certain of Oi’s executive officers that had been appointed by Oi’s board of directors on November 3, 2017 were not permitted to participate in the negotiation of our judicial reorganization plan prior to further review of their appointments and powers by the RJ Court.

On November 22, 2017, Oi’s board of directors approved a revised plan support agreement and a revised judicial reorganization plan, or the Third RJ Plan, which were filed with the RJ Court on November 27, 2017 following the resignation of Oi’s chief executive officer on November 24, 2017 and the election of Oi’s general counsel as Oi’s new chief executive officer on November 27, 2017. On November 27, 2017, ANTEL ordered us not to execute the revised plan support agreement.

 

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On November 29, 2017, the RJ Court again postponed the GCM scheduled on first call until December 19, 2017 (continuing on December 20, 2017, if necessary); the GCM on second call was not postponed and continued to be scheduled for February 1, 2018 (continuing on February 2, 2018, if necessary). In its decision, the RJ Court, (1) confirmed its earlier suspension of the power of certain of Oi’s executive officers that had been appointed by our board of directors on November 3, 2017 to participate in the negotiation of our judicial reorganization plan, and (2) directed Oi’s chief executive officer to present a revised judicial reorganization plan for consideration by the GCM no later than December 12, 2017.

On December 12, 2017, as directed by the RJ Court and with the approval of Oi’s chief executive officer, the RJ Debtors filed a revised judicial reorganization plan, or the Fourth RJ Plan, with the RJ Court.

ANATEL Proceedings

Concurrently with our negotiations with our financial creditors, we engaged in negotiation and litigation with ANATEL, our largest creditor, with respect to the treatment of outstanding claims for fines, interest and penalties in the RJ Proceedings. On November 22, 2016, a hearing was held with the goal of consensually resolving ANATEL’s claims against the RJ Debtors’ as part of a mediation procedure initiated under RJ Proceedings.

The Second List of Creditors recognized claims of ANATEL in the aggregate amount of approximately R$11.1 billion. We disagree with and are challenging some of the noncompliance events alleged by ANATEL, and are also challenging the fairness of the penalties, emphasizing the unreasonableness of the amount of the imposed fines in light of the alleged noncompliance events.

The inclusion of the claims of ANATEL in the RJ Debtor’s judicial reorganization plan does not require the consent of ANATEL, but instead depends on the recognition of the applicability of the RJ Proceedings to these claims.

On June 9, 2017, ANATEL filed an appeal seeking to reverse the decision of the RJ Court that recognized the applicability of the RJ Proceedings to ANATEL’s claims. On August 29, 2017, the 8th Civil Chamber of the Rio de Janeiro State Court of Justice granted ANATEL’s appeal to maintain the name of the RJ Debtors in the databases of the credit protection agencies, but held that the pre-petition claims of ANATEL were not tax claims and, therefore, were subject to the RJ Proceedings.

On September 4, 2017, ANATEL appealed the decision of the RJ Court that permitted the GCM to be held without granting the request made by ANATEL to exclude all of its claims. Judgment on this appeal by the Rio de Janeiro State Court of Justice is pending.

On November 22, 2017, ANATEL filed a special and an extraordinary appeals against the decision of the 8th Civil Chamber of the Rio de Janeiro State Court of Justice that held that the claims of ANATEL were subject to the RJ Proceedings. Judgments on these appeals by the Superior Court of Justice and the Supreme Court of Brazil are pending.

Small Creditor Program

Due to the extraordinarily large number of creditors of the RJ Debtors and the requirement of the Brazilian Bankruptcy Law that creditors must appear personally or through a representative at a GCM in order to vote on any proposed judicial reorganization plan, we sought judicial approval of a program under which creditors could engage in mediation of their claims with us under which we would settle claims of less than R$50,000 without extinguishing those claims, which we refer to as the Small Creditor Program.

On December 19, 2016, the RJ Court authorized us to conduct the Small Creditor Program. Under terms and conditions set forth in the Small Creditor Program, creditors of the RJ Debtors could participate in the Small Creditor Program and the RJ Debtors would prepay to the participating creditors up to R$50,000, such that (1) 90% would be prepaid upon the acceptance by such creditor of a settlement, and (2) the remaining 10% would be prepaid after the approval of a judicial reorganization plan. Creditors of the RJ Debtors with claims of more than R$50,000.00 were entitled to participate in the Small Creditors Program and receive (1) R$45,000 upon the acceptance of such Oi Creditor of a settlement, (ii) R$5,000 after the approval of a judicial reorganization plan, and (3) the remainder of their claims under the terms and conditions applicable to creditors holding claims of the same class as set forth in a judicial reorganization plan. Holders of bonds of Oi, Oi Coop and PTIF that were residents of Portugal were permitted to participate in the Small Creditor Program.

 

 

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On June 22, 2017, one of our creditors, China Development Bank Corporation, appealed the ruling of the RJ Court that authorized us to conduct the Small Creditor Program. On June 26, 2017, the 8th Civil Chamber of the Rio de Janeiro State Court of Justice suspended the ruling of the RJ Court that authorized us to conduct the Small Creditor Program. On August 29, 2017, the Rio de Janeiro State Court of Justice reversed such decision and upheld the validity of the Small Creditors Program. Other creditors also filed similar appeals.

The Small Creditors Program commenced on August 29, 2017 and terminated on December 8, 2017, with more than 34,000 creditors holding more than R$360,000,000 of claims participating in the Small Creditor Program. As of the date of this annual report, all participating creditors have received the payments with respect to their prepetition credits that were due in accordance with the terms of the Small Creditors Program.

Approval of Judicial Reorganization Plan at GCM

On December 19 and 20, 2017, the GCM to consider approval of the Fourth RJ Plan was held following the confirmation that the required quorum of creditors of each of classes I, II, III, and IV was in attendance. The GCM was attended by (1) 83.02% of the Class I creditors holding 92.28% of the Class I claims (labor creditors), (2) 100% of the Class II creditors holding 100% of the Class II claims (secured creditors), (3) 59.95% of the Class II creditors holding 98.57% of the Class III claims (unsecured creditors), and (4) 51.58% of the Class IV creditors holding 59.04% of the Class IV claims (unsecured microbusiness owners and small businesses).

During the GCM, our management engaged in further negotiations to make certain revisions to the Fourth RJ Plan with various parties-in-interest, including Brazilian banks, ANATEL, lenders under the RJ Debtors’ facilities with export credit agencies, the Ad Hoc Group, the IBC and other significant holders of the bonds of Oi, Oi Coop and PTIF. As part of the RJ Plan, we negotiated the terms of the Commitment Agreement with members of the Ad Hoc Group, the IBC and certain other unaffiliated bondholders under which such bondholders agreed to backstop an eventual cash capital increase by our company, which will be commenced following the full implementation of the RJ Plan. The GCM concluded on December 20, 2017 following the approval of a judicial reorganization plan reflecting amendments to the Fourth RJ Plan as negotiated during the course of the GCM, which we refer to as the RJ Plan.

As required by the ruling of the Brazilian Court of Appeals, creditors voted first whether to determine whether to substantively consolidate the RJ Debtors. Substantive consolidation of the Debtors was approved by holders of (1) 99.5% of the claims of Oi present and voting in the GCM; (2) 96.90% of the claims of Oi Mobile present and voting; (3) 99.88% of the claims of Telemar present and voting; (4) 97.98% of the claims of Oi Coop present and voting; (5) 99.89% of the claims of PTIF present and voting; (6) 100% of the claims of Copart 4 present and voting; and (7) 100% of the claims of Copart 5 present and voting.

The RJ Plan was approved by a significant majority of creditors of each class present at the GCM: (1) 100% of the Class I creditors present or represented at the GCM holding 100% of the Class I claims present or represented at the GCM; (2) 100% of the Class II creditors present or represented at the GCM holding 100% of the Class II claims present or represented at the GCM; (3) 99.56% of the Class III creditors present or represented at the GCM holding 72.17% of the Class III claims present or represented at the GCM; and (4) 99.8% of the Class IV creditors present or represented at the GCM holding 99.74% of the Class IV claims present or represented at the GCM.

Under the Trustee Voting Decision, the trustees under the instruments under which the bonds of Oi, Oi Coop and PTIF were issued were be granted the right to represent and vote on behalf of holders of beneficial interests in those bonds that did not individualize their claims. However, both of those trustees chose to abstain from voting on behalf of such bondholders.

Confirmation of Judicial Reorganization Plan by RJ Court

On January 8, 2018, the RJ Court entered the Brazilian Confirmation Order, ratifying and confirming the RJ Plan, according to its terms, but modifying certain provisions of the RJ Plan. The Brazilian Confirmation Order was published in the Official Gazette of the State of Rio de Janeiro on February 5, 2018, the Brazilian Confirmation Date.

The Brazilian Confirmation Order, according to its terms, is binding on all parties as long as its effects are not stayed. By operation of the RJ Plan and the Brazilian Confirmation Order (provided that no stay or appeal of the Brazilian Confirmation Order results in a change of the Brazilian Confirmation Date), the unsecured claims against the RJ Debtors have been novated and discharged under Brazilian law and holders of such claims are entitled only to receive the recoveries set forth in the RJ Plan in exchange for their claims in accordance with the terms and conditions of the RJ Plan.

 

 

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As of the deadline to file interlocutory appeals, 24 interlocutory appeals had been filed against and 19 motions for clarification had been filed with respect to the Brazilian Confirmation Order (the RJ Court considered three simple petitions challenging the Brazilian Confirmation Order as motions for clarification). In addition, four motions for clarification had been filed against the decisions entered by the RJ Court in respect of the motions for clarification filed against the Brazilian Confirmation Order. Although subject to these pending clarification motions and interlocutory appeals, the Brazilian Confirmation Order has not been stayed, fully or partially, and therefore remains in full force and effect, according to its terms.

The deadline to file appeals against the Brazilian Conformation Order has been interrupted with respect to persons that have timely filed motions for clarification with respect to the Brazilian Confirmation Order until the date on which the RJ Court enters its decision in respect of such motions for clarification. Following the decision on any such motion for clarification, parties in interest have to file an appeal within 15 business days from the date of such decision.

Following the resolution of these appeals and motions for clarification, including eventual appeals to the Brazilian Superior and Supreme Courts, if any, the Brazilian Confirmation Order will become final and binding on all parties under Brazilian law.

In the context of the RJ Proceedings, certain balances of consolidated assets and liabilities increased as a result of the inclusion of the RJ Debtors in RJ Proceedings and the resulting suspension of the payment of certain assumed liabilities. The main balances of consolidated assets and liabilities affected were cash, cash equivalents, cash investments, receivables from reciprocal services provided to telecom carriers, trade payables, and borrowings and financing.

Implementation of the Judicial Reorganization Plan

Under the RJ Plan, certain groups of creditors were entitled to make elections with respect to the form of the recovery that they were entitled to receive. The period to make these elections commenced on the Brazilian Confirmation Date and was scheduled to expire on February 26, 2018. On February 26, 2018, the RJ Court extended the election deadline applicable to beneficial holders of bonds issued by Oi, Oi Coop and PTIF until March 8, 2018.

As of the end of the election period applicable to our loans and financings, other than the bonds issued by Oi, Oi Coop and PTIF, creditors had made elections with respect to the various forms of recovery available to them as described under “Item 5. Operating and Financial Review and Prospects—Liabilities Subject to Compromise.”

As of the end of the election period applicable to the bonds issued by Oi, Oi Coop and PTIF, Qualified Bondholders with Bondholder Credits representing an aggregate of US$8,463 million of claims had elected to receive the Qualified Recovery and Non-Qualified Bondholders with Bondholder Credits representing an aggregate of US$187 million of claims had elected to receive the Non-Qualified Recovery. In the event that all such holders participate in the settlement procedures, we expect (1) to issue approximately US$1,655 million principal amount of New Notes, approximately 1,516 million new common shares and Warrants to subscribe to approximately 117 million new common shares, (2) that the aggregate principal amount of the Non-Qualified Credit Agreement will be approximately US$94 million, and (3) the holders of the remaining outstanding Bondholder Credits will be entitled to the Default Recovery with an aggregate principal amount of approximately US$1,094 million. For more information regarding the recoveries available to the holders of the bonds issued by Oi, Oi Coop and PTIF, see “Item 5. Operating and Financial Review and Prospects—Liabilities Subject to Compromise—Fixed Rate Bonds.”

Recognition Proceedings in the United States

On June 22, 2016, the U.S. Bankruptcy Court entered an order granting the provisional relief requested by the Chapter 15 Debtors in their cases that were filed on June 21, 2016 under Chapter 15 of the United States Bankruptcy Code. This provisional relief prevents (1) creditors from initiating actions against the Chapter 15 Debtors or their property located within the territorial jurisdiction of the United States, and (2) parties from terminating their existing U.S. contracts with the Chapter 15 Debtors.

On July 21, 2016, the U.S. Bankruptcy Court held a hearing with respect to the Chapter 15 Debtors petition for recognition of the RJ Proceedings as a main foreign proceedings with regard to each of the Chapter 15 Debtors and did not receive any objections to such petition.

On July 22, 2016, the U.S. Bankruptcy Court granted the U.S. Recognition Order, as a result of which a stay was automatically applied, preventing (1) the filing, in the United States, of any actions against the Chapter 15 Debtors or their properties located within the territorial jurisdiction of the United States, and (2) parties from terminating their existing U.S. contracts with the Chapter 15 Debtors.

 

 

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On July 7, 2017, following affirmation of the Dutch Conversion Decisions by the Dutch Supreme Court, as described under “—Restructuring of Dutch Finance Subsidiaries,” Mr. J.R. Berkenbosch, in his capacity as Oi Coop’s bankruptcy trustee in The Netherlands, filed with the U.S. Bankruptcy Court a motion seeking modification or termination of the U.S. Recognition Order in respect of Oi Coop and filed a competing petition for recognition of the Dutch Bankruptcy Proceeding, as described under “—Restructuring of Dutch Finance Subsidiaries,” in respect of Oi Coop as the foreign main proceeding for purposes of U.S. law.

On December 4, 2017, the U.S. Bankruptcy Court issued a written opinion, denying Mr. Berkenbosch’s motion and petition in its entirety and entered an order to that effect on December 26, 2017. As such, the U.S. Recognition Order remains in place with respect to the RJ Proceedings in respect of each of the Chapter 15 Debtors, including Oi Coop.

On January 8, 2018, Mr. Berkenbosch filed a notice of appeal with the U.S. Bankruptcy Court indicating his intention to appeal the December 4 decision and the December 26 order of the U.S. Bankruptcy Court. On January 9, 2018, the IBC also filed a notice of appeal indicating its intention to appeal the December 4 decision and the December 26 order of the U.S. Bankruptcy Court. Neither Mr. Berkenbosch nor the IBC has sought a stay of the December 4 decision and the December 26 order of the U.S. Bankruptcy Court.

On April 17, 2018, the foreign representative for the Chapter 15 Debtors filed a motion with the U.S. Bankruptcy Court seeking an order of that court granting, among other things, full force and effect to the RJ Plan and the Brazilian Confirmation Order in the United States. The deadline for objections to the proposed order set by the U.S. Bankruptcy Court was May 11, 2018. As of that date, Pharol, Bratel B.V. and Bratel S.à r.l. filed an objection to that motion in which they argued that the motion should be denied without prejudice or deferred consideration until after certain appellate proceedings, arbitration and mediation have been concluded in Brazil. Additionally, The Bank of New York Mellon filed a limited objection requesting to revise certain portions of the proposed order, but did not object to the motion itself. The U.S. Bankruptcy Court has scheduled a hearing on the objections to the proposed order on May 29, 2018. If the U.S. Bankruptcy Court grants the requested order, the claims with respect to our bonds issued under indentures governed by New York law will be novated and discharged under New York law and the holders of these bonds will be entitled only to receive the recovery set forth in the RJ Plan in exchange for the claims represented by these bonds.

Recognition Proceedings in the United Kingdom

On June 23, 2016, the High Court of Justice of England and Wales granted the U.K. Recognition Orders. Each of the U.K. Recognition Orders:

 

    stayed the commencement or continuation of individual actions or individual proceedings concerning the assets, rights, obligations or liabilities of Oi, Telemar and Oi Mobile;

 

    stayed execution against the assets of Oi, Telemar and Oi Mobile; and

 

    suspended the rights of Oi, Telemar and Oi Mobile to transfer, encumber or otherwise dispose of their assets.

On July 28, 2016, the U.K. Recognition Order granted in respect of Oi Mobile was partially modified to lift the suspension on its rights to transfer, encumber or otherwise dispose of its assets.

On April 10, 2018, PTIF deposited a draft of the PTIF Composition Plan with the Dutch Court and Oi Coop deposited a draft of the Oi Coop Composition Plan with the Dutch Court. The PTIF Composition Plan and the Oi Coop Composition Plan each provide for the restructuring of the claims against PTIF and Oi Coop on substantially the same terms and conditions as the RJ Plan.

A meeting of the creditors of PTIF has been scheduled on June 1, 2018 at which the creditors of PTIF will consider the PTIF Composition Plan. If the PTIF Composition Plan is approved at the meeting of the creditors of PTIF, we expect that the Dutch Court will schedule a hearing on prior to June 15, 2018 to rule on the homologation of the PTIF Composition Plan. If the PTIF Composition Plan is homologated, the PTIF Composition Plan will be given full force and effect in each member state of the European Union, including England and Wales.

A meeting of the creditors of Oi Coop has been scheduled on June 1, 2018 at which the creditors of Oi Coop will consider the Oi Coop Composition Plan. If the Oi Coop Composition Plan is approved at the meeting of the creditors of Oi Coop, we expect that the Dutch Court will schedule a hearing on prior to June 15, 2018 to rule on the homologation of the Oi Coop Composition Plan. If the Oi Coop Composition Plan is homologated, the Oi Coop Composition Plan will be given full force and effect in each member state of the European Union, including England and Wales.

For more information regarding the anticipated homologation of the PTIF Composition Plan and the Oi Coop Composition Plan, see “—Restructuring of Dutch Finance Subsidiaries.”

 

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Recognition Orders in Portugal

On November 14, 2016, Oi and Telemar requested the Third Lisbon Commercial Court, or the Portuguese Court, to recognize the RJ Proceedings in relation to Oi and Telemar under the Portuguese Insolvency and Corporate Recovery Code in Portugal. On March 2, 2017, the Portuguese Court issued a decision acknowledging the decision of the RJ Court that granted the processing of the RJ Proceedings of Oi and Telemar.

On July 11, 2017, Oi Mobile requested the Portuguese Court to recognize the RJ Proceedings in relation to Oi Mobile under the Portuguese Insolvency and Corporate Recovery Code in Portugal. On August 9, 2017, the Portuguese Court issued a decision acknowledging the decision of the RJ Court that granted the processing of the RJ Proceedings of Oi Mobile.

On May 9, 2018, Oi, Telemar and Oi Mobile, along with Copart 4 and Copart 5, filed a request for recognition of the RJ Plan in Portugal. As of the date of this annual report, a decision has not yet been rendered.

Restructuring of Dutch Finance Subsidiaries

Although the RJ Proceedings have been recognized in the United States, England and Wales, and Portugal, the laws of The Netherlands do not provide for the recognition of the RJ Proceedings. Two of the RJ Debtors, Oi Coop and PTIF, are organized under the laws of The Netherlands. As a result, a group of opportunistic litigious holders of some of the notes issued by Oi Coop and PTIF led by Aurelius Capital Management LP, or Aurelius, have brought proceedings against these RJ Debtors in The Netherlands.

On June 27, 2016, Syzygy Capital Management, Ltd, or Syzygy, an affiliate of Aurelius, filed a petition for the involuntary bankruptcy of Oi Coop before the Dutch District Court, requesting that the Dutch District Court (1) declare Oi Coop in a state of bankruptcy, (2) declare the bankruptcy of Oi Coop a main insolvency proceeding within the meaning of Article 3.1 of the European Insolvency Regulation (EC no. 1346/2000). On July 8, 2016, Loomis Sayles Strategic Income Fund also filed a petition for the involuntary bankruptcy of Oi Coop in the Dutch District Court making similar requests as those made in the Oi Coop proceeding. On July 11, 2016, a group of beneficial holders of Oi Coop bonds filed an involuntary bankruptcy petition against Oi Coop in the Dutch District Court. On July 15, 2016, another group of beneficial holders of Oi Coop bonds filed an involuntary bankruptcy petition against Oi Coop in the Dutch District Court.

On August 9, 2016 Oi Coop filed with the Dutch District Court a petition for a Dutch suspension of payments (verzoekschrift tot aanvragen surseance van betaling) proceeding, an insolvency proceeding aimed at facilitating the reorganization, rather than the liquidation, of an insolvent debtor by imposing a temporary stay against creditor actions. On August 9, 2016, the Dutch District Court granted the request of Oi Coop for the commencement of suspension of payment proceedings.

On August 22, 2016, Citicorp Trustee Company Limited, or Citicorp, in its capacity as the trustee in respect of the a series of bonds issued by PTIF, purportedly acting at the direction of the requisite majority of the holders of these bonds, filed a petition for the involuntary bankruptcy of PTIF in the Dutch District Court requesting that the Dutch District Court (1) order the bankruptcy of PTIF, and (2) declare the bankruptcy of PTIF a main insolvency proceeding within the meaning of Article 3.1 of the European Insolvency Regulation (EC no. 1346/2000)

On September 30, 2016, PTIF filed with the Dutch District Court a petition for a Dutch suspension of payments proceeding. On October 3, 2016, the Dutch District Court granted the request of PTIF for the commencement of suspension of payment proceedings.

The Oi Coop and PTIF suspension of payments proceedings were initiated in order to ensure compatibility in The Netherlands with the RJ Proceedings initiated by the RJ Debtors in Brazil. These suspension of payment proceedings provide Oi Coop and PTIF with a stay against creditor action in The Netherlands, including actions with respect to the petitions for the involuntary bankruptcy, to allow them to restructure their debts with the ultimate aim of satisfying their creditors. In connection with the granting of the requests for the commencement of suspension of payment proceedings, (1) each of Oi Coop and PTIF filed a draft of a composition with creditors plan (akkoord), or a composition plan, (2) the Dutch District Court appointed Mr. Berkenbosch as administrator of Oi Coop, and set May 18, 2017 as the date on which Oi Coop’s creditors would vote on its composition plan, and (3) the Dutch District Court appointed Mr. J.L.M. Groenewegen as administrator of PTIF, and set May 18, 2017 as the date on which PTIF’s creditors would vote on its composition plan.

On December 1, 2016, both Mr. Berkenbosch for Oi Coop and Mr. Groenewegen for PTIF filed a petition with the Dutch District Court requesting that the Oi Coop suspension of payments proceedings and the PTIF suspension of payments proceedings, respectively, be withdrawn and advising the Dutch District Court to declare Oi Coop and PTIF bankrupt. Subsequently, on December 23, 2016, the IBC filed a petition with the Dutch District Court requesting that the Oi Coop suspension of payments proceeding be withdrawn and that Oi Coop be declared bankrupt. On January 4, 2017, Citicorp filed a petition with the Dutch District Court requesting that the PTIF suspension of payments proceeding be withdrawn and PTIF be declared bankrupt.

 

 

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On February 2, 2017, following hearings to consider these requests on January 12, 2017, the Dutch District Court rendered decisions denying each of these requests.

On February 10, 2017, the IBC and Citicorp appealed the rulings of the Dutch District Court denying their respective requests to the Court of Appeal of Amsterdam, The Netherlands, or the Dutch Court of Appeal.

On April 19, 2017, the Dutch Court of Appeals granted the appeals of the IBC and Citicorp, overturning the Dutch District Court decisions and ordering that the suspension of payments proceedings in respect of Oi Coop and PTIF be converted into Dutch bankruptcy proceedings. The Dutch Court of Appeals further appointed Mr. Berkenbosch as Oi Coop’s bankruptcy trustee in the Netherlands, and Mr. Groenewegen as PTIF’s bankruptcy trustee in the Netherlands.

On July 7, 2017, upon certain appeals of the decisions of the Dutch Court of Appeals, the Dutch Supreme Court issued a decision affirming the decisions of the Dutch Court of Appeals.

On April 10, 2018, PTIF deposited a draft of the PTIF Composition Plan with the Dutch Court and Oi Coop deposited a draft of the Oi Coop Composition Plan with the Dutch Court. The PTIF Composition Plan and the Oi Coop Composition Plan each provide for the restructuring of the claims against PTIF and Oi Coop on substantially the same terms and conditions as the RJ Plan.

On April 10, 2018, Oi commenced a solicitation of votes of the holders of the seven series of bonds issued by PTIF in favor of a proposal to (1) approve extraordinary resolutions (a) releasing of Oi’s guarantee of the relevant series of bonds, and (b) instructing the trustee of such series of bonds to vote in favor of the PTIF Composition Plan and to provide a direction to the PTIF Bankruptcy Trustee in respect of its vote on behalf of PTIF on the Oi Coop Composition Plan; and (2) approve the PTIF Composition Plan.

Under the documents governing the bonds issued by PTIF, these actions may be taken at a meeting of holders of the applicable series of bonds at which at least two-thirds of the principal amount of the applicable bonds are represented in person or by proxy. In the event that quorum is not obtained at any such meeting, these actions may be taken at a meeting of holders of the applicable series of bonds at a second meeting called for the purpose at which at least one-third of the principal amount of the applicable bonds are represented in person or by proxy. In either case, the proposed extraordinary resolution may be passed by the vote of not less than 75% of the principal amount of the applicable bonds represented in the meeting.

The voting deadline under this voting solicitation was April 27, 2018 for one of these series of bonds and April 30, 2018 for the other six series of bonds. At meetings of each of these series of bonds held on May 2, 2018, quorum was not achieved for any of these series of bonds. As a result, on May 3, 2018, Oi published notices to convene adjourned meetings of each of these series of bonds on May 17, 2018 and establishing a new voting deadline of May 14, 2018. Based on the votes received as of the second voting deadline, we believe that each of the extraordinary resolutions will be passed and that each of these series of bonds will vote to approve the PTIF Composition Plan.

A meeting of the creditors of PTIF has been scheduled on June 1, 2018 at which the creditors of PTIF will consider the PTIF Composition Plan and the votes solicited by Oi will be presented to the PTIF Bankruptcy Trustee. Based on the results of the voting solicitation, we expect that the creditors of PTIF will approve the PTIF Composition Plan, however we cannot assure you that procedural matters will not be raised at this meeting of creditors that will result in the failure of the creditors to approve the PTIF Composition Plan.

If the PTIF Composition Plan is approved at the meeting of the creditors of PTIF, we expect that the Dutch Court will schedule a hearing on prior to June 15, 2018 to rule on the homologation of the PTIF Composition Plan. Although we expect that the Dutch Court will homologate the PTIF Composition Plan at that hearing, we cannot assure you that procedural matters will not be raised at this hearing that will result in the failure of the Dutch Court to homologate the PTIF Composition Plan. If the PTIF Composition Plan is homologated, the PTIF Composition Plan will be given full force and effect in each member state of the European Union.

On April 10, 2018, Oi commenced a solicitation of votes of the holders of the two series of bonds issued by Oi Coop in favor of the Oi Composition Plan. The voting deadline under this voting solicitation was May 15, 2018. As of the voting deadline, the tabulation is in the process of being finalized.

 

 

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A meeting of the creditors of Oi Coop has been scheduled on June 1, 2018 at which the creditors of Oi Coop will consider the Oi Coop Composition Plan and the votes solicited by Oi will be presented to the Oi Coop Bankruptcy Trustee and the PTIF Bankruptcy Trustee is expected to vote the claim represented by an intercompany loan made by PTIF to Oi Coop. Based on the preliminary results of the voting solicitation, if the extraordinary resolutions of the PTIF bonds are passed by all series of PTIF bonds instructing the PTIF Bankruptcy Trustee to vote the claim represented by an intercompany loan made by PTIF to Oi Coop in favor of the Oi Coop Composition Plan, we expect that the creditors of Oi Coop will approve the Oi Coop Composition Plan, however we cannot assure you that procedural matters will not be raised at this meeting of creditors that will result in the failure of the creditors to approve the Oi Coop Composition Plan. If the extraordinary resolutions of the PTIF bonds are not passed by all series of PTIF bonds, we cannot assure you as to how the PTIF Bankruptcy Trustee will vote the claim represented by an intercompany loan made by PTIF to Oi Coop, and if the PTIF Bankruptcy Trustee vote this claim against approval of the Oi Coop Composition Plan, we expect the Oi Coop Composition Plan will not be approved.

If the Oi Coop Composition Plan is approved at the meeting of the creditors of Oi Coop, we expect that the Dutch Court will schedule a hearing on prior to June 15, 2018 to rule on the homologation of the Oi Coop Composition Plan. Although we expect that the Dutch Court will homologate the Oi Coop Composition Plan at that hearing, we cannot assure you that procedural matters will not be raised at this hearing that will result in the failure of the Dutch Court to homologate the Oi Coop Composition Plan. If the Oi Coop Composition Plan is homologated, the Oi Coop Composition Plan will be given full force and effect in each member state of the European Union.

Changes to the Membership of Oi’s Board of Directors and Board of Executive Officers

Since January 1, 2016, there have been numerous changes to the composition of Oi’s board of directors and board of executive officers. Prior to the filing of our request for judicial organization on June 20, 2016:

 

    On June 1, 2016, Fernando Marques dos Santos resigned as an alternate member of Oi’s board of directors.

 

    On June 10, 2016, (1) Bayard De Paoli Gontijo resigned as Oi’s chief executive officer, and Oi’s board of directors elected Marco Norci Schroeder as Oi’s chief executive officer, and (2) Robin Bienenstock resigned as a member of Oi’s board of directors and her alternate, Marcos Grodetzky, assumed her position as a member of Oi’s board of directors.

 

    On June 18, 2016, Luiz Antonio do Souto Gonçalves resigned as a member of Oi’s board of directors and his alternate, Joaquim Dias de Castro, assumed his position as a member of Oi’s board of directors; Joaquim Dias de Castro resigned as a member of Oi’s board of directors on June 22, 2016.

Shortly following our request for judicial organization, on July 4, 2016, Marten Pieters resigned as a member of Oi’s board of directors and his alternate, Pedro Zanurtu Gubert Morais Leitao, assumed his position as a member of Oi’s board of directors.

On July 7, 2016, one of Oi’s shareholders, Societé Mondiale Fundo de Investimento em Ações, or Société Mondiale, requested that Oi’s board of directors convene an extraordinary general shareholders meeting within the following eight days meeting to deliberate, among other things, (1) the dismissal of five of the members of Oi’s board of directors that were affiliated with another of Oi’s then-shareholder, Bratel B.V., and their respective alternate members, (2) the dismissal of one independent member of Oi’s board of directors, and (3) the election of new members and alternate members of Oi’s board of directors to replace the dismissed members and to fill existing vacancies on Oi’s board of directors. On July 8, 2016, Pedro Guimarães e Melo de Oliveira Guterres resigned as an alternate member of Oi’s board of directors. On July 14, 2016, Société Mondiale informed us that it extended the deadline for this extraordinary general shareholders meeting until July 22, 2016.

On July 14, 2016, the RJ Court granted a request made by ANATEL that the RJ Court determine that prior approval from ANATEL is required for, among other things, the possible transfer of Oi’s corporate control, including the replacement of Oi’s board of directors. On July 22, 2016, Oi’s board of directors determined that, in light of the ruling of the RJ Court, it should not resolve upon Société Mondiale’s request to call an extraordinary general shareholders’ meeting prior to receiving a ruling of the RJ Court on the timeliness and propriety of the request to call such meeting.

 

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On July 29, 2016, Société Mondiale requested that Oi’s board of directors convene an extraordinary general shareholders meeting within the following eight days meeting to deliberate, among other things, bringing lawsuits on behalf of the company against various parties, including certain members of Oi’s board of directors, in relation to our acquisition of PT Portugal SGPS S.A., or PT Portugal, in May 2014. On August 3, 2016, Oi’s board of directors determined that because any action taken at the meeting to bring actions against Oi’s management would imply a potential change of Oi’s board of directors as a result of Brazilian law requirements that members of Oi’s board of directors or board of executive officers be replaced upon the commencement of such action, the requested deliberations would produce the same effects as those contained in Société Mondiale’s previous request to convene an extraordinary general shareholders meeting, and Oi’s board of directors similarly should not resolve upon Société Mondiale’s request to call an extraordinary general shareholders’ meeting prior to receiving a ruling of the RJ Court on the timeliness and propriety of the request to call such meeting.

On August 10, 2016, Société Mondiale published a call notice with respect to the extraordinary general shareholders meeting that it had requested, setting the date for such meeting as September 8, 2016. On August 12, 2016, Oi’s board of directors elected Marcos Duarte Santos and Ricardo Reisen de Pinho as members of Oi’s board of directors to fill vacancies on Oi’s board of directors.

On September 2, 2016, the RJ Court suspended the extraordinary general shareholders meeting called by Société Mondiale for September 8, 2016 and determined that Bratel B.V. and Société Mondiale should carry out a mediation proceeding to be concluded within the following 20 days.

On September 9, 2016, Marcos Grodetzky resigned as a member of Oi’s board of directors. On September 12, 2016, Flavio Nicolay Guimarães resigned as Oi’s chief financial officer and investor relations officer, and Oi’s board of directors elected Ricardo Malavazi Martins as Oi’s chief financial officer. In connection with this election, Ricardo Malavazi Martins resigned as a member of Oi’s board of directors.

On September 13, 2016, Bratel B.V. and Société Mondiale announced that they had reached an agreement resolving a dispute between these shareholders regarding an extraordinary general shareholders’ meeting that Société Mondiale had called for September 8, 2016. In accordance with their agreement, Société Mondiale requested that the chairman of Oi’s board of directors cancel the extraordinary general shareholders’ meetings.

On September 14, 2016, Oi’s board of directors, in a meeting authorized by the RJ Court, elected Hélio Calixto da Costa and Demian Fiocca as members of Oi’s board of directors, and elected Nelson Sequeiros Rodriguez Tanure as alternate member of Oi’s board of directors to Hélio Calixto da Costa, Blener Braga Cardoso Mayhew as alternate member of Oi’s board of directors to Demian Fiocca, Nelson de Queiroz Sequeiros Tanure as alternate member of Oi’s board of directors to Marcos Duarte Santos, Pedro Grossi Junior as alternate member of Oi’s board of directors to Ricardo Reisen de Pinho, Luís Manuel da Costa de Sousa de Macedo as alternate member of Oi’s board of directors to João Manuel Pisco de Castro, and José Manuel Melo da Silva as alternate member of Oi’s board of directors to Pedro Zañartu Gubert Morais Leitão.

On November 8, 2016, ANATEL issued an order in which it, among other things, (1) suspended the exercise of voting and veto rights by the members of Oi’s board of directors appointed by Société Mondiale, (2) prohibited the participation of members of Oi’s board of directors appointed by Societé Mondiale in Oi’s board of directors, and (3) ordered Oi to notify the Superintendence of Competition of ANATEL of the dates of meetings of Oi’s board of directors so that it could send a representative to attend such meetings;

On January 6, 2017, ANATEL completed its prior approval process as ordered by the RJ Court on July 14, 2016, with respect to the members and alternate members of Oi’s board of directors elected on September 14, 2016 and determined (1) to grant prior approval for the effective entry to Oi’s board of directors for Hélio Calixto da Costa and Demian Fiocca as members of Oi’s board of directors and Nelson Sequeiros Rodriguez Tanure, Blener Braga Cardoso Mayhew, Luís Manuel da Costa de Sousa de Macedo, and José Manuel Melo da Silva as alternate members of Oi’s board of directors, (2) to deny prior approval for the effective entry to Oi’s board of directors for Nelson de Queiroz Sequeiros Tanure and Pedro Grossi Junior, and (3) to require that any modifications to Oi’s board of directors, including any modifications that concern alternate members of Oi’s board of directors, be submitted to ANATEL for the prior approval for as long as the RJ Proceedings is underway.

 

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During the following months:

 

    On March 7, 2017, Rafael Luis Mora Funes resigned as a member of Oi’s board of directors and his alternate, João do Passo Vicente Ribeiro, assumed his position as a member of Oi’s board of directors.

 

    On March 28, 2017, Nuno Rocha dos Santos de Almeida e Vasconcellos resigned as an alternate member of Oi’s board of directors.

 

    On May 24, 2017, Oi’s board of directors appointed Carlos Augusto Machado Pereira de Almeida Brandão as a member of Oi’s board of executive officers without specific designation.

 

    On June 21, 2017, Oi’s board of directors elected Marcio Guedes Pereira Junior as alternate member of Oi’s board of directors to Jose Mauro Mettrau Carneiro da Cunha, and William Connel Steers as alternate member of Oi’s board of directors to André Cardoso de Mendes Navarro. Although the effectiveness of these elections had been conditioned on the prior approval of ANATEL, ANATEL never decided on this matter, which was superseded by ANATEL’s approval on January 15, 2018 of Oi’s transitional board of directors appointed pursuant to the RJ Plan. For more information about Oi’s transitional board of directors, see “Item 6. Directors, Senior Managers and Employees—Board of Directors.”

 

    On September 19, 2017, Oi’s board of directors elected Francisco Marques da Cruz Vieira da Cruz as alternate member of Oi’s board of directors to João do Passo Vicente Ribeiro. Although the effectiveness of these elections had been conditioned on the prior approval of ANATEL, ANATEL never decided on this matter, which was superseded by ANATEL’s approval on January 15, 2018 of Oi’s transitional board of directors appointed pursuant to the RJ Plan. For more information about Oi’s transitional board of directors, see “Item 6. Directors, Senior Managers and Employees—Board of Directors.”

On October 2, 2017, Ricardo Malavazi Martins resigned as Oi’s chief financial officer and investor relations officer, and Oi’s board of directors elected Carlos Augusto Machado Pereira de Almeida Brandão to serve as interim chief financial officer and investor relations officer.

On November 3, 2017, Oi’s board of directors appointed two of its members, Hélio Calixto da Costa and João do Passo Vicente Ribeiro, as members of Oi’s board of executive officers without specific designation. On November 17, 2017, the RJ Court ordered that Hélio Calixto da Costa and João do Passo Vicente Ribeiro refrain from interfering in matters related to RJ Proceedings, as well as the negotiation and preparation of the judicial reorganization plan for the RJ Debtors, without prejudice to the regular exercise of their other operational duties in the direction of our company.

On November 24, 2017, Marco Norci Schroeder resigned as Oi’s chief executive officer, and Oi’s board of directors elected Eurico De Jesus Teles Neto to serve as interim chief executive officer. On November 27, 2017, Oi’s board of directors elected Eurico De Jesus Teles Neto to serve as chief executive officer in addition to his position as chief legal officer.

Pursuant to the RJ Plan, as from the date of the approval of the RJ Plan on December 20, 2017 until the election of Oi’s new board of directors in accordance with the RJ Plan, which is required to occur within 45 business days following the conclusion of the Qualified Recovery as part of the recovery of certain holders of bonds issued by Oi, Oi Coop and PTIF under the RJ Plan as further described under “Item 5. Operating and Financial Review and Prospects—Liabilities Subject to Compromise—Loans and Financing—Fixed Rate Notes—Qualified Recovery,” Oi has and will have a transitional board of directors composed of nine members set forth in the RJ Plan, each of whom will serve without an alternate member. As a result, on December 20, 2017, (1) João do Passo Vicente Ribeiro, André Cardoso de Menezes Navarro, Thomas Cornelius Azevedo Reichenheim, João Manuel Pisco de Castro and Demian Fiocca and each alternate member of Oi’s board of directors were removed from Oi’s board of directors, and (2) Marcos Rocha, Eleazar de Carvalho Filho, and Marcos Grodetzky were installed as members of Oi’s board of directors. The effectiveness of the installation of Marcos Rocha, Eleazar de Carvalho Filho, and Marcos Grodetzky as members of Oi’s board of directors was conditioned on the prior approval of ANATEL, which was granted on January 15, 2018.

On December 28, 2017, one of Oi’s shareholders, Bratel S.à r.l, requested that Oi’s board of directors convene an extraordinary general shareholders’ meeting within eight days to deliberate on, among other things, bringing a lawsuit on behalf of Oi against members of Oi’s board of directors and board of executive officers in relation to the approval of the RJ Plan by the GCM. We submitted this request to the RJ Court for its decision on the legality and convenience of convening and holding the requested extraordinary general shareholders’’ meeting.

 

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On January 8, 2018, Bratel S.à r.l published its proposal for deliberation at its requested extraordinary general shareholders’ meeting and scheduled such meeting for February 7, 2018. In its January 8, 2018 decision ratifying and confirming the RJ Plan, the RJ Court had stated that the amendments to Oi’s bylaws that were approved in the RJ Plan precluded the extraordinary shareholders meeting. On February 5, 2018, the RJ Court rejected Bratel S.à r.l’s request to partially reconsider this portion of its decision.

On February 7, 2018, Bratel S.à r.l purported to convene an extraordinary general shareholders’ meeting and elect members of Oi’s board of directors. On that date, the RJ Court declared invalid and ineffective any out-of-court deliberation that undermined matters approved by the RJ Plan. On February 8, 2018, the RJ Court granted interlocutory relief to Oi’s denying the effectiveness of all resolutions taken at the purported extraordinary general shareholders’ meeting.

On March 7, 2018, the RJ Court suspended the voting rights of the certain shareholders of Oi that participated in the purported extraordinary general shareholders’ meeting held on February 7, 2018, including Bratel S.à r.l and Société Mondiale, and ordered the removal of the members of Oi’s board of directors that had been elected/indicated by such shareholders them the completion of the Capitalization of Credits Capital Increase as part of the RJ Plan. As a result, Luis Maria Viana Palha da Silva, Pedro Zañartu Gubert Morais Leitão and Hélio Calixto da Costa were temporarily removed as members of Oi’s board of directors effective on March 7, 2018. Hélio Calixto da Costa also resigned as a member of Oi’s board of executive officers. The judicial decision also ordered the subpoena of the current executive officers of Oi and the shareholders whose voting rights were suspended, to express their interest in establishing a mediation proceeding. Oi (on behalf of itself and its executive officer), Bratel S.à r.l and Société Mondiale have manifested their interest in a mediation. Oi filed a petition stating that, since Société Mondiale has sold its shares and is no longer a shareholder of Oi, it should not be a part of the mediation. Despite Oi’s position, the RJ Court issued a decision ordering the mediation to be initiated.

In addition, on March 7, 2018, Oi’s board of directors elected Carlos Augusto Machado Pereira de Almeida Brandão to serve as chief financial officer and investor relations officer; he had previously been serving in this position on an interim basis.

Pursuant to the RJ Plan, Oi was required to engage a human resources consultant to assist with the selection of an operating officer. This process concluded on March 23, 2018 with the election by Oi’s board of directors of José Claudio Moreira Gonçalves to serve on Oi’s board of executive officers as Oi’s Chief Operating Officer. In addition, on that date, Oi’s board of directors elected Bernardo Kos Winik to Oi’s board of executive officers and the newly created position of Chief Commercial Officer.

On March 7, 2017, João do Passo Vicente Ribeiro resigned as a member of Oi’s board of executive officers.

For information about the current members of Oi’s board of directors and board of executive officers, see “Item 6. Directors, Senior Management and Employees.”

Settlement of Africatel Arbitration Sale of Interest in MTC

On June 16, 2016, our wholly-owned subsidiaries PT Participações and Africatel GmbH & Co. KG, or Africatel KG, and our 75%-owned subsidiary Africatel Holdings B.V., or Africatel BV, entered into a series of agreements with Samba Luxco S.à r. l., or Samba Luxco, an affiliate of Helios Investors L.P. and the owner of the remaining 25% of Africatel BV, with the primary purpose of settling the arbitral proceedings commenced in the International Court of Arbitration of the International Chamber of Commerce against Africatel KG in November 2014. Samba Luxco brought these proceedings in an effort to enforce a put right under a shareholders agreement between Samba Luxco and Africatel KG with respect to their holdings in Africatel BV, which we refer to as the Africatel shareholders agreement, that Samba Luxco claimed that it was entitled to exercise as a result of our acquisition of PT Portugal in May 2014.

The agreements entered into on June 16, 2016 included an amendment to the Africatel shareholders agreement and a Settlement and Share Exchange Agreement, which we refer to as the Settlement Agreement, under which Samba Luxco agreed, upon the implementation of the Settlement Agreement: (1) to terminate the ongoing arbitration proceeding and release our subsidiaries from all past and present claims related to alleged breaches of the Africatel shareholders agreement asserted in the arbitration proceeding, (2) to waive certain approval rights it had under the Africatel shareholders agreement, and (3) to transfer 11,000 shares of Africatel BV to Africatel BV, resulting in a decline of Samba Luxco’s stake in Africatel BV from 25% to 14%. In exchange, Africatel BV agreed to transfer to Samba Luxco its stake in the capital of Mobile Telecommunications Limited, a the telecommunications operator in Namibia, or MTC, which represented approximately 34% of the share capital of MTC.

 

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On January 31, 2017, the transactions provided for in the Settlement Agreement were completed. As a result, Samba Luxco reduced its stake in Africatel BV to 14,000 shares and Africatel BV transferred to Samba Luxco its stake in MTC. On March 29, 2017, Africatel KG and Samba Luxco adopted a shareholders’ resolution under which the 11,000 Africatel BV shares that Samba Luxco had transferred to Africatel BV were cancelled and an additional 1,791 Africatel BV shares held by Samba Luxco were cancelled, as a result the stakes of Africatel KG and Samba Luxco in Africatel BV are 86% and 14%, respectively.

Acquisition of A.R.M.

We had entered into a services agreement with A.R.M. Engenharia Ltda., or 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 through our subsidiary Serede Serviços de Rede S.A., or Serede. 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 A.R.M Engenharia. The transaction was concluded on June 27, 2016, after satisfaction of the conditions precedent provided in contract, common in transactions of the same nature, including the conclusion of legal and financial audit at A.R.M. Engenharia and the obtainment of approval by the Administrative Council for Economic Defense (CADE—Conselho Administrativo para Defesa Econômica). On the same date, the corporate name of A.R.M. Engenharia was changed to Rede Conecta – Serviços de Rede S.A., or Rede Conecta.

For more information about our network maintenance agreements with Serede and Rede Conecta, see “Item 4. Information on the Company—Network and Facilities—Network Maintenance.”

 

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Corporate Structure

The following chart presents our corporate structure and principal operating subsidiaries as of May 10, 2018. For a complete list of our subsidiaries, see Exhibit 8.01 to this annual report.

 

LOGO

 

(1) Oi directly and indirectly owns 100% of equity stock of Serede Serviços de Rede S.A., as follows: 81.43% is held directly by Telemar and 18.57% is held directly by Oi.
(2) Oi indirectly holds 100% of the equity stock of Brasil Telecom Comunicaçāo Multimedia Ltda., as follows: 99.99% is held directly by Oi Mobile and 0.01% is held directly by Telemar.
(3) Oi indirectly holds 86% of the equity stock of Africatel Holdings B.V., through its wholly-owned subsidiary Africatel GmbH & Co KG. Samba Luxco S.à r.l. holds the remaining 14% of the equity stock of Africatel Holdings B.V.
(4) Oi indirectly holds 100% of the equity stock of Paggo Acquirer Gestão de Meios de Pagamentos Ltda., as follows: 99.99% is held directly by Paggo Empreendimentos S.A. and 0.01% is held directly by Oi Mobile.

Operations in Brazil

We provide the following services:

 

    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;

 

    data transmission services throughout Brazil; and

 

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

 

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

Region I consists of 16 Brazilian states located in the northeastern and part of the northern and southeastern regions. Region I covers an area of approximately 5.4 million square kilometers, which represents approximately 64% of the country’s total land area and accounted for 31.2% of Brazil’s GDP in 2016. The population of Region I was 112.9 million as of 2016, which represented 54.3% of the total population of Brazil as of that date. In 2016, GDP per capita in Region I was approximately R$19,055, varying from R$11,366 in the State of Maranhão to R$39,827 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 2.8 million square kilometers, which represents approximately 33.5% of the country’s total land area and accounted for approximately 26.1% of Brazil’s GDP in 2016. The population of Region II was 49.7 million as of 2016, which represented 23.9% of the total population of Brazil as of that date. In 2016, GDP per capita in Region II was approximately R$32,545, varying from R$16,953 in the State of Acre to R$73,971 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 32.4% of Brazil’s GDP in 2016. The population of Region III was 45.1 million as of 2016, which represented 21.7% of the total population of Brazil as of that date. In 2016, GDP per capita in Region III was approximately R$43,695.

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)
(2016)
     Population
per Square
Kilometer (2016)
     % of GDP
(2016)
     GDP per Capita
(in
reais) (2016)
 

Region I:

           

Rio de Janeiro

     16.7        365.23        11.0        39,826.95  

Minas Gerais

     21.1        33.41        8.7        24,884.94  

Bahia

     15.3        24.82        4.1        16,115.89  

Pernambuco

     9.5        89.62        2.6        16,795.34  

Espírito Santo

     4.0        76.25        2.0        30,627.45  

Pará

     8.4        6.07        2.2        16,009.98  

Ceará

     9.0        56.76        2.2        14,669.14  

Amazonas

     4.1        2.23        1.4        21,978.95  

Maranhão

     7.0        19.81        1.3        11,366.23  

Rio Grande do Norte

     3.5        59.99        1.0        16,631.86  

Paraíba

     4.0        66.7        0.9        14,133.32  

Alagoas

     3.4        112.33        0.8        13,877.53  

Sergipe

     2.3        94.36        0.6        17,189.28  

Piauí

     3.2        12.4        0.7        12,218.51  

Amapá

     0.8        4.69        0.2        18,079.54  

Roraima

     0.5        2.01        0.2        20,476.71  
  

 

 

       

 

 

    

Subtotal

     112.9           39.9     
  

 

 

       

 

 

    

Region II:

           

Rio Grande do Sul

     11.3        37.96        6.4        33,960.36  

Paraná

     11.3        52.4        6.3        33,768.62  

Santa Catarina

     7.0        65.27        4.2        36,525.28  

Goiás

     6.8        17.65        2.9        26,265.32  

Mato Grosso

     3.3        3.36        1.8        32,894.96  

Federal District

     3.0        444.66        3.6        73,971.05  

 

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State

   Population
(in millions)
(2016)
     Population
per Square
Kilometer (2016)
     % of GDP
(2016)
     GDP per Capita
(in 
reais) (2016)
 

Mato Grosso do Sul

     2.7        6.86        1.4        31,337.22  

Rondônia

     1.8        6.58        0.6        20,677.95  

Tocantins

     1.6        4.98        0.5        19,094.16  

Acre

     0.8        4.47        0.2        16,953.46  
  

 

 

       

 

 

    

Subtotal

     49.7           27.9     
  

 

 

       

 

 

    

Region III:

           

São Paulo

     45.1        166.23        32.4        43,694.68  
  

 

 

       

 

 

    

Subtotal

     45.1           32.4     
  

 

 

       

 

 

    

Total

     207.7           100.0     
  

 

 

       

 

 

    

 

Source: IBGE.

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

 

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

Our Services

We provide a variety of telecommunications services to the residential market, the personal mobility market and the B2B markets throughout Brazil.

Convergent Services

Recent figures show that bundled offerings build customer loyalty and serve to reduce churn rates as compared to standalone services. For example, during the year ended December 31, 2017, the average customer churn rate of customers who purchased our Oi Total Residencial triple-play residential bundle that combines fixed-line voice, broadband data and Pay-TV was 36.6% lower than the churn rate recorded for customers who purchased our standalone residential fixed-line voice offering. 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 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 Claro and Telefônica Brasil offer broadband services at higher speeds than us. 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 bundle designed to increase our market penetration and profitability by attracting new customers and offering a higher number of servicers per user. Oi Total embodies our convergence strategy, 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 integrated processes of Oi Total have allowed us to generate greater operational efficiencies, thereby reducing our operating costs. By December 31, 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. In March 2016, we launched Oi Total in the remaining Brazilian states where we offer fixed-line services. As of December 31, 2017 and 2016, 22.9% and 9.0%, respectively, of our fixed-line customers subscribed to one of the plans in our Oi Total portfolio.

Our Oi Total portfolio consists of:

 

    Oi Total Solução Completa, our quadruple-play bundle that combines fixed-line voice, broadband data, Pay-TV and mobile voice and data services, including (1) unlimited local and domestic long-distance calls from one fixed line and one mobile device to any fixed line or mobile device in Brazil, (2) between 10 Mbps and 35 Mbps of broadband data through VDSL, (3) between 2GB and 10 GB of 4G mobile data and up to 10 GB of lower speed mobile data, (4) between 125 and 200 channels of Pay-TV, including between 27 and 75 high-definition, or HD, channels and (5) an extensive on-demand movie, TV and internet content that is available free of charge for streaming anytime, anywhere through Oi Play, our content platform. In addition, all Oi Total Solução Completa customers receive access to our Wi-Fi access points.

 

    Oi Total Conectado, our triple-pay bundle that combines fixed-line voice, broadband data and mobile voice and data services, including all of the features of the Oi Total Solução Completa plans except for Pay-TV.

 

    Oi Total Residencial, our residential bundle that combines fixed-line voice, broadband data and Pay-TV, including all of the features of the Oi Total Solução Completa plans except for mobile voice and data services.

 

    Oi Total TV + Fixo, a bundle that combines fixed-line voice and Pay-TV, including unlimited local and domestic long-distance calls from one fixed line to any fixed-line telephone in Brazil and between 125 and 200 channels of Pay-TV, including between 27 and 75 HD channels and a range of Oi Play content. Oi Total TV + Fixo plans include the option to add mobile voice services.

 

    Oi Total Play, a bundle that combines fixed-line voice and broadband data, including unlimited local and domestic long-distance calls from one fixed line to any fixed-line telephone in Brazil, up to 35 Mbps of broadband data through VDSL and a range of Oi Play content. We launched Oi Total Play in 2017. Oi Total Play is a pioneer in the Brazilian market, since it provides video content that can be accessed by various devices, using the Oi Play platform, without the need to subscribe for a Pay-TV package.

 

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Residential Services

Our primary services to the residential market are fixed-line voice, broadband data 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.

As of December 31, 2017, our Residential Services segment recorded 15,885 thousand RGUs, as follows: 9,233 thousand fixed lines in service; 5,156 thousand broadband RGUs; and 1,496 thousand Pay-TV RGUs. As of December 31, 2016, our Residential Services segment recorded 16,425 thousand RGUs, as follows: 9,947 thousand fixed lines in service; 5,188 thousand broadband RGUs; and 1,290 thousand Pay-TV RGUs.

Bundled Services

Our bundled offerings for residential customers have focused on increasing our profitability by providing a more comprehensive mix of higher-value services to our customers. In 2017, we continued to focus 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 Oi Total Play bundle within our Oi Total portfolio. We believe that these measures, together with our simplified plan offerings in the Residential Services business, resulted in an ARPU increase for our residential services from R$77.2 in 2016 to R$81.3 in 2017.

In addition to Oi Total, bundles for residential customers include:

Oi Conta Total

With the nationwide launch of Oi Total in March 2016, we discontinued new sales of Oi Conta Total, our former triple-play plan that combined fixed-line voice, broadband and mobile voice and data services and unlimited text messages to subscribers of any provider. We have since moved these offerings under the Oi Total portfolio under the Oi Total Conectado plan and have begun efforts to migrate our legacy Oi Conta Total customers to Oi Total. As of December 31, 2017 and 2016, 2.6% and 7.4%, respectively of our fixed-line customers subscribed to one of the plans in the Oi Conta Total portfolio.

Pay-TV and Broadband Bundles

Subscribers to our internet protocol Pay-TV, or 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.

Fixed-Line Voice Services

As of December 31, 2017 and 2016, we had 12.9 million and 13.7 million local fixed-line customers, respectively, in our fixed-line service areas (including customers of our B2B Services business). 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 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, 2017 and 2016, 14.6% and 14.5%, respectively, of our fixed-line customers subscribed to the Basic Plan per Minute or the Mandatory Alternative Service Plan.

 

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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, 2017 and 2016, 85.4% and 85.5%, respectively, 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, 2017 and 2016, we had approximately 640,000 and 642,000 public telephones in service, respectively, 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 each of December 31, 2017 and 2016, we offered broadband services in approximately 4,700 municipalities and had 5.7 million broadband customers in our fixed-line service areas (including customers of our B2B Services business). 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 cloud 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.

In September 2015, we launched high-speed VDSL broadband service with offers ranging from 15 to 35 Mbps. With continued investments in our broadband network infrastructure, we expect to be able to offer our fixed-line broadband services at even greater speeds.

We continue to strategically invest in areas where we see the greatest potential for sales and growth. Our two primary competitors in broadband services, Claro and Telefônica Brasil, both offer broadband at higher speeds than our offerings. As a result, 2017, we devoted a substantial portion of our capital expenditures in investments to our network to increase the available broadband speeds and quality 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 2017.

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. We also deliver Oi TV through our fiber optic network in the cities of Rio de Janeiro, Vilar dos Teles, Duque de Caxias and Niteroi, in the State of Rio de Janeiro, and the city of Belo Horizonte, in the State of Minas Gerais. As of December 31, 2017 and 2016, we had approximately 1.5 million and 1.3 million subscribers, respectively, to our Pay-TV services. As of December 31, 2017 and 2016, approximately 16.2% and 13.0%, respectively, of households with our residential services subscribed to Oi TV.

 

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We offer four packages of Pay-TV services: (1) Oi TV Start HD with 125 channels, including 27 HD channels, (2) Oi TV Mix HD with 159 channels, including 53 HD channels, (3) Oi TV Total HD with 190 o 194 channels, including 69 HD channels, and (4) Oi TV Total Cinema DVR HD with 200 channels, including 75 HD channels and DVR. Subscribers to each of these packages have the option to customize the package through the purchase of additional channels featuring films offered by HBO/Cinemax and Telecine and sports offered by Futebol.

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, 2017, we had approximately 36.6 million subscribers (RGUs) for our mobile services, of which 29.9 million, or 81.6%, were pre-paid subscribers and 5.7 million, or 18.4%, were post-paid subscribers. As of December 31, 2016, we had approximately and 39.9 million subscribers (RGUs) for our mobile services, of which 33.0 million, or 82.8%, were pre-paid subscribers and 6.9 million, or 17.2%, were post-paid subscribers. Our mobile ARPU increased from R$13.1 in 2016 to R$14.6 in 2017.

Our principal mobile services plans are voice and data bundles: Oi Mais for the post-paid market; Oi Livre for the pre-paid market; and Oi Mais Controle as a hybrid solution. These offerings are 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 Bundles

Post-Paid

Customers of our post-paid voice and data bundles are billed on a monthly basis for contracted services used during the previous month, in addition to surplus usage and special services contracted and used and monthly subscription fees. In addition to mobile voice and mobile data communications services, our post-paid voice and data bundles provide voice mail, caller ID, conference calling, call forwarding, calls on hold and other services.

 

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We offer post-paid voice and data bundles through our Oi Mais portfolio. Our Oi Mais plans offer between 7 GB and 50 GB of 4G mobile data with no usage restrictions and, since December 2017, unlimited minutes to call fixed-line and mobile customers of any operator in Brazil. We believe that our Oi Mais plans allow us to satisfy the growing demand from our customers for unlimited voice calls and increased and unrestricted data usage. In addition, all Oi Mais customers receive access to our Oi Play platform and Wi-Fi access points. As of December 31, 2017 and 2016, Oi Mais accounted for 32% and 65%, respectively, of our total post-paid mobile customer base.

Since December 2017, all of our post-paid mobile plans include unlimited all-net voice minutes for calls within Brazil, and by the end of 2017, approximately 28% of our post-paid customer base had subscribed to one of our unlimited all-net voice options. We believe that our offerings in the post-paid market will enable us to improve revenue and market share by offering a mix of services to the post-paid market at more attractive prices.

Pre-Paid

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.

We offer pre-paid voice and data bundles through our Oi Livre portfolio. Our Oi Livre portfolio includes a range of all-net voice minutes for calls within Brazil (including unlimited minutes through the Oi Livre Ilimitado plans) and data allowances (ranging from 500 MB to 7.6 GB of 4G mobile data) for flat fees. Customers choose the amount of time they have to use their voice and data allowances, ranging from one to 30 days. Using the Minha Oi application on their smartphones, customers can freely switch between their data and voice allowances depending on their individual needs using a pre-determined exchange rate. Oi Livre changed 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 in 2015 was a strategic move given the 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. As of December 31, 2017 and 2016, Oi Livre accounted for approximately 65.5% and 44.7%, respectively, of our total pre-paid base.

Under our pre-paid voice plans, our customers may also exchange the credits they purchase for additional services, such as: (1) Bônus Extra, which permits our customers to purchase additional minutes for local or long-distance calls to our fixed-line or mobile subscribers at discounted rates; (2) Pacote de Dados, which permits our customers to purchase a specified data allowance for use on their handsets; and (3) Pacote de SMS, which permits our customers to purchase the ability to send a specified number of text messages.

In keeping with our focus on cost control and increasing profitability, throughout 2017 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

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.

We offer the Oi Mais Controle portfolio of plans for customers who wish to combine the cost savings of our post-paid plans with the self-imposed limits of our pre-paid plans. Oi Mais Controle subscribers have similar benefits as the Oi Mais customers, such as data packages with no usage restrictions, unlimited text messaging and unlimited all-net voice minutes for calls within Brazil, combined with the ability of Oi Livre customers to freely switch between their data and voice allowances depending on their individual needs using a pre-determined exchange rate using the Minha Oi application on their smartphones. We believe these 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. As of December 31, 2017 and 2016, Oi Mais Controle accounted for approximately 51% and 62%, respectively, of our total hybrid mobile customer base.

 

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Mobile Voice Only Services

We no longer sell voice-only mobile plans. However, we offer mobile voice plans for our pre-paid and hybrid customers who wish to purchase additional voice minutes.

Mobile Data Only Services

We offer post-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.

Post-Paid

As with our Oi Mais customers, 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, and we throttle the speed of service for customers who exceed their data allowances. We also offer internet access for a daily fee to customers who do not subscribe to a monthly plan.

We offer a variety of post-paid mobile data communications plans that provide data allowances from 3 GB to 30 GB for smartphones and from 2 GB to 10 GB for tablets and laptop computers and provide data transmission at speeds of 1 Mbps (3G network) or 5 Mbps (4G network). 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 Mais customers who wish to purchase additional data and to customers of our legacy post-paid stand-alone voice plans who wish to add mobile data services to their smartphones. Our post-paid mobile internet plans for tablets and laptop computers are sold on a stand-alone basis or, in some cases, through our voice and data bundles. 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 and Hybrid

We also offer mobile data communications services through smartphones for our Oi Livre (pre-paid) and Oi Mais Controle (hybrid) customers who wish to purchase additional data and to customers of our legacy pre-paid and hybrid stand-alone voice plans who wish to add mobile data services to their smartphones.

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 2017.

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.

 

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B2B Services

In our B2B Services business, we serve SME and corporate (including government) customers and other telecommunications providers. We offer a variety of services to our SME and corporate customers, including our core fixed-line, broadband and mobile services, as well as our value-added services, advanced voice services and commercial data transmission services. For our corporate customers, we also offer information technology services, such as network management and security, Storage, Smartcloud, anti-distributed denial of service and machine-to-machine products, which enable communication between a product and its control center or database (such as a car and its GPS navigation system), in order to expand our revenue sources from corporate customers beyond voice services, increase customer loyalty and ensure greater revenue predictability. We also provide wholesale interconnection, network usage and traffic transportation services to other telecommunications providers.

As of December 31, 2017, our B2B Services segment recorded 6,512 thousand RGUs, as follows: 3,641 thousand fixed lines in service; 543 thousand broadband RGUs; 2,316 thousand mobile RGUs; and 12 thousand Pay-TV RGUs. As of December 31, 2016, our B2B Services segment recorded 6,617 thousand RGUs, as follows: 3,760 thousand fixed lines in service; 553 thousand broadband RGUs; 2,290 thousand mobile RGUs; and 13 thousand Pay-TV RGUs.

The implementation of certain initiatives since the end of 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 launched FTTH plans for SMEs. In addition, we offer SMEs:

 

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

 

    dedicated internet connectivity and data network services; and

 

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

In general, our sales team works with our SME customer to determine that customer’s telecommunications needs and negotiates a package of services and pricing structure that is best suited to its needs. In December 2015, we launched Oi Mais Empresas for SMEs. Oi Mais Empresas provides a portfolio of flat fee services. 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, we launched the Oi Mais Empresas app, a fully digital customer channel through a smartphone application. 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.

 

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Services for Corporate Customers

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

 

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

 

    dedicated Line Services (Serviços de Linhas Dedicadas), or SLD, under which we lease dedicated lines to corporate customers for use in private networks that link different corporate websites; and

 

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

We provide these services at data transmission speeds of 2 Mbps to 100 Gbps.

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

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

 

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

 

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

 

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

 

    Security services, a centralized, anti-spam filtering solution for corporate email; and

 

    Telepresence as a Service (TPaaS), a video-conferencing service that allows collaboration among people at remote locations.

We also offer various services based on IT applications:

 

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

 

    Interação Web, a digital marketing service, which allows us to implement on the website of our B2B Services customers an intelligent interaction with their digital users in real time.

 

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

 

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

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

Wholesale Services

We offer specialized wholesale 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.

 

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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.

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 Claro 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 certain services, including basic local fixed-line and domestic long-distance plans, interconnection, EILD and SLD services, are subject to regulation by ANATEL, subject to certain exceptions. For information on ANATEL regulation of our rates, see “—Telecommunications Regulation—Regulation of the Brazilian Telecommunications Industry.” Under our current authorizations, which we operate under the private regime, we are allowed to set prices for our mobile service plans, provided that such amounts do not exceed a specified inflation adjusted cap. Other telecommunications services, such as broadband services, IP services, frame relay services and DTH and IP TV are not subject to ANATEL regulation.

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.

 

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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, 2017 and 2016, 14.6% and 14.5%, respectively, of our 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 offering those plans to our customers. In general, ANATEL does not raise objections to the terms of these plans. As of December 31, 2017 and 2016, 85.4% and 85.5%, respectively, of our fixed-line customers subscribed to alternative plans, including our bundled 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 3.6% as of June 13, 2015 and 2.94% as of September 12, 2016, and decreased the rates that we may charge by an average of 0.08% as of November 11, 2017. In addition, we are authorized to adjust the rates applicable to our alternative plans annually by no more than the rate of inflation, as measured by the Telecommunications Services Index (Índice de Serviços de Telecomunicações – IST), or IST. Discounts from the rates set in basic service plans and alternative service plans may be granted to customers without ANATEL approval.

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

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

On an annual basis, ANATEL may increase or decrease the maximum VC Rates that we are permitted to charge. As a result of the substantial reductions in VC Rates in past years (for example, between 2012 and 2018, ANATEL reduced our VC-1 rate by approximately 65%) 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. In addition, since 2017 most of our mobile plans allow our customers to place unlimited local and long-distance calls regardless of the network where the call originates or terminates. All-net and unlimited plans eliminate the effect of VC Rate reductions on our customers’ telephone bills and simplify the billing process.

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.

 

 

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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 may charge by an average of 0.7% as of September 9, 2016 and decreased such rates by 0.7% as of November 11, 2017. 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 and data packages paid by our pre-paid and post-paid mobile subscribers and monthly subscription charges paid by our post-paid plan subscribers. Monthly subscription charges are based on a post-paid subscriber’s service plan. If one of our mobile subscribers places or receives a call from a location outside of his or her home registration area, we are permitted to charge that customer the applicable roaming rate. We charge for all mobile calls made by our pre-paid customers, and for mobile calls made by our post-paid customers in excess of their allocated monthly number of minutes, on a per-minute basis.

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 30 days of such notice.

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. We may grant customers discounts from the rates set in our service plans without ANATEL approval. The rate of inflation as measured by the IGP-DI was 10.7% in 2015, 7.2% in 2016 and (0.42)% in 2017.

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

 

    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. Historically, 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.

 

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In July 2014, ANATEL published the maximum fixed reference rates, including TU-RL and TU-RIU, for entities with significant market power, such as our company, for 2016 through 2019. As a result, our TU-RL and TU-RIU reference rates have declined significantly and will continue to decline through 2019, when TU-RL and TU-RIU rates reflecting a methodology that takes into consideration all long-run incremental costs, updated to current values, of providing a particular service and the unit costs of such service based on an efficient network considering the existing regulatory obligations, will apply. In February 2016, our TU-RL rate in each of Region I and II was R$0.01146 per minute, our TU-RIU1 rates in Regions I and II were R$0.06124 per minute and R$0.4946 per minute, respectively, and our TU-RIU2 rates in Regions I and II were R$0.06621 per minute and R$0.5524 per minute, respectively. In each of February 2017 and 2018, our TU-RL rates in Regions I and II declined by 20.9% and 22.8%, respectively, our TU-RIU1 rates in Regions I and II declined by 52.8% and 45.1%, respectively, and our TU-RIU2 rates declined by 57.3% and 49.9%, respectively, and we expect that these rates will decline by the same percentages in 2019.

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 MTR 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 MTR rates to all requesting service providers on a nondiscriminatory basis. We apply MTR charges on a per-minute basis.

In December 2013 ANATEL established the maximum MTR rate of R$0.33 per minute that is applicable in the event that providers could not agree upon the MTR applicable in their interconnection agreements. Under the General Plan on Competition Targets, for the period from February 2015 to February 2016, the MTR rate was reduced to 50% of the maximum MTR rate established by ANATEL in December 2013. In July 2014, ANATEL published the maximum MTR reference rates for entities with significant market power, such as our company, for 2016 through 2019. As a result, our MTR rates have declined significantly and will continue to decline through 2019, when MTR rates reflecting a methodology that takes into consideration all long-run incremental costs, updated to current values, of providing a particular service and the unit costs of such service based on an efficient network considering the existing regulatory obligations, will apply. In February 2016, our MTR rates in Regions I, II and III were set at R$0.09317 per minute, R$0.10308 per minute and R$0.11218 per minute, respectively. In each of February 2017 and 2018, our MTR reference rates in Regions I, II and III declined by 47.1%, 47.7% and 39.2%, respectively, and they will decline by the same percentages in February 2019.

Data Transmission Rates

Broadband services, IP services and frame relay services are market driven and not subject to ANATEL regulation. 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 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 July 2014, ANATEL published reference rates for EILD services that contain a single reference table which will be valid from 2016 until 2020, when rates reflecting a methodology that takes into consideration all long-run incremental costs, updated to current values, of providing a particular service and the unit costs of such service based on an efficient network considering the existing regulatory obligations, 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.

 

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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 ANATEL 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 2017 and 2016, we incurred R$410 million and R$427 million, respectively, in marketing expenses in our Brazilian operations. On a company-wide basis, we focus our marketing efforts on the upscaling of existing clients while strengthening the “Oi” brand through our convergent services offerings and promotion of our Minha Oi smartphone application, which allows our pre-paid customers to freely switch between their data and voice allowances. We also engage in digital marketing and multiple customer relationship management (CRM) marketing programs to support our B2B Services business.

In 2017, we dramatically increased our investment in digital advertising, which has increasingly grown in relevance as compared to more traditional advertising platforms. In combination with television advertising, our digital presence maximizes our return on investment in line with our strategy to reach all types and classes of customers and potential customers. We tactically use other media outlets, such as radio, billboards and exterior signage, for specific initiatives, while direct mail, text messaging and telemarketing are used to upscale our current base. We also sponsor sporting events and individual athletes, as well as cultural events, to increase brand awareness and promote our portfolio as a telecommunications provider capable of meeting all of the telecommunications needs of our customers.

Our principal marketing expenditures to support our Residential Services business are designed to:

 

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

 

    promote cross-selling of our services by promoting our bundled plans and higher-value offers, as part of our effort to generate higher ARPU and reduce customer churn rates.

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

 

    promote the Minha Oi app, which allows our customers to freely switch between their data and voice allowances, via ad campaigns on television and digital media;

 

    promote our post-paid and hybrid 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.

 

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Our principal marketing expenditures to support our B2B Services business focus on customer relationship management (CRM) initiatives and include:

 

    press releases to announce sales cases and launches of new products and services;

 

    C-suite level relationship events;

 

    attendance at fairs and conferences;

 

    digital media; 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, 2017, the principal distribution channels that we used for sales to residential customers were:

 

    our own network of stores, which included 131 “Oi” branded stores;

 

    approximately 562 “Oi” franchised service stores and kiosks located in the largest shopping malls and other high density areas throughout Brazil;

 

    approximately 7,300 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 1,365 sales representatives that answer more than 550 thousand calls per month. This channel provides us with the ability to proactively reach new customers, thereby increasing our client base and revenues, and also receives calls prompted by our offers made in numerous types of media;

 

    our “teleagents” channel, which consists of approximately 472 local sales agents that operate in specific regions and complement our telemarketers;

 

    door-to-door sales calls made by our sales force of approximately 1,965 salespeople trained to sell our services throughout Brazil in places where customers generally are not reachable by telemarketing; and

 

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

 

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Personal Mobility Services

Our distribution channels for personal mobility customers are focused on sales of mobile services to post-paid customers and pre-paid customers, including mobile broadband customers. As 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, 2017, the principal distribution channels that we used for sales of our pre-paid personal mobility services were:

 

    approximately 810 stores that are part of large national chains which sell our post-paid and pre-paid personal mobility services and SIM cards;

 

    approximately 25 multibrand distributors that distribute our SIM cards and pre-paid mobile cards to approximately 267,597 pharmacies, supermarkets, newsstands and similar outlets;

 

    our telemarketing sales channel has of approximately 695 sales representatives that answer more than 650 thousand calls per month selling our post-paid personal mobility services; and

 

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

B2B Services

We have established separate distribution channels to serve SME and corporate customers. 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. As of December 31, 2017, the principal distribution channels that we use to market our services to SMEs were:

 

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

 

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

 

    our website and the Oi Mais Empresas application.

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, 2017, our corporate sales team, including post-sale service personnel, was composed of approximately 1,390 employees operating in five 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. Payments of Residential Services bills are due within an average of 15 days after the billing date. We charge late-payment interest at a rate of 1% per month plus a one-time late charge of 2% of the amount outstanding. We have agreements with several banks for the receipt and processing of payments from our Residential Services customers. A variety of businesses, such as lottery houses, drugstores and grocery stores, accept payments from our Residential Services customers as agents for these banks. As of December 31, 2017, 15.6% of all accounts receivable due from our Residential Services customers in Brazil were outstanding for more than 30 days and 12.0% were outstanding for more than 90 days.

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

 

 

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ANATEL regulations permit us to restrict outgoing calls made by a Residential Services customer 15 days after we send the customer a past due notice, restrict incoming calls received by a Residential Services customer 30 days after the restriction on outgoing calls is imposed, and disconnect a Residential Services customer after 30 days after the restriction on incoming calls is imposed. The disconnection process thus comprises several stages, including customer notification regarding the referral of their delinquency to credit bureaus, before the Residential Services customer may be ultimately disconnected due to non-payment. Notices range from voice messages to active calls for negotiation with the customer. Our collection system enables us to access delinquent subscribers’ accounts according to their payment profile. This profile takes into consideration, among other things, the length of subscription, the outstanding balance of the account and the longest payment delays.

Personal Mobility Services

We bill our post-paid Personal Mobility Services customers on a monthly basis and itemize charges in the same manner as we bill our Residential Services customers. In addition, the monthly bills also provide details regarding minutes used and roaming charges. Payments are due within an average of 15 days after the billing date. We charge late-payment interest at a rate of 1% per month plus a one-time late charge of 2% of the amount outstanding. As with our Residential Services business, we have agreements with several banks for the receipt and processing of payments from our post-paid Personal Mobility Services customers. A variety of businesses, such as lottery houses, drugstores and grocery stores, accept payments from our post-paid Personal Mobility Services customers as agents for these banks. As of December 31, 2017, 34.7% of all accounts receivable due from our Personal Mobility Services customers in Brazil were outstanding for more than 30 days and 30.4% were outstanding for more than 90 days.

ANATEL regulations permit us to restrict outgoing calls made and text messages sent by a post-paid Personal Mobility Services customer 15 days after we send the customer a past due notice, restrict incoming calls and text messages received by a post-paid Personal Mobility Services customer 30 days after the restriction on outgoing calls and text messages is imposed, and cancel services to a post-paid Personal Mobility Services customer after 30 days after the restriction on incoming calls is imposed. The cancellation process thus comprises several stages, including customer notification regarding the referral of their delinquency to credit bureaus, before services to the post-paid Personal Mobility Services customer may be ultimately cancelled due to non-payment. Notices range from text messages to active calls for negotiation with the customer. Our collection system enables us to access delinquent subscribers’ accounts according to their payment profile. This profile takes into consideration, among other things, the length of subscription, the outstanding balance of the account and the longest payment delays. We have also implemented an information tool to assist with account management that is designed to warn subscribers of high outstanding amounts due and unpaid.

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

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.

 

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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 DSLAM equipment as demand for data services increases. As of December 31, 2017, approximately 93% of our fixed-line network had been updated to support ADSL2+ or VDSL2 and we provided ADSL or VDSL2 services in approximately 4,700 municipalities.

ADSL technology allows high-speed transmission of voice and data signals on a single copper wire pair for access to the network. Since voice transmission through telephone lines uses only one of many available frequency bands, the remaining frequency bands are available for data transmission. Our network supports ADSL2+ and VDSL2, or very-high-bitrate digital subscriber line, technologies. ADSL2+ is a data communications technology that allows data transmission at speeds of up to 24 Mbps downstream and 1 Mbps upstream, which is much faster than data transmission through conventional ADSL. ADSL2+ permits us to offer a wider range of services than ADSL, 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.

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,
 
     2017      2016      2015  

Installed access lines (in millions)

     27.0      27.4        27.5  

Access lines in service (in millions)

     12.8        14.3        14.9  

Public telephones in service (in thousands)

     640.1        642.5        651.7  

Broadband access lines in service (in millions)

     5.9        5.9        5.9  

 

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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, 2017, our 2G mobile access networks, consisting of 13,873 active radio base stations, covered 3,407 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, 2017, our 3G mobile access networks, consisting of 10,020 active radio base stations, covered 1,603 municipalities, or 81% of the urban population of Brazil. We have HSPA coverage in all state capitals.

As of December 31, 2017, our 4G access networks, consisting of 7,965 active radio base stations, covered 813 municipalities, or 73% of the urban population of Brazil.

In addition to these mobile access networks, we also operate Wi-Fi hotspots in indoor public and commercial areas such as coffee shops, airports and shopping centers. Since 2012, we have provided outdoor urban wireless networks, including in the neighborhoods of Copacabana and Ipanema in the city of Rio de Janeiro. As of December 31, 2017, our Wi-Fi network consisted of more than two million hotspots, with broadband access compatible with more than two million access points provided by Fon Wireless Ltd., or Fon, which allows our customers to access Fon lines worldwide.

Aggregation Networks

Voice and data signals sent through our access network are routed through our aggregation networks to digital switches which connect voice calls and route digital signals to their destinations. Portions of our aggregation network use conventional copper trunk lines to connect our access network to our switches and transportation networks. For a small portion of our aggregation network, we still use ATM protocol to permit high speed transmission of these signals. Other portions of our aggregation network use fiber optic cable to connect our access network to our switches and transportation networks using 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. Our Metro Ethernet networks are fully-integrated management systems and provide:

 

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

 

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

 

    aggregation network services for ADSL2+ and VDSL2 platforms;

 

    aggregation network services for GPON platforms; and

 

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

In the past, we used ATM protocol to transport digital signals through our access network from non-residential customers that require dedicated bandwidth to our switching stations. In response to changing customer needs, we converted elements of our network that use ATM and SDH protocols, that permit us to offer dedicated bandwidth to our customers, to MPLS protocol, which supports IP and permits the creation of VPNs through our MetroEthernet networks. We now use MPLS-TP capable devices that have been designed to interface with our existing Metro Ethernet Network to increase the bandwidth of our networks to support our 4G network data traffic and replace our legacy SDH networks.

 

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Transportation Networks

We have a nationwide long-distance backbone, consisting of an optical fiber network that 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 state capitals, including São Paulo, Rio de Janeiro, Brasília and Belo Horizonte. This new OTN/DWDM network spreads over approximately 30,000 km of optical cables. Our optical network is complemented by microwave links to reach smaller cities and towns. In 2017 we began the extension of the OTN/DWDM network, with 100 Gbps links, to an additional seven state capitals. This extension is expected to be completed in the first half of 2018 and spreads over an additional 18,000 km of optical cables.

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

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

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, 2017, our satellite network covered approximately 5,144 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.

 

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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.

As of December 31, 2017, we leased transponders from:

 

    Hispamar with 754 MHz of capacity, in C band, on the Amazonas 3 satellite and 432 MHz of capacity in C band on the Amazonas 2 satellite to provide voice and data services through 653 remote switches covering 390 municipalities; and

 

    Hispamar with 98.3 MHz of capacity, in Ku band, on the Amazonas 3 satellite and 540 MHz of capacity in Ku band on the Amazonas 2 satellite to provide voice and data services to approximately 3,028 localities.

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 S.A. We lease transponders for the delivery of these television signals to our subscribers from Telefónica S.A. We have leased 216 MHz of capacity in Ku band on the Amazonas 3 satellite and 36 MHz of capacity in 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 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

Through our FTTH network, we offer IP TV services in the cities of Rio de Janeiro, Vilar dos Teles, Duque de Caxias and Niteroi, in the State of Rio de Janeiro, and the city of Belo Horizonte, in the State of Minas Gerais. For subscribers of our Oi TV services, through our DTH or FTTH networks, we also offer OTT services, which provide customers with access to different content on different devices (mobile phones, tablets and computers).

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.

 

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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 SBA Torres Brasil 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 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.

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 Telefônica Brasil in five municipalities. In 2016, we expanded to cities with over 100,000 inhabitants, reaching 284 cities with 4G coverage. In 2017, we expanded to cities with less than 100,000 inhabitants, reaching 813 cities with 4G coverage.

In June 2015, we entered into a memorandum of understanding under which we agreed to the joint use of elements of the 4G network under a RAN sharing model pursuant to which Oi, TIM, and Telefônica Brasil agreed to invest proportionally (50% Telefônica Brasil, 25% Oi and 25% TIM) in sites in certain cities based on each operators’ respective coverage obligations, which we refer to as the 2015 RAN Sharing Agreement. The 2015 RAN Sharing Agreement has a term of 12 years. In early 2016, ANATEL required the inclusion of additional clauses in the agreement allowing an additional operator to be added. This agreement 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 our wholly-owned subsidiaries Serede and Rede Conecta (formerly A.R.M. Engenharia), as well as one third-party service provider, Telemont Engenharia de Telecomunicações S.A., or Telemont. We employ our own team of technicians for our internal plant and equipment maintenance.

Insourced Network Maintenance

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

We have entered into arms’-length services agreements with our wholly-owned subsidiaries Serede and Rede Conecta to perform our external plant and equipment maintenance, installation and network servicing in the States of São Paulo, Rio de Janeiro, Rio Grande do Sul, Santa Catarina, Paraná, Maranhão, Piauí, Ceará, Rio Grande do Norte, Paraíba, Pernambuco, Alagoas, Sergipe, Bahia, Amazonas, Roraima, Pará and Amapá.

In January 2012, we entered into a services agreement with Serede for installation, operation, and corrective and preventive maintenance in connection with our external plants and associated equipment, public telephones, and fiber optic and data communication networks (including broadband access services) in certain parts of the State of Rio de Janeiro. Over the years, we have amended this agreement to expand its scope to the entirety of the State of Rio de Janeiro (following our acquisition of Telemont’s operations in Rio de Janeiro), as well as the States of São Paulo, Rio Grande do Sul, Santa Catarina and Paraná (following our acquisition of A.R.M Engenharia in June 2016). The total estimated payments under this contract, which expires in January 2022, are approximately R$10.0 billion.

In June 2016, we acquired 100% of the capital stock of A.R.M. Engenharia and changed its corporate name to Rede Conecta – Serviços de Rede S.A. In July 2016, we entered into a services agreement with Rede Conecta for installation, operation and corrective and preventive maintenance in connection with our external plant and associated equipment, public telephones, and fiber optic and data communication networks (including broadband access services) in the States of Maranhão, Piauí, Ceará, Rio Grande do Norte, Paraíba, Pernambuco, Alagoas, Sergipe, Bahia, Amazonas, Roraima, Pará and Amapá. The total estimated payments under this contract, which expires in June 2021, are approximately R$3.2 billion.

Outsourced Network Maintenance

In October 2012, we entered into five-year services agreements with Telemont for installation, operation, and corrective and preventive maintenance in connection with our external plant and associated equipment, public telephones, and fiber optic and data communication networks (including broadband access services) in the States of Minas Gerais, Espírito Santo, Mato Grosso, Mato Grosso do Sul, Tocantins, Acre, Rondônia and Goiás and the Federal District. The total payments under this contract, which expired in October 2017, amounted to R$3.7 billion.

In October 2017, we entered into new services agreements with Telemont for installation, operation, and corrective and preventive maintenance in connection with our external plant and associated equipment, public telephones, and fiber optic and data communication networks (including broadband access services) in the States of Minas Gerais, Espírito Santo, Mato Grosso, Mato Grosso do Sul, Tocantins, Acre, Rondônia and Goiás and the Federal District. The total estimated payments under this contract, which expires in October 2022, are approximately R$4.2 billion.

 

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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 12.9 million fixed lines in service (including the number fixed lines provided to our B2B Services customers) as of December 31, 2017. Based on information available from ANATEL, as of December 31, 2017, we had a market share of 54.1% of the total fixed lines in service in Region I (including the number fixed lines provided to our B2B Services customers) and a market share of 50.1% of the total fixed lines in service in Region II (including the number fixed lines provided to our B2B Services customers). Our principal competitors for fixed-line services are (1) Claro, which had a market share of 24.9% of the total fixed lines in service in Region I and a market share of 19.2% of the total fixed lines in service in Region II as of December 31, 2017, based on information available from ANATEL, and (2) Telefônica Brasil, which had a market share of 13.7% of the total fixed lines in service in Region I and a market share of 25.7% of the total fixed lines in service in Region II as of December 31, 2017, 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. The number of mobile subscribers in Brazil increased from 121.0 million as of December 31, 2007 to 236.5 million as of December 31, 2017, 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

Claro, a subsidiary of América Móvil, provides local fixed-line services to residential customers through its cable network in the portions of Regions I and II where it provides cable television and broadband services under the “Net” brand. As a result, Claro is able to offer cable television, broadband and telephone services as a bundle at a very competitive price. We also expect competition from Claro 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.

 

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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 Claro and Telefônica Brasil, represent our principal competition in the broadband market. As of December 31, 2017, Claro and Telefônica Brasil had market shares of 24.4% and 16.7%, respectively, for broadband services in Regions I and II of Brazil, while we had a market share of 33.4% for broadband services in Regions I and II of Brazil, according to data from ANATEL. Both Claro and Telefônica Brasil offer broadband services at 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. Claro 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 approximately 15% of broadband customers.

Pay-TV

In Brazil, the high quality programming of television broadcasters 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 8.6% of Brazilian households in 2006 to approximately 33.7% in 2016. According to information available from ANATEL, the Brazilian subscription television market decreased by 4.2% to 8.0 million subscribers as of December 31, 2017 from 18.8 million subscribers as of December 31, 2016.

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

We also deliver Oi TV through our FTTH network in the cities of Rio de Janeiro, Vilar dos Teles, Duque de Caxias and Niteroi, in the State of Rio de Janeiro, and the city of Belo Horizonte, in the State of Minas Gerais.

 

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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, 2017, based on information available from ANATEL (which includes B2B Services subscribers), we had a market share of 16.5% of the total number of mobile subscribers in Brazil, ranking behind Telefônica Brasil with 31.7%, Claro with 25.0% and TIM with 24.8%. As of December 31, 2017, based on information available from ANATEL, the competitive landscape for mobile services was as follows: in Region I, we had a market share of 22.4% of the total number of mobile subscribers, behind Telefônica Brasil with 28.9%, TIM with 23.9% and Claro with 22.7%; in Region II, we had a market share of 12.2% of the total number of mobile subscribers, ranking behind Telefônica Brasil with 32.5%, Claro with 28.3% and TIM with 26.7%; and in Region III, we had a market share of 9.7% of the total number of mobile subscribers, ranking behind Telefônica Brasil with 36.0%, Claro with 25.9% and TIM with 24.6%.

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.

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, 2017, our Wi-Fi network consisted of more than two million hotspots, with broadband access compatible with more than two million access points provided by Fon, 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.

 

 

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In the post-paid mobile data communications market, our primary competitors are Telefônica Brasil, Claro and TIM. As of December 31, 2017, based on information available from ANATEL, which includes B2B Services subscribers, we had a market share of 10.4% of the total number of post-paid mobile data subscribers in Brazil (including hybrid data plan subscribers), ranking behind Telefônica Brasil with 41.8%, Claro with 23.1% and TIM with 20.2%. 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, Telefônica Brasil 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, 2017, based on information available from ANATEL, which includes B2B Services subscribers, we had a market share of 20.1% of the total number of pre-paid mobile data subscribers in Brazil, ranking behind TIM with 27.5%, Claro with 26.0% and Telefônica Brasil with 25.7%. 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 offers plans similar to Oi Livre.

Competition in Mobile Long-Distance Services

Recent reductions in the interconnection 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, all of the major mobile services providers now offer unlimited voice and messaging plans that allow customers to call anywhere in Brazil for a flat rate. We believe that the introduction of unlimited plans, coupled with more robust data packages that allow consumers to use smartphones applications more freely, have substantially reduced competition in the mobile long-distance services market.

B2B 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 corporate and SME services providers toward value-added services. With the exception of the Oi Mais Empresas app and web service, our value-added products and services for the SME segment are substantially similar to those offered by our competitors, and we rely on client service and customer satisfaction to maintain existing customers and attract new customers. Our principal competitors for both core and value-added services for SME and corporate customers are Claro, Telefônica Brasil and TIM, as well as smaller niche companies.

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 (Lei Geral das Telecomunicações) 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;

 

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    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;

 

    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. 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.

The General Plan on Universal Service Goals also require us to provide transmission lines connecting our fiber-optic internet backbones to municipalities in our concession areas in which we did not provide internet service, which we refer to as backhaul. Under these concession agreements, we are obligated to set up backhaul in 3,252 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 revision of the terms of our concession agreements. The comment period, which ended on December 26, 2014, was opened for comments on certain topics such as service universalization, rates and fees, among others. Throughout 2015, ANATEL, the Brazilian Ministry of 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 Brazilian Ministry of Communications created a working group to evaluate the status of the concessions and propose guidelines for the amendment of the concession agreements. In April 2016, the Brazilian Ministry of Communications issued a decree addressing guidelines for the establishment of a new regulatory framework for telecommunications, which were expected to be implemented by ANATEL through the conclusion of the concession amendments. In line with the provisions of PLC 79, these guidelines provided for, among other things, the expansion of broadband services (including in rural regions), the elimination of the reversibility of assets, and an extension of the terms of concessions, which in our case are currently scheduled to expire in 2025. As a result of the publication of these guidelines, ANATEL requested a further postponement of the review of our concession agreements, which was granted. The implementation of these guidelines, however, depends on the passage of PLC 79 to provide the necessary legal authority and framework. As a result of the Brazilian Congress’s failure to date to pass PLC 79, the review of our concession agreements, which was scheduled to occur by June 2017, has not yet taken place, and further discussions regarding amendments to our concession agreements have halted pending resolution of PLC 79. Under their existing terms, our concession agreements may be amended by December 2020 at the latest. If PLC 79 is not passed, our concession agreements will expire in 2025 without the possibility of renewal.

In connection with the consideration of revisions to the concession agreements under the public regime, in January 2017, ANATEL proposed revisions to the terms of the General Plan of Grants (Plano Geral de Outorgas), in line with the provisions of PLC 79, which include the ability of companies operating under a concession in the public regime to convert their concessions into authorizations to operate in the private regime and thereby eliminate a number of substantial obligations currently imposed by the concession regime, in exchange for the assumption of obligations to make additional investments in their networks, primarily related to the expansion of broadband services or through the payment of fees to ANATEL. The value of the obligations currently imposed by the concession agreement and, therefore, the cost of the additional investments or fees to be paid to ANATEL in exchange for the elimination of such obligations, would be subject to discussion between the parties, with ANATEL having the ability to make the final valuation. However, as a result of the legislative gridlock faced by PLC 79, ANATEL has halted implementation of the General Plan of Grants. For more information about PLC 79 and ANATEL’s proposed revisions to the terms of the General Plan of Grants, see “—Regulation of the Brazilian Telecommunications Industry—Other Regulatory Matters—New Regulatory Framework.”

We cannot assure you that any future amendments to our concession agreements or the General Plan of Grants 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.

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 “—Regulation of the Brazilian Telecommunications Industry— Regulation of Fixed-Line Services.”

2G Radio Frequency Licenses

We hold fifteen 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 one of our radio frequency spectrum licenses expired in 2016 and was extended for an additional 15 year term. The initial terms of the remainder of our radio frequency spectrum licenses expire between 2022 and 2023.

 

 

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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, although we believe that we are in compliance with the network scope and service performance obligations set forth in these authorization agreements, ANATEL has not yet made its final determination with respect to our compliance with certain obligations to provide services under the 900 MHz spectrum. We are currently discussing this matter with ANATEL. Furthermore, we have obtained judicial protection under the RJ Proceedings to forego renewal of the performance guarantees we would have otherwise been required to maintain with respect to the obligations under discussion.

3G Radio Frequency Licenses

We hold six 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 covered by these licenses with a population in excess of 100,000 inhabitants, (3) provide 3G service to 50% of all of the municipalities with a population between 30,000 and 100,000, and (4) provide 3G service to 60% of the municipalities, including 684 specified municipalities, covered by these licenses with a population less than 30,000.

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 3G frequency licenses by ANATEL. As of the date of this annual report, although we believe that we are substantially in compliance with the network scope and service performance obligations set forth in these licenses, ANATEL has not yet made its final determination with respect to our compliance. We are currently discussing this matter with ANATEL. Furthermore, we have obtained judicial protection under the RJ Proceedings to forego renewal of the performance guarantees we would have otherwise been required to maintain with respect to the obligations under discussion.

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 (1) all state capitals and municipalities with a population of 30,000 or more and (2) 30% of the municipalities covered by these licenses with a population less than 30,000 and the Federal District; provided, however, that for the latter, we are may comply with this obligation by providing service with transmission rates equal to 1.9/2.1 GHz or above;

 

    voice services in the 450 MHz or other spectrum granted to us and data services at minimum upload speeds of 256 kbps and download speeds of 1Mbps and a minimum monthly allowance of 500 MB in 962 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 1Mbps 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; 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.

 

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In addition, we will be required to:

 

    provide 4G service to 60% of the municipalities covered by these licenses with a population less than 30,000 by December 31, 2018, provided, however, that for these municipalities, we are may comply with this obligation by providing service with transmission rates equal to 1.9/2.1 GHz or above; and

 

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

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% by 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, although we believe that we are in compliance with the network scope and service performance obligations set forth in these licenses, ANATEL is currently debating our compliance with certain obligations to provide services under the 450 MHz spectrum. Since we do not yet have all of the necessary technology to support the use of the 450 MHz spectrum using land frequencies, we have been meeting our coverage obligations in certain areas using satellites. If ANATEL decides that we have not been meeting our obligations, we will be given two years to comply, failure of which may lead to termination of our authorizations to use 450 MHz frequencies. Furthermore, we have obtained judicial protection under the RJ Proceedings to forego renewal of the performance guarantees we would have otherwise been required to maintain with respect to the obligations under discussion.

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.

 

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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 Brazilian 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 of making 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 Regions 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 Regions 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:

 

    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 Brazilian 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 expired on December 31, 2016 and has not been renewed. Although we believe that we are in compliance with all of our network scope and service performance obligations set forth under the Term of Commitment, as of the date of this annual report, ANATEL has yet to complete its review, and we cannot predict when it will do so. Our failure to meet our obligations may result in the imposition of penalties established in ANATEL regulations.

Subscription Television Authorization Agreement

In November 2008, we entered into a 15-year authorization agreement with ANATEL that governs our use of satellite technology to provide DTH satellite television services throughout Brazil. Under this authorization, we are required to furnish equipment to certain public institutions, to make channels available for broadcasting by specified public institutions, and to comply with quality of service obligations set forth in applicable ANATEL regulations.

In December 2012, ANATEL granted our request to convert our DTH authorization agreement into a Conditional Access Service authorization allowing us to provide nationwide subscription television services through any technology, including satellite, wireline, optical fiber and coaxial cable. The Conditional Access Service authorization agreement authorized us to offer the services to be governed by such agreement, including IP TV. In accordance with Law No. 12,485/11, which approved the Conditional Access Service regime, our Conditional Access Service authorization prohibits us from creating television content or owning more than 30% of a company that creates content. We are also required to carry a certain percentage of Brazilian programming, including open channels and public access channels.

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.

 

 

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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), 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 the last three years, we intensified the process for the exploration of innovative services and activities concerning innovation, research, development and to promote an open innovation ecosystem through our inhouse incubator, “Incubadora OiTo” our inhouse development and innovation incubator in Rio de Janeiro. “Incubadora OiTo” is a development and innovation hub responsible for generating new business, accelerating technological solutions, developing startups and supporting social initiatives.

Our investments in innovation, research and development totaled R$16 million in 2017, R$20 million in 2016 and R$20 million in 2015.

Property, Plant and Equipment

Our principal Brazilian properties, owned and leased, are located in Regions I and II. As of December 31, 2017 and 2016, the net book value of our property, plant and equipment in Brazil was R$27,083 million and R$26,080 million, respectively. 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, 2017 and 2016, of the net book value of our property, plant and equipment in Brazil, (1) transmission and other equipment represented 49.7% and 51.4%, respectively; (2) infrastructure, primarily underground ducts, post and towers, cables and lines represented 22.4% and 22.6%, respectively; (3) work in progress represented 12.7% and 9.3%, respectively; (4) buildings represented 6.4% and 6.8%, respectively; (5) automatic switching equipment represented 5.2% and 6.5%, respectively; and (6) other fixed assets represented 3.5% and 3.4%, respectively.

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 13 to our consolidated financial statements included in this annual report.

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, 2017, we had 887 trademarks registered by the BPTO and 432 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, 14 are being contested by third parties. In addition, 58 of our pending trademark applications have been challenged by third parties.

As of December 31, 2017, we had 453 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, 2017, the BPTO had granted nine patents, utility models or industrial designs in the name of our company. We had also filed six 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; and (2) loss of profit insurance covering lost profits deriving from property damage and business interruption.

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 Instituto Telemar, known as Oi Futuro, Oi’s corporate social responsibility institute, which 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 acts as an innovation network, catalyzing the transformation in the fields of education, cultural activities, social innovation and sports. Oi Futuro develops and accelerates social impact initiatives through collaborative solutions and innovation. We believe that innovation and creativity empower personal and collective development, which should be strengthened through technology and dissemination of information.

In the field of education, Oi Futuro invests in new approaches to learning and teaching to transform the classroom environment and preparing young people for future jobs. Created in 2006, the Advanced Education Center (Núcleo Avançado em Educação), or NAVE, trains young students for digital and creative economies, focusing on the production of games, applications and audiovisual products. This program, developed as a partnership with the Secretaries of Education of the States of Rio de Janeiro and Pernambuco, offers integrated and professional high school education for 1,000 students. In addition to obtaining technical training, NAVE students are encouraged to develop an entrepreneurial spirit and to establish their first professional connections through projects and events, favoring their integration with the innovative market.

In the field of cultural activities, Oi Futuro also serves as a creative catalyst, motivating people through art and stimulating collaborative projects by sponsoring cultural projects from all regions of Brazil. In 2017, Oi Futuro sponsored 68 cultural projects. We also operate a cultural center in Rio de Janeiro, with a program that stimulates avant-garde production and convergence of contemporary art and technology, and manage the Museum of Telecommunications in Rio de Janeiro. In 2017, we launched LabSonica, a sound and music experimentation lab created to stimulate creativity and innovation in the field of sound. With the new laboratory, we will offer technical support and physical structures for artistic productions, such as a recording studio, rehearsal rooms, studio, auditorium and coworking space.

In the field of social innovation, Oi Futuro launched Labora, a social impact lab that supports social entrepreneurs who put forward new ideas, actions and prototypes for addressing contemporary challenges. We promote social initiatives that aim to create a more abundant future through connections between changemakers, entrepreneurs, investors and organizations and mentoring. In 2017, Oi Futuro supported 25 social innovation projects.

In the field of sports, Oi Futuro invests in projects that promote social inclusion and citizenship.

In 2017 and 2016, we contributed R$22 million and R$23 million, respectively, 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 interest 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 operates 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., 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 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.

 

 

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As of December 31, 2017, in addition to its interests in Unitel, MTC, CVTelecom and CST, Africatel owned 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 owned 75% of the equity interests in Africatel.

Pharol, our subsidiaries PT Ventures and Africatel GmbH & Co KG, or 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. In September 2014, 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 November 2014, Samba Luxco commenced arbitral proceedings against our subsidiary, Africatel GmbH, which directly holds our interest in Africatel, in the International Court of Arbitration of the International Chamber of Commerce.

In June 2016, we and Samba Luxco entered into a settlement agreement under which (1) Samba Luxco agreed to waive certain approval rights under the Africatel shareholders’ agreement, and (2) Samba Luxco agreed to transfer to Africatel 11% of the share capital of Africatel in exchange for Africatel’s transfer to Samba Luxco of Africatel’s interest in MTC. These transfers were completed on January 31, 2017, as a result of which Samba Luxco’s equity interest in Africatel was reduced from 25% to 14%. As a consequence, on February 2, 2017, the parties to these proceedings informed the arbitral tribunal of the full and final settlement of their dispute. Samba Luxco has withdrawn all claims brought in the arbitration and released Oi’s subsidiaries from all past and present claims relating to alleged breaches of the Africatel shareholders’ agreement.

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 had an 18.75% economic interest in Unitel. As a result of Samba Luxco’s transfer to Africatel 11% of the share capital of Africatel in January 2017, we have a 21.50% economic interest in Unitel. We account for this investment as an asset held-for-sale. We have brought suits against Unitel in the courts of Angola and have instituted arbitral proceedings against the other shareholders of Unitel in the International Court of Arbitration of the International Chamber of Commerce based on our inability to collect dividends owed to us by Unitel and breaches of the Unitel shareholders’ agreement. For more information about these proceedings, see “Item 3. Key Information—Risk Factors—Risks Relating to Our African and Asian Operations “ and “Item 8. Financial Information—Legal Proceedings—Legal Proceedings Relating to Our Interest in Unitel.”

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, PT Ventures was only able to elect three of the seven members of the board of directors of CVTelecom. In March 2015, PT Ventures commenced an arbitration proceeding before the International Chamber of Commerce, or ICC, disputing this interpretation of the shareholders’ agreement, and PT Ventures intends to vigorously defend its rights under the shareholders’ agreement. Also in March 2015, PT Ventures commenced an arbitration proceeding against the Republic of Cabo Verde before the International Centre for Settlement of Investment Disputes, or ICSID, due to the violation of CVTelecom’s exclusivity rights under the concession agreement by the Republic of Cabo Verde. Both proceedings had been temporarily suspended so that the parties could engage in negotiations to seek an alternative resolution of these disputes but the arbitrations were resumed in February 2017. As a result of these disputes, for dates and periods ending after January 1, 2015, we have recorded our interest in CVTelecom under the equity method.

 

 

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As of December 31, 2016, CVTelecom had approximately 52,700 fixed-lines in service. As of December 31, 2016, CVTelecom had approximately 368,000 active mobile telephone cards. As of December 31, 2016, CVTelecom had approximately 14,400 broadband customers and 5,400 Pay TV customers.

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.

CST, São Tomé and Principe

Africatel owns 51% of the share capital of CST, which provides fixed and mobile services in São Tomé and Principe. As of December 31, 2017, CST had approximately 155,600 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 from 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.

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, mobile telecommunications, data transmission and Pay TV services under concessions, authorizations and licenses that were granted by ANATEL and allow us to provide specified services in designated geographic areas, as well as set forth certain obligations with which we must comply. See “— Concessions, Authorizations and Licenses.”

ANATEL is a regulatory agency that was established in July 1997 pursuant to the General Telecommunications Law and ANATEL Regulation (Regulamento da Agência Nacional de Telecomunicações). ANATEL oversees our activities and enforces the General Telecommunications Law and the regulations promulgated thereunder. ANATEL is 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

The current regulatory framework for the Brazilian telecommunications industry was adopted in 1998. Under the General Telecommunications Law and ANATEL regulations, the right to provide telecommunications services is granted either through a concession under the public regime (as discussed below) or an authorization under the private regime (as discussed below). A concession is granted for a fixed period of time following a public auction and is generally renewable only once. An authorization is granted for an indeterminate period of time and public auctions are held for some authorizations. These concessions and authorizations allow service providers to provide specific services in designated geographic areas, set forth certain obligations with which the service providers must comply and require equal treatment of customers by the service providers.

 

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

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 revision of the terms of our concession agreements. The comment period, which ended on December 26, 2014, was opened for comments on certain topics such as service universalization, rates and fees, among others. Throughout 2015, ANATEL, the Brazilian Ministry of 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 Brazilian Ministry of Communications created a working group to evaluate the status of the concessions and propose guidelines for the amendment of the concession agreements. In April 2016, the Brazilian Ministry of Communications issued a decree addressing guidelines for the establishment of a new regulatory framework for telecommunications, which were expected to be implemented by ANATEL through the conclusion of the concession amendments. In line with the provisions of PLC 79, these guidelines provided for, among other things, the expansion of broadband services (including in rural regions), the elimination of the reversibility of assets, and an extension of the terms of concessions, which in our case are currently scheduled to expire in 2025. As a result of the publication of these guidelines, ANATEL requested a further postponement of the review of our concession agreements, which was granted. The implementation of these guidelines, however, depends on the passage of PLC 79 to provide the necessary legal authority and framework. As a result of the Brazilian Congress’s failure to date to pass PLC 79, the review of our concession agreements, which was scheduled to occur by June 2017, has not yet taken place, and further discussions regarding amendments to our concession agreements have halted pending resolution of PLC 79. Under their existing terms, our concession agreements may be amended by December 2020 at the latest. If PLC 79 is not passed, our concession agreements will expire in 2025 without the possibility of renewal.

For more information about our concession agreements, see “—Concessions, Authorizations and Licenses—Fixed-Line and Domestic Long-Distance Services Concession Agreements.”

In connection with the consideration of revisions to the concession agreements under the public regime, in January 2017, ANATEL proposed revisions to the terms of the General Plan of Grants, in line with the provisions of PLC 79, which include the ability of companies operating under a concession in the public regime to convert their concessions into authorizations to operate in the private regime and thereby eliminate a number of substantial obligations currently imposed by the concession regime, in exchange for the assumption of obligations to make additional investments in their networks, primarily related to the expansion of broadband services or through the payment of fees to ANATEL. The value of the obligations currently imposed by the concession agreement and, therefore, the cost of the additional investments or fees to be paid to ANATEL in exchange for the elimination of such obligations, would be subject to discussion between the parties, with ANATEL having the ability to make the final valuation. However, as a result of the legislative gridlock faced by PLC 79, ANATEL has halted implementation of the General Plan of Grants. For more information about PLC 79 and ANATEL’s proposed revisions to the terms of the General Plan of Grants, see “—Other Regulatory Matters—New Regulatory Framework.”

 

 

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We cannot assure you that any future amendments to our concession agreements or the General Plan of Grants 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. In addition, PLC 79 has faced political gridlock in the Brazilian Congress and has not yet been passed, and we cannot predict whether this legislation will ultimately be adopted by the Brazilian Congress and executed by the President or whether the features of this modification of the regulatory scheme will be adopted as proposed. We continue to analyze the potential effects of this modification of the regulatory scheme on our business, capital expenditure obligations, results of operations, cash flows and financial position and whether we would seek to convert our concessions into authorizations should this feature of the proposed modifications be adopted, but are unable to predict with any certainty the effects of this modification on our company, if adopted. Should this modification be adopted, many provisions of the proposed legislation would only have effects on our business following a rule-making procedure by ANATEL to implement the modifications to the regulatory scheme. We cannot predict the form of these new regulations or the time required for ANATEL to propose or adopt these regulations.

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 2011, (2) the General Plan on Quality Goals that was adopted by ANATEL in June 2013, 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 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. In October 2017, ANATEL passed Resolution No. 684, which modifies the Factor X applicable to the determination of rate increases available to public concessionaires providing fixed-line services. However, this resolution will only take effect only after the publication of an Act of the Superintendent of ANATEL, which we expect to happen in the first half of 2018.

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.

 

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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, as amended, 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 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