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the rate of growth of the Brazilian economy;
economic, political or social instability;
fluctuating exchange rates;
inflation;
interest rates and monetary policies;
reductions in salaries or income levels and unemployment rates;
liquidity of domestic capital and lending markets;
energy policy;
exchange controls and restrictions on remittances abroad;
changes to the regulatory framework governing our industry;
fiscal policies and changes in tax laws;
labor and social security policies, laws and regulations; and
other political, diplomatic, social and economic developments in or affecting Brazil.
| · | the rate of growth of the Brazilian economy; |
| · | economic, political or social instability; |
| · | fluctuating exchange rates; |
| · | inflation; |
| · | interest rates and monetary policies; |
| · | reductions in salaries or income levels and unemployment rates; |
| · | liquidity of domestic capital and lending markets; |
| · | energy policy; |
| · | exchange controls and restrictions on remittances abroad; |
| · | changes to the regulatory framework governing our industry; |
| · | fiscal policies and changes in tax laws; |
| · | labor and social security policies, laws and regulations; and |
| · | other political, diplomatic, social and economic developments in or affecting Brazil. |
Uncertainty over whether the Brazilian federal government will implement changes to the policies, regulations or standards affecting these or other factors in the future may affect economic performance and contribute to economic uncertainty in Brazil and to heightened volatility in the Brazilian securities markets and securities issued abroad by Brazilian issuers, which may have an adverse effect on us and the trading price of our Common Shares, Preferred Shares and ADSs.
Ongoing political instability has adversely affected the Brazilian economy, our business and results of operations and may adversely affect the market price of our Common Shares, Preferred Shares and ADSs.
The Brazilian economy has been affected by political events in Brazil, which have also affected the confidence of investors and the public in general, adversely impacting the performance of the Brazilian economy and heightening the volatility of securities issued by Brazilian companies.
Brazilian markets have also experienced heightened volatility due to uncertainties derived from the ongoing investigations conducted by the Brazilian Federal Police and the Federal Prosecutor’s Office (Ministério PúblicoFederal), among which is Operation Car Wash (OperaçãoLava Jato). Such investigations have impacted the Brazilian economy and political environment. Numerous members of the Brazilian government and of the legislative branch, as well as senior officers of large state-owned and private companies, have been convicted of political corruption related to bribes by means of kickbacks on contracts granted by the government to several infrastructure, oil and gas and construction companies, among others. Profits of these kickbacks allegedly financed the political campaigns of political parties that were unaccounted for or not publicly disclosed, and served to further the personal enrichment of the recipients of the bribery schemes. As a result, a number of senior politicians, including former presidentPresident Luiz Inácio Lula da Silva, congressmen and officers of the major state-owned and private companies in Brazil, resigned and/or have been arrested, and numerous senior elected officials and other public officials are being investigated for unethical and illegal behavior.
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The outcome of these investigations is uncertain, but they have already had an adverse impact on the image and reputation of the implicated companies, and on the general market perception of Brazil. The development of these investigations has and may continue to adversely affect us. We cannot predict whether the ongoing investigations will affect the market or will lead to heightened economic and political volatility in Brazil, nor whether new investigations against politicians and/or officers of private companies will occur in the future.
In addition, in October 2018, Brazilians elected federal congressmen, state congressmen,two-thirds of the total number of senators and governors, and the president, and the new elected officials took office at the beginning of 2019. Following a divisive presidential race, Congressman Jair Bolsonaro became Brazil’s president on January 1, 2019.
Any continuation of such divisions could result in congressional deadlock, political unrest and massive demonstrations and/or strikes that could materially adversely affect our operations. Uncertainties in relation to the implementation by the new administration of changes relating to monetary, tax and pension funds policies, as well as to the relevant legislation that must be passed to implement them, may contribute to economic instability. These uncertainties and new measures may increase market volatility of Brazilian securities issued abroad.
The President of Brazil has the power to determine policies and issue governmental acts related to the Brazilian economy that affect the operations and financial performance of companies, including us. We cannot predict which policies the newly elected president will adopt or if these policies or changes in current policies may have an adverse effect on us or the Brazilian economy.
The recent political and economic instability in Brazil has led to a negative perception of the Brazilian economy and an increased volatility in the Brazilian securities market, which may also adversely affect us and the market price of our Common Shares, Preferred Shares and ADSs.
Fluctuations in exchange rates may lead to substantial losses on our liabilities denominated in or linked to foreign currencies.
Since 1999, exchange rates for thereal have been set by the market, i.e., a floating exchange rate system. Although long-term depreciation of thereal is generally linked to the rate of inflation in Brazil, depreciation of thereal occurring over shorter periods of time has resulted in significant variations in the exchange rate between thereal, the U.S. dollar and other currencies. The exchange rate between the U.S. dollar and the Brazilianreal has experienced significant fluctuations in recent years. Therealdepreciated against the U.S. dollar by 47.1% during 2015. During 2016, thereal appreciated against the U.S. dollar by 16.5% and thereal depreciated against the U.S. dollar by 1.5% in 2017, 17.1% in 2018, and 4.0% in 2019.2019 and 28.9% in 2020.
As of December 31, 2019,2020, R$18,29427,660 million, or 57.8%66.7%, of our total consolidated borrowings and financing was denominated in currencies other than thereal, excluding the fair value adjustment to our borrowings and financing and debt issuance costs, and R$9,52116,842 million, or 52.2%63.9%, of our total consolidated borrowings and financing was denominated in currencies other than thereal, after giving effect to the fair value adjustment to our borrowings and financing and debt issuance costs. When thereal depreciates against foreign currencies, we incur losses on our liabilities denominated in foreign currencies, such as our U.S. dollar-denominated PIK Toggle Notes, Oi Mobile’s non-convertible debentures and export credit facilities, and we incur gains on our monetary assets denominated in or indexed to foreign currencies, as the liabilities and assets are translated intoreais. On the other hand, when therealdepreciates against foreign currencies, we incur gains on the balance of our fair value adjustment as a consequence of the gross debt balance, which partially offsets the negative impact on our borrowings and financings. If significant depreciation of thereal 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 thereal 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. We have historically entered into derivative transactions to manage our foreign currency exchange rate risk. However, we may be limited in reducing our foreign-currency exposure using derivatives due to credit constraints. For more information, see “Item 11. Quantitative and Qualitative Disclosures About Market Risk.”
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The significant depreciation of thereal subsequent to December 31, 2019, partially due to theCOVID-19 pandemic and the public health measures adopted to combat the pandemic in Brazil and internationally,2020, is expected to have effects on our U.S. dollar-denominated indebtedness and interest expenses, negatively affecting our results of operations. Notwithstanding the adverse effects on the carrying amounts of our financial liabilities, we do not anticipate any substantial effect on our liquidity as there are few short-term payment obligations under our indebtedness, which we have hedged by continuing to hold a portion of the proceeds from our sale of PT Venturesas described in U.S. dollars.“Item 11. Quantitative and Qualitative Disclosures About Market Risk.” However, a prolonged deterioration of the value of thereal could adversely affect our ability to meet our payment obligations on our indebtedness when future amortization payments become due. A portion of our capital expenditures and operating leases require us to acquire assets or use third-party assets at prices denominated in or linked to foreign currencies, some of which are financed by liabilities denominated in foreign currencies, principally the U.S. dollar. We generally do not hedge exposures relating to our capital expenditures against risks related to movements of thereal against foreign currencies. To the extent that the value of thereal decreases relative to the U.S. dollar, it becomes more costly for us to purchase these assets or services, which could adversely affect our business and financial performance. Despite the 17.1% depreciation of thereal during 2018, the slow recovery of the Brazilian economy limited inflation and allowed the Central Bank of Brazil (Banco Central do Brasil), or the Brazilian Central Bank to reduce the SELIC rate (the Brazilian Central Bank’s overnight rate) by 0.50% during 2018, ending 2018 at 6.5%. AsThe SELIC rate declined further to 4.5% as of December 31, 2019 and 2.0% as of December 31, 2020. During 2020, the SELIC rateBrazilian economy was 4.5%.
The significantaffected by the social distancing measures that were implemented in order to fight the COVID-19 pandemic, which allowed the Brazilian Central Bank to maintain an expansionist monetary policy despite the depreciation of thereal subsequent to December 31, 2019 is expected to have effects on our U.S. dollar-denominated capital expenditure and operating lease costs, although we do not anticipate any substantial effects in the short-term as we generally fix the exchange rates applicable to our network equipment orders at the time that these orders are placed and we have hedged our U.S. dollar-denominated operating expenses by continuing to hold a portion of the proceeds from our sale of PT Ventures in U.S. dollars.28.9%. A prolonged deterioration of the value of thereal could adversely affect our ability to implement our capital expenditure program and increase our operating costs, adversely affect our operating results and overall financial performance.
Appreciation of thereal against the U.S. dollar may lead to a deterioration of the country’s current account and the balance of payments, as well as to a dampening of export-driven growth. Any such appreciation could reduce the competitiveness of Brazilian exports and adversely affect net sales and cash flows from exports. Depreciation of thereal relative to the U.S. dollar could create additional inflationary pressures in Brazil by increasing the price of imported products, which may result in the adoption of deflationary government policies. The sharp depreciation of thereal in relation to the U.S. dollar may generate inflation and governmental measures to fight possible inflationary outbreaks, including the increase in interest rates, which reduces the purchasing power of consumers and raises the cost in the credit market. Any such macroeconomic effects could adversely affect our net operating revenues and our overall financial performance.
If Brazil experiences substantial inflation in the future, our margins and our ability to access foreign financial markets may be reduced. Inflation and government measures to curb inflation may have adverse effects on the Brazilian economy, the Brazilian securities market and our business and results of operations.
In the past, Brazil has experienced extremely high rates of inflation. Inflation, policies adopted to curb inflationary pressures and uncertainties regarding possible future governmental intervention have had and are expected to continue to have significant negative effects on the Brazilian economy generally, and have contributed to economic uncertainty and heightened volatility in the Brazilian capital markets.
According to the Broad Consumer Price Index (Índice Nacional de Preços ao Consumidor Ampliado), or IPCA, published by the Brazilian Institute of Geography and Statistics (Instituto Brasileiro de Geografia e Estatística), the Brazilian consumer price inflation rates were 10.7% during 2015, 6.3% during 2016, 3.0% during 2017, 3.8% during 2018, and 4.3% during 2019.2019 and 4.5% during 2020. Brazil may experience high levels of inflation in the future and inflationary pressures may lead to the Brazilian government’s intervening in the economy and introducing policies that could harm our business and the price of our Common Shares, Preferred Shares and ADSs.
As of the date of this annual report, fixed broadband and mobile service providers use the General Market Price Index — Internal Availability (Índice Geral de Preços — Disponibilidade Interna), orIGP-DI, to adjust their prices. TheIGP-DI is an inflation index developed by the Fundação Getúlio Vargas, or FGV, a private organization. TheIGP-DI index was 10.7% during 2015, 7.2% during 2016, (0.42)% during 2017, 7.1% during 2018, and 7.7% during 2019.2019 and, as of the strong depreciation of the real during the year, 23.1% during 2020.
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Since 2006, rates for fixed-line services have been indexed to the Telecommunication Services Index (Índice de Serviços de Telecomunicações), or IST, adjusted by a productivity factor, which is defined by ANATEL Resolution 507/2008. The IST is an index composed of other domestic price indexes (including the IPCA, theIGP-DI and the General Market Price Index (Índice Geral de Preços ao Mercado), orIGP-M, published by FGV, among others) that is intended to reflect the telecommunications industry’s operating costs. As a result, this index serves to reduce potential discrepancies between our industry’s revenue and costs, and thus reduce the apparent adverse effects of inflation on our operations. The productivity factor, pursuant to which ANATEL is authorized to adjust fee rates, is calculated based on a compensation index established by ANATEL to incentivize operational efficiency and to share related gains in earnings from fixed line services with customers through fee rate adjustments. The IST is calculated based on a12-month period average. This may cause increases in our revenues above or below our costs (including salaries), with potentially adverse impacts on our profitability.
If Brazil experiences substantial inflation in the future, our costs may increase and our operating and net margins may decrease. Although ANATEL regulations provide for annual price increases for most of our services in Brazil, such increases are linked to inflation indices, discounted by increases in our productivity. During periods of rapid increases in inflation, the price increases for our services may not be sufficient to cover our additional costs and we may be adversely affected by the lag in time between the incurrence of increased costs and the receipt of revenues resulting from the annual price increases. Inflationary pressures may also curtail our ability to access foreign financial markets and may lead to further government intervention in the economy, including the introduction of government policies that may adversely affect the overall performance of the Brazilian economy.
Fluctuations in interest rates could increase the cost of servicing our debt and negatively affect our overall financial performance.
Our financial expenses are affected by changes in the interest rates that apply to our floating rate debt. As of December 31, 2019,2020, we had, among other consolidated debt obligations, excluding the fair value adjustment to our borrowings and financing and debt issuance costs, R$13,08713,596 million of borrowings and financing that were subject to variable interest rates, including R$9,1409,339 million of borrowings and financing and debentures that were subject to the Interbank Certificate of Deposit (Certificado de DepóDepósito InterbancáInterbancário), or CDI, rate, an interbank rate, and R$3,9474,257 million of borrowings and financing that were subject to the Long-Term Interest Rate (Taxa de Juros de Longo Prazo), or TJLP, a long-term interest rate. As of December 31, 2019,2020, we had, among other consolidated debt obligations, after giving effect to the fair value adjustment to our borrowings and financing and debt issuance costs, R$9,1489,442 million of borrowings and financing that were subject to variable interest rates, including R$4,6955,185 million of borrowings and financing and debentures that were subject to the CDI rate, and R$3,9464,257 million of borrowings and financing that were subject to the TJLP.
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 rate decreased from 11.57% per annum as of December 31, 2014 to 14.13% per annum as of December 31, 2015, and decreased to 13.63% per annum as of December 31, 2016, 6.89% per annum as of December 31, 2017, 6.40% per annum as of December 31, 2018, and 4.40% per annum as of December 31, 2019.2019 and 1.90% per annum as of December 31, 2020.
The market value of securities issued by Brazilian companies is influenced by the perception of risk in Brazil and other countries, which may have a negative effect on the trading price of Common Shares, Preferred Shares and ADSs and may restrict our access to international capital markets.
Economic and market conditions in other countries and regions, including the United States, the European Union and emerging market countries, may affect to varying degrees the market value of securities of Brazilian issuers. Although economic conditions in these countries and regions may differ significantly from economic conditions in Brazil, investors’ reactions to developments in these other countries may have an adverse effect on the market value of securities of Brazilian issuers, the availability of credit in Brazil and the amount of foreign investment in Brazil. Crises in the European Union, the United States and emerging market countries have at times resulted in significant outflows of funds from Brazil and may diminish investor interest in securities of Brazilian issuers, including our company. This could materially and adversely affect the market price of our securities, and could also make it more difficult for us to access the capital markets and finance our operations in the future on acceptable terms or at all.
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Risks Relating to the Common Shares, Preferred Shares and ADSs
Holders of Common Shares, Preferred Shares or ADSs may not receive any dividends or interest on shareholders’ equity.
According to Oi’sby-laws and the Brazilian Corporate Law, Oi must pay its shareholders at least 25% of Oi’s consolidated annual net income as dividends or interest on shareholders’ equity, as calculated and adjusted in accordance with the Brazilian Corporate Law. This adjusted net income may be capitalized, used to absorb losses or otherwise retained as allowed under the Brazilian Corporate Law and Oi’sby-laws and may not be available to be paid as dividends or interest on shareholders’ equity. Holders of Common Shares or Common ADSs may not receive any dividends or interest on shareholders’ equity in any given year due to the dividend preference of Preferred Shares. Additionally, the Brazilian Corporate Law allows a publicly traded company like Oi to suspend the mandatory distribution of dividends in any particular year if Oi’s board of directors informs Oi’s shareholders at the ordinary general shareholders’ meeting that such distributions would be inadvisable in view of Oi’s financial condition or cash availability and subject to approval of the general shareholders’ meeting. In addition, the members of Oi’s fiscal council must issue an opinion with respect to the suspension of the mandatory distribution of dividends and Oi’s board of directors must submit to the CVM the justification for such suspension.
Moreover, under the RJ Plan and the RJ Plan Amendment, 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 February 5, 2024.December 31, 2025. After February 5, 2024,December 31, 2025, Oi and the other RJ Debtors will be permitted to declare or pay dividends, interest on shareholders’ equity or other forms of return on capital or make any other payment or distribution on or related to their shares (including any payment related to a merger or consolidation) if Oi meets a certain financial ratio, as described under “Item 8. Financial Information—Dividends and Dividend Policy.” There shall not be any restriction to the distribution of dividends under the RJ Plan after the full payment of the Financial Credits (as defined in the RJ Plan). The restrictions of the payment of dividends and other distributions described in this paragraph are subject to certain exceptions, as described under “Item 8. Financial Information—Dividends and Dividend Policy.”
Holders of ADSs are not entitled to attend shareholders’ meetings and may only vote through the depositary.
Under Brazilian law, only shareholders registered as such in Oi’s corporate books may attend Oi’s shareholders’ meetings. All Common Shares and Preferred Shares underlying our ADSs are registered in the name of the depositary. Consequently, a holder of ADSs is not entitled to attend Oi’s shareholders’ meetings. Holders of ADSs may exercise the voting rights with respect to Common Shares and the limited voting rights with respect to Preferred Shares represented by our ADSs only in accordance with the applicable deposit agreement relating to the ADSs. There are practical limitations upon the ability of holders of ADSs to exercise their voting rights due to the additional steps involved in communicating with holders of ADSs. For example, Oi is required to publish a notice of Oi’s shareholders’ meetings in certain newspapers in Brazil. To the extent that holders of Common Shares or Preferred Shares are entitled to vote at a shareholders’ meeting, they will be able to exercise their voting rights by attending the meeting in person or voting by proxy. By contrast, holders of ADSs will receive notice of a shareholders’ meeting by mail from the depositary following Oi’s notification to the depositary of the shareholders’ meeting and Oi’s request that the depositary inform holders of ADSs of the shareholders’ meeting. To exercise their voting rights, holders of ADSs must instruct the depositary on a timely basis. This voting process will take longer for holders of ADSs than for holders of Common Shares or Preferred Shares. If the depositary fails to receive timely voting instructions for all or part of ADSs, the depositary will assume that the holders of those ADSs are instructing it to give a discretionary proxy to a person designated by us to vote their ADSs, except in limited circumstances.
We cannot assure you that holders of ADSs will receive the voting materials in time to ensure that such holders can instruct the depositary to vote Common Shares or Preferred Shares underlying their ADSs. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions of the holders of ADSs or for the manner of carrying out those voting instructions. Accordingly, holders of ADSs may not be able to exercise voting rights, and they will have no recourse if the Common Shares or Preferred Shares underlying their ADSs are not voted as requested.
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Holders of Common Shares, Preferred Shares or ADSs in the United States may not be entitled to participate in future preemptive rights offerings of Common Shares or Preferred Shares.
Under Brazilian law, if Oi offers to issue new shares in exchange for cash or assets as part of a capital increase, Oi generally must grant its shareholders the right to purchase a sufficient number of the offered shares to maintain their existing ownership percentage. Rights to purchase shares in these circumstances are known as preemptive rights. Oi may not legally be permitted to allow holders of Common Shares, Preferred Shares or ADSs in the United States to exercise any preemptive rights in any future capital increase unless either (1) Oi files a registration statement with the SEC with respect to that offering of shares, as Oi did for its most recent capital increase, or (2) that offering of shares qualifies for an exemption from the registration requirements of the Securities Act. At the time of any future capital increase, Oi will evaluate the costs and potential liabilities associated with filing a registration statement with the SEC and any other factors that Oi considers important in determining whether to file such a registration statement. Oi is not obligated to file a registration statement in connection with any future capital increase, and Oi cannot assure the holders of Common Shares, Preferred Shares or ADSs in the United States that it will file a registration statement with the SEC to allow them to participate in a preemptive rights offering. As a result, the equity interest of such holders in Oi may be diluted.
If holders of ADSs exchange them for Common Shares or Preferred Shares, they may risk temporarily losing, or being limited in, the ability to remit foreign currency abroad and certain Brazilian tax advantages.
The Brazilian custodian for the Common Shares and Preferred Shares underlying our ADSs has obtained an electronic registration number with the Brazilian Central Bank to allow the depositary to remit U.S. dollars abroad. ADS holders benefit from the electronic certificate of foreign capital registration from the Brazilian Central Bank obtained by the custodian for the depositary, which permits it to convert dividends and other distributions with respect to the Common Shares or Preferred Shares into U.S. dollars and remit the proceeds of such conversion abroad. If holders of our ADSs decide to exchange them for the underlying Common Shares or Preferred Shares, they will be required to appoint a Brazilian financial institution to act as their legal representative who shall be responsible, among other things, for keeping and updating the investors’ certificates of registrations with the Brazilian Central Bank, as provided in CMN Resolution No. 4,373. Investors will only be able to remit U.S. dollars abroad if the relevant new electronic certificate of foreign capital registration in connection with the Common Shares or Preferred Shares is previously obtained. If such investors fail to obtain or update the relevant certificates of registration, it may result in additional expenses and may cause delays in receiving distributions. See “Item 10. Additional Information—Exchange Controls.”
In addition, if holders of our ADSs exchange our ADSs for Common Shares or Preferred Shares, generally they may be subject to a less favorable tax treatment on the proceeds from any sale of, our Common Shares or Preferred Shares. See “Item 10. Additional Information—Taxation—Brazilian Tax Considerations.”
Holders of ADSs may face difficulties in serving process on or enforcing judgments against us and other persons.
Oi is incorporated as a corporation under the laws of Brazil and substantially all of Oi’s assets are located in Brazil. In addition, all of Oi’s directors and executive officers reside outside the United States and all or a significant portion of the assets of such persons may be located outside the United States. As a result, it may not be possible for holders of ADSs to effect service of process within the United States or other jurisdictions outside Brazil upon such persons, or to enforce against such persons judgments of U.S. courts, including judgments predicated upon the civil liability provisions of the U.S. federal securities laws or the laws of such other jurisdictions.
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Holders of Common Shares and Preferred Shares will be subject to, and holders of ADSs could be subject to, Brazilian income tax on capital gains from sales of Common Shares, Preferred Shares or ADSs.
According to Article 26 of Brazilian Law No. 10,833/2003, if a holder not deemed to be domiciled in Brazil for Brazilian tax and regulatory purposes, or aNon-Brazilian Holder, disposes of assets located in Brazil, the transaction will be subject to taxation in Brazil, even if such disposition occurs outside Brazil or if such disposition is made to anotherNon-Brazilian Holder. Accordingly, on the disposition of common sharesCommon Shares or preferred shares,Preferred Shares, which are considered assets located in Brazil, theNon-Brazilian Holder will be subject to income tax on the gains assessed, following the rules described under “Item 10. Additional Information—Taxation—Brazilian Tax Considerations—Taxation of Gains,” regardless of whether the transactions are conducted in Brazil or abroad and with a Brazilian resident or not. A disposition of our ADSs, however, involves the disposal of anon-Brazilian asset, which in principle should not be subject to taxation in Brazil. Nevertheless, in the event that the concept of “assets located in Brazil” is interpreted to include our ADSs, this tax law could result in the imposition of withholding taxes on the disposition of our ADSs made byNon-Brazilian Holders. Due to the fact that, as of the date of this annual report, Article 26 of Brazilian Law No. 10,833/2003 has no judicial guidance as to its application to ADSs, we are unable to predict which interpretation would ultimately prevail in Brazilian courts. See “Item 10. Additional Information—Taxation—Brazilian Tax Considerations —Taxation of Gains.”
Oi believes that it was not a passive foreign investment company (“PFIC”) for its taxable year ended December 31, 2019.2020. However, if Oi were characterized as a PFIC for its taxable year ended December 31, 2020, certain adverse U.S. federal income tax consequences could apply to a U.S. investor who holds Common Shares or Preferred Shares or ADSs.
Oi will be classified as a passive foreign investment company, or PFIC, in any taxable year if either: (1) 50% or more of the fair market value of our gross assets (determined on the basis of a quarterly average) for the taxable year produce passive income or are held for the production of passive income, or (2) 75% or more of our gross income for the taxable year is passive income. As a publicly traded foreign corporation, Oi intends for this purpose to treat the aggregate fair market value of our gross assets as being equal to the aggregate value of our outstanding stock plus the total amount of our liabilities (“market capitalization”) and to treat the excess of the fair market value of our assets over their book value as a nonpassive asset to the extent attributable to our nonpassive income. Based on the market price of the Common Shares and the Preferred Shares and the composition of our assets, Oi believes that it was not a PFIC for U.S. federal income tax purposes for its taxable year ended December 31, 2019, although Oi believes that it was a PFIC2020, or for the taxable year ended December 31, 2018.2019. 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, 2020,2021, 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 Common 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 contrary to Oi’s belief, Oi were characterized as a PFIC for its taxable year ended December 31, 2019,2020, certain adverse U.S. federal income tax consequences could apply to a U.S. investor who holds Common Shares or Preferred Shares or ADSs with respect to any “excess distribution” received from Oi and any gain from a sale or other disposition of Common Shares or Preferred Shares or ADSs, and U.S. investors also may be subject to additional reporting obligations with respect to Common Shares or Preferred Shares or ADSs. In such case, Oi does not intend to provide the information necessary for a U.S. investor to make a qualified electing fund election with respect to the Common Shares or Preferred Shares or ADSs. See “Item 10. Additional Information—Taxation – 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 ournon-U.S. subsidiaries could) be treated as controlled foreign corporations. In addition, if our group includes one or more U.S. subsidiaries, certain of ournon-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 intangiblelow-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 ournon-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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Trading onover-the-counter markets may be volatile and sporadic, which could depress the market price of the Preferred ADSs and make it difficult for holders to resell Oi’s Preferred ADSs.
On June 21, 2016, the Preferred ADSs were delisted from the New York Stock Exchange, or NYSE. On June 23, 2016, OTC Markets Group, Inc. began publishing quotations for the Preferred ADS in the “pink sheets” under the trading symbol OIBRQ. Trading in stock quoted on over the counter markets is often thin, volatile, and characterized by wide fluctuations in trading prices due to many factors that may have little to do with our operations or business prospects. This volatility could depress the market price of the Preferred ADSs for reasons unrelated to operating performance. Moreover, the over the counter markets are not a stock exchange, and trading of securities on the over the counter markets is often more sporadic than the trading of securities listed on other stock exchanges such as the NYSE, the NASDAQ Stock Market or the American Stock Exchange. Accordingly, holders of Preferred ADSs may have difficulty reselling such securities.
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ITEM 4. INFORMATION ON THE COMPANY
| Overview |
Overview
We are one of the principal integrated telecommunications service providers in Brazil with approximately 53.452.1 million revenue generating units, or RGUs, as of December 31, 2019. We operate throughout Brazil2020 from continuing and offer a range of integrated telecommunications services that includediscontinued operations, which included Residential Services, Personal Mobility Services and B2B Services.
We are in the process of implementing our Strategic Plan, the main objective of which is to transform our business model into two separate companies: (1) a consumer-focused company that will provide fixed-line telecommunications services to customers and businesses; and (2) an infrastructure company that will focus on a neutral network. This will allow us to focus on the use and rapid expansion of our extensive fiber-optic infrastructure, including our transportation networks (backbone, backhaul and data network) and primary and secondary access networks (dedicated links, metropolitan rings and FTTH access networks). We believe that through the implementation of our Strategic Plan, we will enable and support the high-speed connection needs of our residential, business, corporate and government customers and provide infrastructure services for other telecommunication service providers in Brazil, including in support of 5G services. For additional information regarding our Strategic Plan, see “—II. Our Residential ServicesRecent History and Development—Adoption of Strategic Plan.”
In order to implement our Strategic Plan and achieve greater operational and financial flexibility for our company, on February 27, 2020, the RJ Debtors filed a petition with the RJ Court requesting that we be permitted to submit to our creditors for their consideration and deliberation at a new general creditors’ meeting a proposed amendment to the RJ Plan. On September 8, 2020, our creditors approved the RJ Plan Amendment, which was ratified and confirmed by the RJ Court on October 5, 2020. The RJ Plan Amendment Confirmation Order was published in the Official Gazette on October 8, 2020, the RJ Plan Amendment Confirmation Date. For additional information regarding the RJ Plan Amendment, see “—II. Our Recent History and Development—Our Judicial Reorganization Proceedings—Extension of the Judicial Reorganization Proceedings.”
To further our Strategic Plan and pursuant to the RJ Plan Amendment, we formed or plan to form five UPIs for the disposal of certain of our businesses and/or isolated assets, as follows: (1) UPI Mobile Assets, which includes our mobile telephony and data operations; (2) UPI Towers and UPI Data Center, which includes our passive infrastructure; (3) UPI InfraCo, which includes our telecommunications network operation; and (4) UPI TVCo, which includes our Pay-TV business. Pursuant to the RJ Plan Amendment and the Brazilian Bankruptcy Law, our UPIs are separated from the assets, liabilities and rights of the RJ Debtors. We plan to sell our UPIs to ensure our ability to service our debt and generate the funds necessary to expand our fiber infrastructure and associated services, which is the key focus of our strategy. We expect that the divestment of our UPIs will allow us to maximize the business includes localvalue of our investments by expanding our residential and long-distance fixed-line voicebusiness access services broadband servicesnationwide, exploit more efficiently our network components andPay-TV services provided create new business opportunities for the exploitation of these networks by offering them to residential customersother telecommunications service providers, as permitted by law.
As of the date of this annual report, we have entered into agreements to sell or completed the sale of UPI Data Center, UPI Towers and UPI Mobile Assets. In addition, we have accepted a binding proposal from a group of prospective buyers to acquire a majority interest in UPI InfraCo. For additional information, see “—II. Our Recent History and Development—Adoption of Strategic Plan.” For additional information regarding our UPIs, see “—V. Assets Held for Sale and Discontinued Operations.”
The assets and liabilities related to UPI Mobile Assets, UPI InfraCo, UPI TVCo, UPI Towers, and UPI Data Center are classified as held for sale since their carrying amounts are being recovered primarily through sale transactions rather than through continuous use. We consider the sale of these assets to be highly probable, considering how the divestment plan of these assets is unfolding. We have also classified the operations related to the UPI Mobile Assets, UPI InfraCo, UPI TVCo and UPI Data Center as discontinued operations, as their sale represents a strategic shift in our fixed-line concession service areas, comprisingoperations and are an integral part of our coordinated divestment plan. In addition, we have revised our comparative statements of profit or loss, statements of comprehensive income and statements of cash flows for the entire territory of Brazil other than the State of São Paulo. We are the largest fixed-line telecommunications company in Brazil in terms of total number of lines in service as ofyears ended December 31, 2019 based on our 10.3 million fixed linesand 2018 and the corresponding notes thereto, in serviceline with IFRS 5, which requires that an entity reclassify the disclosures related to all operations that have been discontinued as of December 31, 2019, with a market share of 48.4%the balance sheet date of the total fixed lineslast reporting period presented. The effects of the reclassifications are set forth in servicenote 31 to our audited consolidated financial statements included in this annual report. We do not consider the operations of UPI Towers to represent a separate line of business, and the revenues and expenses associated with these assets are presented under the full consolidation method in our service areas asstatement of that date. We ownprofit or loss.
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If the largest fiber optic network in Brazil, with more than 376,000 kilometerssale of installed fiber optic cable, distributed throughout Brazil. We focus on increasing the revenue generated by this customer base by aggressively promoting convergent services (double-play, triple-play and quadruple-play packages) including our mobile, broadband andPay-TV services. We offer a variety of high-speed broadband services. As of December 31, 2019, we had 4.2 million asymmetric digital subscriber line, or ADSL, subscribers, representing 60.0% of our residential fixed line customers as of that date. We offerPay-TV services under ourOi TV brand. We deliverPay-TV services throughout our residential service areas using DTH satellite technology. As of December 31, 2019, we had 1.5 million residentialPay-TV subscribers, representing 20.7% of our residential fixed line customers as of that date.
Our Personal Mobility Services business offers mobile telecommunications services throughout Brazil. Our mobile network covers areas in which approximately 94%all of the Brazilian population livesUPIs as provided for by the RJ Plan Amendment is implemented, we will retain all activities, assets, rights and works. In addition, we provideobligations not expressly transferred to the UPIs, including certain copper backhaul assets related to our transportation network, usage (interconnection) services. Based oncertain residential and B2B services, digital and IT services, field maintenance and installation operations and customer service operations. For additional information regarding our 36.8 million mobile subscribers as of December 31, 2019, we had a 16.2% market share of the Brazilian mobile telecommunications market as of that date.
Our B2B Services business provides voice, broadband,Pay-TV, data transmission and other telecommunications services to small and medium sized enterprises, or SMEs, corporation and governmental agencies throughout Brazil. We also provide wholesale interconnection, network usage (interconnection) services and traffic transportation services to other telecommunications providers.continuing operations, see “—IV. Continuing Operations.”
Our principal executive office is located at Rua Humberto de Campos No. 425, 8th floor–Leblon,22430-190 Rio de Janeiro, RJ, Brazil, and our telephone number at this address is(55-21) 3131-2918.
Our Recent History and Development
| II. | Our Recent History and Development |
Our 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 to an urgent measure approved by our board of directors.
On December 19 and 20, 2017, a GCM to consider approving the RJ Plan was held following the confirmation that the required quorum of creditors of each of classes I, II, III, and IV was in attendance. As part of the RJ Plan, we negotiated the terms of a commitment agreement, which we refer to as the Commitment Agreement, with members of a diverse ad hoc group of holders of the bonds issued by Oi, Oi Coop and PTIF, which we refer to as the Ad Hoc Group, the International Bondholder Committee, a group of creditors in the Netherlands, which we refer to as the IBC, and certain other unaffiliated bondholders. Under the terms of the Commitment Agreement, such bondholders, which we refer to as the Backstop Investors, agreed to backstop our preemptive offering of Common Shares, subject to the terms and conditions of the Commitment Agreement. This GCM concluded on December 20, 2017 following the approval of the RJ Plan by a significant majority of creditors of each class present at this GCM, reflecting amendments to the RJ Plan presented at this GCM as negotiated during the course of this 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 Since then, the Brazilian Confirmation Order according to its terms, is currentlyhas been binding on all parties.
By operation of the RJ Plan and the Brazilian Confirmation Order, the unsecured claims against the RJ Debtors have been novated and discharged under Brazilian law and holders of such claims willare 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.
During 2018, the restructuring of the RJ Debtor’s financial debt in accordance with the applicable terms and conditions set forth in the RJ Plan was concluded.
Extension of the Judicial Reorganization Proceedings
The Brazilian Bankruptcy Law provides that the RJ Proceedings and the judicial supervision of the RJ Debtors may be terminated on the second anniversary of the Brazilian Confirmation Date if the RJ Court determines that all obligations provided for in the RJ Plan have been satisfied based on the analysis of compliance with the RJ Plan.
On December 6, 2019, wethe RJ Debtors filed a petition with the RJ Court requesting that the judicial supervision of the RJ Debtors not be terminated on February 5, 2020, the second anniversary of the Brazilian Confirmation Date, in order to allow us to continue to execute the RJ Plan and remain focused on our strategic transformation. Notwithstanding the conclusion of the restructuring of the RJ Debtor’s financial debt in accordance with the applicable terms and conditions set forth in the RJ Plan, we presented to the RJ Court circumstances related to the complexity inherent to the magnitude of the RJ Proceedings and the ongoing reforms in the legal-regulatory environment, which we believe require additional measures yet to be implemented under the RJ Proceedings.
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On February 27, 2020, we filed a petition with the RJ Court requesting that we be permitted to submit to our creditors for their consideration and deliberation at a new general creditors’ meeting a proposed amendment to the RJ Plan designed to achieve greater operational and financial flexibility for our company to continue with investments and the fulfillment of our strategic plan. At the new general creditors’ meeting, only creditors of the RJ Debtors that held credits and had voting rights at the time of the original GCM and who continued to hold an interest in the debt obligations or equity securities of the RJ Debtors on February 27, 2020 will be entitled to vote.Strategic Plan.
On March 6, 2020, the RJ Court issued a decision granting our request to hold a new general creditors’ meeting to deliberate on a proposed amendment to the RJ Plan. The RJ Court required that:
the RJ Debtors must submit the proposed amendment to the RJ Plan to the RJ Court on or prior to September 8, 2020; and
At the new general creditors’ meeting, organized byheld on September 8, 2020, only creditors that held credits and had voting rights at the Judicial Administrator must take place within 60 days from the date of submissiontime of the proposed amendmentoriginal general creditors meeting and who continued to hold an interest in the RJ Plan to the RJ Court by the RJ Debtors.
We intend to seek to amend the RJ Plan in order to facilitate asset sales contemplated by our strategic plan, including the potential sale of our mobile business and the proposed sales of othernon-core assets. We continue to discuss the termsdebt obligations or equity securities of the proposed amendment with various constituencies of our company and can provide no assurances with respectCompany on February 27, 2020 were entitled to the specific terms of the proposed amendment that will be presentedvote.
On September 8, 2020, a GCM was held to the RJ Court.
Preemptive Offering and Closing Under Commitment Agreement
As contemplated by Section 6consider approval of the RJ Plan on November 13, 2018, we commenced a preemptive offering of Common Shares that was registered withAmendment. The creditors present at the SECGCM approved the RJ Plan Amendment pursuant to the requirements under the Securities Act underBrazilian Bankruptcy Law. On October 5, 2020, the RJ Court entered the RJ Plan Amendment Confirmation Order, which holdersratified and confirmed the RJ Plan Amendment. The RJ Plan Amendment Confirmation Order was published in the Official Gazette on October 8, 2020, the RJ Plan Amendment Confirmation Date.
The RJ Plan Amendment authorized us to carry out certain transactions, including, among other things, the following: (1) forming five UPIs for the disposal of certain businesses and/or isolated assets pursuant to the Brazilian Bankruptcy Law; (2) improving the payment terms and conditions for a significant portion of small creditors as a way of reducing litigation and speeding up the settlement of these claims, as required by the RJ Court; (3) allowing the RJ Debtors to raise additional financing and other funding to allow them to maintain the necessary investments and pay their creditors; and (4) segregating some fiber optics assets and infrastructure through SPE InfraCo to create a more flexible and efficient corporate structure to accelerate investments in the expansion of our Common Sharesfiber optics network and Preferred Shares received 1.333630 transferable rights for each Common Share or Preferred Share held as of November 19, 2018. Each subscription right entitled its holderallowing SPE InfraCo to subscribehave access to one Common Sharefinancial and capital markets and raise additional funds at a subscription price of R$1.24 per Common Share. In addition, each holder of a subscription right was entitled to request the subscription for additional Common Shares, up to the total of 3,225,806,451 Common Shares that were offered in the preemptive offering less the total number of initial Common Shares.lower costs.
The subscription rights expiredRJ Plan Amendment provides that the RJ Proceedings and the judicial supervision of the RJ Debtors will terminate on January 4, 2019. On January 16, 2019, we issued 1,530,457,356 Common Shares to holders of subscription rights that had exercised those subscription rights with respect to the initial Common Shares. On January 21, 2019, we issued 91,080,933 Common Shares to holders of subscription rights that had requested subscriptions for excess Common Shares. The proceeds of these subscriptions were R$2,011 million.
On January 25, 2019, we issued 1,604,268,162 Common Shares, representing the total number of Common Shares that were offered in the preemptive offering less the total number of initial Common Shares and excess Common Shares, to the Backstop Investors in a private placement underMay 30, 2022. Notwithstanding the terms of the RJ Plan Amendment, the RJ Plan Amendment Confirmation Order stipulates that the RJ Proceedings and the Commitment Agreement forjudicial supervision of the aggregate amount of R$1,989 million. In addition,RJ Debtors will terminate 12 months from the RJ Plan Amendment Confirmation Date, which term may be extended if additional time is required to implement the asset dispositions provided under the termsRJ Plan Amendment. Accordingly, as of the date of this annual report, the RJ Proceedings and the judicial supervision of the RJ Debtors are scheduled to terminate on October 8, 2021. However, the RJ Debtors have filed an interlocutory appeal to overturn the provisions of the RJ Plan and the Commitment Agreement, on that date we issued 272,148,705 Common Shares in a private placementAmendment Confirmation Order related to the Backstop Investorstermination of the RJ Proceedings. This appeal is pending judgment.
For more information regarding the effects of the RJ Plan Amendment on our business and paid US$13 million toresults of operations, see “Item 5. Operating and Financial Review and Prospects—Principal Factors Affecting Our Financial Condition and Results of Operations—Effects of Confirmation of the Backstop Investors as compensation for their commitments under the Commitment Agreement.RJ Plan Amendment on Our Statement of Operations and Balance Sheet.”
Pharol Settlement Agreement
On January 8, 2019, Oi and its subsidiaries Telemar and PT Participações entered into a settlement agreement with Bratel and Pharol, or the Pharol Settlement Agreement, which provides, among other things, for the termination of all then-existing litigation involving the parties in Brazil and abroad.
Under the Pharol Settlement Agreement Oi was required to: (1) pay Bratel an amount in U.S. dollars corresponding to €25 million, which under the Pharol Settlement Agreement was used by Pharol for the subscription of 85,721,774 Common Shares issued by Oi in our preemptive offering of Common Shares; and (2) upon confirmation of the Pharol Settlement Agreement by the RJ Court, (a) transfer to Bratel 32,000,000 Common Shares and 1,800,000 Preferred Shares of Oi held in treasury, (b) pay Pharol the annual fees related to certain obligations assumed by Oi with respect to proceedings of Pharol in Portugal, and (c) in case of a sale of at least 50% of the shares of Unitel indirectly held by Oi, deposit into an escrow account an amount necessary to guarantee the payment of any potential liabilities of Pharol in tax proceedings whose chance of loss is assessed as possible or probable.
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Under the Pharol Settlement Agreement, on February 8, 2019, the member designated by Oi was elected to Pharol’s board of directors.
On February 28, 2019, the RJ Court confirmed the Pharol Settlement Agreement by a decision published in the Official Gazette of the State of Rio de Janeiro on March 12, 2019. This decision became final on April 3, 2019.
During February 2019, we repurchased a total of 1,800,000 Preferred Shares over the B3 at prices ranging between R$1.42 and R$1.45 per Preferred Share, for an aggregate purchase price of R$2.6 million. These Preferred Shares were transferred to Pharol to satisfy the terms of the Pharol Settlement Agreement. Oi has satisfied the other terms of the Pharol Settlement Agreement applicable to our company and on April 4, 2019, all then-existing litigation involving the parties in Brazil and abroad was terminated.
Merger of Copart 4 with and into Telemar and Merger of Copart 5 with and into Oi
In January 2019, Copart 4 was merged with and into Telemar and in March 2019, Copart 5 was merged with and into Oi.
Sale of Interest in CVTelecom
On May 21, 2019, PT Ventures sold all of the shares that it owned of Cabo Verde Telecom, S.A., or CVTelecom, a provider of fixed-line and mobile services in the Cabo Verde Islands, representing 40% of CVTelecom’s share capital, to the National Social Security Institute (Instituto Nacional de Previdência Social) and state-owned company, ASA – National Airport and Aerial Security Company (ASA – Empresa Nacional de Aeroportos e Segurança Aérea, S.A.), for US$26 million. This sale generated a net gain of R$67 million.
In connection with the sale of the CVTelecom shares, PT Ventures entered into an agreement with the government of Cabo Verde for the definite termination of the arbitration proceedings pending before the International Centre for Settlement of Investment Disputes and the International Chamber of Commerce that had been filed by PT Ventures against the government of Cabo Verde in March 2015.
Adoption of Strategic Plan
OnJulyOn July 16, 2019, we announced our plan to pursue strategic alternatives, with a focus on the improvement of our operational and financial performance with a sustainable business model, for the purpose of maximizing enterprise value, in the context of the RJ process. We refer to this strategic plan as our “Strategic Plan.” We developed this planour Strategic Plan in collaboration with a group of strategic advisors following an assessment of each of our business units focused on competitive advantages, effective capital allocation and anticipated funding needs to execute this plan.
TheAt the time of its initial implementation, the principal elements of this plan include:
accelerating our deployment of FTTH leveraging ournon-replicable fiber optic network to become the national leader in FTTH;Strategic Plan included:
accelerating our wholesale operation to exploit the full potential of the unregulated market for wholesale transmission services utilizing our fiber optic network as we seek to become the leading provider of infrastructure in support of 5G services in Brazil;
increasing our focus on our information and communications technology solutions business;
| · | accelerating our deployment of FTTH leveraging our non-replicable fiber optic network to become the national leader in FTTH; |
| · | accelerating our wholesale operation to exploit the full potential of the unregulated market for wholesale transmission services utilizing our fiber optic network as we seek to become the leading provider of infrastructure in support of 5G services in Brazil; |
| · | increasing our focus on our information and communications technology solutions business; |
| · | leveraging our mobile network capacity by increasing our investment in 4G and 4.5G services using our available 1.8 GHz spectrum and increasing our marketing efforts focused on high-value post-paid customers to increase revenue of our mobile services; |
| · | exploring strategic alternatives with respect to our mobile business to maximize shareholder value; |
| · | implementing a sustainable program of cost reductions based on opportunities identified by our management in our sales and marketing, organizational processes, information technology, procurement and network operations activities; |
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| · | divesting non-core assets, including communications towers, data centers, our African investments, certain real estate and other non-strategic assets, as part of our efforts to finance our capital expenditure plans. |
Our Strategic Plan has evolved over time. Currently, our aim is to transform our business model into two separate companies: (1) a consumer-focused company that will provide fixed-line telecommunications services to customers and businesses; and (2) an infrastructure company that will focus on a neutral network. This will allow us to focus on the use and rapid expansion of our extensive fiber-optic infrastructure, including our transportation networks (backbone, backhaul and data network) and primary and secondary access networks (dedicated links, metropolitan rings and FTTH access networks). Our new Strategic Plan also includes the divestment of our mobile services;assets.
exploring strategic alternatives with respect to our mobile business to maximize shareholder value;
implementing a sustainable program of cost reductions based on opportunities identified by our managementWe have undertaken the following steps in our sales and marketing, organizational processes, information technology, procurement and network operations activities;
divestingnon-core assets, including communications towers, data centers, our African investments, certain real estate and othernon-strategic assets, as partfurtherance of our efforts to finance our capital expenditure plans.Strategic Plan:
Sale of PT Ventures
On January 24, 2020, Africatel sold and transferred 100% of the share capital of PT Ventures to Sonangol for an aggregate purchase price of US$1 billion, of which US$61 million was paid to Africatel prior to the transfer of the shares, and Sonangol paid US$699 million of the purchase pricewas paid in cash on the closing date. The remainingdate and US$240 million of the purchase price is to bewas paid to Africatelin several installments between February 2020 and July 2020, by Sonangol by July 31, 2020, with a guaranteedmeans of minimum monthly paymentpayments of US$40 million beginning in February 2020, and we havetotaling R$4.1 billion cash received the minimum monthly payments due in February and March 2020. Payment of the remaining purchase price is fully guaranteed by a letter of credit. Pursuant to the Pharol Settlement Agreement, we deposited 34 million euros of the proceeds of this sale in an escrow account to cover losses relating to certain tax proceedings against Pharol.
The principal assets of PT Ventures included (1) a 25% stake in Unitel, (2) a 40% stake in Multitel Serviços de Telecomunicações Lda., (3) rights to dividends previously declared by Unitel, but not received by PT Ventures, and (4) all rights arising from a final award in the amount of approximately US$659 million in an arbitration proceeding initiated by PT Ventures against the other Unitel shareholders.
As a result of this transaction, we are no longer party to any litigation involving PT Ventures, Unitel or the other Unitel shareholders.
Sale of Botafogo PropertyNon-Core Real Estate Assets
On February 21, 2020, we sold our property at Rua General Polidoro nº 99, Botafogo, Rio de Janeiro, to Alianza Gestão de Recursos Ltda. for R$120.5 million.
Throughout 2020, we also sold the following properties:
| · | Rua Quintino Bocaiuva, Centro, Nova Iguaçu, Rio de Janeiro, to Relup 3 Empreendimentos Imobiliários Ltda., for R$4.7 million; |
| · | Avenida Goiás, 516, quadra 08, Lotes 60 and 56, Setor Central, Goiânia, to Jingxiang Utilidades e Bazar EIRELI, for R$3.5 million; |
| · | Rua Vitorio Nunes da Motta, 160, Enseada do Suá, in the city of Vitória, Espírito Santo, to Opus Enseada Empreendimento Imobiliários Ltda., for R$16 million; |
| · | Avenida Diógenes Chianca, St. 24, Qd. 418, Lt 0118, Agua Fria, João Pessoa, Paraíba, to Comar Consultoria Ltda., for R$6.5 million; and |
| · | Avenida Madre Benvenuta, 2080, Florianópolis, Santa Catarina, to UDESC - Fundação Universidade Estado de Santa Catarina, for R$79 million. |
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Market Sounding Regarding Mobile BusinessSale of UPI Data Center
DuringOn December 11, 2020, following a hearing held in November 2020 in connection with a competitive bidding process carried out in accordance with the first quarterRJ Plan Amendment, the RJ Debtors executed a sale and purchase agreement, or the UPI Data Center SPA, to sell UPI Data Center to Titan Venture Capital e Investimentos Ltda., or Titan, for the amount of 2020, our financial advisor, BankR$325 million. On March 12, 2021, after satisfying all contractual conditions precedent, the sale was completed, at which time all of America Merrill Lynch, conductedthe shares of SPE Data Center were transferred to Titan, which made a market sounding process seeking to gauge the interest of a variety of strategic investorscash payment in the acquisitionamount of R$250 million. The remaining amount is payable in installments in the form and terms provided for in the UPI Data Center SPA.
Sale of UPI Towers
On December 23, 2020, following a hearing held in November 2020 in connection with a competitive bidding process carried out in accordance with the RJ Plan Amendment, the RJ Debtors executed a sale and purchase agreement, or the UPI Towers SPA, to sell UPI Towers to Highline do Brasil II Infraestrutura de Telecomunicações S.A., or Highline, for the amount of approximately R$1.1 billion, subject to certain price adjustments as provided in the UPI Towers SPA. On March 30, 2021, after satisfying all contractual conditions precedent, the sale was completed, at which time all of the shares of SPE Towers were transferred to Highline, which made a cash payment in the amount of R$862 million. The remaining amount is subject to common price adjustments in the form and terms provided in the UPI Towers SPA.
Sale of UPI Mobile Assets
On January 28, 2021, following a hearing held in December 2020 in connection with a competitive bidding process carried out in accordance with the RJ Plan Amendment, the RJ Debtors executed a sale and purchase agreement, or the UPI Mobile Assets SPA, to sell UPI Mobile Assets to the telecom companies Telefônica Brasil S.A., TIM S.A., and Claro S.A. (collectively, the “Mobile Assets Buyers”) for the amount of R$16.5 billion, subject to certain conditions precedent, including regulatory authorizations. The UPI Mobile Assets SPA also provides for transition services to be provided by Oi to the Mobile Assets Buyers for a period of up to 12 months, and a long term “take or pay” agreement with Oi and certain of its subsidiaries for the performance of services of transmission capacity.
Partial Sale of UPI InfraCo – Binding Proposal
On February 4, 2021, the RJ Debtors entered into an exclusivity agreement with Globenet Cabos Submarinos S.A., or Globenet, BTG Pactual Economia Real Fundo de Investimento em Participações Multiestratégia, and other investment funds managed or controlled by companies belonging to the BTG Group, which we collectively refer to as the “InfraCo Prospective Buyers,” to negotiate the terms and conditions of our mobile business. The goalpartial sale of shares representing a majority of the market sounding process wastotal capital stock of SPE InfraCo. Pursuant to assist us in identifying opportunities relating to our mobile business, and to enable us to make a preliminary assessment regarding the creation of value arising out of a potential sale of our mobile business.
In March 2020, Bank of America Merrill Lynch received manifestations of interest from several of these investors. We continue to analyze these manifestations of interest, and are engaging is discussions with certain of these investors regarding due diligence matters. However, we have not entered into any binding agreement with respect to any proposed sale of our mobile business and cannot do so without approvalterms of the RJ Court. AlthoughPlan Amendment, we may engageare required to maintain a significant interest in negotiations with certain of these investors to discuss the terms under which these investors would be willing to makeUPI InfraCo.
On April 12, 2021, RJ Debtors accepted a binding proposal from the InfraCo Prospective Buyers to purchase a portion of UPI InfraCo. Pursuant to the terms of the binding proposal, the InfraCo Prospective Buyers will acquire 57.9% of the voting and total capital stock of SPE InfraCo for consideration of approximately R$12.9 billion, which will take the form of: (1) cash payments for newly issued shares of SPE InfraCo; (2) cash payments for shares in SPE InfraCo held by us; and (3) the merger of Globenet with and into SPE InfraCo. The purchase price of the transaction is subject to earn-out and other adjustments based on certain performance indicators of SPE InfraCo, as agreed between us and the InfraCo Prospective Buyers in the binding proposal. The binding proposal gives the InfraCo Prospective Buyers the right to top any binding proposals would be requiredfuture bids that we may acquire in a competitive bidding process expected to be submitted pursuant to a process supervised by the RJ Court following an amendment tocarried out in 2021 in accordance with the RJ Plan Amendment.
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Consent Solicitation for 10.000%/12.000% Senior PIK Toggle Notes due 2025
On February 18, 2021, Oi announced that it was soliciting consents, or the Consent Solicitation, from holders of its PIK Toggle Notes for the adoption of certain proposed amendments, or the Proposed Amendments, to the indenture governing the PIK Toggle Notes, dated as of July 27, 2018, or the PIK Toggle Notes Indenture.
The Proposed Amendments primarily seek to align certain provisions of the PIK Toggle Notes Indenture with the terms of RJ Plan Amendment in order to, among other things, increase the Company’s financial flexibility and operating efficiency, and include certain other changes as a result of discussion with holders of the process necessaryPIK Toggle Notes. The Consent Solicitation expired at 5:00 p.m. (New York City time) on May 5, 2021, or the Expiration Date. As of the Expiration Date, the Company received consents from the holders of a majority in aggregate principal amount of the PIK Toggle Notes. Promptly following the Expiration Date, the Company, the guarantors party thereto and the trustee executed the first supplemental indenture to solicit such binding proposals.the PIK Toggle Notes Indenture to implement the Proposed Amendments.
There can be no assurance thatOffering of InfraCo Debentures
On February 18, 2021, in accordance with the RJ Plan Amendment, SPE InfraCo launched a private offering of secured convertible debentures, or the InfraCo Debentures, in the total amount of up to R$2,500 million. The InfraCo Debentures must be subscribed and paid-in by May 17, 2021 and will be amendedmature within 24 months from the issue date, except in the events of an early redemption or early maturity as provided for in the indenture governing the InfraCo Debentures. The InfraCo Debentures are convertible into redeemable preferred shares issued by SPE InfraCo, which represent a manner necessary to facilitatemajority of SPE InfraCo’s voting shares. As provided for in the potential sale of our mobile business, thatRJ Plan Amendment, Oi, through its subsidiaries Telemar and Oi Mobile, will hold a process to solicit binding proposals supervisedcall option for all the preferred shares held by the RJ Court willInfraCo Debenture holders as a result in our receiving proposals containing terms and conditions, includingof any conversion. The InfraCo Debentures bear interest at the purchase price, that will be satisfactory to our company, that we will be able to fulfill the conditions included in any binding proposal, or the timingIPCA rate plus 11% per annum. The InfraCo Debentures are secured by certain assets of SPE InfraCo. The issuance of the completion of any potential sale of our mobile business.
ChangesInfraCo Debentures is subject to the Membership of Oi’s Board of Directors and Board of Executive Officers
Since January 1, 2019, there have been several changes to the composition of Oi’s board of directors and board of executive officers.
On June 3, 2019, Ricardo Reisen de Pinho resigned as a member of Oi’s board of directors.
On September 20, 2019, Oi’s board of directors elected Rodrigo Modesto de Abreu to serve as a member of our board of executive officers, without specific designation, to act as our chief operating officer, and Mr. Abreu resigned as a member of our board of directors.
On October 31, 2019, Carlos Augusto Machado Pereira de Almeida Brandão resigned as our chief financial officer and investor relations officer and Eurico de Jesus Teles Neto resigned as our chief legal officer. On the same date, Oi’s board of directors elected Camille Loyo Faria to serve as our chief financial officer and investor relations officer and elected Antonio Reinaldo Rabelo Filho to serve as our chief legal officer.
On January 31, 2020, Eurico de Jesus Teles Neto resigned as our chief executive officer. On the same date, Oi’s board of directors elected Rodrigo Modesto de Abreu to serve as our chief executive officer.
On March 4, 2020, Oi’s board of directors appointed Claudia Quintella Woods to fill one of the vacancies on Oi’s board of directors, and on March 13, 2020, Oi’s board of directors appointed Armando Lins Netto to fill the remaining vacancy on Oi’s board of directors. The investiture of Mr. Armando Lins Netto is conditioned upon the prior assessment of ANATEL.
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.”certain conditions precedent.
Issuance of Oi Mobile Debentures
In February 2020, an investor subscribed tofor an aggregate amount of R$2,500 million of Oi Mobile’snon-convertible secured debentures. These debentures, or the Oi Mobile Debentures. The Oi Mobile Debentures are guaranteed by Oi and Telemar and are secured by a pledge of cash flows from our receivables in an amount up to R$200 million per month and a first-priority lien on our right to use mobile frequencies. These debenturesThe Oi Mobile Debentures mature in January 2022 in the event that we raise more than R$5 billion from our divestments by July 31, 2020, and will amortize at a rate of R$100 million per month beginning in August 2020 through January 2022 in the event that we do not achieve this divestment target. These debenturesThe Oi Mobile Debentures bear PIK interest, capitalized monthly, through January 2021 at a rate of 12.66% per annum based on the daily U.S. dollar equivalent principal amount determined in accordance with the daily exchange rate between the U.S. dollar and the Brazilianreal, and interest at a rate of 13.61% per annum, payable in cash, thereafter.
Changes to the Membership of Oi’s Board of Directors and Board of Executive Officers
Since January 1, 2020, there have been several changes to the composition of Oi’s board of directors and board of executive officers.
Corporate StructureOn January 31, 2020, Eurico de Jesus Teles Neto resigned as our chief executive officer. On the same date, Oi’s board of directors elected Rodrigo Modesto de Abreu to serve as our chief executive officer. Mr. Abreu had previously served as Oi’s Chief Operating Officer since September 2019 and as a member of Oi’s board of directors from September 2018 to September 2019.
On March 4, 2020, Oi’s board of directors appointed Claudia Quintella Woods to fill one of the vacancies on Oi’s board of directors. On March 13, 2020, Oi’s board of directors also appointed Armando Lins Netto to Oi’s board of directors, whose investiture was subject to ANATEL approval. On April 30, 2020, Oi’s Ordinary and Extraordinary Shareholders’ General Meeting ratified the appointment of Claudia Woods and Armando Lins Netto to the board. On June 3, 2020, ANATEL granted its consent for Armando Lins Netto to serve in the board of directors and his investiture became effective.
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On October 16, 2020, an extraordinary general shareholders’ meeting was convened to resolve upon the election of a new board of directors. In view of a request jointly submitted by certain shareholders whose combined holdings represent more than 5% of our capital stock, the election of the members of Oi’s board of directors took place through a multiple vote process. The following members were elected to serve a unified mandate with a term of office through our annual shareholders’ meeting on April 30, 2021: (1) Eleazar de Carvalho Filho; (2) Henrique José Fernandes Luz; (3) Marcos Bastos Rocha; (4) Marcos Grodetzky; (5) Maria Helena dos Santos Fernandes de Santana; (6) Paulino do Rego Barros Jr.; (7) Roger Solé Rafols; (8) Claudia Quintela Woods; (9) Armando Lins Netto; (10) Mateus Affonso Bandeira; and (11) Luis Maria Viana Palha da Silva.
The following chart presentsfirst nine members mentioned above already served on Oi’s corporate structureboard of directors and ANATEL had already granted its consent for their reelection. The investiture of Mateus Affonso Bandeira and Luis Maria Viana Palha da Silva was subject ANATEL’s consent, which was obtained on January 20, 2021.
At our annual shareholders’ meeting held on April 30, 2021, our shareholders elected to retain all but one of the members of Oi’s board of directors to serve a unified term through April 30, 2023. Mr. Marcos Bastos Rocha no longer serves Oi’s board of directors. Instead, Mr. Raphael Manhães Martins, a former member of Oi’s fiscal council, was elected to Oi’s board of directors. 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.”
Merger of Telemar with and into Oi
At an extraordinary shareholders’ meeting held on April 30, 2021, our shareholders voted to approve the merger of Telemar with and into Oi, as a result of which Oi issued 644,019,090 common shares in treasury. This merger became effective on May 3, 2021, with the transfer to Oi of Telemar’s concessions and authorizations to provide local, domestic long-distance and international long-distanced fixed-line telephone services (Serviço Telefônico Fixo Comutado - STFC) and national Multimedia Communication Service (Serviço de Comunicação Multimídia – SCM) authorizations to provide high speed data service.
| III. | Corporate Structure |
Our principal operating subsidiariessubsidiary as of April 24, 2020.May 5, 2021 was Oi Mobile. For a complete list of our subsidiaries, see Exhibit 8.01 to this annual report.
| IV. | Continuing Operations |
Our Services
WeAs part of our continuing operations, we provide the following services:
Residential Services throughout Brazil (other than in the State of São Paulo), consisting of local and long-distance fixed-line voice services and broadband services; and |
| · | B2B Services throughout Brazil, consisting of our fixed-line voice and broadband services, which are marketed and |
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| Table of Contents |
Personal Mobility Services throughout Brazil consisting of mobile voice
We have classified the operations related to the UPI Mobile Assets, UPI InfraCo, UPI TVCo and data telecommunications servicesUPI Data Center as welldiscontinued operations, as value-added services;their sale represents a strategic shift in our operations and
B2B Services throughout Brazil consisting are an integral part of our fixed-linecoordinated divestment plan. In addition, we have revised our comparative statements of profit or loss, statements of comprehensive income and mobile voicestatements of cash flows for the years ended December 31, 2019 and data telecommunications services, broadband services2018 andPay-TV services, the corresponding notes thereto, in line with IFRS 5, which requires that an entity reclassify the disclosures related to all operations that have been discontinued as of the balance sheet date of the last reporting period presented. The effects of the reclassifications are marketedset forth in note 31 to our audited consolidated financial statements included in this annual report. For additional information regarding our discontinued operations, see “—V. Assets Held for Sale and delivered to SME, corporate and governmental customers, as well as interconnection services, wholesale network usage services and traffic transportation services, which are primarily marketed and delivered to corporate customers (including other telecommunications providers).Discontinued Operations.”
Residential Services
Our Residential Services business includes local and long-distance fixed-line voice services and broadband services provided to residential customers in our fixed-line concession service areas, comprising the entire territory of Brazil other than the State of São Paulo. We are the largest fixed-line telecommunications company in Brazil in terms of total number of lines in service as of December 31, 2020 based on our 9.5 million fixed lines in service as of December 31, 2020, with a market share of 49.3% of the total fixed lines in service in our service areas as of that date. We own the largest fiber optic network in Brazil, with more than 388,000 kilometers of installed fiber optic cable, distributed throughout Brazil. We offer a variety of high-speed broadband services. As of December 31, 2020, we had 4.1 million asymmetric digital subscriber line, or ADSL, subscribers, representing 64.5% of our residential fixed line customers as of that date.
We offer our residential services as bundles, including bundles with other services including our mobile voice and data communications services, as well as on an a la carte basis. In the Residential Services business, we view the household, rather than an individual, as our customer, and our offerings, particularly our bundled offerings, are designed to meet the needs of the household as a whole.
Fixed-Line Voice Services
Local fixed-line services include installation, monthly subscription, metered services, collect calls and supplemental local services. Metered services include local calls that originate and terminate within a single local area and calls between separate local areas within specified metropolitan regions, which we refer to as local calls. ANATEL has divided our fixed-line service areas into approximately 4,400 local areas.
Calls within Brazil that are not classified as local calls are classified as domestic long-distance calls. We provide domestic and international long-distance services for calls originating from fixed-line devices in our fixed-line service areas.
Under our concession agreements, we are required to offer two local fixed-line plans to users: the Basic Plan per Minute (Plano Básico de Minutos) and the Mandatory Alternative Service Plan (Plano Alternativo de Serviços de Oferta Obrigatória), to which a small percentage of our residential customers subscribe. A large majority of our residential customers subscribe to one of a variety of alternative fixed-line plans that we offer, which are designed to meet our customers’ usage profiles, including our bundled services plans. We continually monitor customer usage profiles and preferences and periodically revise our alternative fixed-line plans and promotions in order to better service the needs of our residential customers.
Broadband Services
We offer fixed broadband services through xDSL technologies and FTTH, with speeds ranging from 1 megabit per second, or Mbps, to 200500 Mbps. We offer broadband services to our residential customers as mostly as part of bundled plans with our traditional fixed-line services. Customers pay a fixed monthly subscription fee, irrespective of their actual connection time to the internet.
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As of December 31, 2019,2020, our network covered 85.3%87.3% of the municipalities in our fixed-line service areas, reaching a total of more than 3.64.5 million fixed broadband customers, of which 2.1 million have FTTH connections and 2.4 million have copper wire connections, and our national fiber network reached approximately 4.69.1 million homes through FTTH. As of December 31, 2019,2020, we offered FTTH in 82134 municipalities, an increase of 5448 municipalities as compared to December 31, 2018.2019. We continue to strategically invest in our broadband network in areas that we believe have the greatest potential for sales and growth.
As with our traditional fixed-line services, we continually monitor customer usage profiles and preferences and periodically revise our broadband plans and promotions in order to better service the needs of our residential customers, to encourage our existing broadband customers to migrate to plans offering higher speeds and to attract new customers to our broadband services.
Pay-TVB2B Services
We deliverPay-TV services throughoutIn our fixed-line service areas using our DTH satellite network. We also deliverPay-TV services through our fiber optic network (internet protocolPay-TV,B2B Services business, we serve small and medium sized enterprises, or IPTV) in all the cities where we have deployed FTTH.
We offerPay-TV services to our residential customers as part of bundled plans with our traditional fixed-line services or on an a la carte basis. We offer several packages ofPay-TV channels at different price pointsSMEs, corporate and offer subscribers to each of these packages the option to customize the package through the purchase of additional channels featuring films offered by HBO/Cinemax and Telecine and sports offered by Futebol.
As with our traditional fixed-line services, we continually monitor customer usage profiles and preferences and periodically revise ourPay-TV plans and promotions in order to better service the needs of our residentialgovernmental customers and to attract new customers to ourPay-TV services.
Bundled Services
As an integratedother telecommunications service provider, we focus a significant part of our marketing efforts on promoting our bundled services offerings, including through offers of free installation of fixed-line and broadband services, free modem andWi-Fi and access to certain smartphone applications free of charge. Our bundled services offerings for residential customers have focused on increasing our profitability by providing a more comprehensive mix of higher-value services to our customers. Our market research has shown that bundled offerings build customer loyalty and serve to reduce churn rates as compared to standalone services. In addition, we believe that by developing unique, multi-product bundles with joint installation, integrated billing and unified customer service, we set ourselves apart from other service providers.
We offer a variety of bundled services to our SME, corporate and governmental customers, including ourOi Total portfolio, core fixed-line, broadband and mobile services, as well as our value-added services, advanced voice services and commercial data transmission services. For our corporate customers, we also offer information technology services, such as network management and security, storage, Smartcloud, anti-distributed denial of service and machine-to-machine products, which enable communication between a product and its control center or database (such as a car and its GPS navigation system), in order to expand our revenue sources from corporate customers beyond voice services, increase customer loyalty and ensure greater revenue predictability. We also provide specialized wholesale services, consisting of:of data network services and facilities, interconnection, national and international voice traffic transit and roaming.
Our B2B Services business provides voice, broadband, Pay-TV, data transmission and other telecommunications services to small and medium sized enterprises, or SMEs, corporation and governmental agencies throughout Brazil. We also provide wholesale interconnection, network usage (interconnection) services and traffic transportation services to other telecommunications providers.
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; | |
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| |
| • | value-added services, such as help desk support that provides assistance for technical support issues, web services with hosting, e-mail tools and website builder and security applications. |
In general, our sales team works with our SME customer to determine that customer’s telecommunications needs and negotiates a package of services and pricing structure that is best suited to its needs.
Services for Corporate Customers
We offer corporate customers all of the services offered to our SME customers. In addition, we provide a variety of customized, high-speed data transmission services through various technologies and means of access to corporate customers. Our principal data transmission services for corporate customers are:
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| • |
|
| • | Dedicated Line Services ( |
| • |
|
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, 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 five major service groups through Oi SmartCloud:
| 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 |
| · | Security services, a centralized, anti-spam filtering solution for corporate email; and |
| · | Telepresence as a Service (TPaaS), a video-conferencing service that |
Customers who subscribeWe 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 bundlesprovide 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
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We are responsible for providing services over the local access network and over the long distance network. Our portfolio includes specialized services, consisting interconnection, national and international voice traffic transit and infrastructure sharing.
Interconnection
As part of our wholesale services, we provide interconnection services to users of other network providers. The interconnection is a link between compatible telecommunications networks which permits that a fixed or mobile service user of one network can adequately communicate with the users of a network from another provider. All providers of telecommunication services (fixed or mobile) are required to provide interconnection upon request to any other telecommunication collective service provider. The interconnection agreements are negotiated according to the General Rules on Interconnection (Regulamento Geral de Interconexão), established by ANATEL.
Voice Traffic Transit
We offer national and international voice traffic transit that meets all our customers’ expectations and satisfies the dynamic needs of the telecommunications market. Direct interconnections with the major national and international telecommunication carriers, as well as most small carriers, ensure high-quality voice traffic transit in Brazil.
Roaming
We provide Global System for Mobile Communications, or GSM, roaming in Brazil to national and international mobile operators. Our roaming agreements enables mobile users to automatically make and receive price discountsvoice calls, send and doublereceive SMS as well as access internet service while traveling outside the geographical coverage area of their own home network by using our mobile network.
Marketing and Distribution
We focus our marketing efforts on the upselling to our 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 allowanceand voice allowances. We also engage in digital marketing and multiple customer relationship management (CRM) marketing programs to support our B2B Services business.
We strive to increase the visibility of our brand and provide a consistent branding message. In the year ended December 31, 2020, we adjusted our brand strategy and placed greater emphasis on marketing our fiber services. In addition, we developed a new strategy for addressing our corporate clients, which now focuses on providing products and infrastructure to address the needs of large corporations, including ACT solutions, outsourcing, and cybersecurity.
During the year ended December 31, 2020, we increased our investment in advertising, with a focus on digital advertising, with the goal of improving traffic to our digital channels and generating sales in other channels. In addition to digital advertising, we used traditional advertising mediums, such as cable and network television and radio to increase our presence and the reach of our branding. In addition, we developed a detailed communications strategy to grow sales of our FTTH services.
To grow our customer base, we use proprietary media tools including telemarketing, e-mail and text messages. We also developed a branded content strategy, combining sponsorships of events, athletes and influencers to increase brand awareness and demonstrate our credibility.
Distribution Channels
We distribute our services through channels focused on: (1) residential customers; and (2) business and corporate customers.
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Residential Services
Our distribution channels for residential customers are focused on sales of fixed-line services, including voice, broadband services and Oi TV, and post-paid mobile services. As of December 31, 2020, the principal distribution channels that we offerused for sales to residential customers were:
| · | our own network of stores, which included 124 “Oi” branded stores; |
| · | 308 “Oi” franchised service stores and kiosks located in the largest shopping malls and other high density areas throughout Brazil; |
| · | our telemarketing sales channel, which is operated by our call center and other third-party agents and consists of 1,557 sales representatives that answer more than 203,770 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 718 local sales agents that operate in specific regions and complement our telemarketers; |
| · | door-to-door sales calls made by our sales force of 3,267 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. |
B2B Services
We have established separate distribution channels to serve SME and corporate customers. As of December 31, 2020, the principal distribution channels that we use to market our services to SMEs were:
| · | “Oi” exclusive agents with 753 door-to-door sales consultants and remote salespeople that are dedicated to understanding and addressing the communications needs of our existing and prospective SME customers; |
| · | our telemarketing sales channel, which consists of two agents that use sales representatives that are specifically trained to discuss the business needs of our prospective SME customers to make sales calls, as well as representatives in our call center and representatives at call centers under contract with us to receive calls from existing and prospective SME customers to sell services to new customers and promote higher-value and additional services to existing customers. In addition, our telemarketing channel utilizes customer retention representatives; and |
| · | our website and the Oi Mais Empresas application. |
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, 2020, our corporate sales team, excluding post-sale service personnel, was composed of approximately 231 employees operating in 6 regional offices.
Rates, Billing and Collection
Rates
Our rates for certain services, including basic local fixed-line and domestic long-distance plans, interconnection, EILD and SLD services, are generally subject to regulation by ANATEL. The rates for other telecommunications services, such as broadband services, IP services and frame relay services are market oriented but may still be subject to ANATEL regulation. Furthermore, the rates for DTH and IP TV services are not subject to ANATEL regulation.
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For more information about the regulations applicable to our rates, see “—IX. Regulation of the Brazilian Telecommunications Industry.”
Billing and Collection
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 la carte basis.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.
We are required to include in our monthly Residential Services bills charges incurred by our customers for long-distance services provided by other long-distance service providers upon the request of these providers. We have billing agreements with each long-distance telecommunications service provider that interconnects with our networks under which we bill our customers for any long-distance calls originated on our network that are carried by another long-distance service provider and transfer the balance to the relevant provider after deducting any access fees due for the use of our network.
ANATEL regulations permit us to restrict outgoing calls made by a Residential Services customer 15 days after we send the customer a past due notice, restrict incoming calls received by a Residential Services customer 30 days after the restriction on outgoing calls is imposed, and disconnect a Residential Services customer after 30 days after the restriction on incoming calls is imposed. The disconnection process thus comprises several stages, including customer notification regarding the referral of their delinquency to credit bureaus, before the Residential Services customer may be ultimately disconnected due to non-payment. Notices range from voice messages to active calls for negotiation with the customer. Our collection system enables us to access delinquent subscribers’ accounts according to their payment profile. This profile takes into consideration, among other things, the length of subscription, the outstanding balance of the account and the longest payment delays.
Competition
The Brazilian telecommunications industry is highly competitive. The competitive environment is significantly affected by key trends, including technological and service convergence, market consolidation and combined service offerings by service providers.
Residential Services
We are a leading provider of residential services in our fixed-line service areas. Based on information available from ANATEL, as of December 31, 2020, we had a market share of 49.0% of the total fixed lines in service in our service areas (including the number fixed lines provided to our B2B Services customers). Our principal competitors for fixed-line services in our service areas are Claro and Telefônica Brasil.
We face competition from other telecommunications services providers, particularly from mobile telecommunications services providers, which has led to traffic migration from fixed-line traffic to mobile traffic and the substitution of mobile services in place of fixed-line services.
In addition, toOi Total, we offer bundles forface competition from providers of cable television services, particularly Claro and Telefônica Brasil, which provide local fixed-line services and broadband services (in many areas at higher speeds than our offerings) to residential customers through their cable network in municipalities in our service areas that subscribe to our IPTV service that include broadband subscriptions at speedshave the highest concentration of up to 200 Mbps. Subscriptions to our IPTV packages are only availablepurchasing power.
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Telefônica Brasil has been increasing its competitive activities through traditional fixed-line networks in areas in which we have deployed our FTTH network. Outside our FTTH network, we offerPay-TV services throughout our fixed-line service areas, expanding its fiber optic network in high-income residential areas and increasing its services to low- and medium-size businesses.
The decrease in interconnection rates has led to decreases in market prices for telecommunications services by enabling telecommunications service providers that use the local fixed-line networks of incumbent fixed-line providers, such as our company, to offer lower prices to their customers for fixed-line services, such as voice and broadband. Although regional broadband service providers do not have the same national footprint as our company, they have established networks in the regions in which they operate and often have a market share of approximately 15% of broadband customers.
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 our DTH satellite network.coaxial cable under the “Net” brand.
B2B Services
The competitive landscape we face relating to the fixed-line and mobile services we provide to our B2B customers are similar to those relating to the fixed-line and mobile services we provide to our residential and personal mobility customers.
In recent years, there has been a shift among corporate and SME services providers toward value-added services. With the exception of the Oi Mais Empresas application 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.
Property, Plant and Equipment
As of December 31, 2020, the net book value of our property, plant and equipment from continuing operations was R$24,135 million. As of December 31, 2020, of the net book value of our property, plant and equipment, (1) transmission and other equipment, primarily data communication equipment, network systems and infrastructure (including alternating and direct current supply equipment) and motor-generator groups, represented 41.1%; (2) infrastructure, primarily consisting of metallic and fiber-optic cable networks and lines, underground ducts, posts and towers, represented 30.7%; (3) right of use – leases, primarily consisting of communications towers, real estate, stores, vehicles, and sites (physical spaces), represented 12.1%; (4) work in progress represented 8.1%; (5) buildings represented 5.6%; (6) automatic switching equipment, consisting of trunking and switching stations (including local, tandem and transit telephone exchanges), represented 1.3%; and (7) other fixed assets represented 1.2%.
All Brazilian property, plant and equipment that are essential in providing the services described in our fixed-line concession agreements are considered “reversible assets,” which means that, should our fixed-line concession agreements expire or terminate without being renewed, these assets will automatically revert to ANATEL. There are no other encumbrances that may affect the utilization of our property, plant and equipment. For more details, see note 16 to our audited consolidated financial statements included in this annual report.
Intellectual Property
We hold several material intellectual property assets, including patents and trademarks registered with the Brazilian Patent and Trademark Office (Instituto Nacional de Propriedade Industrial), or BPTO. Our main trademark used in Brazil, “Oi,” is registered with the BPTO in several classes, which allows us to use this trademark in a variety of markets in which we operate, including in connection with our fixed-line, broadband and fiber optic internet services (internet and television).
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Operating Agreements
Fixed-Line Tower Leases
We have also entered into three operating lease agreements with owners of fixed-line communications towers to lease space to install equipment related to the delivery of our fixed-line services on an aggregate of approximately 6,400 fixed-line communications towers.
The monthly payments under our operating lease agreements reflect a base rental amount specified in the agreement, adjusted annually by the positive variation of IPCA.
The operating lease agreements for space on fixed-line communications towers have 20-year terms expiring between April 2033 and July 2033 and are renewable for additional 20-year terms.
Satellite Network
We have deployed a range of satellite-based services to comply with our public service obligations to the rural and remote areas of Brazil, including the Amazon rainforest region. These satellite services include internet access and access to corporate data applications. The satellite network comprises satellite earth stations located in less-populated rural areas, as well as hub stations in the cities of Brasília, Manaus, Belém, Rio de Janeiro, Porto Velho, Boa Vista, Macapá, Santarém, and Marabá. Our fiber optic backbone connects all these hub stations. The integration of the land-based segment of our satellite network allows us to provide fixed-line to our subscribers in any location in our fixed-line service areas.
Network Maintenance
Our external plant and equipment maintenance, installation and network servicing are performed by our wholly-owned subsidiary Serede Serviços de Rede S.A., or Serede, as well as one third-party service provider, Telemont. We employ our own team of technicians for our internal plant and equipment maintenance.
Insourced Network Maintenance
In May 2013 and June 2013, we insourced our installation, operations, and corrective and preventive maintenance services in connection with our fixed-line telecommunications services, mobile telecommunications services, data transmission services (including broadband access services), satellite services, buildings, access ways and towers. These services had previously been provided by Nokia Solutions and Networks do Brasil Telecomunicações Ltda. and Alcatel-Lucent Brasil S.A.
In June 2016, we acquired 100% of the capital stock of A.R.M. Engenharia and changed its corporate name to Rede Conecta – Serviços de Rede S.A. In November 2018, Rede Conecta merged into Serede. Through Serede we perform 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).
Outsourced Network Maintenance
In October 2017, we entered into 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 2025, are approximately R$6.1 billion.
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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.
| V. | Assets Held-For-Sale and Discontinued Operations |
As a result of our decision to dispose of certain businesses and/or isolated assets in connection with the RJ Plan Amendment, we have revised our comparative statements of profit or loss, statements of comprehensive income and statements of cash flows for the years ended December 31, 2019 and 2018 and the corresponding notes thereto, in line with IFRS 5, which requires that an entity reclassify the disclosures related to all operations that have been discontinued as of the balance sheet date of the last reporting period presented. The effects of the reclassifications are set forth in note 31 to our audited consolidated financial statements included in this annual report.
As of December 30, 2020, our assets held-for-sale included our UPIs, our operations in Africa and other non-core real estate assets. As of December 31, 2020, we recorded total assets of R$20,772 million and total liabilities of R$9,195 million related to our assets held-for-sale.
UPIs
To further our Strategic Plan and pursuant to the RJ Plan Amendment, we created five UPIs for the disposal of certain of our businesses and/or isolated assets, as follows: (1) UPI Mobile Assets, which includes our mobile telephony and data operations; (2) UPI Towers and UPI Data Center, which includes our passive infrastructure; (3) UPI InfraCo, which includes our telecommunications network operation; and (4) UPI TVCo, which includes our Pay-TV business. Pursuant to the RJ Plan Amendment and the Brazilian Bankruptcy Law, our UPIs are separated from the assets, liabilities and rights of the RJ Debtors.
As of the date of this annual report, we have entered into agreements to sell or completed the sale of UPI Data Center, UPI Towers and UPI Mobile Assets. In addition, we have accepted a binding proposal from a group of prospective buyers to acquire a majority interest in UPI InfraCo. For additional information, see “—II. Our Recent History and Development—Adoption of Strategic Plan.”
The assets and liabilities related to UPI Mobile Assets, UPI InfraCo, UPI TVCo, UPI Towers, and UPI Data Center are classified as held for sale since their carrying amounts are being recovered primarily through sale transactions rather than through continuous use. We consider the sale of these assets to be highly probable, considering how the divestment plan of these assets is unfolding. We have also classified the operations related to the UPI Mobile Assets, UPI InfraCo, UPI TVCo and UPI Data Center as discontinued operations, as their sale represents a strategic shift in our operations and are an integral part of our coordinated divestment plan. We do not consider the operations of UPI Towers to represent a separate line of business, and the revenues and expenses associated with these assets are presented under the full consolidation method in our statement of profit or loss.
As of December 31, 2020, we recorded total assets of R$20,625 million and total liabilities of R$9,153 million related to our UPIs held-for-sale. As of December 31, 2020, the net book value of our property, plant and equipment associated with our UPIs was R$17,298 million.
UPI Mobile Assets
Pursuant to the RJ Plan Amendment, UPI Mobile Assets holds 100% of the capital stock of SPE Mobile Assets. SPE Mobile Assets will hold assets relating to our Personal Mobility business in Brazil, including our mobile client base, our authorizations to provide mobile telephone services and certain mobile network equipment and information technology systems.
On January 28, 2021, following a hearing held in December 2020 in connection with a competitive bidding process carried out in accordance with the RJ Plan Amendment, the RJ Debtors executed the UPI Mobile Assets SPA to sell UPI Mobile Assets to the telecom companies Telefônica Brasil S.A., TIM S.A., and Claro S.A. (collectively, the “Mobile Assets Buyers”) for the amount of R$16.5 billion, subject to certain conditions precedent, including regulatory authorizations. The UPI Mobile Assets SPA also provides for transition services to be provided by Oi to the Mobile Assets Buyers for a period of up to 12 months, and a long term “take or pay” agreement with Oi and certain of its subsidiaries for the performance of services of transmission capacity.
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Overview of Our Personal Mobility Services
Our Personal Mobility Services business offers mobile telecommunications services throughout Brazil. Our mobile network covers areas in which approximately 94% of the Brazilian population lives and works. In addition, we provide network usage (interconnection) services. Based on our 36.7 million mobile subscribers as of December 31, 2020, we had a 15.8% market share of the Brazilian mobile telecommunications market as of that date.
We offer pre-paid and post-paid mobile voice and data communications plans:plans, including: Pré da Oi Livreplans for thepre-paid market;Pós da Oi Mais plans for the post-paid market; andOi Mais Controle as a hybrid solution. Although we no longer offer new subscriptions for voice-only mobile services, we continue to provide services to customers that have subscribed to these legacy plans. Since our 3G and 4G networks offernetwork expansion, we have greater capacity to meet the growing demand for data, we areand have focused on acceleratingincreasing the migration of users from 2G to 3G and from 3G to 4G by encouraging sales of 3G/4G smartphones and by including more data allowances in our new mobile offers.
Pre-Paid Plans
Pre-paid customers activate their cellular numbers through the purchase and installation of a SIM card in their mobile handsets. We offerpre-paid voice and data bundles through ourPré da Oi Livre portfolio. OurPré da Oi Livre portfolio includes a range ofall-net voice minutes for calls within Brazil (including unlimited minutes through theOi Livre Ilimitado plans) and data allowances (ranging from 1 GB to 415 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 seven to 3031 days. Using theMinha Oi application on their smartphones, customers can freely switch between their data and voice allowances depending on their individual needs using apre-determined exchange rate. Ourpre-paid customers are able to add credits to their accounts throughpoint-of-sale machines, ATMs, Apple and Android applications installed on their mobile devices such asMinha Oi andRecarga Oi using a credit card our toll-free number or the purchase ofpre-paid cards at a variety of prices.Caixa Tem debit credit. These credits are valid for a fixed period of time following activation and can be extended when additional credits are purchased.
Post-Paid Plans
Customers of our post-paid plans are billed on a monthly basis for contracted services used during the previous month, in addition to any fees for special services. OurPós da Oi MaisDigital portfoliooffersportfolio offers unlimited text messages, unlimited minutes for calls to any operator in Brazil and two mobile data plans (8 GB and 50100 GB) with no usage restrictions, plus no data traffic charge for major social networks and video to apps, which vary according to the data plan, and include, among others: YouTube, Netflix, Facebook, Instagram, WhatsApp and Messenger. CustomersOn our premium plan, customers can include up to four additional lines and manage or share their data plan through our self-serve application,Minha Oi. Our premium plan subscription also includesOi Play bundled with video streaming services. To increase our value proposition, in addition to mobile voice and data services, we bundle premium content and services including newspapers, magazines ande-books.
Hybrid PlansWholesale Services
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We are responsible for providing services over the local access network and over the long distance network. Our portfolio includes specialized services, consisting interconnection, national and international voice traffic transit and infrastructure sharing.
Interconnection
Our hybrid plans present strategic value forAs part of our company because they combinewholesale services, we provide interconnection services to users of other network providers. The interconnection is a link between compatible telecommunications networks which permits that a fixed or mobile service user of one network can adequately communicate with the advantagesusers ofpre-paid offerings, such as the absence a network from another provider. All providers of bad debt and a favorable impact on working capital, with advantages of post-paid offerings, such as a heavier consumption profile and higher ARPUs. We improve our revenues and market share through the offer of hybrid plans by consolidating customer recharges in our hybrid plans’ SIM cards and by improving the mix of offeringstelecommunication services (fixed or mobile) are required to provide interconnection upon request to any other telecommunication collective service provider. The interconnection agreements are negotiated according to the post-paid market.General Rules on Interconnection (Regulamento Geral de Interconexão), established by ANATEL.
Voice Traffic Transit
We offer national and international voice traffic transit that meets all our customers’ expectations and satisfies the dynamic needs of the telecommunications market. Direct interconnections with the major national and international telecommunication carriers, as well as most small carriers, ensure high-quality voice traffic transit in Brazil.
Roaming
We provide Global System for Mobile Communications, or GSM, roaming in Brazil to national and international mobile operators. Our roaming agreements enables mobile users to automatically make and receive voice calls, send and receive SMS as well as access internet service while traveling outside the geographical coverage area of their own home network by using our mobile network.
Marketing and Distribution
We focus our marketing efforts on the upselling to our 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.
We strive to increase the visibility of our brand and provide a consistent branding message. In the year ended December 31, 2020, we adjusted our brand strategy and placed greater emphasis on marketing our fiber services. In addition, we developed a new strategy for addressing our corporate clients, which now focuses on providing products and infrastructure to address the needs of large corporations, including ACT solutions, outsourcing, and cybersecurity.
During the year ended December 31, 2020, we increased our investment in advertising, with a focus on digital advertising, with the goal of improving traffic to our digital channels and generating sales in other channels. In addition to digital advertising, we used traditional advertising mediums, such as cable and network television and radio to increase our presence and the reach of our branding. In addition, we developed a detailed communications strategy to grow sales of our FTTH services.
To grow our customer base, we use proprietary media tools including telemarketing, e-mail and text messages. We also developed a branded content strategy, combining sponsorships of events, athletes and influencers to increase brand awareness and demonstrate our credibility.
Distribution Channels
We distribute our services through channels focused on: (1) residential customers; and (2) business and corporate customers.
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Residential Services
Our distribution channels for residential customers are focused on sales of fixed-line services, including voice, broadband services and Oi TV, and post-paid mobile services. As of December 31, 2020, the principal distribution channels that we used for sales to residential customers were:
| · | our own network of stores, which included 124 “Oi” branded stores; |
| · | 308 “Oi” franchised service stores and kiosks located in the largest shopping malls and other high density areas throughout Brazil; |
| · | our telemarketing sales channel, which is operated by our call center and other third-party agents and consists of 1,557 sales representatives that answer more than 203,770 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 718 local sales agents that operate in specific regions and complement our telemarketers; |
| · | door-to-door sales calls made by our sales force of 3,267 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. |
B2B Services
We have established separate distribution channels to serve SME and corporate customers. As of December 31, 2020, the principal distribution channels that we use to market our services to SMEs were:
| · | “Oi” exclusive agents with 753 door-to-door sales consultants and remote salespeople that are dedicated to understanding and addressing the communications needs of our existing and prospective SME customers; |
| · | our telemarketing sales channel, which consists of two agents that use sales representatives that are specifically trained to discuss the business needs of our prospective SME customers to make sales calls, as well as representatives in our call center and representatives at call centers under contract with us to receive calls from existing and prospective SME customers to sell services to new customers and promote higher-value and additional services to existing customers. In addition, our telemarketing channel utilizes customer retention representatives; and |
| · | our website and the Oi Mais Empresas application. |
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, 2020, our corporate sales team, excluding post-sale service personnel, was composed of approximately 231 employees operating in 6 regional offices.
Rates, Billing and Collection
Rates
Our rates for certain services, including basic local fixed-line and domestic long-distance plans, interconnection, EILD and SLD services, are generally subject to regulation by ANATEL. The rates for other telecommunications services, such as broadband services, IP services and frame relay services are market oriented but may still be subject to ANATEL regulation. Furthermore, the rates for DTH and IP TV services are not subject to ANATEL regulation.
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For more information about the regulations applicable to our rates, see “—IX. Regulation of the Brazilian Telecommunications Industry.”
Billing and Collection
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.
We are required to include in our monthly Residential Services bills charges incurred by our customers for long-distance services provided by other long-distance service providers upon the request of these providers. We have billing agreements with each long-distance telecommunications service provider that interconnects with our networks under which we bill our customers for any long-distance calls originated on our network that are carried by another long-distance service provider and transfer the balance to the relevant provider after deducting any access fees due for the use of our network.
ANATEL regulations permit us to restrict outgoing calls made by a Residential Services customer 15 days after we send the customer a past due notice, restrict incoming calls received by a Residential Services customer 30 days after the restriction on outgoing calls is imposed, and disconnect a Residential Services customer after 30 days after the restriction on incoming calls is imposed. The disconnection process thus comprises several stages, including customer notification regarding the referral of their delinquency to credit bureaus, before the Residential Services customer may be ultimately disconnected due to non-payment. Notices range from voice messages to active calls for negotiation with the customer. Our collection system enables us to access delinquent subscribers’ accounts according to their payment profile. This profile takes into consideration, among other things, the length of subscription, the outstanding balance of the account and the longest payment delays.
Competition
The Brazilian telecommunications industry is highly competitive. The competitive environment is significantly affected by key trends, including technological and service convergence, market consolidation and combined service offerings by service providers.
Residential Services
We are a leading provider of residential services in our fixed-line service areas. Based on information available from ANATEL, as of December 31, 2020, we had a market share of 49.0% of the total fixed lines in service in our service areas (including the number fixed lines provided to our B2B Services customers). Our principal competitors for fixed-line services in our service areas are Claro and Telefônica Brasil.
We face competition from other telecommunications services providers, particularly from mobile telecommunications services providers, which has led to traffic migration from fixed-line traffic to mobile traffic and the substitution of mobile services in place of fixed-line services.
In addition, we face competition from providers of cable television services, particularly Claro and Telefônica Brasil, which provide local fixed-line services and broadband services (in many areas at higher speeds than our offerings) to residential customers through their cable network in municipalities in our service areas that have the highest concentration of purchasing power.
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Telefônica Brasil has been increasing its competitive activities through traditional fixed-line networks in our fixed-line service areas, expanding its fiber optic network in high-income residential areas and increasing its services to low- and medium-size businesses.
The decrease in interconnection rates has led to decreases in market prices for telecommunications services by enabling telecommunications service providers that use the local fixed-line networks of incumbent fixed-line providers, such as our company, to offer lower prices to their customers for fixed-line services, such as voice and broadband. Although regional broadband service providers do not have the same national footprint as our company, they have established networks in the regions in which they operate and often have a market share of approximately 15% of broadband customers.
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.
B2B Services
The competitive landscape we face relating to the fixed-line and mobile services we provide to our B2B customers are similar to those relating to the fixed-line and mobile services we provide to our residential and personal mobility customers.
In recent years, there has been a shift among corporate and SME services providers toward value-added services. With the exception of the Oi Mais Empresas application 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.
Property, Plant and Equipment
As of December 31, 2020, the net book value of our property, plant and equipment from continuing operations was R$24,135 million. As of December 31, 2020, of the net book value of our property, plant and equipment, (1) transmission and other equipment, primarily data communication equipment, network systems and infrastructure (including alternating and direct current supply equipment) and motor-generator groups, represented 41.1%; (2) infrastructure, primarily consisting of metallic and fiber-optic cable networks and lines, underground ducts, posts and towers, represented 30.7%; (3) right of use – leases, primarily consisting of communications towers, real estate, stores, vehicles, and sites (physical spaces), represented 12.1%; (4) work in progress represented 8.1%; (5) buildings represented 5.6%; (6) automatic switching equipment, consisting of trunking and switching stations (including local, tandem and transit telephone exchanges), represented 1.3%; and (7) other fixed assets represented 1.2%.
All Brazilian property, plant and equipment that are essential in providing the services described in our fixed-line concession agreements are considered “reversible assets,” which means that, should our fixed-line concession agreements expire or terminate without being renewed, these assets will automatically revert to ANATEL. There are no other encumbrances that may affect the utilization of our property, plant and equipment. For more details, see note 16 to our audited consolidated financial statements included in this annual report.
Intellectual Property
We hold several material intellectual property assets, including patents and trademarks registered with the Brazilian Patent and Trademark Office (Instituto Nacional de Propriedade Industrial), or BPTO. Our main trademark used in Brazil, “Oi,” is registered with the BPTO in several classes, which allows us to use this trademark in a variety of markets in which we operate, including in connection with our fixed-line, broadband and fiber optic internet services (internet and television).
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Operating Agreements
Fixed-Line Tower Leases
We have also entered into three operating lease agreements with owners of fixed-line communications towers to lease space to install equipment related to the delivery of our fixed-line services on an aggregate of approximately 6,400 fixed-line communications towers.
The monthly payments under our operating lease agreements reflect a base rental amount specified in the agreement, adjusted annually by the positive variation of IPCA.
The operating lease agreements for space on fixed-line communications towers have 20-year terms expiring between April 2033 and July 2033 and are renewable for additional 20-year terms.
Satellite Network
We have deployed a range of satellite-based services to comply with our public service obligations to the rural and remote areas of Brazil, including the Amazon rainforest region. These satellite services include internet access and access to corporate data applications. The satellite network comprises satellite earth stations located in less-populated rural areas, as well as hub stations in the cities of Brasília, Manaus, Belém, Rio de Janeiro, Porto Velho, Boa Vista, Macapá, Santarém, and Marabá. Our fiber optic backbone connects all these hub stations. The integration of the land-based segment of our satellite network allows us to provide fixed-line to our subscribers in any location in our fixed-line service areas.
Network Maintenance
Our external plant and equipment maintenance, installation and network servicing are performed by our wholly-owned subsidiary Serede Serviços de Rede S.A., or Serede, as well as one third-party service provider, Telemont. We employ our own team of technicians for our internal plant and equipment maintenance.
Insourced Network Maintenance
In May 2013 and June 2013, we insourced our installation, operations, and corrective and preventive maintenance services in connection with our fixed-line telecommunications services, mobile telecommunications services, data transmission services (including broadband access services), satellite services, buildings, access ways and towers. These services had previously been provided by Nokia Solutions and Networks do Brasil Telecomunicações Ltda. and Alcatel-Lucent Brasil S.A.
In June 2016, we acquired 100% of the capital stock of A.R.M. Engenharia and changed its corporate name to Rede Conecta – Serviços de Rede S.A. In November 2018, Rede Conecta merged into Serede. Through Serede we perform 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).
Outsourced Network Maintenance
In October 2017, we entered into 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 2025, are approximately R$6.1 billion.
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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.
| V. | Assets Held-For-Sale and Discontinued Operations |
As a result of our decision to dispose of certain businesses and/or isolated assets in connection with the RJ Plan Amendment, we have revised our comparative statements of profit or loss, statements of comprehensive income and statements of cash flows for the years ended December 31, 2019 and 2018 and the corresponding notes thereto, in line with IFRS 5, which requires that an entity reclassify the disclosures related to all operations that have been discontinued as of the balance sheet date of the last reporting period presented. The effects of the reclassifications are set forth in note 31 to our audited consolidated financial statements included in this annual report.
As of December 30, 2020, our assets held-for-sale included our UPIs, our operations in Africa and other non-core real estate assets. As of December 31, 2020, we recorded total assets of R$20,772 million and total liabilities of R$9,195 million related to our assets held-for-sale.
UPIs
To further our Strategic Plan and pursuant to the RJ Plan Amendment, we created five UPIs for the disposal of certain of our businesses and/or isolated assets, as follows: (1) UPI Mobile Assets, which includes our mobile telephony and data operations; (2) UPI Towers and UPI Data Center, which includes our passive infrastructure; (3) UPI InfraCo, which includes our telecommunications network operation; and (4) UPI TVCo, which includes our Pay-TV business. Pursuant to the RJ Plan Amendment and the Brazilian Bankruptcy Law, our UPIs are separated from the assets, liabilities and rights of the RJ Debtors.
As of the date of this annual report, we have entered into agreements to sell or completed the sale of UPI Data Center, UPI Towers and UPI Mobile Assets. In addition, we have accepted a binding proposal from a group of prospective buyers to acquire a majority interest in UPI InfraCo. For additional information, see “—II. Our Recent History and Development—Adoption of Strategic Plan.”
The assets and liabilities related to UPI Mobile Assets, UPI InfraCo, UPI TVCo, UPI Towers, and UPI Data Center are classified as held for sale since their carrying amounts are being recovered primarily through sale transactions rather than through continuous use. We consider the sale of these assets to be highly probable, considering how the divestment plan of these assets is unfolding. We have also classified the operations related to the UPI Mobile Assets, UPI InfraCo, UPI TVCo and UPI Data Center as discontinued operations, as their sale represents a strategic shift in our operations and are an integral part of our coordinated divestment plan. We do not consider the operations of UPI Towers to represent a separate line of business, and the revenues and expenses associated with these assets are presented under the full consolidation method in our statement of profit or loss.
As of December 31, 2020, we recorded total assets of R$20,625 million and total liabilities of R$9,153 million related to our UPIs held-for-sale. As of December 31, 2020, the net book value of our property, plant and equipment associated with our UPIs was R$17,298 million.
UPI Mobile Assets
Pursuant to the RJ Plan Amendment, UPI Mobile Assets holds 100% of the capital stock of SPE Mobile Assets. SPE Mobile Assets will hold assets relating to our Personal Mobility business in Brazil, including our mobile client base, our authorizations to provide mobile telephone services and certain mobile network equipment and information technology systems.
On January 28, 2021, following a hearing held in December 2020 in connection with a competitive bidding process carried out in accordance with the RJ Plan Amendment, the RJ Debtors executed the UPI Mobile Assets SPA to sell UPI Mobile Assets to the telecom companies Telefônica Brasil S.A., TIM S.A., and Claro S.A. (collectively, the “Mobile Assets Buyers”) for the amount of R$16.5 billion, subject to certain conditions precedent, including regulatory authorizations. The UPI Mobile Assets SPA also provides for transition services to be provided by Oi to the Mobile Assets Buyers for a period of up to 12 months, and a long term “take or pay” agreement with Oi and certain of its subsidiaries for the performance of services of transmission capacity.
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Overview of Our Personal Mobility Services
Our Personal Mobility Services business offers mobile telecommunications services throughout Brazil. Our mobile network covers areas in which approximately 94% of the Brazilian population lives and works. In addition, we provide network usage (interconnection) services. Based on our 36.7 million mobile subscribers as of December 31, 2020, we had a 15.8% market share of the Brazilian mobile telecommunications market as of that date.
We offer pre-paid and post-paid mobile voice and data communications plans, including: Pré da Oi plans for the pre-paid market; Pós da Oi plans for the post-paid market; and Oi Controle as a hybrid solution. Since our 4G network expansion, we have greater capacity to meet the growing demand for data, and have focused on increasing the migration of users from 2G and 3G to 4G by encouraging sales of 3G/4G smartphones and by including more data allowances in our new mobile offers.
Pre-Paid Plans
Pre-paid customers activate their cellular numbers through the purchase and installation of a SIM card in their mobile handsets. We offer pre-paid voice and data bundles through our Pré da Oi portfolio. Our Pré da Oi portfolio includes a range of plans for customers who wish to combine the cost savings of our post-paid plans with the self-imposed limits of ourpre-paid plans.Oi Mais Controle subscribers have similar benefits as theOi Mais customers, such as data packages with no usage restrictions, unlimited text messaging and unlimitedall-net voice minutes for calls within Brazil combined withand data allowances (ranging from 1 GB to 15 GB of 4G mobile data) for flat fees. Customers choose the abilityamount of time they have to use their voice and data allowances, ranging from seven to 31 days. Using the Minha Oi Livre application on their smartphones, customers tocan freely switch between their data and voice allowances depending on their individual needs using apre-determined exchange rate using therate. 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 application on their smartphones.using a credit card or Caixa Tem debit credit. These credits are valid for a fixed period of time following activation and can be extended when additional credits are purchased.
Value-Added ServicesPost-Paid Plans
In 2019, we continuedCustomers of our post-paid plans are billed on a monthly basis for contracted services used during the previous month, in addition to accelerateany fees for special services. Our Pós da Oi Digital portfolio offers unlimited text messages, unlimited minutes for calls to any operator in Brazil and two mobile data plans (8 GB and 100 GB) with no usage restrictions, plus no data traffic charge for major social networks and video to apps, which vary according to the data plan, and include, among others: YouTube, Netflix, Facebook, Instagram, WhatsApp and Messenger. On our digital transformation process, which included restructuringpremium plan, customers can include up to four additional lines and manage or share their data plan through our value-added services under the following categories: (1) films and series; (2) education; (3) health; (4) written media; and (5) utilities. Within each category, we highlight the following value-added services:
self-serve application, Films and SeriesMinha Oi
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Education
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Health
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Written Media
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Utilities
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. Our value-added services are developed by third-party application or content providers and offeredplan subscription also includes Oi Play bundled with video streaming services. To increase our value proposition, in addition to our customers.
B2B Services
In our B2B Services business, we serve SME, corporate and governmental customers and other telecommunications providers. We offer a variety of services to our SME, corporate and governmental customers, including our core fixed-line, broadband and mobile services, as well as our value-added services, advanced voice services and commercial data transmission services. For our corporate customers, we also offer information technology services, such as network management and security, storage, Smartcloud, anti-distributed denial of service andmachine-to-machine products, which enable communication between a product and its control center or database (such as a car and its GPS navigation system), in order to expand our revenue sources from corporate customers beyond voice services, increase customer loyalty and ensure greater revenue predictability. We also provide specialized wholesale services, consisting of data network services and facilities, interconnection, national and international voice traffic transit and roaming.
Services for SMEs
We offer SME services similar to those offered to our residential and personal mobility customers, including fixed-line and mobile voice services, and fixed-line and mobile broadband services. We also launched FTTH plans for SMEs. In addition, we offer SMEs:
advanced voice services, primarily 0800 (toll free) services, as well as voice portals where customers can participate in real-time chats and other interactive voice services;
dedicated internet connectivity and data network services;services, we bundle premium content and
value-added services such as help desk support that provides assistance for technical support issues, web services with hosting,e-mail toolsincluding newspapers, magazines and website builder and security applications.
In general, our sales team works with our SME customer to determine that customer’s telecommunications needs and negotiates a package of services and pricing structure that is best suited to its needs.
Services for Corporate Customers
We offer corporate customers all of the services offered to our SME customers. In addition, we provide a variety of customized, high-speed data transmission services through various technologies and means of access to corporate customers. Our principal data transmission services for corporate customers are:
we act as the internet service provider for our corporate customers, connecting their networks to the internet;
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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 themend-to-end solutions through which we are able to provide and manage their connectivity and information technology needs. For example, we offerOi 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 five major service groups throughOi 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, anin-memory computing platform for large amounts of data;
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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;
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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
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| Table of Contents |
We are the largest wholesale service provider in Brazil.
We are responsible for providing services over the local access network and over the long distance network. Almost 2,000 service providers use our network to deliver services ranging from telephony and broadband to high-speed data connections for businesses of all sizes.
Our portfolio includes specialized services, consisting of data network services and facilities, interconnection, national and international voice traffic transit roaming and infrastructure sharing.
Data Network Services and Facilities
We provide services referred to as industrial exploration of dedicated line (Exploração Industrial de Linha Dedicada), or EILD, pursuant to our concession agreement. The EILD consists of leased lines and clear channel protocols for the provision of services to third parties.
In addition, we are able to offer a complete portfolio of wholesale products, includingfiber-to-the-x, or FTTx, solutions, IP, Ethernet and Multi-Protocol Label Switching, or MPLS. All of these products are used to meet the demands of other network operators and regional internet providers. The circuits are requested with different service level agreements; and we are required to provide the facilities with contingency routes, sites and equipment to improve the service against points of failure.
Interconnection
As part of our wholesale services, we provide interconnection services to users of other network providers. The interconnection is a link between compatible telecommunications networks which permits that a fixed or mobile service user of one network can adequately communicate with the users of a network from another provider. All providers of telecommunication services (fixed or mobile) are required to provide interconnection upon request to any other telecommunication collective service provider. The interconnection agreements are negotiated according to the General Rules on Interconnection (Regulamento Geral de Interconexão), established by ANATEL.
Voice Traffic Transit
We offer national and international voice traffic transit that meets all our customers’ expectations and satisfies the dynamic needs of the telecommunications market. Direct interconnections with the major national and international telecommunication carriers, as well as most small carriers, ensure high-quality voice traffic transit in Brazil.
Roaming
We provide Global System for Mobile Communications, or GSM, roaming in Brazil to national and international mobile operators. Our roaming agreements enables mobile users to automatically make and receive voice calls, send and receive SMS as well as access internet service while traveling outside the geographical coverage area of their own home network by using our mobile network.
Marketing and Distribution
We focus our marketing efforts on the upselling to our existing clients while strengthening the “Oi” brand through our convergent services offerings and promotion of ourMinha Oi smartphone application, which allows ourpre-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.
We strive to increase the visibility of our brand and provide a consistent branding message. In the year ended December 31, 2019,2020, we adjusted our brand strategy and placed greater emphasis on marketing our fiber services and post-paid mobile packages.services. In addition, we developed a new strategy for addressing our corporate clients, which now focuses on providing products and infrastructure to address the needs of large corporations, including ACT solutions, outsourcing, and cybersecurity.
During the year ended December 31, 2019,2020, we increased our investment in advertising, with a focus on digital advertising, with the goal of improving traffic to our digital channels and generating sales in other channels. In addition to digital advertising, we used traditional advertising mediums, such as cable and network television and radio to increase our presence and the reach of our branding. In addition, we developed a detailed communications strategy to grow sales of our FTTH services.
To grow our customer base, we use proprietary media tools including telemarketing,e-mail and text messages. We also developed a branded content strategy, combining sponsorships of events, athletes and influencers to increase brand awareness and demonstrate our credibility.
Distribution Channels
We distribute our services through channels focused on three separate sectors of the telecommunications services market:on: (1) residential customers, including customers of our mobile services to whom we sell bundled plans;customers; and (2) personal mobility customers that purchase our mobile services independently of our bundled plans; and (3) business and corporate customers.
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Residential Services
Our distribution channels for residential customers are focused on sales of fixed-line services, including voice, broadband services andOi TV, and post-paid mobile services. As of December 31, 2019,2020, the principal distribution channels that we used for sales to residential customers were:
our own network of stores, which included |
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6,837 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
B2B Services We have established separate distribution channels to serve SME and corporate customers. As of December 31,
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, Rates, Billing and Collection Rates Our rates for certain services, including basic local fixed-line and domestic long-distance plans, interconnection, EILD and SLD services, are generally subject to regulation by ANATEL.
For more information about the regulations applicable to our rates, see “—IX. Regulation of the Brazilian Telecommunications Industry.” Billing and Collection
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 aone-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. We are required to include in our monthly Residential Services bills charges incurred by our customers for long-distance services provided by other long-distance service providers upon the request of these providers. We have billing agreements with each long-distance telecommunications service provider that interconnects with our networks under which we bill our customers for any long-distance calls originated on our network that are carried by another long-distance service provider and transfer the balance to the relevant provider after deducting any access fees due for the use of our network. ANATEL regulations permit us to restrict outgoing calls made by a Residential Services customer 15 days after we send the customer a past due notice, restrict incoming calls received by a Residential Services customer 30 days after the restriction on outgoing calls is imposed, and disconnect a Residential Services customer after 30 days after the restriction on incoming calls is imposed. The disconnection process thus comprises several stages, including customer notification regarding the referral of their delinquency to credit bureaus, before the Residential Services customer may be ultimately disconnected due tonon-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.
Competition The Brazilian telecommunications industry is highly competitive. The competitive environment is significantly affected by key trends, including technological and service convergence, market consolidation and combined service offerings by service providers. Residential Services We are a leading provider of residential services in our fixed-line service areas. Based on information available from ANATEL, as of December 31, We face competition from other telecommunications services providers, particularly from mobile telecommunications services providers, which has led to traffic migration from fixed-line traffic to mobile traffic and the substitution of mobile services in place of fixed-line services. In addition, we face competition from providers of cable television services, particularly Claro and Telefônica Brasil, which provide local fixed-line services and broadband services (in many areas at higher speeds than our offerings) to residential customers through their cable network in municipalities in our service areas that have the highest concentration of purchasing power.
Telefônica Brasil has been increasing its competitive activities through traditional fixed-line networks in our fixed-line service areas, expanding its fiber optic network in high-income residential areas and increasing its services tolow- andmedium-size businesses. The decrease in interconnection rates has led to decreases in market prices for telecommunications services by enabling telecommunications service providers that use the local fixed-line networks of incumbent fixed-line providers, such as our company, to offer lower prices to their customers for fixed-line services, such as voice and broadband. Although regional broadband service providers do not have the same national footprint as our company, they have established networks in the regions in which they operate and often have a market share of approximately 15% of broadband customers. 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 andPay-TV services using coaxial cable under the “Net” brand.
B2B Services The competitive landscape we face relating to the fixed-line and mobile services we provide to our B2B customers are similar to those relating to the fixed-line and mobile services we provide to our residential and personal mobility customers. In recent years, there has been a shift among corporate and SME services providers toward value-added services. With the exception of theOi Mais Empresas application 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. Property, Plant and Equipment As of December 31, 2020, the net book value of our property, plant and equipment from continuing operations was R$24,135 million. As of December 31, 2020, of the net book value of our property, plant and equipment, (1) transmission and other equipment, primarily data communication equipment, network systems and infrastructure (including alternating and direct current supply equipment) and motor-generator groups, represented 41.1%; (2) infrastructure, primarily consisting of metallic and fiber-optic cable networks and lines, underground ducts, posts and towers, represented 30.7%; (3) right of use – leases, primarily consisting of communications towers, real estate, stores, vehicles, and sites (physical spaces), represented 12.1%; (4) work in progress represented 8.1%; (5) buildings represented 5.6%; (6) automatic switching equipment, consisting of trunking and switching stations (including local, tandem and transit telephone exchanges), represented 1.3%; and (7) other fixed assets represented 1.2%. All Brazilian property, plant and equipment that are essential in providing the services described in our fixed-line concession agreements are considered “reversible assets,” which means that, should our fixed-line concession agreements expire or terminate without being renewed, these assets will automatically revert to ANATEL. There are no other encumbrances that may affect the utilization of our property, plant and equipment. For more details, see note 16 to our audited consolidated financial statements included in this annual report. Intellectual Property We hold several material intellectual property assets, including patents and trademarks registered with the Brazilian Patent and Trademark Office (Instituto Nacional de Propriedade Industrial), or BPTO. Our main trademark used in Brazil, “Oi,” is registered with the BPTO in several classes, which allows us to use this trademark in a variety of markets in which we operate, including in connection with our fixed-line, broadband and fiber optic internet services (internet and television).
Operating Agreements Fixed-Line Tower Leases We have also entered into three operating lease agreements with owners of fixed-line communications towers to lease space to install equipment related to the delivery of our fixed-line services on an aggregate of approximately 6,400 fixed-line communications towers. The monthly payments under our operating lease agreements reflect a base rental amount specified in the agreement, adjusted annually by the positive variation of IPCA. The operating lease agreements for space on fixed-line communications towers have 20-year terms expiring between April 2033 and July 2033 and are renewable for additional 20-year terms. Satellite Network We have deployed a range of satellite-based services to comply with our public service obligations to the rural and remote areas of Brazil, including the Amazon rainforest region. These satellite services include internet access and access to corporate data applications. The satellite network comprises satellite earth stations located in less-populated rural areas, as well as hub stations in the cities of Brasília, Manaus, Belém, Rio de Janeiro, Porto Velho, Boa Vista, Macapá, Santarém, and Marabá. Our fiber optic backbone connects all these hub stations. The integration of the land-based segment of our satellite network allows us to provide fixed-line to our subscribers in any location in our fixed-line service areas. Network Maintenance Our external plant and equipment maintenance, installation and network servicing are performed by our wholly-owned subsidiary Serede Serviços de Rede S.A., or Serede, as well as one third-party service provider, Telemont. We employ our own team of technicians for our internal plant and equipment maintenance. Insourced Network Maintenance In May 2013 and June 2013, we insourced our installation, operations, and corrective and preventive maintenance services in connection with our fixed-line telecommunications services, mobile telecommunications services, data transmission services (including broadband access services), satellite services, buildings, access ways and towers. These services had previously been provided by Nokia Solutions and Networks do Brasil Telecomunicações Ltda. and Alcatel-Lucent Brasil S.A. In June 2016, we acquired 100% of the capital stock of A.R.M. Engenharia and changed its corporate name to Rede Conecta – Serviços de Rede S.A. In November 2018, Rede Conecta merged into Serede. Through Serede we perform 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). Outsourced Network Maintenance In October 2017, we entered into 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 2025, are approximately R$6.1 billion.
Research and Development We conduct independent innovation, research and development in areas of telecommunications services but historically we have not independently developed new telecommunications technologies. We depend primarily on suppliers of telecommunications equipment for the development of new technology.
As a result of our decision to dispose of certain businesses and/or isolated assets in connection with the RJ Plan Amendment, we have revised our comparative statements of profit or loss, statements of comprehensive income and statements of cash flows for the years ended December 31, 2019 and 2018 and the corresponding notes thereto, in line with IFRS 5, which requires that an entity reclassify the disclosures related to all operations that have been discontinued as of the balance sheet date of the last reporting period presented. The effects of the reclassifications are set forth in note 31 to our audited consolidated financial statements included in this annual report. As of December 30, 2020, our assets held-for-sale included our UPIs, our operations in Africa and other non-core real estate assets. As of December 31, 2020, we recorded total assets of R$20,772 million and total liabilities of R$9,195 million related to our assets held-for-sale. UPIs To further our Strategic Plan and pursuant to the RJ Plan Amendment, we created five UPIs for the disposal of certain of our businesses and/or isolated assets, as follows: (1) UPI Mobile Assets, which includes our mobile telephony and data operations; (2) UPI Towers and UPI Data Center, which includes our passive infrastructure; (3) UPI InfraCo, which includes our telecommunications network operation; and (4) UPI TVCo, which includes our Pay-TV business. Pursuant to the RJ Plan Amendment and the Brazilian Bankruptcy Law, our UPIs are separated from the assets, liabilities and rights of the RJ Debtors. As of the date of this annual report, we have entered into agreements to sell or completed the sale of UPI Data Center, UPI Towers and UPI Mobile Assets. In addition, we have accepted a binding proposal from a group of prospective buyers to acquire a majority interest in UPI InfraCo. For additional information, see “—II. Our Recent History and Development—Adoption of Strategic Plan.” The assets and liabilities related to UPI Mobile Assets, UPI InfraCo, UPI TVCo, UPI Towers, and UPI Data Center are classified as held for sale since their carrying amounts are being recovered primarily through sale transactions rather than through continuous use. We consider the sale of these assets to be highly probable, considering how the divestment plan of these assets is unfolding. We have also classified the operations related to the UPI Mobile Assets, UPI InfraCo, UPI TVCo and UPI Data Center as discontinued operations, as their sale represents a strategic shift in our operations and are an integral part of our coordinated divestment plan. We do not consider the operations of UPI Towers to represent a separate line of business, and the revenues and expenses associated with these assets are presented under the full consolidation method in our statement of profit or loss. As of December 31, 2020, we recorded total assets of R$20,625 million and total liabilities of R$9,153 million related to our UPIs held-for-sale. As of December 31, 2020, the net book value of our property, plant and equipment associated with our UPIs was R$17,298 million. UPI Mobile Assets Pursuant to the RJ Plan Amendment, UPI Mobile Assets holds 100% of the capital stock of SPE Mobile Assets. SPE Mobile Assets will hold assets relating to our Personal Mobility business in Brazil, including our mobile client base, our authorizations to provide mobile telephone services and certain mobile network equipment and information technology systems. On January 28, 2021, following a hearing held in December 2020 in connection with a competitive bidding process carried out in accordance with the RJ Plan Amendment, the RJ Debtors executed the UPI Mobile Assets SPA to sell UPI Mobile Assets to the telecom companies Telefônica Brasil S.A., TIM S.A., and Claro S.A. (collectively, the “Mobile Assets Buyers”) for the amount of R$16.5 billion, subject to certain conditions precedent, including regulatory authorizations. The UPI Mobile Assets SPA also provides for transition services to be provided by Oi to the Mobile Assets Buyers for a period of up to 12 months, and a long term “take or pay” agreement with Oi and certain of its subsidiaries for the performance of services of transmission capacity.
Overview of Our Personal Mobility Services Our Personal Mobility Services business offers mobile telecommunications services throughout Brazil. Our mobile network covers areas in which approximately 94% of the Brazilian population lives and works. In addition, we provide network usage (interconnection) services. Based on our 36.7 million mobile subscribers as of December 31, 2020, we had a 15.8% market share of the Brazilian mobile telecommunications market as of that date. We offer pre-paid and post-paid mobile voice and data communications plans, including: Pré da Oi plans for the pre-paid market; Pós da Oi plans for the post-paid market; and Oi Controle as a hybrid solution. Since our 4G network expansion, we have greater capacity to meet the growing demand for data, and have focused on increasing the migration of users from 2G and 3G to 4G by encouraging sales of 3G/4G smartphones and by including more data allowances in our new mobile offers. Pre-Paid Plans Pre-paid customers activate their cellular numbers through the purchase and installation of a SIM card in their mobile handsets. We offer pre-paid voice and data bundles through our Pré da Oi portfolio. Our Pré da Oi portfolio includes a range of all-net voice minutes for calls within Brazil and data allowances (ranging from 1 GB to 15 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 seven to 31 days. Using the Minha Oi application on their smartphones, customers can freely switch between their data and voice allowances depending on their individual needs using a pre-determined exchange rate. Our pre-paid customers are able to add credits to their accounts through point-of-sale machines, ATMs, Apple and Android applications installed on their mobile devices such as Minha Oi using a credit card or Caixa Tem debit credit. These credits are valid for a fixed period of time following activation and can be extended when additional credits are purchased. Post-Paid Plans Customers of our post-paid plans are billed on a monthly basis for contracted services used during the previous month, in addition to any fees for special services. Our Pós da Oi Digital portfolio offers unlimited text messages, unlimited minutes for calls to any operator in Brazil and two mobile data plans (8 GB and 100 GB) with no usage restrictions, plus no data traffic charge for major social networks and video to apps, which vary according to the data plan, and include, among others: YouTube, Netflix, Facebook, Instagram, WhatsApp and Messenger. On our premium plan, customers can include up to four additional lines and manage or share their data plan through our self-serve application, Minha Oi. Our plan subscription also includes Oi Play bundled with video streaming services. To increase our value proposition, in addition to mobile voice and data services, we bundle premium content and services including newspapers, magazines and e-books. Hybrid Plans Our hybrid plans present strategic value for our company because they combine the advantages of pre-paid offerings, such as the absence of bad debt and a favorable impact on working capital, with advantages of post-paid offerings, such as a heavier consumption profile and higher ARPUs. We improve our revenues and market share through the offer of hybrid plans by consolidating customer recharges in our hybrid plans’ SIM cards and by improving the mix of offerings to the post-paid market. We offer the Oi 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 Controle subscribers have similar benefits as the Pós da Oi 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 Pré da Oi 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.
Value-Added Services In 2020, we continued to accelerate our digital transformation process, which included restructuring our value-added services under the following categories: (1) films and series; (2) education; (3) health; (4) written media; and (5) utilities. Within each category, we highlight the following value-added services: Films and Series
Education
Health
Written Media
Utilities
Our value-added services are developed by third-party application or content providers and offered to our customers. Marketing and Distribution As with our residential services, we focus our personal mobility marketing efforts on the upselling to our 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 strive to increase the visibility of our brand and provide a consistent branding message. In the year ended December 31, 2020, we adjusted our brand strategy and placed greater emphasis on marketing our post-paid mobile packages. During the year ended December 31, 2020, we increased our investment in advertising, with a focus on digital advertising, with the goal of improving traffic to our digital channels and generating sales in other channels. In addition to digital advertising, we used traditional advertising mediums, such as cable and network television and radio to increase our presence and the reach of our branding. To grow our customer base, we use proprietary media tools including telemarketing, e-mail and text messages. We also developed a branded content strategy, combining sponsorships of events, athletes and influencers to increase brand awareness and demonstrate our credibility. Our distribution channels for personal mobility customers are focused on sales of mobile services to post-paid customers and pre-paid customers, including mobile broadband customers. As of December 31, 2020, the principal distribution channels that we used for sales of our pre-paid Personal Mobility Services were:
Rates, Billing and Collection Rates Under our current authorizations, we are allowed to set prices for our mobile service plans, provided that such amounts do not exceed a specified inflation adjusted cap. For more information about the regulations applicable to our rates, see “—IX. Regulation of the Brazilian Telecommunications Industry.” Billing and Collection We bill our post-paid Personal Mobility Services customers on a monthly basis and itemize charges in the same manner as we bill our Residential Services customers. In addition, the monthly bills also provide details regarding minutes used and roaming charges. Payments are due within an average of 15 days after the billing date. We charge late-payment interest at a rate of 1% per month plus a one-time late charge of 2% of the amount outstanding. As with our Residential Services business, we have agreements with several banks for the receipt and processing of payments from our post-paid Personal Mobility Services customers. A variety of businesses, such as lottery houses, drugstores and grocery stores, accept payments from our post-paid Personal Mobility Services customers as agents for these banks. ANATEL regulations permit us to restrict outgoing calls made and text messages sent by a post-paid Personal Mobility Services customer 15 days after we send the customer a past due notice, restrict incoming calls and text messages received by a post-paid Personal Mobility Services customer 30 days after the restriction on outgoing calls and text messages is imposed, and cancel services to a post-paid Personal Mobility Services customer after 30 days after the restriction on incoming calls is imposed. The cancellation process thus comprises several stages, including customer notification regarding the referral of their delinquency to credit bureaus, before services to the post-paid Personal Mobility Services customer may be ultimately cancelled due to non-payment. Notices range from text messages to active calls for negotiation with the customer. Our collection system enables us to access delinquent subscribers’ accounts according to their payment profile. This profile takes into consideration, among other things, the length of subscription, the outstanding balance of the account and the longest payment delays. We have also implemented an information tool to assist with account management that is designed to warn subscribers of high outstanding amounts due and unpaid. Customers of our pre-paid Personal Mobility Services can only use a paid service if they have enough active credits in their accounts to do so. In order to acquire credits, customers must recharge their SIM cards in one of our many points of sales. Services are charged directly from the customer’s accounts and are free of bad-debt risk. Competition The 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, 2020, based on information available from ANATEL (which includes B2B Services subscribers), we had a market share of 15.7% of the total number of mobile subscribers in Brazil. We believe that in the medium-term, personal mobility service providers in Brazil will experience increasing competition from OTT providers, as customers shift from mobile voice and SMS communications to internet-based voice and data communications through computers and smartphone or tablet applications such as WhatsApp, Viber and Skype. Technology Mobile devices access our GSM, or 2G, mobile networks on frequencies of 900 MHz/1800 MHz, our 3G mobile networks on frequencies of 2100 MHz and our 4G/4.5G mobile networks on frequencies of 1800 MHz/2600 MHz. Our 2G access points use General Packet Radio Service (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, and HSPA+, which allows speeds in the range of 42.2 Mbps, to send and receive data signals. Our 4G access points use 10+10 MHz and 2x2 and 4x4 multiple-input multiple-output, or MIMO, depending on the site configuration, which allows speeds in the range of 75 Mbps (2x2 MIMO configuration sites) and 300 Mbps (4x4 MIMO and carrier aggregation configuration sites), to send and receive data signals. Although currently the majority of voice signals are sent and received through our 2G and 3G access points are routed to our aggregation networks, we are initiating Voice over LTE (VoLTE) that will enable 4G routes voice signal over 4G access points, allowing offering new type of services based on the IP Multimedia Subsystem, or IMS, platform. Our mobile networks have unique data core and are fully integrated with our fixed-line data networks.
UPI Towers Pursuant to the RJ Plan Amendment, UPI Towers holds 100% of the capital stock of SPE Towers. SPE Towers holds certain of our passive infrastructure, including: (1) 637 mobile communications towers and rooftop antennae; and (2) cables and antennae used to propagate mobile telephone signals in 222 indoor sites. On December 23, 2020, following a hearing held in November 2020 in connection with a competitive bidding process carried out in accordance with the RJ Plan Amendment, the RJ Debtors executed the UPI Towers SPA to sell UPI Towers to Highline do Brasil II Infraestrutura de Telecomunicações S.A., or Highline, for the amount of approximately R$1.1 billion, subject to certain price adjustments as provided in the UPI Towers SPA. On March 30, 2021, after satisfying all contractual conditions precedent, the sale was completed, at which time all of the shares of SPE Towers were transferred to Highline, which made a cash payment in the amount of R$862 million. The remaining amount is subject to common price adjustments in the form and terms provided in the UPI Towers SPA. UPI Data Center Pursuant to the RJ Plan Amendment, UPI Data Center holds 100% of the capital stock of SPE Data Center. SPE Data Center holds our five cyber data centers located in Brasília, São Paulo, Curitiba and Porto Alegre. On December 11, 2020, following a hearing held in November 2020 in connection with a competitive bidding process carried out in accordance with the RJ Plan Amendment, the RJ Debtors executed a the UPI Data Center SPA to sell UPI Data Center to Titan Venture Capital e Investimentos Ltda., or Titan, for the amount of R$325 million. On March 12, 2021, after satisfying all contractual conditions precedent, the sale was completed, at which time all of the shares of SPE Data Center were transferred to Titan, which made a cash payment in the amount of R$250 million. The remaining amount is payable in installments in the form and terms provided for in the UPI Data Center SPA. UPI InfraCo Pursuant to the RJ Plan Amendment, UPI InfraCo holds 100% of the capital stock of SPE InfraCo. SPE InfraCo will hold infrastructure and fiber assets relating to our access and transportation networks. On February 4, 2021, the RJ Debtors entered into an exclusivity agreement with Globenet Cabos Submarinos S.A., or Globenet, BTG Pactual Economia Real Fundo de Investimento em Participações Multiestratégia, and other investment funds managed or controlled by companies belonging to the BTG Group, which we collectively refer to as the “InfraCo Prospective Buyers,” to negotiate the terms and conditions of our partial sale of shares representing a majority of the total capital stock of SPE InfraCo. Pursuant to the terms of the RJ Plan Amendment, we are required to maintain a significant interest in UPI InfraCo. On April 12, 2021, RJ Debtors accepted a binding proposal from the InfraCo Prospective Buyers to purchase a portion of UPI InfraCo. Pursuant to the terms of the binding proposal, the InfraCo Prospective Buyers will acquire 57.9% of the voting and total capital stock of SPE InfraCo for consideration of approximately R$12.9 billion, which will take the form of: (1) cash payments for newly issued shares of SPE InfraCo; (2) cash payments for shares in SPE InfraCo held by us; and (3) the merger of Globenet with and into SPE InfraCo. The purchase price of the transaction is subject to earn-out and other adjustments based on certain performance indicators of SPE InfraCo, as agreed between us and the InfraCo Prospective Buyers in the binding proposal. The binding proposal gives the InfraCoProspective Buyers the right to top any future bids that we may acquire in a competitive bidding process expected to be carried out in 2021 in accordance with the RJ Plan Amendment.
Following the partial sale of UPI InfraCo, SPE InfraCo will become our associated company. UPI TVCo Pursuant to the RJ Plan Amendment, UPI TVCo holds 100% of the capital stock of SPE TVCo. SPE TVCo will hold assets relating to our Pay-TV services in Brazil. Overview of Our 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 direct to home, or DTH, satellite technology. We also deliver Pay-TV services through our fiber optic network (internet protocol Pay-TV, or IPTV) in all the cities where we have deployed FTTH. As of December 31, 2020, we had 1.3 million residential Pay-TV subscribers, representing 20.2% of our residential fixed line customers of that date. We offer Pay-TV services to our residential customers as part of bundled plans with our traditional fixed-line services or add-on channels. We offer several packages of Pay-TV channels at different price points and offer subscribers to each of these packages the option to purchase additional channels such as HBO, Telecine, Star Premium and nationwide known sports products Premiere and Combate. As with our traditional fixed-line services, we continually monitor customer usage profiles and preferences and periodically revise our Pay-TV plans and promotions in order to better service the needs of our residential customers and to attract new customers to our Pay-TV services. We provide our DTH services through satellite uplinks that receive, encode and transmit the television signals to satellite transponders through our own facilities in Barra da Tijuca near Rio de Janeiro. As of December 31, 2020, we leased transponders to provide DTH services from SES New Skies with 1.296 GHz of capacity on the SES-6 satellite in Ku band. Through our FTTH network, we offered IPTV services in 133 cities in more than 26 states as of December 31, 2020. 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). Other Assets Held-for-Sale Operations in Africa We own 86% of the share capital of Africatel, which indirectly owns 51% of the share capital of CST – Companhia Santomense de Telecomunicações, S.A.R.L., or CST, a provider of fixed and mobile services in São Tomé and Principe, that was established in 1989 and provides fixed-line and mobile telecommunications services under the terms of a 20-year license granted in 2007. On October 20, 2020, Africatel entered into an agreement to sell its shares in CST. As a result of this agreement, we record the assets and liabilities of CST as held-for sale, although we do not record CST as discontinued operations in our income statement due to the immateriality of the effects of CST on our results of operations. As of December 31, 2020, we recorded total assets of R$100 million and total liabilities of R$42 million related to our African assets held-for-sale. As of the date of this annual report, Africatel’s sale of CST’s shares is subject to approval by the government of São Tomé and Príncipe.
As part of our Strategic Plan, our board of directors has authorized our management to take the necessary measures to sell the remainder of our African and Asian operations, consisting primarily of Directel—Listas Telefónicas Internacionais, Lda., a Portuguese entity with subsidiaries in Angola, Cabo Verde, Mozambique, and Kenya that publish telephone directories and operate related data bases in those countries, and Timor Telecom, S.A., a company that provides telecommunications, multimedia and IT services in Timor Leste in Asia. Real Estate Assets As part of our Strategic Plan, our board of directors has authorized our management to take the necessary measures to dispose of certain non-core real estate assets. As of December 31, 2020, we recorded total assets of R$47 million related to our non-core real estate assets held-for-sale.
Joint Venture We own 19.04% of the share capital of Hispamar Satélites S.A., or Hispamar, a Spanish-Brazilian enterprise created in November 1999 by Hispasat S.A., or Hispasat (the leading satellite telecommunications provider in the Iberian Peninsula), and our company. Hispamar operates the Amazonas 2 and Amazonas 3 satellites. In December 2002, we entered into an agreement with Hispasat that granted and transferred to Hispamar the rights to exploit geostationary orbital position 61 degrees west, and we acquired a minority equity stake in Hispamar. In 2009, the Amazonas 2 satellite was launched and this satellite commenced commercial operations in early 2010. This satellite provides both C and Ku band transponders and on-board switching, with an expected useful life of 15 years. The Amazonas 2 satellite is owned by a subsidiary of Hispasat and Hispamar has been granted the right to operate and lease all of the transponder’s space segment on this satellite. In 2013, the Amazonas 3 satellite was launched and commenced commercial operations. This satellite provides both C and Ku band transponders, with an expected useful life of 15 years. The Amazonas 3 satellite is owned by Hispamar, which operates and leases all of the transponder’s space segment on this satellite. Associated Company We own 50% of Companhia AIX de Participações S.A., or AIX. AIX provides infrastructure services to our company and is engaged in the construction of ductwork for the installation of fiber optic cables along highways in the State of São Paulo.
During the year ended December 31, 2020, we modernized our core network, with a focus on infrastructure improvements and enhancing our customers’ experience, by making strategic investment decisions that allow us to do more with less and we invested in our FTTH network. As a result, we expanded our fiber optic backbone, which enhanced our data traffic capabilities for fixed and mobile networks, to keep up with the growing demand. In addition, our performance on ANATEL’s network quality metrics improved. The following table sets forth our capital expenditures for the periods indicated with respect to our continuing and discontinued operations.
Our principal capital expenditures relate to a variety of projects designed to expand and upgrade our transmission networks, our broadband access networks (fixed and mobile), our service platforms (data, video and voice), our information technology systems and our telecommunications services infrastructure. Data Transmission Equipment Programs We are engaged in a long-term program to upgrade portions of our fixed-line access networks with optical fiber networks based on GPON. The implementation of this technology permits us to provide broadband with speeds up to 200 Mbps to residential customers and up to 1 Gbps to commercial customers. In our access networks, we have been engaged in a program of deploying FTTH technology to support our “triple play” services, using a GPON network engineered to support IPTV, high speed internet (currently speeds up to 200 Mbps), and VoIP services. We have acquired and installed data communications equipment to convert elements of our networks that used ATM and SDH protocols to MPLS protocol over optical fiber, which supports IP and permits the creation of VPNs through our Metro Ethernet networks. We also deployed an optical switching layer based on optical transport network technology in order to provide more efficient use of our DWDM capacity, fast restorations, and IP routers traffic offloading. We have been implementing a new broadband data communications network architecture, which we refer to as the Single Edge project. This architecture enables Oi to offer access network services such as mobile, broadband, IPTV, and corporate customer links in a single platform, which eliminates the need for individual management of each type of access network, expedites the resolution of network problems and minimizes maintenance and operation costs. In addition to expanding our IP backbone capacity, we are continuing to simplify our transport network architecture through the adoption of the single-edge concept, which means using one single router to join our commercial, mobile and residential functions that would otherwise require many specialized routers. We believe that this network simplification will reduce both capital and operational expenditures. Mobile Services Network Programs 4G Network We offer 4G services using LTE network technology and have been deploying our 4G network since 2012. In compliance with our obligations under our LTE authorizations, in 2016, we extended our LTE network to cities with over 100,000 inhabitants, adding 284 new cities to our LTE network, and in 2017, we extended our LTE network to cities with less than 100,000 inhabitants, adding 813 cities to our LTE network. In 2018, we began deploying 4.5G services by using carrier aggregation with 1800 MHz spectrum refarming and MIMO 4x4 in 27 municipalities in the first phase of the project. It has allowed us to offer best user experience and aligning our network to main operators in Brazil.
3G Network We have undertaken a project to upgrade a portion of our mobile networks to enable us to increase the capacity of our mobile network. We have deployed new radio base stations and transceivers to improve our 3G coverage and quality in areas we already serve, reducing the level of signal congestion in these areas, and to expand our 3G service to municipalities in Brazil to which we have not historically provided 3G service. Voice Transmission Network Programs We are engaged in a program of investing in new equipment for our switching stations to support next-generation networks, which we believe will permit us to offer new value-added services to our fixed-line customers. We believe that our investment in next-generation networks will:
As part of this program, we have deployed an IMS core that will facilitate our convergent voice and broadband offerings. The IMS core not only provides control for the VoIP resource but also integrated access control and authentication for all services, significantly improving automation and speed for customer provisioning. We have also undertaken a program of removing and replacing smaller switching stations and integrating these operations with other switching stations to promote efficiency in our operations. Information Technology Services Programs We are investing in the expansion of supply in our cloud computing services in data centers, particularly in the State of São Paulo, in order to support the growing demand from our corporate customers. Our cloud computing services enable us to provide our customers with integrated telecommunications and information technology solutions. Telecommunications Services Infrastructure Programs We are investing in several structural projects in order to improve and modernize our business support systems and operational support systems, or OSS, and consolidate duplicative systems resulting from integrating previously acquired companies, thereby optimizing our capital and operational expenditure investments. Based on the Telemanagement Forum frameworks and best practices, our main projects are unified customer relationship management; network provisioning services; order management; consolidation of network inventory; network planning, project and construction; network fault management; performance management; customer experience management; API management and digital self-care, among others. One of the primary projects connected to the OSS is related to assurance and quality. In January 2017, we completed the transition from a network centric monitoring system to a customer-focused approach and thereby our network operations have migrated from network operations centers to service operations centers which provide more efficient and customer-based support. In December 2016, we completed a project to improve fulfillment by speeding up service creation and provisioning, reducing costly human intervention and increasing overall customer quality of experience through automation of the fulfillment processes.
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. We are in the process of determining which of our technology assets will remain as part of our continuing operations and which will be transferred to SPE InfraCo.
We offer 4G services using LTE network technology and have been deploying our
In 2018, we began deploying 4.5G services by using carrier aggregation with 1800 MHz spectrum refarming and
3G Network We have undertaken a Voice Transmission Network Programs We are engaged in a
As part of
We have also undertaken a Information Technology Services Programs We are investing in the expansion of supply in our cloud computing services in data centers, particularly in the State of São Paulo, in order to support the growing demand from our corporate customers. Our cloud computing services enable us to provide our customers with integrated telecommunications and information technology solutions. Telecommunications Services Infrastructure Programs We are investing in several structural projects in order to improve and modernize our business support systems and operational support systems, or OSS, and consolidate duplicative systems resulting from integrating previously acquired companies, thereby optimizing our capital and operational expenditure investments. Based on the Telemanagement Forum frameworks and best practices, our main projects are unified customer relationship management; network One of the quality. In In
Our Brazilian
We are
Our external plant and equipment maintenance, installation and network servicing are performed by our wholly-owned subsidiary Serede Serviços de Rede S.A., or Serede, as well as one third-party service provider, Telemont. We employ our own team of technicians for our internal plant and equipment maintenance.
In
In June 2016, we acquired 100% of the capital stock of A.R.M. Engenharia and changed its corporate name to Rede Conecta – Serviços de Rede S.A. In November 2018, Rede Conecta merged into Serede. Through Serede we perform 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
Research and Development We conduct independent innovation, research and development in areas of telecommunications services but historically we have
As a result of our decision to dispose of certain businesses and/or isolated assets in connection with As of December 30, 2020, our assets held-for-sale included our UPIs, our operations in Africa and other non-core real estate assets. As of December 31, 2020, we recorded total assets of R$20,772 million and total liabilities of R$9,195 million related to our assets held-for-sale. UPIs To further our Strategic Plan and pursuant to the RJ Plan Amendment, we created five UPIs for the disposal of certain of our
As of the date of this annual report, we have entered into agreements to sell or completed the sale of UPI Data Center, UPI Towers and UPI Mobile Assets. In addition, we have accepted a binding proposal from a group of prospective buyers to acquire a majority interest in UPI InfraCo. For additional information, see “—II. Our Recent History and Development—Adoption of Strategic Plan.” The assets and liabilities related to UPI Mobile Assets, UPI InfraCo, UPI TVCo, UPI Towers, and UPI Data Center are As of December 31, 2020, we recorded total assets of R$20,625 million and total liabilities of R$9,153 million related to our UPIs held-for-sale. As of December 31, 2020, the net book value of our property, plant and equipment associated with our UPIs was R$17,298 million. UPI Mobile Assets Pursuant to the RJ Plan Amendment, UPI Mobile Assets holds 100% of the capital stock of SPE Mobile Assets. SPE Mobile Assets will hold assets relating to our Personal Mobility business in Brazil, including our mobile client base, our authorizations to provide mobile telephone services and certain mobile network equipment and information technology systems. On January 28, 2021, following a hearing held in December 2020 in connection with a competitive bidding process carried out in accordance with the RJ Plan Amendment, the RJ Debtors executed the UPI Mobile Assets SPA to sell UPI Mobile Assets to the telecom companies Telefônica Brasil S.A., TIM S.A., and Claro S.A. (collectively, the “Mobile Assets Buyers”) for the amount of R$16.5 billion, subject to certain conditions precedent, including regulatory authorizations. The UPI Mobile Assets SPA also provides for transition services to be provided by Oi to the Mobile Assets Buyers for a period of up to 12 months, and a long term “take or pay” agreement with Oi and certain of its subsidiaries for the performance of services of transmission capacity.
Overview of Our Personal Mobility Services Our Personal Mobility Services business offers mobile telecommunications services throughout Brazil. Our mobile network covers areas in which approximately 94% of the Brazilian population lives and works. In addition, we provide network usage (interconnection) services. Based on our 36.7 million mobile subscribers as of December 31, 2020, we had a 15.8% market share of the Brazilian mobile telecommunications market as of that date. We offer pre-paid and post-paid mobile voice and data communications plans, including: Pré da Oi plans for the pre-paid market; Pós da Oi plans for the post-paid market; and Oi Controle as a hybrid solution. Since our 4G network expansion, we have greater capacity to meet the growing demand for data, and have focused on increasing the migration of users from 2G and 3G to 4G by encouraging sales of 3G/4G smartphones and by including more data allowances in our new mobile offers. Pre-Paid Plans Pre-paid customers activate their cellular numbers through the purchase and installation of a SIM card in their mobile handsets. We offer pre-paid voice and data bundles through our Pré da Oi portfolio. Our Pré da Oi portfolio includes a range of all-net voice minutes for calls within Brazil and data allowances (ranging from 1 GB to 15 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 seven to 31 days. Using the Minha Oi application on their smartphones, customers can freely switch between their data and voice allowances depending on their individual needs using a pre-determined exchange rate. Our pre-paid customers are able to add credits to their accounts through point-of-sale machines, ATMs, Apple and Android applications installed on their mobile devices such as Minha Oi using a credit card or Caixa Tem debit credit. These credits are valid for a fixed period of time following activation and can be extended when additional credits are purchased. Post-Paid Plans Customers of our post-paid plans are billed on a monthly basis for contracted services used during the previous month, in addition to any fees for special services. Our Pós da Oi Digital portfolio offers unlimited text messages, unlimited minutes for calls to any operator in Brazil and two Hybrid Plans Our hybrid plans present strategic value for our company because they combine the advantages of pre-paid offerings, such as the absence of bad debt and a favorable impact on working capital, with advantages of post-paid offerings, such as a heavier consumption profile and higher ARPUs. We improve our revenues and market share through the offer of hybrid plans by consolidating customer recharges in our hybrid plans’ SIM cards and by improving the mix of offerings to the post-paid market. We offer the Oi 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 Controle subscribers have similar benefits as the Pós da Oi 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 Pré da Oi 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.
Value-Added Services In 2020, we continued to accelerate our digital transformation process, which included restructuring our value-added services under the following categories: (1) films and series; (2) education; (3) health; (4) written media; and (5) utilities. Within each category, we highlight the following value-added services: Films and Series
Education
Health
Written Media
Utilities
Our value-added services are developed by third-party application or content providers and offered to our customers. Marketing and Distribution As with our residential services, we focus our personal mobility marketing efforts on the upselling to our 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 strive to increase the visibility of our brand and provide a consistent branding message. In the year ended December 31, 2020, we adjusted our brand strategy and placed greater emphasis on marketing our post-paid mobile packages. During the year ended December 31, 2020, we increased our investment in advertising, with a focus on digital advertising, with the goal of improving traffic to our digital channels and generating sales in other channels. In addition to digital advertising, we used traditional advertising mediums, such as cable and network television and radio to increase our presence and the reach of our branding. To grow our customer base, we use proprietary media tools including telemarketing, e-mail and text messages. We also developed a branded content strategy, combining sponsorships of events, athletes and influencers to increase brand awareness and demonstrate our credibility. Our distribution channels for personal mobility customers are focused on sales of mobile services to post-paid customers and pre-paid customers, including mobile broadband customers. As of December 31, 2020, the principal distribution channels that we used for sales of our pre-paid Personal Mobility Services were:
Rates, Billing and Collection Rates Under our current authorizations, we are allowed to set prices for our mobile service plans, provided that such amounts do not exceed a specified inflation adjusted cap. For more information about the regulations applicable to our rates, see “—IX. Regulation of the Brazilian Telecommunications Industry.” Billing and Collection We bill our post-paid Personal Mobility Services customers on a monthly basis and itemize charges in the same manner as we bill our Residential Services customers. In addition, the monthly bills also provide details regarding minutes used and roaming charges. Payments are due within an average of 15 days after the billing date. We charge late-payment interest at a rate of 1% per month plus a one-time late charge of 2% of the amount outstanding. As with our Residential Services business, we have agreements with several banks for the receipt and processing of payments from our post-paid Personal Mobility Services customers. A variety of businesses, such as lottery houses, drugstores and grocery stores, accept payments from our post-paid Personal Mobility Services customers as agents for these banks. ANATEL regulations permit us to 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 Customers of our pre-paid Personal Mobility Services can only use a paid service if they have enough active credits in their accounts to do so. In order to acquire credits, customers must recharge their SIM cards in one of our many points of sales. Services are charged directly from the customer’s accounts and are free of bad-debt risk. Competition The 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, 2020, based on information available from ANATEL (which includes B2B Services subscribers), we had a market share of 15.7% of the We believe that in the Technology Mobile devices access our GSM, or 2G, mobile networks on frequencies of 900 MHz/1800 MHz, our 3G mobile networks on frequencies of 2100 MHz and our 4G/4.5G mobile networks on frequencies of 1800 MHz/2600 MHz. Our 2G access points use General Packet Radio Service (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, and HSPA+, which allows speeds in the range of 42.2 Mbps, to send and receive data signals. Our 4G access points use 10+10 MHz and 2x2 and 4x4 multiple-input multiple-output, or MIMO, depending on the site configuration, which allows speeds in the range of 75 Mbps (2x2 MIMO configuration sites) and 300 Mbps (4x4 MIMO and carrier aggregation configuration sites), to send and receive data signals. Although currently the majority of voice signals are sent and received through our 2G and 3G access points are routed to our aggregation networks, we are initiating Voice over LTE (VoLTE) that will enable 4G routes voice signal over 4G access points, allowing offering new type of services based on the IP Multimedia Subsystem, or IMS, platform. Our mobile networks have unique data core and are fully integrated with our fixed-line data networks.
UPI Towers Pursuant to the RJ Plan Amendment, UPI Towers holds 100% of the capital stock of SPE Towers. SPE Towers holds certain of our passive infrastructure, including: (1) 637 mobile communications towers and rooftop antennae; and (2) cables and antennae used to propagate mobile telephone signals in 222 indoor sites. On December 23, 2020, following a hearing held in November 2020 in connection with a competitive bidding process carried out in accordance with the RJ Plan Amendment, the RJ Debtors executed the UPI Towers SPA to sell UPI Towers to Highline do Brasil II Infraestrutura de Telecomunicações S.A., or Highline, for the amount of approximately R$1.1 billion, subject to certain price adjustments as provided in the UPI Towers SPA. On March 30, 2021, after satisfying all contractual conditions precedent, the sale was completed, at which time all of the UPI Data Center Pursuant to the RJ Plan Amendment, UPI Data Center holds 100% of the capital stock of SPE Data Center. SPE Data Center holds our five cyber data centers located in Brasília, São Paulo, Curitiba and Porto Alegre. On December 11, 2020, following a hearing held in November 2020 in connection with UPI InfraCo Pursuant to the RJ Plan Amendment, UPI InfraCo holds 100% of the capital stock of SPE InfraCo. SPE InfraCo will hold infrastructure and fiber assets relating to our
On April 12, 2021, RJ Debtors accepted a binding proposal from the InfraCo Prospective Buyers to purchase a portion of UPI InfraCo. Pursuant to the terms of the binding proposal, the InfraCo Prospective Buyers will acquire 57.9% of the voting and total capital stock of SPE InfraCo for consideration of approximately R$12.9 billion, which will take the form of: (1) cash payments for newly issued shares of SPE InfraCo; (2) cash payments for shares in SPE InfraCo held by us; and (3) the merger of Globenet with and into SPE InfraCo. The
UPI TVCo Pursuant to the Overview of
We areas using direct to home, or DTH, satellite technology. We also deliver Pay-TV services through our fiber optic network (internet protocol Pay-TV, or IPTV) in all the cities where we have deployed FTTH. As of December 31,
As with our traditional fixed-line services, we continually monitor customer usage profiles and preferences and periodically revise our Pay-TV plans and promotions in
We provide our DTH services through satellite uplinks that receive, encode and transmit the television signals to satellite transponders through our own facilities in Barra da Tijuca near Rio de Janeiro. As of December 31, Through our FTTH network, we offered IPTV services in 133 cities in more than 26 states as of December 31, 2020. 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). Other Assets Held-for-Sale
We own 86% of the share capital of Africatel, which indirectly owns 51% of the share capital of CST – Companhia Santomense de Telecomunicações, S.A.R.L., or CST, a provider of fixed and mobile services in São Tomé and Principe, that was established in 1989 and provides fixed-line and mobile telecommunications services under the terms of a 20-year license granted in 2007. On October 20, 2020, Africatel entered into an agreement to sell its shares in CST. As a result of this agreement, we record the assets and liabilities of CST as held-for sale, although we do not record CST as discontinued operations in our income statement due to the immateriality of the effects of CST on our results of operations. As of December 31, 2020, we recorded total assets of R$100 million and total liabilities of R$42 million related to our African assets held-for-sale. As of the date of this annual report, Africatel’s sale of CST’s shares is subject to approval by the government of São Tomé and Príncipe.
As part of our Strategic Plan, our board of directors has authorized our management to take the necessary measures to sell the remainder of our African and Asian operations, consisting primarily of Directel—Listas Telefónicas Internacionais, Lda., a Portuguese entity with subsidiaries in Angola, Cabo Verde, Mozambique, and Kenya that publish telephone directories and operate related data bases in those countries, and Timor Telecom, S.A., a company that provides telecommunications, multimedia and IT services in Timor Leste in Asia. Real Estate Assets As part of our Strategic Plan, our board of directors has authorized our management to take the necessary measures to dispose of certain non-core real estate assets. As of December 31, 2020, we recorded total assets of R$47 million related to our non-core real estate assets held-for-sale.
Joint Venture We own 19.04% of the share capital of Hispamar Satélites S.A., or Hispamar, a Spanish-Brazilian enterprise created in November 1999 by Hispasat S.A., or Hispasat (the leading satellite telecommunications provider in the Iberian Peninsula), and our company. Hispamar operates the Amazonas 2 and Amazonas 3 satellites. In In 2009, the Amazonas 2 satellite was launched and this satellite commenced commercial operations in early 2010. This satellite provides both C and Ku band transponders and on-board switching, with an expected useful life of 15 years. The Amazonas 2 satellite is owned by a subsidiary of Hispasat and Hispamar has been granted the right to operate and lease all of the transponder’s space segment on this satellite. In 2013, the Amazonas 3 satellite was launched and commenced commercial operations. This satellite provides both C and Ku band transponders, with an expected useful life of 15 years. The Amazonas 3 satellite is owned by Hispamar, which operates and leases all of the transponder’s space segment on this satellite. Associated Company We own 50% of Companhia AIX de Participações S.A., or AIX. AIX provides infrastructure services to
During the year ended December 31, 2020, we modernized our core network, with a focus on infrastructure improvements and enhancing our customers’ experience, by making strategic investment decisions that allow us to do more with less and we invested in our FTTH network. As a result, we expanded our fiber optic backbone, which enhanced our data traffic capabilities for fixed and mobile networks, to keep up with the growing demand. In addition, our performance on ANATEL’s network quality metrics improved. The following table sets forth our capital expenditures for the periods indicated with respect to our continuing and discontinued operations.
Our principal capital expenditures relate to a variety of projects Data Transmission Equipment Programs We are engaged in a long-term program to upgrade portions of our fixed-line access networks with optical fiber networks based on GPON. The implementation of this technology permits us to provide broadband with speeds up to 200 Mbps to residential customers and up to 1 Gbps to commercial customers. In our access networks, we have been engaged in a program of deploying FTTH technology to support our “triple play” services, using a GPON network We have acquired and installed data communications equipment to convert elements of our We have been implementing a new broadband data communications network architecture, which we refer to In addition to expanding our IP backbone capacity, we are continuing to simplify our transport network architecture through the adoption of the single-edge concept, which means using one single router to join our commercial, mobile and residential functions that would otherwise require many specialized routers. We believe that this network simplification will reduce both capital and Network Maintenance Our external plant and equipment maintenance, installation and network servicing are performed by our wholly-owned subsidiary Serede Serviços de Rede S.A., or Serede, as well as one third-party service provider, Telemont. We employ our own team of technicians for our internal plant and equipment maintenance. Insourced Network Maintenance In May 2013 and June 2013, we insourced our installation, operations, and corrective and preventive maintenance services in connection with our fixed-line telecommunications services, mobile telecommunications services, data transmission services (including broadband access services), satellite services, buildings, access ways and towers. These services had previously been provided by Nokia Solutions and Networks do Brasil Telecomunicações Ltda. and Alcatel-Lucent Brasil S.A. In June 2016, we acquired 100% of the capital stock of A.R.M. Engenharia and changed its corporate name to Rede Conecta – Serviços de Rede S.A. In November 2018, Rede Conecta merged into Serede. Through Serede we perform 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). Outsourced Network Maintenance In October 2017, we entered into 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
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 result of our decision to dispose of certain businesses and/or isolated assets in As of December 30, 2020, our assets held-for-sale included our UPIs, our operations in Africa and other non-core real estate assets. As of December 31, 2020, we recorded total assets of R$
To further our Strategic Plan and pursuant to the RJ Plan Amendment, we created five UPIs for the disposal of certain of our businesses and/or isolated assets, as follows: (1) UPI Mobile Assets, As of the date of this annual report, we have entered into agreements to sell or completed the sale of UPI Data Center, UPI Towers and UPI Mobile Assets. In addition, we have accepted a binding proposal from a group of prospective buyers to acquire a majority interest in UPI InfraCo. For additional information, see “—II. Our Recent History and Development—Adoption of Strategic Plan.” The assets and liabilities related to UPI Mobile Assets, UPI InfraCo, UPI TVCo, UPI Towers, and UPI Data Center are classified as held for sale since their carrying amounts are being recovered primarily through sale transactions rather than through continuous use. We consider the sale of these assets to be highly probable, considering how the divestment plan of these assets is unfolding. We have also classified the operations related to the UPI Mobile Assets, UPI InfraCo, UPI TVCo and UPI Data Center as discontinued operations, as their sale represents a strategic shift in our operations and are an integral part of our coordinated divestment plan. We do not consider the operations of UPI Towers to represent a separate line of business, and the revenues and expenses associated with these assets are presented under the full consolidation method in our statement of profit or loss. As of December 31, 2020, we recorded total assets of R$20,625 million and total liabilities of R$9,153 million related to our UPIs held-for-sale. As of December 31, 2020, the net book value of our property, plant and equipment associated with our UPIs was R$17,298 million. UPI Mobile Assets Pursuant to the RJ Plan Amendment, UPI Mobile Assets holds 100% of the capital stock of SPE Mobile Assets. SPE Mobile Assets will hold assets relating to our Personal Mobility business in Brazil, including our mobile client base, our authorizations to provide mobile telephone services and certain mobile network equipment and information technology systems. On January 28, 2021, following a hearing held in December 2020 in connection with a competitive bidding process carried out in accordance with the RJ Plan Amendment, the RJ Debtors executed the UPI Mobile Assets SPA to sell UPI Mobile Assets to the telecom companies Telefônica Brasil S.A., TIM S.A., and Claro S.A. (collectively, the “Mobile Assets Buyers”) for the amount of R$16.5 billion, subject to certain conditions precedent, including regulatory authorizations. The UPI Mobile Assets SPA also provides for transition services to be provided by Oi to the Mobile Assets Buyers for a period of up to 12 months, and a long term “take or pay” agreement with Oi and certain of its subsidiaries for the performance of services of transmission capacity.
Overview of Our Personal Mobility Services Our Personal Mobility Services business offers mobile telecommunications services throughout Brazil. Our mobile network covers areas in which approximately 94% of the Brazilian population lives and works. In addition, we provide network usage (interconnection) services. Based on our 36.7 million mobile subscribers as of December 31, 2020, we had a 15.8% market share of the Brazilian mobile telecommunications market as of that date. We offer pre-paid and post-paid mobile voice and data communications plans, including: Pré da Oi plans for the pre-paid market; Pós da Oi plans for the post-paid market; and Oi Controle as a hybrid solution. Since our 4G network expansion, we have greater capacity to meet the growing demand for data, and have focused on increasing the migration of users from 2G and 3G to 4G by encouraging sales of 3G/4G smartphones and by including more data allowances in our new mobile offers. Pre-Paid Plans Pre-paid customers activate their cellular numbers through the purchase and installation of a SIM card in their mobile handsets. We offer pre-paid voice and data bundles through our Pré da Oi portfolio. Our Pré da Oi portfolio includes a range of all-net voice minutes for calls within Brazil and data allowances (ranging from 1 GB to 15 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 seven to 31 days. Using the Minha Oi application on their smartphones, customers can freely switch between their data and voice allowances depending on their individual needs using a pre-determined exchange rate. Our pre-paid customers are able to add credits to their accounts through point-of-sale machines, ATMs, Apple and Android applications installed on their mobile devices such as Minha Oi using a credit card or Caixa Tem debit credit. These credits are valid for a fixed period of time following activation and can be extended when additional credits are purchased. Post-Paid Plans Customers of our post-paid plans are billed on a monthly basis for contracted services used during the previous month, in addition to any fees for special services. Our Pós da Oi Digital portfolio offers unlimited text messages, unlimited minutes for calls to any operator in Brazil and two mobile data plans (8 GB and 100 GB) with no usage restrictions, plus no data traffic charge for major social networks and video to apps, which vary according to the data plan, and include, among others: YouTube, Netflix, Facebook, Instagram, WhatsApp and Messenger. On our premium plan, customers can include up to four additional lines and manage or share their data plan through our self-serve application, Minha Oi. Our plan subscription also includes Oi Play bundled with video streaming services. To increase our value proposition, in addition to mobile voice and data services, we bundle premium content and services including newspapers, magazines and e-books. Hybrid Plans Our hybrid plans present strategic value for our company because they combine the advantages of pre-paid offerings, such as the absence of bad debt and a favorable impact on working capital, with advantages of post-paid offerings, such as a heavier consumption profile and higher ARPUs. We improve our revenues and market share through the offer of hybrid plans by consolidating customer recharges in our hybrid plans’ SIM cards and by improving the mix of offerings to the post-paid market. We offer the Oi 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 Controle subscribers have similar benefits as the Pós da Oi 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 Pré da Oi 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.
Value-Added Services In 2020, we continued to accelerate our digital transformation process, which included restructuring our value-added services under the following categories: (1) films and series; (2) education; (3) health; (4) written media; and (5) utilities. Within each category, we highlight the following value-added services: Films and Series
Education
Health
Written Media
Utilities
Our value-added services are developed by third-party application or content providers and offered to our customers. Marketing and Distribution As with our residential services, we focus our personal mobility marketing efforts on the upselling to our 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 strive to increase the visibility of our brand and provide a consistent branding message. In the year ended December 31, 2020, we adjusted our brand strategy and placed greater emphasis on marketing our post-paid mobile packages. During the year ended December 31, 2020, we increased our investment in advertising, with a focus on digital advertising, with the goal of improving traffic to our digital channels and generating sales in other channels. In addition to digital advertising, we used traditional advertising mediums, such as cable and network television and radio to increase our presence and the reach of our branding. To grow our customer base, we use proprietary media tools including telemarketing, e-mail and text messages. We also developed a branded content strategy, combining sponsorships of events, athletes and influencers to increase brand awareness and demonstrate our credibility. Our distribution channels for personal mobility customers are focused on sales of mobile services to post-paid customers and pre-paid customers, including mobile broadband customers. As of December 31, 2020, the principal distribution channels that we used for sales of our pre-paid Personal Mobility Services were:
Rates, Billing and Collection Rates Under our current authorizations, we are allowed to set prices for our mobile service plans, provided that such amounts do not exceed a specified inflation adjusted cap. For more information about the regulations applicable to our rates, see “—IX. Regulation of the Brazilian Telecommunications Industry.” Billing and Collection We bill our post-paid Personal Mobility Services customers on a monthly basis and itemize charges in the same manner as we bill our Residential Services customers. In addition, the monthly bills also provide details regarding minutes used and roaming charges. Payments are due within an average of 15 days after the billing date. We charge late-payment interest at a rate of 1% per month plus a one-time late charge of 2% of the amount outstanding. As with our Residential Services business, we have agreements with several banks for the receipt and processing of payments from our post-paid Personal Mobility Services customers. A variety of businesses, such as lottery houses, drugstores and grocery stores, accept payments from our post-paid Personal Mobility Services customers as agents for these banks. ANATEL regulations permit us to restrict outgoing calls made and text messages sent by a post-paid Personal Mobility Services customer 15 days after we send the customer a past due notice, restrict incoming calls and text messages received by a post-paid Personal Mobility Services customer 30 days after the restriction on outgoing calls and text messages is imposed, and cancel services to a post-paid Personal Mobility Services customer after 30 days after the restriction on incoming calls is imposed. The cancellation process thus comprises several stages, including customer notification regarding the referral of their delinquency to credit bureaus, before services to the post-paid Personal Mobility Services customer may be ultimately cancelled due to non-payment. Notices range from text messages to active calls for negotiation with the customer. Our collection system enables us to access delinquent subscribers’ accounts according to their payment profile. This profile takes into consideration, among other things, the length of subscription, the outstanding balance of the account and the longest payment delays. We have also implemented an information tool to assist with account management that is designed to warn subscribers of high outstanding amounts due and unpaid. Customers of our pre-paid Personal Mobility Services can only use a paid service if they have enough active credits in their accounts to do so. In order to acquire credits, customers must recharge their SIM cards in one of our many points of sales. Services are charged directly from the customer’s accounts and are free of bad-debt risk. Competition The 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, 2020, based on information available from ANATEL (which includes B2B Services subscribers), we had a market share of 15.7% of the total number of mobile subscribers in Brazil. We believe that in the medium-term, personal mobility service providers in Brazil will experience increasing competition from OTT providers, as customers shift from mobile voice and SMS communications to internet-based voice and data communications through computers and smartphone or tablet applications such as WhatsApp, Viber and Skype. Technology Mobile devices access our GSM, or 2G, mobile networks on frequencies of 900 MHz/1800 MHz, our 3G mobile networks on frequencies of 2100 MHz and our 4G/4.5G mobile networks on frequencies of 1800 MHz/2600 MHz. Our 2G access points use General Packet Radio Service (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, and HSPA+, which allows speeds in the range of 42.2 Mbps, to send and receive data signals. Our 4G access points use 10+10 MHz and 2x2 and 4x4 multiple-input multiple-output, or MIMO, depending on the site configuration, which allows speeds in the range of 75 Mbps (2x2 MIMO configuration sites) and 300 Mbps (4x4 MIMO and carrier aggregation configuration sites), to send and receive data signals. Although currently the majority of voice signals are sent and received through our 2G and 3G access points are routed to our aggregation networks, we are initiating Voice over LTE (VoLTE) that will enable 4G routes voice signal over 4G access points, allowing offering new type of services based on the IP Multimedia Subsystem, or IMS, platform. Our mobile networks have unique data core and are fully integrated with our fixed-line data networks.
UPI Towers Pursuant to the RJ Plan Amendment, UPI Towers holds 100% of the capital stock of SPE Towers. SPE Towers holds certain of our passive infrastructure, including: (1) 637 mobile communications towers and rooftop antennae; and (2) cables and antennae used to propagate mobile telephone signals in 222 indoor sites. On December 23, 2020, following a hearing held in November 2020 in connection with a competitive bidding process carried out in accordance with the RJ Plan Amendment, the RJ Debtors executed the UPI Towers SPA to sell UPI Towers to Highline do Brasil II Infraestrutura de Telecomunicações S.A., or Highline, for the amount of approximately R$1.1 billion, subject to certain price adjustments as provided in the UPI Towers SPA. On March 30, 2021, after satisfying all contractual conditions precedent, the sale was completed, at which time all of the shares of SPE Towers were transferred to Highline, which made a cash payment in the amount of R$862 million. The remaining amount is subject to common price adjustments in the form and terms provided in the UPI Towers SPA. UPI Data Center Pursuant to the RJ Plan Amendment, UPI Data Center holds 100% of the capital stock of SPE Data Center. SPE Data Center holds our five cyber data centers located in Brasília, São Paulo, Curitiba and Porto Alegre. On December 11, 2020, following a hearing held in November 2020 in connection with a competitive bidding process carried out in accordance with the RJ Plan Amendment, the RJ Debtors executed a the UPI Data Center SPA to sell UPI Data Center to Titan Venture Capital e Investimentos Ltda., or Titan, for the amount of R$325 million. On March 12, 2021, after satisfying all contractual conditions precedent, the sale was completed, at which time all of the shares of SPE Data Center were transferred to Titan, which made a cash payment in the amount of R$250 million. The remaining amount is payable in installments in the form and terms provided for in the UPI Data Center SPA. UPI InfraCo Pursuant to the RJ Plan Amendment, UPI InfraCo holds 100% of the capital stock of SPE InfraCo. SPE InfraCo will hold infrastructure and fiber assets relating to our access and transportation networks. On February 4, 2021, the RJ Debtors entered into an exclusivity agreement with Globenet Cabos Submarinos S.A., or Globenet, BTG Pactual Economia Real Fundo de Investimento em Participações Multiestratégia, and other investment funds managed or controlled by companies belonging to the BTG Group, which we collectively refer to as the “InfraCo Prospective Buyers,” to negotiate the terms and conditions of our partial sale of shares representing a majority of the total capital stock of SPE InfraCo. Pursuant to the terms of the RJ Plan Amendment, we are required to maintain a significant interest in UPI InfraCo. On April 12, 2021, RJ Debtors accepted a binding proposal from the InfraCo Prospective Buyers to purchase a portion of UPI InfraCo. Pursuant to the terms of the binding proposal, the InfraCo Prospective Buyers will acquire 57.9% of the voting and total capital stock of SPE InfraCo for consideration of approximately R$12.9 billion, which will take the form of: (1) cash payments for newly issued shares of SPE InfraCo; (2) cash payments for shares in SPE InfraCo held by us; and (3) the merger of Globenet with and into SPE InfraCo. The purchase price of the transaction is subject to earn-out and other adjustments based on certain performance indicators of SPE InfraCo, as agreed between us and the InfraCo Prospective Buyers in the binding proposal. The binding proposal gives the InfraCoProspective Buyers the right to top any future bids that we may acquire in a competitive bidding process expected to be carried out in 2021 in accordance with the RJ Plan Amendment.
Following the partial sale of UPI InfraCo, SPE InfraCo will become our associated company. UPI TVCo Pursuant to the RJ Plan Amendment, UPI TVCo holds 100% of the capital stock of SPE TVCo. SPE TVCo will hold assets relating to our Pay-TV services in Brazil. Overview of Our 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 direct to home, or DTH, satellite technology. We also deliver Pay-TV services through our fiber optic network (internet protocol Pay-TV, or IPTV) in all the cities where we have deployed FTTH. As of December 31, 2020, we had 1.3 million residential Pay-TV subscribers, representing 20.2% of our residential fixed line customers of that date. We offer Pay-TV services to our residential customers as part of bundled plans with our traditional fixed-line services or add-on channels. We offer several packages of Pay-TV channels at different price points and offer subscribers to each of these packages the option to purchase additional channels such as HBO, Telecine, Star Premium and nationwide known sports products Premiere and Combate. As with our traditional fixed-line services, we continually monitor customer usage profiles and preferences and periodically revise our Pay-TV plans and promotions in order to better service the needs of our residential customers and to attract new customers to our Pay-TV services. We provide our DTH services through satellite uplinks that receive, encode and transmit the television signals to satellite transponders through our own facilities in Barra da Tijuca near Rio de Janeiro. As of December 31, 2020, we leased transponders to provide DTH services from SES New Skies with 1.296 GHz of capacity on the SES-6 satellite in Ku band. Through our FTTH network, we offered IPTV services in 133 cities in more than 26 states as of December 31, 2020. 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). Other Assets Held-for-Sale Operations in Africa We own 86% of the share capital of Africatel, which indirectly owns 51% of the share capital of CST – Companhia Santomense de Telecomunicações, S.A.R.L., or CST, a provider of fixed and mobile services in São Tomé and Principe, that was established in 1989 and provides fixed-line and mobile telecommunications services under the terms of a 20-year license granted in 2007. On October 20, 2020, Africatel entered into an agreement to sell its shares in CST. As a result of this agreement, we record the assets and liabilities of CST as held-for sale, although we do not record CST as discontinued operations in our income statement due to the immateriality of the effects of CST on our results of operations. As of December 31, 2020, we recorded total assets of R$100 million and total liabilities of R$42 million related to our African assets held-for-sale. As of the date of this annual report, Africatel’s sale of CST’s shares is subject to approval by the government of São Tomé and Príncipe.
As part of our Strategic Plan, our board of directors has authorized our management to take the necessary measures to sell the remainder of our African and Asian operations, consisting primarily of Directel—Listas Telefónicas Internacionais, Lda., a Portuguese entity with subsidiaries in Angola, Cabo Verde, Mozambique, and Kenya that publish telephone directories and operate related data bases in those countries, and Timor Telecom, S.A., a company that provides telecommunications, multimedia and IT services in Timor Leste in Asia. Real Estate Assets As part of our Strategic Plan, our board of directors has authorized our management to take the necessary measures to dispose of certain non-core real estate assets. As of December 31, 2020, we recorded total assets of R$47 million related to our non-core real estate assets held-for-sale.
Joint Venture We own 19.04% of the share capital of Hispamar Satélites S.A., or Hispamar, aSpanish-Brazilian enterprise created in November 1999 by Hispasat S.A., or Hispasat (the leading satellite telecommunications provider in the Iberian Peninsula), and our company. Hispamar operates the Amazonas 2 and Amazonas 3 satellites. In December 2002, we entered into an agreement with Hispasat that granted and transferred to Hispamar the rights to exploit geostationary orbital position 61 degrees west, and we acquired a minority equity stake in Hispamar. In 2009, the Amazonas 2 satellite was launched and this satellite commenced commercial operations in early 2010. This satellite provides both C and Ku band transponders andon-board switching, with an expected useful life of 15 years. The Amazonas 2 satellite is owned by a subsidiary of Hispasat and Hispamar has been granted the right to operate and lease all of the transponder’s space segment on this satellite. In 2013, the Amazonas 3 satellite was launched and commenced commercial operations. This satellite provides both C and Ku band transponders, with an expected useful life of 15 years. The Amazonas 3 satellite is owned by Hispamar, which operates and leases all of the transponder’s space segment on this satellite. Associated Company We own 50% of Companhia AIX de Participações S.A., or AIX. AIX provides infrastructure services to our company and is engaged in the construction of ductwork for the installation of fiber optic cables along highways in the State of São Paulo.
The following table sets forth our capital expenditures for the periods indicated with respect to our continuing and
Our principal capital expenditures relate to a variety of projects designed to expand and
We In our access networks, we have been engaged in a program of deploying FTTH technology to support our “triple play” services, using a GPON network engineered to support IPTV, high speed internet (currently speeds up to 200 Mbps), and VoIP services. We have acquired and installed data communications equipment to convert elements of our networks that used ATM and SDH protocols to MPLS protocol over optical fiber, which supports IP and permits the creation of VPNs through our Metro Ethernet networks. We also deployed an optical switching layer based on optical transport network technology in order to provide more efficient use of our DWDM capacity, fast restorations, and IP routers traffic offloading. We have been implementing a new broadband data communications network architecture, which we refer to as the Single Edge project. This architecture enables Oi to offer access network services such as mobile, broadband, IPTV, and corporate customer links in a single platform, which eliminates the need for individual management of each type of access network, expedites the resolution of network problems and minimizes maintenance and operation costs. In addition to expanding our IP backbone capacity, we are continuing to simplify our transport network architecture through the adoption of the Mobile Services Network Programs 4G Network We offer 4G services using LTE network technology and have been deploying our 4G network since 2012. In compliance with our obligations under our LTE authorizations, in 2016, we extended our LTE network to cities with over 100,000 inhabitants, adding 284 new cities to our LTE network, and in 2017, we extended our LTE network to cities with less than 100,000 inhabitants, adding 813 cities to our LTE network. In 2018, we began deploying 4.5G services by using carrier aggregation with 1800 MHz spectrum refarming and MIMO 4x4 in 27 municipalities in the first phase of the
3G Network We have undertaken a project to upgrade a portion of our mobile networks to enable us to increase the capacity of our mobile network. We have deployed new radio base stations and transceivers to improve our 3G coverage and quality in areas we already serve, reducing the level of signal congestion in these areas, and to expand our 3G service to municipalities in Brazil to which we have not historically provided 3G service. Voice Transmission Network Programs We are engaged in a program of investing in new equipment for our switching stations to support next-generation networks, which we believe will permit us to offer new value-added services to our fixed-line customers. We believe that our investment in next-generation networks will:
As part of this program, we have deployed an IMS core that will facilitate our convergent voice and broadband offerings. The IMS core not only provides control for the VoIP resource but also integrated access control and authentication for all services, significantly improving automation and speed for customer provisioning. We have also undertaken a program of removing and replacing smaller switching stations and integrating these operations with other switching stations to promote efficiency in our operations. Information Technology Services Programs We are investing in the expansion of supply in our cloud computing services in data centers, particularly in the State of São Paulo, in order to support the growing demand from our corporate customers. Our cloud computing services enable us to provide our customers with integrated telecommunications and information technology solutions. Telecommunications Services Infrastructure Programs We are investing in several structural projects in order to improve and modernize our business support systems and operational support systems, or OSS, and consolidate duplicative systems resulting from integrating previously acquired companies, thereby optimizing our capital and operational expenditure investments. Based on the Telemanagement Forum frameworks and best practices, our main projects are unified customer relationship management; network provisioning services; order management; consolidation of One of the primary projects connected to the OSS is related to assurance and quality. In January 2017, we completed the transition from a network centric monitoring system to a customer-focused approach and thereby our network operations have migrated from network operations centers to service operations centers which provide more efficient and customer-based support. In December 2016, we completed a project to improve fulfillment by speeding up service creation and provisioning, reducing costly human intervention and increasing overall customer quality of experience through automation of the fulfillment processes.
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. We are in the process of determining which of our technology assets will remain as part of our continuing operations and which will be transferred to SPE InfraCo. Access Networks Our Brazilian access networks connect our customers to our aggregation and transportation networks. We have a large number of network access points, including twisted copper pair wires to residences and commercial buildings, fiber optic lines to residences and commercial buildings, wireless transmission equipment and Wi-Fi hotspots. Our fixed-line networks are fully digitalized. Voice and data signals that originate through fixed-line access points are routed through Multi-service Access Nodes (MSANs), or We are engaged in a long-term program to upgrade portions of our fixed-line access networks with optical FTTH networks based on gigabit passive optical network, or GPON, technology to support our FTTH triple-play services. The implementation of this technology permits us to provide broadband with speeds up to 200 Mbps to residential customers and up to 1 Gbps to commercial customers. As of December 31, 2020, our FTTH network reached more than 9.07 million homes passed, and approximately 2.1 million homes connected. We expect to reach more than 14.8 million homes passed and an additional 1.6 million homes connected by the end of 2021. 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. In the past, we used ATM protocol to transport digital signals through our access network from non-residential customers that required dedicated bandwidth to our switching stations. In response to changing customer needs, we converted elements of our network that use ATM and Synchronous Digital Hierarchy, or SDH, protocols which 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 invested in aggregation networks based on Ethernet over MPLS (Metro Ethernet) and MPLS - Transport Profile (MPLS-TP) to increase the bandwidth of our networks to support the traffic demands of our 4G, B2C and B2B clients and to replace our legacy SDH networks. Those access networks are still operational. In last 5 years, we have invested in aggregation networks based on Packet OTN, or POTN, to increase the network capacity, mainly in large metropolitan areas where the density of access point results in increased demand. Our aggregation networks are fully integrated to management systems and provide:
We have plans to deploy a new access/aggregation network model based on IP technology. The new end-to-end IP access/aggregation network is based on IP/Segment Routing technology and MEF 3.0 services over EVPN. The new end-to-end IP network will be integrated to the IP/MPLS backbone and will allow connectivity services all over the country. Since 2016, we have been working to establish a new network model based on NFV and SDN which is compliant with ETSI architecture. This new approach is part of our digital transformation strategy of network, services and automation. The first two Telco Data Centers (Private Cloud) became operational in the second half of 2021. With the end-to-end IP network we intend to deploy our MEC infrastructures to deploy service closer to our customers. Transportation Networks We have a nationwide long-distance backbone, consisting of our optical fiber network that covers more than 2,370 municipalities, connecting the Federal District and all state capitals in Brazil. Our fiber network supports high capacity DWDM systems that can operate with up to 80 channels at 10, 100 and 200 Gbps. Our optical network is complemented by microwave links and satellite transport to reach smaller cities and towns. In 2015, we completed the implementation of a new Optical Transport Network/DWDM, or OTN/DWDM network, with 100 Gbps links, that connect 11 state capitals, including São Paulo, Rio de Janeiro, Brasília and Belo Horizonte. This new OTN/DWDM network spreads over approximately 30,000 km of optical cables. In the first half of 2018, we completed the extension of the OTN/DWDM network, with 100 Gbps links, to an additional seven state capitals and spread over an additional 18,000 km of optical cables. In 2020 we extended our OTN/DWDM network, with 100 Gbps links, to reach 26 state capitals and spread over 65,400 km of optical cables. In addition, in 2019, we began to expand our OTN/DWDM network using 200 Gbps links, having deployed some routes using this technology, among them a route between the cities of Goiânia and Brasília. As demand increases, more expansions of our 200 Gbps network will be implemented and we will begin to replace our existing 100 Gbps links with 200 Gbps links where technically feasible. We are planning to improve the capacity of our OTN/DWDM in the national backbone to 400/800Gbps channels in the near future. We employ automatic traffic protection to improve the reliability of our network and increase its traffic capacity. The network is fully supervised and operated by management systems that allow rapid response to customer service requests and reduce the recovery time in case of failure. We operate an internet backbone network and a fully IP-routed network, which provides Our transportation network is directly interconnected to the national and international long-distance networks of all long-distance service providers operating in
Our Residential Services are highly automated on all levels, including customer support, workforce management and network and service activation. We have implemented a digital transformation in order to open new channels of communication with our customers through the launch of a number of self-service applications, which our customers are increasingly using for a variety of purposes. The tools available include self-care diagnostics for FTTH/3 Play Services (High Speed Broadband Internet, VOIP and Video) and chatbots, among others. Development of new support systems, tools and processes, such as the use of chatbots, will allow us to become more service and customer centric.
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. ANATEL is an administratively independent and financially autonomous regulatory agency that was established in July 1997 pursuant to the General Telecommunications Law and ANATEL Regulation (Regulamento da Agência Nacional de Telecomunicações). ANATEL oversees our activities and enforces the General Telecommunications Law and the regulations promulgated thereunder. ANATEL is required to report on its activities to the Brazilian Ministry of 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. An authorization is granted for an indeterminate period of time and public auctions are held for some authorizations. These concessions and authorizations allow service providers to provide specific services in designated geographic areas, set forth certain obligations with which the service providers must comply and require equal treatment of customers by the service providers. The three principal providers of fixed-line telecommunications services in Brazil, Telefônica Brasil, Claro and our company, provide these services under the public regime. In addition, CTBC (also known as Algar) 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. On October 3, 2019, the President of Brazil signed Law No. 13,879, which amended the General Telecommunications Law to allow, among other things, providers of fixed-line telecommunications services 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 February 2020, ANATEL proposed regulations to implement Law No. 13,879, including the rules that will govern the conversion of concessions into authorizations. These proposed regulations
Public 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. Under their concession agreements, public regime service providers are required to comply with the provisions of the PGMU, which was most recently updated in In addition, public regime service providers, as well as private regime service providers, are required to comply with the provisions of: (1) the RGQ, which was adopted by ANATEL in June 2013 and was partially superseded by the RQUAL in December 2019; and (2) the General Plan on Competition Targets (Plano Geral de Metas de The rates that public regime service providers may charge customers are subject to ANATEL supervision. Another distinctive feature of public concessions is the right of the concessionaire to maintain certain economic and financial standards, which are calculated based on the rules set forth in the concession agreements and were designed based on a price cap model. For more information, see “—Our Services—Fixed-Line Telephone Services—Rate Regulation.” Concessions are granted for 20 years.Whereas prior to the passage of Law No. 13,897, only one20-year renewal period was allowed, the new law permits providers to renew their concession for indefinite additional20-year periods, provided that at least 30 months prior to each expiration date, the providers have complied with the obligations required of them under the applicable concession. ANATEL may terminate the concession of any public regime service provider upon the occurrence of certain events described below under “—Termination of a Concession.” The modification right permits ANATEL to impose new terms and conditions in response to changes in technology, competition in the marketplace and domestic and international economic conditions. ANATEL is obligated to engage in public consultation in connection with each of these potential modifications. General Plan of Universal Service Goals (PGMU) The PGMU sets forth the principal network expansion and modernization obligations of the public regime providers. The PGMU was Public regime providers are subject to network expansion requirements under the PGMU, which are revised by ANATEL from time to time. No subsidies or other supplemental financings are anticipated to finance our network expansion obligations. Our failure to meet the network expansion and modernization obligations established by the PGMU or in our concession agreements may result in fines and penalties of up to R$50 million for eachnon-compliance with an obligation or rule as verified in an administrative process, as well as potential revocation of our concessions.
The PGMU requires the following, among other things:
The 2021 PGMU also eliminated the obligation to build wireless access facilities required by the 2018 PGMU. In addition, the 2021 PGMU provides that the infrastructure already in place shall be maintained until the end of the
The value of the obligations currently imposed by the PGMU and, therefore, the cost of the additional investments in exchange for the elimination of such obligations, is subject to discussion between the parties, with ANATEL having the ability to make the final valuation. Termination of a Concession ANATEL may terminate the concession of any public regime service provider upon the occurrence of any of the following:
In the event a concession is terminated, ANATEL is authorized to administer the provider’s properties and its employees in order to continue rendering services. Service Restrictions Public regime service providers are subject to certain restrictions on alliances, joint ventures and mergers and acquisitions with other public regime providers, including:
In September 2011, Law No. 12,485 became effective, which creates a new legal framework for subscription television services in Brazil, and determines, among other provisions to
Amendments to the General Telecommunications Law On October 3, 2019, the President of Brazil signed Law No. 13,879, which amended the General Telecommunications Law. Law No. 13,879 will allow providers of fixed-line telecommunications services 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, including the inability of providers to sell certain property, plant and equipment used to provide fixed-line telephone services. In exchange, providers may be required to assume obligations to make additional investments in their networks, primarily related to the expansion of broadband services. The cost of the additional investments 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. In addition, the new law permits providers to renew their concession for indefinite additional20-year periods, whereas previously only one20-year renewal period was allowed, provided that at least 30 months prior to each expiration date, the providers have complied with the obligations required of them under the applicable concession. In February 2020, ANATEL proposed regulations to implement Law No. 13,879, including the rules that will govern the conversion of concessions into authorizations, such as the methodology for calculating the cost of investments that providers will need to undertake as well as deadlines to complete the conversions. A draft of the new form of authorization agreement was also provided. These proposed regulations
Private Regime Providers of private regime services, although not generally subject to the requirements concerning continuity and universality of service and network modernization, are subject to certain network expansion and quality of service obligations set forth in their respective authorizations and applicable regulation. For example, private regime service providers are required to comply with the provisions of the RGQ and the PGMC. For more information about the RGQ and the PGMC, see “—Our Services—Fixed-Line Telephone Services—General Plan on Quality Goals (RGQ)” and “—Other Regulatory Matters—General Plan on Competition Targets (PGMC),” respectively. Our Services Continuing Operations Fixed-Line Telephone Services Regulatory Overview We provide the majority of our fixed-line telephone services (Serviço Telefônico Fixo Our Concessions and Authorizations The following table sets forth certain details of our concessions and authorizations to provide local, domestic long-distance and international long-distanced fixed-line telephone services:
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Each of our concession agreements:
In addition, each of our concession and authorization agreements:
On October 3, 2019, the President of Brazil signed Law No. 13,879, which amended the General Telecommunications Law to allow, among other things, providers of fixed-line telecommunications services 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 addition, the new law permits providers to renew their concession for indefinite additional20-year periods, whereas previously only one20-year renewal period was allowed, provided that at least 30 months prior to each expiration date, the providers have complied with the obligations required of them under the applicable concession. Prior to the passage of Law No. 13,879, our concession agreements would have expired in 2025 without the possibility of renewal. In February 2020, ANATEL proposed regulations to implement Law No. 13,879, including the rules that will govern the conversion of concessions into authorizations. These proposed regulations are subject to a public consultation period that In addition, in connection with the consideration of revisions to the concession agreements under the public regime, in January 2017, ANATEL proposed revisions to the terms of the PGO, in line with the provisions of PLC 79 (the bill that preceded Law No. 13, 789). However, despite the passage of Law No. 13,789, we cannot predict when and to what extent ANATEL will revise the PGO. We cannot assure you that the implementation of Law No. 13,879 or any future amendments to our concession agreements (including renewals) or the PGO will not impose requirements on our company that will require us to undertake significant capital expenditures or will not modify the rate-setting procedures applicable to us in a manner that will significantly reduce the net operating revenue that we generate from our Brazilian fixed-line businesses. If the migration of our concessions to the private regime or the amendments to our concession agreements have these effects, our business, financial condition and results of operations could be materially adversely affected. See “Item 3. Key Information—Risk Factors—Risks Relating to the Brazilian Telecommunications Industry and Regulatory Environment—Our concession agreements in Brazil are subject to periodic modifications by ANATEL, and we cannot assure you that the modifications to these concession agreements will not have adverse effects on our company” and “Item 3. Key Information—Risk Factors—Risks Relating to the Brazilian Telecommunications Industry and Regulatory Environment—We cannot assure you that we will be able to convert our concessions into authorizations or renew our concessions in a timely or cost-effective manner.”
Rate Regulation Under their concession agreements, public regime service providers are required to offer basic local fixed-line plans to users. Rates for the basic long-distance services plan originated and terminated on fixed lines vary in accordance with certain criteria. The concession agreements establish aprice-cap mechanism for annual rate adjustments for basic service plans and basic domestic long-distance plans based on formulas set forth in each provider’s concession agreement. The formula provides for two adjustments to the price cap based on the local rate basket, the long-distance rate basket and the use of a price index. The price cap is first revised upward to reflect increases in inflation, as measured by an index, then ANATEL applies a productivity discount factor, or Factor X, which reduces the impact of the rate readjustment provided by the index. Factor X is equal to (1) 50% of the increase in the productivity rate of public regime providers, plus (2) 75% of a factor calculated by ANATEL that is designed to reflect cost optimization targets for the telecommunications industry as a whole. If the weighted average productivity rate is negative, ANATEL will not allow an annual adjustment in excess of the IST. A provider may increase rates for individual services within the local rate basket or the long-distance rate basket by up to 5% more than the IST so long as the rates for other services in that rate basket are reduced to the extent necessary to ensure that the weighted average increase for the entire rate basket does not exceed the permitted annual rate adjustment. A provider may also offer alternative plans in addition to the basic service plan. Alternative plans must be submitted for ANATEL’s approval. The rates offered under the alternative plans may be adjusted annually based on the IST. Local Rates. Our revenues from local fixed-line services consist mainly of monthly subscription charges, charges for local calls and charges for the activation of lines for new subscribers or subscribers that have changed addresses. Monthly subscription charges are based on the plan to which the customer subscribes and whether the customer is a residential, commercial or trunk line customer. Under our concession agreements, we are required to offer two local fixed-line plans to users: the Basic Plan per Minute and the Mandatory Alternative Service Plan. In addition to the Basic Plan per Minute and the Mandatory Alternative Service Plan, we are permitted to offernon-discriminatory alternative plans to the basic service plans. The rates for applicable services under these plans must be submitted for ANATEL approval prior to offering those plans to our customers. Historically, ANATEL has generally not raised objections to the terms of these plans. On an annual basis, ANATEL increases or decreases the maximum rates that we are permitted to charge for our basic service plans. In addition, we are authorized to adjust the rates applicable to our alternative plans annually by no more than the rate of inflation, as measured by the Telecommunications Services Index (Índice de Serviços de Telecomunicações – IST), or IST. Discounts from the rates set in basic service plans and alternative service plans may be granted to customers without ANATEL approval. Local FixedLine-to-Mobile Rates(VC-1) and Mobile Long Distance Rates
FixedLine-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 aper-minute basis for the duration of the call. On an annual basis, ANATEL increases or decreases the maximum domestic fixedline-to-fixed line long-distance rates that we are permitted to charge. For more information about the rates applicable to our fixed-line services, see “—Rates, Billing and Collection—Rates.” General Plan on Quality Goals (RGQ) The RGQ for fixed-line voice services was approved by ANATEL in December 2012 and became effective in June 2013. Each fixed-line service provider operating under the public regime or the private regime must comply with the provisions of the RGQ. All costs related to compliance with the quality goals established by the RGQ must be borne exclusively by the service provider. The RGQ establishes minimum quality standards with regard to:
These quality standards are measured according to the definitions and quality indicators established by ANATEL. The indicators, as well as their respective methods of collection, calculation and other quality requirements, are defined in specific regulations published by ANATEL. ANATEL measures the performance of fixed-line service providers in each individual state in which they operate. As a result, the performance of fixed-line service providers in any particular state may not meet one or more quality performance targets even if such service provider’s overall performance is satisfactory. For cases in which there are indications of performance or conduct other than those established in the regulations, ANATEL establishes a noncompliance process called Procedure for Determination ofNon-Compliance to Obligations (Procedimento de Apuração de Descumprimento de Obrigações – PADO) in detriment to the provider. Therefore, fixed-line service providers, including us, could be subject to fines or penalties as a result of the failure to meet the quality performance targets in one or more particular area codes. In November 2017, ANATEL submitted the RQUAL, a proposal to review the methods by which the quality standards for fixed-line services, personal mobility services, multimedia communications services and subscription television services are measured, for public consultation. In December 2019, ANATEL approved the RQUAL, which immediately superseded certain provisions of the RGQ obligations. However, the majority of the provisions of the RQUAL are not expected to be implemented until
Multimedia Communication Services Our Authorizations We have national Multimedia Communication Service (Serviço de Comunicação Multimídia – SCM) authorizations, which superseded our prior Telecommunications Network Transportation Services (Serviço de Rede de Transporte de Telecomunicações) authorizations, permitting us to provide high speed data service. The Multimedia Communication Services authorizations became effective in May 2003 and cover the same geographical areas as our concession and personal communication service agreements. In April 2008, in connection with the amendments to our fixed-line services concessions, we agreed to provide internet service free of charge until December 31, 2025 to all urban schools in the areas of our concession agreements. Rate Regulation A significant portion of our revenues from commercial data transmission services are generated by monthly charges for EILD ANATEL is expected to publish new reference rates for these services in Broadband services, IP services and frame relay services are market oriented but may still be subject to ANATEL regulation. Quality Regulation In June 2011, the President of Brazil issued Executive Decree No. 7,512/11, which mandated ANATEL to take the necessary regulatory measures to establish quality standards for broadband internet services. In compliance with such decree, on October 31, 2011, ANATEL published Resolution 574/2011 approving the Multimedia Communication Service Quality Management Regulations (Regulamentação de Gestão da Qualidade do Serviço de Comunicação Multimídia), which identify network quality indicators and establish performance goals for multimedia communications service providers, including broadband internet service providers, with more than 50,000 subscribers. Such providers will be required to collect representative data using dedicated equipment installed at the site of each network connection and be subject to periodic measurements to ensure their compliance with such regulation, including:
To increase transparency, customers must be provided with specialized software at no cost to measure their own network quality, although such customer-generated measurements will be included in official calculations. In January 2018, ANATEL adopted new models for measuring the quality of fixed broadband networks using automated processes that collect data from multiple data points. To measure our fixed broadband network quality, we have implemented the HDM platform. This new method allows us to better manage the quality of our network, allowing us to identify corrective actions and more efficiently direct investments in our network.
Nevertheless, the performance of fixed broadband service providers in any particular state may not meet one or more quality performance targets even if such service provider’s overall performance is satisfactory. For cases in which there are indications of performance or conduct other than those established in the regulations, ANATEL establishes a noncompliance process called Procedure for Determination ofNon-Compliance to Obligations (Procedimento de Apuração de Descumprimento de Obrigações – PADO) in detriment to the provider. Therefore, fixed broadband service providers, including us, could be subject to fines or penalties as a result of the failure to meet the quality performance targets in one or more particular states. In November 2017, ANATEL submitted for public consultation the RQUAL, a proposal to review the methods by which the quality standards for fixed-line services, personal mobility services, multimedia communications services and subscription television services are measured. In December 2019, ANATEL approved the RQUAL, which immediately superseded certain provisions of the existing quality regulation applicable to multimedia communications service providers. However, the majority of the provisions of the RQUAL are not expected to be implemented until Discontinued Operations Mobile Telephone Services Regulatory Overview In September 2000, ANATEL adopted regulations that established operating rules for providers under the personal mobile service (Serviço Móvel Pessoal - SMP) regime. The regulations permitted ANATEL to grant authorizations to provide mobile telecommunications services under the personal mobile service regime. For purposes of the personal mobile service regulations, Brazil is divided into three service regions covering the same geographic areas as the concessions for fixed-line telecommunications services. Auction of 3G Spectrum. In preparation for auctions of spectrum in Bands F, G, I and J (2.1 GHz), the use of which allows personal mobile services providers to offer 3G services to their customers, ANATEL issued regulations that divide the Brazilian territory into nine regions for purposes of operations using these frequency bands. In December 2007, ANATEL auctioned radiofrequency licenses to operate on each of these frequency bands in each of the nine regions and the related licenses to use these frequency bands. In this auction, we acquired the radio frequency licenses necessary to offer 3G services in eight of the nine regions delineated by ANATEL for 3G services (corresponding to Regions I, II and III under the personal mobile services regime, other than an area in Region III that consists of 23 municipalities in the interior of the State of São Paulo that includes the city of Franca and surrounding areas). Authorizations to Use 450 MHz Band and 2.5 GHz Band. In preparation for auctions of the 450MHz band and 2.5 GHz band, the use of which allows personal mobile services providers to offer 4G services to their customers, ANATEL issued regulations that divided the Brazilian territory into three regions for purposes of providing personal mobile services. In June 2012, ANATEL auctioned radio frequency licenses to operate and the related licenses to use the frequency bands in the following manner: (1) four national lots for 2.5 GHz bands, each accompanied by a regional band of 450 MHz, and (2) 132 regional lots for 2.5GHz bands, including “P” band radiofrequencies. In this auction, we acquired (1) one of the national lots for 2.5 GHz and the corresponding regional lot of 450MHz to provide rural broadband services in the States of Goiás, Mato Grosso, Mato Grosso do Sul, Rio Grande do Sul and the Federal District, and (2) 11 regional lots for “P” band radiofrequencies. Since that time, we have waived our right to use and/or chosen not to renew our “P” band authorizations. Network Sharing. In 2013, ANATEL and Brazil’s national competition regulator (Conselho Administrativo de Defesa Econômica), or CADE, approved the 2013 RAN Sharing Agreement between TIM and Oi, which has been implemented, for the construction, implementation and mutual assignment of network tools to support personal mobile services (voice and broadband) in the 2.5 GHz band, among others, in order to ensure compliance with the scope of 4G commitments.
In 2014, TIM and Oi agreed to negotiate the joint construction, implementation and reciprocal assignment of elements of their respective 2G and 3G network infrastructures, which was approved by ANATEL and CADE. In 2015, ANATEL and CADE approved the 2015 RAN Sharing Agreement between Telefônica Brasil, TIM and Oi, which has been implemented, for the construction, implementation and mutual assignment of network tools to support personal mobile services (voice and broadband) in the 2.5 GHz band, among others, in order to ensure compliance with the scope of commitments. With respect to the latter agreement, ANATEL rejected the proposal to conduct RAN sharing in conurbations because it detected interference in the service. As a result, ANATEL will not allow RAN sharing in municipalities experiencing interference until a solution has been found. In 2018, ANATEL and CADE approved an amendment to the 2013 RAN Sharing Agreement between TIM and Oi, which has been implemented, to update the technology covered by the agreement and to permit infrastructure sharing in the 1800 MHz spectrum technology. Our Authorizations We hold radiofrequency spectrum authorizations to provide 2G, 3G and 4G services in Regions I, II and III. The majority of these authorizations grant us permission to use the applicable radio spectrum for 15 years from the date of the authorization agreement under which they are granted and are renewable for additional 15-year terms. Upon renewal of any of these authorizations and on every second anniversary of such renewal, we will be required to pay an amount equal to 2.0% of our prior year’s net operating revenue from personal mobile services. The initial terms of one of our radio frequency spectrum authorizations expired in 2016 and was extended for an additional 15-year term. Following the passage of Law No. 13,879 in October 2019, mobile telephone service providers may renew their radiofrequency spectrum authorizations indefinitely without undergoing new auctions. However, there is doubt as to whether this new framework will be applicable for authorizations in effect at the time of the law was changed. As a result, we cannot be certain that we will be able to renew our existing authorizations indefinitely without undergoing new auctions. The following table sets forth certain information about our authorizations to provide mobile telephone services:
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Our authorization agreements are also subject to network scope and contains service performance obligations set forth in these authorization agreements, under which we are required to service all municipalities in Brazil with a population in excess of 100,000 habitants. Under our 3G authorizations, as of the date of this annual report we are also required to (1) provide service to 459 municipalities that did not have mobile services at the time these licenses were granted with either 2G or 3G mobile telecommunications services, (2) provide 3G service to 50% of all of the municipalities with a population between 30,000 and 100,000, and (3) provide 3G service to 60% of the municipalities, including 684 specified municipalities, covered by these licenses with a population less than 30,000. Under our 4G authorizations, as of the date of this annual report we were also required to provide 4G service in (1) all municipalities with a population of 30,000 or more and (2) 60% by December 31, 2018 and 100% by December 31, 2019 of the municipalities covered by these licenses with a population less than 30,000; provided, however, that for the latter, we may comply with this obligation by providing service with transmission rates equal to or greater than those set for the 1.9/2.1 GHz (3G) bands. In 2012 we acquired 450 MHz license on the 4G services auction, which requires us to, in 964 municipalities in the States of Goiás, Mato Grosso, Mato Grosso do Sul, Rio Grande do Sul and the Federal District: (1) provide voice services in the 450 MHz or other spectrum granted to us and data services at minimum upload speeds of 256 kbps and download speeds of 1 Mbps and a minimum monthly allowance of 500 MB in rural areas; (2) provide unlimited data services at minimum upload speeds of 256 kbps and download speeds of 1 Mbps to rural schools in those municipalities; and (3) make our fixed-line network available to other telecommunications service providers to allow them to comply with their obligations under the PGMU. As of the date of this annual report, although we believe that we are in compliance with the network scope and service performance obligations set forth in these licenses, ANATEL is debating our compliance with certain obligations to provide services under the 450 MHz spectrums. Since we did not have all of the necessary systems in place to support the use of the 450 MHz spectrum using land frequencies by the required deadline, we have been meeting our coverage obligations in certain areas using satellites. If ANATEL makes a final decision that we have not been meeting our obligations, our authorizations to use 450 MHz frequencies may be terminated. As of the date of this annual report, ANATEL’s determination regarding this matter is suspended by court order. For most obligations, a municipality is considered “serviced” when the covered service area contains at least 80% of the urban area in the municipality. Our failure to meet these targets may result in the imposition of penalties established in ANATEL regulations and, in extreme circumstances, in termination of our authorizations to use those radiofrequencies by ANATEL. As of the date of this 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 450 MHz/900 MHz/1800 MHz/2100 and 2500 MHz spectrums. Furthermore, we have obtained judicial protection under the RJ Proceedings to forego renewal of many of the performance guarantees we would have otherwise been required to maintain with respect to the obligations under discussion. Our 4G radio frequency authorizations also impose minimum investment obligations in domestic technologies. At least 65% of the cost of all goods, services, equipment, telecommunications systems and data networks that we purchase to meet our 4G service obligations must be developed in Brazil. As of the date of this annual report, ANATEL has recognized that our obligations to use domestic technology have not been met in the past due to the unavailability of such products in Brazil, and has consequently not sanctioned us. This minimum requirement will increase to 70% by December 31, 2022.
Roaming Under the PGMC, a mobile services provider with significant market power, such as our company, must offer roaming services to other mobile services providers without significant market power at the maximum rate that the mobile services provider with significant market power is permitting ANATEL to offer such services to its retail customers. In March 2017, ANATEL began a pilot program with the four principal mobile services providers, including our company, to share infrastructure costs to expand the existing voice roaming agreements to voice and data roaming services to 35 municipalities with fewer than 30,000 residents. As a result of this program, which is ongoing and is in the process of expansion to include additional mobile service providers and additional municipalities with fewer than 30,000 residents, the providers began or resumed discussions about voice and data roaming tariffs and the timeline to implement the requirements of the program. As of the date of this annual report, certain providers, including our company, have entered into bilateral agreements regarding these matters, and new municipalities count on roaming coverage, increasing satisfaction to our clients. Rate Regulation Mobile telecommunications service in Brazil is offered on a “calling-party-pays” basis under which a mobile subscriber pays only for calls that he or she originates (in addition to roaming charges paid on calls made or received outside the subscriber’s home registration area). A mobile subscriber receiving a collect call is also required to pay mobile usage charges. Our revenues from mobile services consist mainly of charges for local and long-distance calls and data packages paid by our pre-paid and post-paid mobile subscribers and monthly subscription charges paid by our post-paid plan subscribers. Monthly subscription charges are based on a post-paid subscriber’s service plan. If one of our mobile subscribers places or receives a call from a location outside of his or her home registration area, we are permitted to charge that customer the applicable roaming rate. We charge for all mobile calls made by our pre-paid customers, and for mobile calls made by our post-paid customers in excess of their allocated monthly number of minutes, on a per-minute basis. Rates under our mobile plans may be adjusted annually by no more than the rate of inflation, as measured by the IGP-DI. Quality Regulation Our personal mobile services authorizations impose obligations on us to meet quality of service standards. To restructure the process of assessing the quality of mobile service, with the inclusion of processes and measurement of indicators to check the quality of mobile broadband and the quality perceived by the user, ANATEL published Resolution 575/2011, approving the Regulation for the Management of Quality of Provision of Personal Mobile Service (Regulamento de Gestão da Qualidade da Prestação de Serviço Móvel Pessoal), or SMP-RGQ. The SMP-RGQ provides for the assessment of the network connection and their respective data transmission rate, assessing aspects of availability, stability and connection speed for the data network. Targets are defined as 80% of speed hired (on average per month) by users and 40% of the instant speed, according to the definitions of Resolution 575/2011. In January 2018, ANATEL adopted a new model for measuring the quality of mobile broadband networks through the use of smartphones, replacing the previous model that required data from volunteers and often led to statistically insignificant results. The new model, which we have adopted by collecting user data directly from smartphones using the Minha Oi application, allows us to better manage the quality of our network, allowing us to identify corrective actions and more efficiently direct investments in our network. As a result, the performance of mobile telephony service providers in any particular state may not meet one or more quality performance targets even if such service provider’s overall performance is satisfactory. For cases in which there are indications of performance or conduct other than those established in the regulations, ANATEL establishes a noncompliance process called Procedure for Determination of Non-Compliance to Obligations (Procedimento de Apuração de Descumprimento de Obrigações – PADO) in detriment to the provider. Therefore, mobile telephony service providers, including us, could be subject to fines or penalties as a result of the failure to meet the quality performance targets in one or more particular area codes.
In November 2017, ANATEL submitted for public consultation the RQUAL, a proposal to review the methods by which the quality standards for fixed-line services, personal mobility services, multimedia communications services and subscription television services are measured. In December 2019, ANATEL approved the RQUAL, which immediately superseded certain provisions of the SMP-RGQ obligations. However, the majority of the provisions of the RQUAL are not expected to be implemented until 2022, as provided for in the regulation. For more information, see “—Other Regulatory Matters—Quality of Telecommunications Services Regulation (RQUAL).” Subscription Television Services Regulatory Overview The framework established by Law No. 12,485 of 2011 increased the availability and lowered the price of subscription television services in Brazil, through increased competition among providers, and improved the quality, speed and availability of broadband internet services as a result of the expected proliferation of fiber optic cables used to transmit cable television. In March 2012, ANATEL adopted new regulations under which the authorizations to provide various existing subscription television services have been consolidated into authorizations to provide a newly-defined service called Conditional Access Service (Serviço de Acesso Condicionado – SeAC). Under these regulations, authorizations to provide Conditional Access Service apply to private telecommunications services, the receipt of which are conditioned on payment by subscribers, for the distribution of audiovisual contents in the form of packages, individual channels and channels with required programming, by means of any communications technology, processes, electronic means or protocols. An authorization granted by ANATEL to provide Conditional Access Service will be valid for the entire Brazilian territory; however, the provider must indicate in its application for an authorization the localities that it will service. Our Authorizations In November 2008, we entered into a15-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, and has no termination date. In accordance with Law No. 12,485/11, which approved the Conditional Access Service regime, our Conditional Access Service authorization prohibits us from creating television content or owning more than 30% of a company that creates content. We are also required to carry a certain percentage of Brazilian programming, including open channels and public access channels. Rate Regulation The rates and prices for DTH and IP TV services are not subject to ANATEL regulation and are market-driven. Quality Regulation The quality of service onPay-TV is monitored by ANATEL. These quality standards are measured according to the definitions and quality indicators established by Resolution 411/2005. The indicators, as well as their respective methods of collection, calculation and other quality requirements, measures the performance ofPay-TV service providers in each individual geographic area in which they operate. As a result, the performance ofPay-TV service providers in any particular geographic area may not meet one or more quality performance targets even if such service provider’s overall performance is satisfactory.
For cases in which there are indications of performance or conduct other than those established in the regulations, ANATEL establishes a noncompliance process called Procedure for Determination ofNon-Compliance to Obligations (Procedimento de Apuração de Descumprimento de Obrigações – PADO) in detriment to the provider. Therefore,Pay-TV service providers, including us, could be subject to fines or penalties as a result of the failure to meet the quality performance targets In November 2017, ANATEL submitted for public consultation the RQUAL, a proposal to review the methods by which the quality standards for fixed-line services, personal mobility services, multimedia communications services and subscription television services are measured. In December 2019, ANATEL approved the RQUAL, which immediately superseded certain provisions of the existing quality regulation applicable to subscription television service providers. However, the majority of the provisions of the RQUAL are not expected to be implemented until Other Regulatory Matters Consumer Protection Regulation In March 2014, ANATEL published a regulation approving the General Regulation on Telecommunications Customers Rights (Regulamento Geral de Direitos do Consumidor de Serviços de Telecomunicações, or the “RGC”), a single regulation for the telecommunications sector with general rules for customer service, billing, and service offers, which are applicable to fixed, mobile, broadband andPay-TV customers. This regulation establishes a period ranging from 120 days to 24 months from the date of publication for entering into compliance with the new rules. Most of the new rules that expand the rights of those who use the telecommunications services entered into force on July 8, 2014. Our failure to comply with this regulation may result in various fines and penalties being imposed on us by ANATEL. At the end of 2020, ANATEL began the process of revising this regulation by submitting a proposal for a new regulation which will be subject to public review and comment through April 2021. The proposed text of the new regulation eases some of the restrictions of the RGC, but places new restrictions on, among others, contracting services, customer service and billing requirements. The new regulation is unlikely to be published before December 2021. Oi, together with the main Brazilian telecommunications operators, created the Telecommunications Self-Regulation System (SART) with the goal of establishing common rules and procedures to be followed by all participating companies in practices including telemarketing, collections, products and customer service, which are the areas considered most critical in the relationship between providers and customers, and which historically generate the largest volume of complaints with ANATEL and the consumer protection bureau, Procons (Procuradoria de Proteção e Defesa do Consumidor). The aim of SART is to provide ANATEL and Procons with means by which to solve common issues for consumers and companies in order to lessen regulatory burdens and improve these companies’ relationship with the public. The aim is to participate in the drafting of the rules and regulations applicable to telecommunications companies in order to produce legislation that is more effective and efficient, reducing costs for all parties involved and improving consumer relations. Interconnection Regulations Under the General Telecommunications Law, all telecommunications service providers are required, if technically feasible, to make their networks available for interconnection on anon-discriminatory basis whenever a request is made by another telecommunications service provider. Interconnection permits a call originated on the network of a requesting fixed-line or personal mobile services provider’s network to be terminated on the fixed-line or personal mobile services network of the other provider. ANATEL has adopted the General Rules on Interconnection (Regulamento Geral de Interconexão) to implement these requirements.
Interconnection Regulations Applicable to Fixed-Line Service Providers Our revenues from the use of our local fixed-line networks by other telecommunications services providers consist primarily of payments at rates designated by ANATEL asTU-RL rates from:
Fixed-line service providers are not permitted to charge other fixed-line service providers for local fixed-line calls originating on their local fixed-line networks and terminating on the other provider’s local fixed-line networks. Our revenues from the use of our long-distance networks consist primarily of payments at rates designated by ANATEL asTU-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-RL andTU-RIU rates vary depending on the time of the day and day of the week and are subject to price caps established by ANATEL. The price cap for interconnection rates varies from service provider to service provider based on the retail prices of each service provider and are adjusted annually by ANATEL at the same time that rates for local and long-distance calls are adjusted. Fixed-line service providers must offer the sameTU-RL andTU-RIU rates to all requesting providers on a nondiscriminatory basis. The maximumTU-RL andTU-RIU rates that ANATEL has permitted us to charge have declined significantly since 2016. In December 2018, ANATEL published the maximum fixed reference rates, includingTU-RL andTU-RIU, for 2020 through 2023, using a methodology that takes into consideration alllong-run incremental costs, updated to current values, of providing a particular service and the unit costs of such service based on an efficient network considering our existing regulatory obligations. Interconnection Regulations Applicable to Personal Mobile Services Providers Our revenues from the use of our mobile networks by other telecommunications services providers consist primarily of payments on aper-minute basis from (1) local fixed-line, long-distance and mobile services providers to complete calls terminating on our mobile networks, and (2) long-distance service providers for the transfer to their networks of calls originating on our mobile networks. The terms and conditions of interconnection to our mobile networks, including the rates charged to terminate calls on these mobile networks, which are designated by ANATEL as MTR rates, the commercial conditions and technical terms and conditions, may be freely negotiated between us and other mobile and fixed-line telecommunications service providers, subject to compliance with regulations established by ANATEL relating to traffic capacity and interconnection infrastructure that must be made available to requesting providers, among other things. Personal mobile services providers must offer the same MTR rate to all requesting providers on a nondiscriminatory basis. ANATEL must determine that the intercompany agreements meet certain formal requirements before they become effective. These agreements may be rejected if they are contrary to the principles of free competition and the applicable regulations. If the providers cannot agree upon the terms and conditions of the interconnection agreements, ANATEL may determine terms and conditions by arbitration. Since no agreement with fixed-line service providers could be reached regarding MTR rates when we began offering personal mobile services, ANATEL set the initial MTR rates.
In December 2018, ANATEL published the maximum fixed reference rates for 2020 through 2023, using a methodology that takes into consideration alllong-run incremental costs, updated to current values, of providing a particular service and the unit costs of such service based on an efficient network considering our existing regulatory obligations. Quality of Telecommunications Services Regulation (RQUAL) In November 2017, ANATEL submitted for public consultation the RQUAL, a proposal to review the methods by which the quality standards for fixed-line services, personal mobility services, multimedia communications services and subscription television services are measured. In December 2019, ANATEL approved the RQUAL, which established a new quality management model and immediately superseded certain provisions of the quality regulations then in existence. In addition, the RQUAL provides standardized rules regarding communications and reimbursement to users impacted by service interruptions. Pursuant to the new model, telecommunications services providers will be evaluated on the basis of three indices: (1) service quality; (2) perceived quality; and (3) user complaints. Providers will be given annual grades, ranging from “A” (best) to “E” (worst), at the national, state and municipal levels. Customers whose providers receive “E” grades will be able to break their contracts without paying a fine regardless of the length of the contract or remaining term. The RQUAL will also replace the existing sanctioning regime. Providers will no longer automatically receive fines for not complying with quality targets. The RQUAL also provides for the replacement of the automatic sanctioning rules (fines fornon-compliance with targets), by the adoption of specific measures and appropriate to the specific case, in order to guarantee the improvement of quality standards. The RQUAL provides for the creation of a technical quality group, including representatives from ANATEL and various service providers, and a quality assessment support entity, with the aim of creating a manual that defines the technical parameters that will comprise the quality indicators and establishes the criteria for service interruptions and reimbursements. ANATEL’s board of directors will then be required to approve the manual, which is expected to become effective in General Plan on Competition Targets (PGMC) The PGMC, which was approved by ANATEL, became effective in November 2012 and was updated in July 2018, contemplates the creation of one entity to manage information about telecommunications networks, act as an intermediary in contracts between telecommunications providers and supervise the offering of wholesale data traffic services. The PGMC also addresses a variety of other matters relating to both fixed-line and mobile service providers, including criteria for the evaluation of telecommunications providers to determine which providers have significant market power and price regulations applicable to wholesale products, including EILD services, passive pipeline and subduct infrastructure, fixed line interconnection services, mobile interconnection services, roaming, high-speed data, and infrastructure for data transmitted through copper wires at speeds of 12 Mbps or less. The evaluation framework also takes into account the providers’ market position in several retail markets in which we participate. Under this framework, municipalities are categorized according to degree of competition present: competitive, moderately competitive, potentially competitive and not competitive. ANATEL then regulates companies based on the degree of competition present in each municipality. The PGMC imposes stricter restrictions on providers that are deemed to have significant market power in a particular geographic area, ranging from a neighborhood within a municipality to the entire national territory. In order to determine whether a provider has significant market power, ANATEL established criteria that consider:
As of the date of this annual report, Oi is considered to be a service provider with significant market power in most of the cities in Brazil, except in the mobile interconnection market, where Oi has significant market power only in Region I. Infrastructure Sharing Prior to the adoption of the PGMC, ANATEL had established rules for partial unbundling of the local fixed-line networks of the public regime service providers, which we refer to as “line sharing,” and which (1) limited the rates service providers can charge for line sharing, and (2) addressed related matters such asco-location space requirements.Co-location means that a service provider requesting unbundling may place its switching equipment in or near the local exchange of the service provider whose network the requesting service provider wishes to use and may connect to the network at this local exchange. The PGMC requires public regime service providers that have significant market power, such as our company, to share their fixed-line network infrastructure with other providers, including their local fixed-line access networks. Providers that are deemed to have significant market power must share their fixed access network infrastructure for transmission of data through copper wires at transmission rates of up to 12 Mbps. Providers with significant market power must also share their passive infrastructure with other service providers at prices determined by bilateral negotiations between the providers. In addition, infrastructure sharing is governed by the Regulation of Infrastructure Sharing (Regulamento de Compartilhamento de Infraestrutura), which requires that all owners of infrastructure (who may or may not be telecommunications service providers) share their excess capacity with telecommunications service providers. Ownership and Corporate Governance Restrictions Over the years, ANATEL has initiated several internal proceedings to monitor our financial situation and to evaluate our ability to continue to perform our obligations under our concession agreements. In light of the approval of the RJ Plan by the creditors on December 20, 2017, and its subsequent ratification and confirmation by the RJ Court, ANATEL began to monitor our operating and financial positions based on the effectiveness of the RJ Plan. In addition, in connection with the RJ Proceedings, ANATEL gained expanded powers regarding our ownership and corporate governance decisions. In March 2019, ANATEL determined it would continue to monitor us in 2019, and imposed measures related to transparency, corporate governance, and financial performance. Regulatory Agenda ANATEL’s Regulatory Agenda for Environmental and Other Regulatory Matters As part of ourday-to-day operations, we regularly install ducts for wires and cables and erect towers for transmission antennae. We may be subject to federal, state and/or municipal environmental licensing requirements due to the installation of cables along highways and railroads, over bridges, rivers and marshes and through farms, conservation units and environmental preservation areas, among other places. As of the date of this annual report, we have been required to obtain environmental licenses for the installation of transmission towers and antennae in several municipalities with no expected impact on our operations. However, there can be no assurances that other state and municipal environmental agencies will not require us to obtain environmental licenses for the installation of transmission towers and antennae in the future or that such a requirement would not have a material adverse effect on the installation costs of our network or on the speed with which we can expand and modernize our network.
We must also comply with environmental legislation regarding the management of solid waste. According to resolutions adopted by the National Environmental Council (Conselho Nacional do Meio Ambiente), companies responsible for the treatment and final disposal of solid industrial waste, special waste and solid urban waste are subject to environmental licensing. Should the waste not be disposed of in accordance with standards established by environmental legislation, the company generating such waste may be held jointly and severally liable with the company responsible for waste treatment for any damage caused. Also, in all states where we operate, we have implemented management procedures promoting the recycling of batteries, transformers and fluorescent lamps. In addition, we are subject to ANATEL regulations that impose limits on the levels and frequency of the electromagnetic fields originating from our telecommunications transmissions stations. We believe that we are in compliance with ANATEL standards as well as with all material environmental legislation and regulations.
Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012 added Section 13(r) to the Exchange Act. Section 13(r) requires an issuer to disclose in its annual or quarterly reports filed with the SEC whether the issuer or any of its affiliates has knowingly engaged in certain activities, transactions or dealings with the Government of Iran, relating to Iran or with designated natural persons or entities involved in terrorism or the proliferation of weapons of mass destruction during the period covered by the annual or quarterly report. Disclosure is required even when the activities were conducted outside the United States bynon-U.S. entities and even when such activities were conducted in compliance with applicable law. We have roaming agreements with MTN Irancell, Mobile Company of Iran and Rightel Communications, each of which is an Iranian mobile phone operator. Pursuant to such roaming agreements, our customers are able to roam in these mobile phone operators’ networks (outbound roaming) and customers of MTN Irancell, Mobile Company of Iran and Rightel Communications are able to roam in our network (inbound roaming). For outbound roaming, we pay roaming fees for use of their network by our customers, and for inbound roaming, we receive roaming fees for use of our network. During We do not maintain any bank accounts in Iran. All payments in connection with our international roaming agreements are effected through our bank accounts in London. The purpose of all of these agreements is to provide our customers with coverage in areas where we do not own networks. For that purpose, we intend to continue maintaining these agreements. We also provide telecommunications services in the ordinary course of business to the Embassy of Iran in Brasilia. In
Not applicable.
The following discussion of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements as of December 31, 2020 and 2019 and The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including those set forth in “Cautionary Statement with Respect to Forward-Looking Statements” and “Item 3. Key Information—Risk Factors.” Overview We are one of the principal integrated telecommunications service providers in Brazil with approximately We are in the In order to implement our Strategic Plan and achieve greater operational and financial flexibility for our company, on February 27, 2020, we filed a petition with the RJ Court requesting that we be permitted to submit to our creditors for their consideration and deliberation at a new general creditors’ meeting a proposed amendment to the RJ Plan. On September 8, 2020, our creditors approved the RJ Plan Amendment, which was ratified and confirmed by the RJ Court on October 5, 2020. The RJ Plan Amendment Confirmation Order was published on October 8, 2020 in the Official Gazette. For additional information regarding the RJ Plan Amendment, see “Item 4. Information on the Company—II. Our Recent History and Development—Our Judicial Reorganization Proceedings—Extension of the Judicial Reorganization Proceedings.” To further our Strategic Plan and pursuant to the RJ Plan Amendment, we formed or plan to form five UPIs for the disposal of certain of our businesses and/or isolated assets, as follows: (1) UPI Mobile Assets, which includes our mobile telephony and data operations; (2) UPI Towers and UPI Data Center, which includes our passive infrastructure; (3) UPI InfraCo, which includes our telecommunications network operation; and (4) UPI TVCo, which includes our Pay-TV business. Pursuant to the RJ Plan Amendment and the Brazilian Bankruptcy Law, our UPIs are separated from the assets, liabilities and rights of the RJ Debtors. We plan to sell our UPIs to ensure our ability to service our debt and generate the funds necessary to expand our fiber infrastructure and associated services, which is the key focus of our strategy. We expect that the divestment of our UPIs will allow us to maximize the business value of our investments by expanding our residential and business access services nationwide, exploit more efficiently our network components and create new business opportunities for the exploitation of these networks by offering them to other telecommunications service providers, as permitted by law. As of the date of this annual report, we have entered into agreements to sell or completed the sale of UPI Data Center, UPI Towers and UPI Mobile Assets. In addition, we have accepted a binding proposal from a group of prospective buyers to acquire a majority interest in UPI InfraCo. For additional information, see “Item 4. Information on the Company—II. Our Recent History and Development—Adoption of Strategic Plan.” For additional information regarding our UPIs, see “Item 4. Information on the Company—V. Assets Held for Sale and Discontinued Operations.”
The assets and liabilities related to UPI Mobile Assets, UPI InfraCo, UPI TVCo, UPI Towers, and UPI Data Center are classified as held for sale since their carrying amounts are being recovered primarily through sale transactions rather than through continuous use. We consider the sale of these assets to be highly probable, considering how the divestment plan of these assets is unfolding. We have also classified the operations related to the UPI Mobile Assets, UPI InfraCo, UPI TVCo and UPI Data Center as discontinued operations, as their sale represents a strategic shift in our operations and are an integral part of our coordinated divestment plan. In addition, we have revised our comparative statements of profit or loss, statements of comprehensive income and statements of cash flows for the years ended December 31, 2019 If the During the year ended December 31, Our results of operations and financial condition have been and will be significantly influenced in future periods by the RJ Proceedings as described under “Item 4. Information on the Company—Our Recent History and Development—Our Judicial Reorganization Proceedings” and our
We expect that our financial condition and liquidity will be influenced by a variety of factors, including:
Financial Presentation and Accounting Policies Presentation of Financial Statements We have prepared our audited consolidated financial statements in accordance with IFRS as issued by the IASB under the assumption that we will continue as a going concern and in compliance with the legal requirements applicable to a judicial reorganization. Our audited consolidated financial statements as of December 31, The RJ Proceedings are aimed at ensuring the continuation of our company as a going concern. This continuity was strengthened Our company has been successfully discharging the obligations set forth in the RJ Proceedings and even though there are no indications in this regard, we emphasize that these conditions and circumstances indicate, by their own nature, uncertainties that may affect the success of the RJ Proceedings and
As a result of our decision to dispose of certain businesses and/or isolated assets in connection with the
Business Segments and Presentation of Segment Financial Data We use operating segment information for decision-making. We have identified only one operating segment that corresponds to the telecommunications business in Brazil. The Telecommunications in Brazil segment includes our telecommunications business in Brazil. In addition to our telecommunications business in Brazil, we conduct other businesses that individually or in aggregate do not meet any of the quantitative indicators that would require their disclosure as reportable business segments. These businesses are conducted primarily by CST, Directel, and Timor Telecom, which provide fixed and mobile telecommunications services and publish telephone directories in Africa and Asia, and which have been consolidated in our financial statements since May 2014. Within our Telecommunications in Brazil segment, our management assesses revenue generation from continuing operations based on customer segmentation into the following categories:
Within our Telecommunications in Brazil segment, we also generate a small portion of our revenue from long-distance calls that originate from mobile devices and terminate on fixed-line telephones in our concession areas. As a result of our decision to sell our UPIs, we now account for the operations related to the UPI Mobile Assets (including the sale of mobile telephony services to postpaid (subscription) and prepaid customers that include voice services and data communication
Critical Accounting Policies and Estimates Our critical accounting policies and estimates are described in note 2 to our audited consolidated financial statements. In preparing our audited consolidated financial statements in conformity with IFRS, our management uses estimates and assumptions based on historical experience and other factors, including expected future events, which we consider reasonable and relevant. Critical accounting policies are those that are important to the portrayal of our consolidated financial position and results of operations and require management’s subjective and complex judgments, estimates and assumptions. The application of these critical accounting policies frequently requires judgments made by management regarding the effects of matters that are inherently uncertain with respect to the outcomes of transactions and the carrying value of our assets and liabilities. Our actual results of operations and financial position may differ from those set forth in our audited consolidated financial statements, if our actual experience differs from management’s assumptions and estimates. In order to provide an understanding of our critical accounting policies, including some of the variables and assumptions underlying the estimates, and the sensitivity of those assumptions and estimates to different parameters and conditions, we set forth below a discussion of our critical accounting policies relating to:
and discontinued operations; Revenue Recognition and Trade Receivables
Our revenues correspond primarily to the amount of the payments received or receivable from sales of services in the regular course of our activities and our subsidiaries’ activities. Revenue is recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Our revenue recognition considers the judgments that significantly affect the determined amount and the recognition timing of the revenue from a contract with a customer, taking into account the five-step recognition model: (i) identify the contract; (ii) identify the separate performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the entity satisfies a performance obligation. Service revenue is recognized when services are provided. Local and long-distance calls are charged based on time measurement according to the legislation in effect. The services charged based on monthly fixed amounts are calculated and recorded on a straight-line basis. Prepaid services are recognized as unearned revenues and recognized in revenue as these services are used by customers.
Our revenue is a material component of our results of operations. Management’s determination of price, collectability and the rights to receive certain revenues for the use of our network are based on judgments regarding the nature of the fee charged for services rendered, the price for certain services delivered and the collectability of those revenues. Should changes in conditions cause management to conclude that these criteria are not met for certain transactions, the amount of accounts receivable could be adversely affected. In addition, for certain categories of revenue we rely upon revenue recognition measurement guidelines set by ANATEL. We consider revenue recognition to be a critical accounting policy, because of the uncertainties caused by different factors such as the complex information technology required, high volume of transactions, risk of fraud and piracy, accounting regulations, management’s determination of collectability and uncertainties regarding our right to receive certain revenues (mainly revenues for use of our network). Significant changes in these factors could cause us to fail to recognize revenues or to recognize revenues that we may not be able to realize in the future, despite our internal controls and procedures. We have not identified any significant need to change our revenue recognition policy. Expected Credit Losses on Trade Receivables Our expected credit losses on trade receivables are established in order to recognize We have entered into agreements with certain customers to collectpast-due accounts receivable, including agreements allowing customers to settle their delinquent accounts in installments. The amounts that we actually fail to collect in respect of these accounts may differ from the amount of the allowance established, and additional allowances may be required. Depreciation of Property, Plant and Equipment We depreciate property, plant and equipment using the straight-line method at rates we judge compatible with the useful lives of the underlying assets. The average depreciation rates of each of our classes of assets are presented in note 16 to our audited consolidated financial statements. The useful lives of assets in certain categories may vary based on whether they are used primarily to provide fixed-line or mobile services. We review the estimated useful lives of the assets taking into consideration technical obsolescence and a valuation by outside experts.
Given the complex nature of our property, plant and equipment, the estimates of useful lives require considerable judgment and are inherently uncertain, due to rapidly changing technology and industry practices, which could cause early obsolescence of our property, plant and equipment. If we materially change our assumptions of useful lives and if external market conditions require us to determine the possible obsolescence of our property, plant and equipment, our depreciation expense, obsolescencewrite-off and consequently net book value of our property, plant and equipment could be materially different. Impairment of Long-Lived Assets Long-lived assets include assets that do not have indefinite lives, such as property, plant, and equipment, and purchased intangible assets subject to amortization. These assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment, we first compare the value in use of that asset or asset group to its recoverable value. If the carrying amount of the long-lived asset or asset group exceeds the value in use of that asset or asset group, an impairment is recognized to the extent that the carrying amount exceeds its recoverable value. The calculation of value in use and recoverable value of assets or asset groups requires the use of judgments and assumptions that may be influenced by different external and internal factors, such as economic trends, industry trends and interest rates, changes in business strategies, and changes in the type of services and products sold our company to the market. The use of different assumptions may significantly change our financial statements. During the year ended December 31, 2020, we performed an impairment test on our non-current assets under IAS 36 and recognized an impairment reversal of R$1,130 million in connection with previously recognized impairment losses. This impairment reversal was primarily due to the expected future profitability of assets with finite useful lives of the cash-generating units (CGU) from continuing operations, due to developments in the financial scenarios and indicators taken into account to estimate in our cash flows in the RJ Plan Amendment. During the year ended December 31, 2019, we performed an impairment test on ournon-current assets under IAS 36 and recognized an impairment provision of R$2,111 million primarily as a result of (1) the revision of our strategic plan, focused on improving operating and financial performance, using a sustainable business model that is designed to maximize the Company’s value in the context of our judicial reorganization; and (2) increased market competitiveness, mainly in the residential market, which accelerated the decline in the revenues from fixed-line services and DTH services. During the Leases We recognize aright-of-use asset and a lease liability on our balance sheet with respect to leased assets. Theright-of-use asset is measured at cost, which consists of the initial amount of the lease liability measurement, any initial direct costs incurred by us, an estimate of any costs to disassemble and remove the asset at the end of the lease, and any lease payments made before the lease commencement date (net of any incentives received), calculated at present value, discounted using the incremental lending rate. We depreciate theright-of-use assets on a straight-line basis from the commencement of the lease to the termination of the lease. We also assess impairment when there are indicators that an asset might be Our assumptions regarding appropriate discount rates used in our calculation of the present value of our leases are subject to significant fluctuations due to different external and internal factors, including economic trends and the financial performance of our company. The use of different assumptions to measure the present value of our leases could have a material effect on the estimated present value of theright-of-use asset and of the lease liability in our balance sheet.
Fair Value of Financial Liabilities Under IFRS 9, our borrowings and financing were substantially modified as of the Brazilian Confirmation Date and therefore derecognized and the modified borrowings and The fair value adjustment recognized on our balance sheet with respect to each financial liability as of the Brazilian Confirmation Date is amortized on a straight-line basis over the term of that financial liability and on a monthly basis we record a financial expense in the amount of the amortization in our statement of operations and a corresponding reduction in the fair value adjustment on our balance sheet. During the year ended December 31, 2018, we recorded gains on adjustments to fair value of our borrowings and financings of R$13,928 million and gains on adjustments to present value of our trade payables (including trade payables toANATEL-AGU) of R$1,167 million. We do not expect to record additional significant fair value adjustments in our statements of operations. Our assumptions regarding appropriate discount rates and foreign exchange rates used in our calculation of the fair value of our financial liabilities are subject to significant fluctuations due to different external and internal factors, including economic trends and the financial performance of our company. The use of different assumptions to measure the fair value of our financial liabilities could have a material effect on the estimated fair value of these financial liabilities and the amounts recorded as borrowings and financings in our balance sheet, as well as the amounts recognized as profit or loss in our statement of operations. Provisions for Contingencies Liabilities for loss contingencies arising from claims, assessment, litigation, fines and penalties are recorded when it is probable that the liability has been incurred and the amount can be reasonably estimated, based on the opinion of management and itsin-house and outside legal counsel. The amounts are recognized based on the cost of the expected outcome of ongoing lawsuits. We classify our risk of loss in legal proceedings as remote, possible or probable. Provisions recorded in our audited consolidated financial statements in connection with these proceedings reflect reasonably estimated losses at the relevant date as determined by our management after consultation with our general counsel and the outside legal counsel. Depending on the nature of the contingency, our management uses the statistical measurement or the individual measurement methodology to calculate provisions for contingencies. In any of these methodologies, we use a set of assumptions, information, an internal and external risk assessment, and statistical models that management considers to be appropriate, including the successful implementation of the RJ Plan. As discussed in note 24 to our audited consolidated financial statements, we record as a liability our estimate of the costs of resolution of such claims, when we consider our losses probable. We continually evaluate the provisions based on changes in relevant facts, circumstances and events, such as judicial decisions, that may impact the estimates, which could have a material impact on our results of operations and shareholders’ equity. While management believes that the current provision is adequate, it is possible that our assumptions used to estimate the provision and, therefore, our estimates of loss in respect of any given contingency will change in the future based on changes in the relevant situation. This may therefore result in changes in future provisioning for legal claims. For more information regarding material pending claims against our company, see “Item 8. Financial Information—Legal Proceedings” and note 24 to our audited consolidated financial statements.
Assets are classified as assets held for sale when their carrying amount is recoverable, principally through a sale, and when such sale is highly probable. These assets are stated at the lower of
A discontinuing operation is a component of an entity or a business unit that can be clearly distinguished operationally from the rest of the company. The classification of a discontinuing operation is made when the operation is sold or meets the criteria to be classified as Deferred Income Taxes and Social Contribution Income taxes in Brazil are calculated and paid on a legal entity basis, and there are no consolidated tax returns. Accordingly, we only recognize deferred tax assets, related to tax loss carryforwards and temporary differences, if it is likely that they will be realized on a legal entity basis. We recognize and settle taxes on income based on the results of operations determined in accordance with the Brazilian Corporate Law, taking into consideration the provisions of Brazilian tax law, which are materially different from the amounts calculated for IFRS purposes. Under IFRS, we recognize deferred tax assets and liabilities for temporary differences between the carrying amounts and the taxable bases of the assets and liabilities, and tax loss carryforwards are recorded in assets or liabilities, as applicable. We recognize the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50 percent likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. We regularly test deferred tax assets for impairment and recognize a provision for impairment losses when it is probable that these assets may not be realized, based on the history of taxable income, the projection of future taxable income, and the time estimated for the reversal of existing temporary differences. These projections require the use of estimates and assumptions. In order to project future taxable income, we need to estimate future taxable revenues and deductible expenses, which are subject to a variety of external and internal factors, such as economic trends, industry trends and interest rates, changes in business strategies, and changes in the type of services and products sold by our company. The use of different estimates and assumptions could result in the recognition of a provision for impairment losses for the entire or a significant portion of the deferred tax assets. Defined Postretirement Benefit Plans We sponsor certain defined postretirement benefit plans for our employees. We record liabilities for defined postretirement benefits plan based on actuarial valuations which are calculated based on assumptions and estimates regarding discount rates, investment returns, inflation rates for future periods, mortality indices and projected employment levels relating to postretirement benefit liabilities. The accuracy of these assumptions and estimates will determine whether we have created sufficient reserves for the costs of accumulated defined postretirement benefits plans, and the amount we are required to disburse each year to fund postretirement benefits plans. These assumptions and estimates are subject to significant fluctuations due to different external and internal factors, such as economic trends, social indicators, our capacity to create new jobs and our ability to retain our employees. All of these assumptions are reviewed at the end of each reporting period. If these assumptions and estimates are not accurate, we may be required to revise our reserves for defined postretirement benefits, which could materially impact our results of operations.
Principal Factors Affecting Our Financial Condition and Results of Operations Principal Factors Affecting our Continuing Operations Effects of the RJ Proceedings and Our Financial Restructuring In June 2016, as a result of several factors affecting our liquidity, we anticipated that we would no longer be able to comply with our payment obligations under our borrowings and financing transactions and we concluded that filing of a request for judicial reorganization in Brazil would be the most appropriate course of action (1) to preserve the continuity of our offering of quality services to our customers, within the rules and commitments undertaken with ANATEL, (2) to preserve the value of our company, (3) to maintain the continuity of our operations and corporate activities in an organized manner that protects the interests of our company, customers, shareholders and other stakeholders, and (4) to protect our cash and cash equivalents. Our liquidity crisis resulted principally from:
On June 20, 2016, Oi, together with the other RJ
Effects of RJ Proceedings on Our Statement of Operations Our net operating revenue was negatively affected by the RJ Proceedings primarily as a result of the impact of these proceedings on our ability to attract new corporate customers for our B2B business as these potential customers have been wary of entering into long-term service contracts with us during the pendency of these proceedings. We do not believe that the RJ Proceedings had a direct impact on our net revenue from other services.
Effects of Confirmation of the RJ Plan on Our Statement of Operations and Balance Sheet On December 19 and 20, 2017, a GCM was held to consider approval of the most recently filed judicial reorganization plan. This GCM concluded on December 20, 2017 following the approval of the RJ Plan reflecting amendments to the judicial reorganization plan presented at this GCM as negotiated during the course of this 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 The Brazilian Confirmation Order, according to its terms, is currently binding on all parties, although As a result of the approval and confirmation of the RJ Plan, we
In addition, as a result of the approval and confirmation of the RJ Plan, we began to attract new corporate customers for our B2B business as the concerns of these potential customers regarding the long-term sustainability of our business have
On September The RJ Plan Amendment authorized
We plan to sell our UPIs to ensure our ability to service our debt and generate the funds necessary to expand our fiber infrastructure and associated services, which is the key focus of our strategy. We expect that the divestment of our UPIs will allow us to maximize the business value of our investments by expanding our residential and business access services nationwide, exploit more efficiently our network components and create new business opportunities for the exploitation of these networks by offering them to other telecommunications service providers, as The assets and liabilities
Other effects of the RJ Plan Amendment include adjustments to the
Rate of Growth of Brazil’s Gross Domestic Product and Demand for Telecommunications Services As a Brazilian company with substantially all of our operations in Brazil, we are affected by economic conditions in Brazil. Brazilian GDP
Demand for Our Residential Services The number of our residential fixed lines in service declined by We have sought to combat the general trend in the Brazilian telecommunications industry of substitution of mobile services in place of local fixed-line services by offering a variety of bundled plans that include mobile services, broadband services andOi TV subscriptions to our fixed-line customers. We believe that through our sales of bundles consisting of more than one service, we improve customer profitability and enhance loyalty, while also increasing ARPU and minimizing churn rates. In addition, we have been focusing on structural network investments, including the introduction of VDSL technology, in order to offer service plans that include higher broadband speeds.
Demand for Our B2B Services
Our corporate customers, while better able to survive the current economic instability, often respond by reducing their economic activity and their spending for telecommunications products and services. In addition, provided that our B2B Services customers also purchase the core fixed-line and mobile services offered to our Residential and Personal Mobility Services customers, demand for our B2B Services is subject to some of the same conditions that affect our Residential and Personal Mobility Services, including reductions in interconnection tariffs, which have led to more robust mobile package offerings and driven the traffic migration trend offixed-to-mobile substitution. Effects of
Since December 2019,COVID-19 has spread throughout the world. On January 31, 2020, the World Health Organization announced thatCOVID-19 was a global health emergency and on March 3, 2020, the World Health Organization categorizedCOVID-19 as a
The principal measures we have
·activating new circuits in our backbone infrastructure in order to From March 2020 to May 2020, state, local and municipal authorities within Brazil promoted and enforced public health measures, including social isolation and quarantine measures, and enacted regulations limiting the operations of “non-essential” businesses. These measures resulted in the shutdown of our retail stores, which impacted our revenue from prepaid charges. In contrast, we have experienced a significant surge in demand for our broadband services, including services delivered through our expanding FTTH network, both from residential and B2B customers. Beginning in June 2020, many states and municipalities began the process of gradually reopening and easing restrictive measures. Accordingly, we resumed activities in our To date the COVID-19 pandemic has not had a material adverse effect on our business or results of our operations. However, there are still uncertainties regarding the duration and effects of the COVID-19 pandemic, including new virus strains and pandemic “waves” with an increase in the number of confirmed cases in Brazil, and the local, national and international response to the virus is still fluid and uncertain. Accordingly, we have preventatively maintained all mitigation actions already adopted. In addition, we have intensified our digitalization of our sales, telemarketing and teleagents channels, which has allowed for Effects of Our Absorption of Network Maintenance Service Operations and Adoption of New Customer Care Model We introduced programs beginning in 2015 to control costs related to network maintenance services and third-party services by (1) absorbing operation of several network maintenance service operations and providing these services ourselves, and (2) implementing a new customer care quality model through which we have improved our method of allocation of call center traffic to promote a greater level of customer service and digitized some of our customer interactions with respect to processing order for new services, troubleshooting service issues and dispatching maintenance personnel. Through our subsidiary Serede we absorbed operations of our network maintenance service operations of our contractor in Rio de Janeiro in October 2015, our network maintenance service operations of our contractor in the South region of Brazil in May 2016 and our network maintenance service operations of our contractor in the North and Northeast regions of Brazil in June 2016. As a result, 75% of the members of our technical field staff are our employees and are directly managed by our company compared to 20% prior to the absorption of these operations. We have revised the focus of our network maintenance service operations to concentrate on preventive network maintenance the reduce the number of repairs, in turn reducing the volume of network interventions and increasing field force productivity, thus freeing capacity to increase our focus on preventive maintenance. This virtuous cycle improves field operations efficiency and reduces costs in terms of both the number of technicians and the volume of materials applied. As a result of internalizing these operations, our network maintenance services expense has declined to R$
During 2016, we implemented a new customer care quality model in which we allocated call traffic among our call center service providers based on service quality. In addition, in 2018, we began to promote electronic channels that allow self-service, increasing digital interactions and consequently reducing calls requiring interactions with call center personnel. These initiatives have stimulated better quality in the provision of services, resulting in a Effects of Adjustments to Our Interconnection Rates Telecommunications services rates are subject to comprehensive regulation by ANATEL. In particular, interconnection rates for fixed-line In July 2014, ANATEL approved rules under which interconnection rates charged by our company for the use of our fixed-line and mobile networks would be reduced over a period of years until they were set at rates based on along-run incremental cost methodology. The MTR tariffs that we charged to terminate calls on our mobile networks were reduced by
As a result of the substantial reductions in our interconnection costs, and in keeping with our strategy of simplifying our portfolios to enhance our customers’ experience, since 2015 we have been offering fixed-line and mobile plans that allowall-net calls for a flat fee. Effects of Claims by ANATEL that Our Company Has Not Fully Complied with Our Quality of Service and Other Obligations As a fixed-line service provider, we must comply with the provisions of the RGQ. As a public regime service provider, we must comply with the network expansion and modernization obligations under the PGMU and our concession agreements. Our personal mobile services authorizations set forth certain network expansion obligations and targets and impose obligations on us to meet quality of service standards. In addition, we must comply with regulations of general applicability promulgated by ANATEL, which generally relate to quality of service measures. If we fail to meet quality goals established by ANATEL under the RGQ, fail to meet the network expansion and modernization targets established by ANATEL under the PGMU and our concession agreements, fail to comply with our obligations under our personal mobile services authorizations or fail to comply with our obligations under other ANATEL regulations, we may be subject to warnings, fines, intervention by ANATEL, temporary suspensions of service or cancellation of our concessions and authorizations. On an almost weekly basis, we receive inquiries from ANATEL requiring information from us on our compliance with the various service obligations imposed on us by our concession agreements. If we are unable to respond satisfactorily to those inquiries or comply with our service obligations under our concession agreements, ANATEL may commence administrative proceedings in connection with such noncompliance. We have received numerous notices of commencement of administrative proceedings from ANATEL, mostly due to our inability to achieve certain targets established in the RGQ and the PGMU. At the time that ANATEL notifies us it believes that we have failed to comply with our obligations, we evaluate the claim and, based on our assessment of the probability of loss relating to that claim, may establish a provision. We vigorously contest a substantial number of the assessments made against us by ANATEL. As of December 31,
Pursuant to the RJ Plan Amendment, the payment terms and conditions of certain prepetition creditors were adjusted, which resulted in the settlement of certain ANATEL claims, pursuant to which we transferred R$200 million in judicial deposits to ANATEL during 2020. Effect of Level of Indebtedness and Interest Rates As of December 31, Borrowing and financing costs consist of interest on borrowings payable to third parties, exchange losses on third-party borrowings and gains and losses on derivative financial instruments as set forth in note 6 to our audited consolidated financial statements included in this annual report. As a result of the implementation of the RJ Plan, most of our obligations under our restructured indebtedness In addition, the RJ Plan permits us to borrow up to R$2 billion under new export credit facilities. This debt may accrue interest at floating rates and/or be denominated in foreign currencies. Accordingly, we may incur interest expenses and foreign exchange gains and losses in connection with this debt, if incurred. Effects of Fluctuations in Exchange Rates between the Real and the U.S. Dollar Substantially all of our cost of services and operating expenses in Brazil are incurred inreais. As a result, the appreciation or depreciation of thereal against the U.S. dollar does not have a material effect on our operating margins. However, the costs of a substantial portion of the network equipment that we purchase for our capital expenditure projects are denominated in U.S. dollars or are U.S. dollar-linked. As a result, depreciation of thereal against the U.S. dollar results in this network equipment being more costly inreais and leads to increased depreciation expenses. Conversely, appreciation of thereal against the U.S. dollar results in this network equipment being less costly inreais and leads to reduced depreciation expenses. As a result of the confirmation of the RJ Plan, our obligations under our restructured Export Credit Agreements, our PIK Toggle Notes and ourNon-Qualified Credit Agreement are denominated in U.S. dollars and will accrue interest in U.S. dollars. As a result, when thereal appreciates against the U.S. dollar:
A depreciation of therealagainst the U.S. dollar will have the converse effects.
The significant depreciation of thereal subsequent to December 31, Effects of Inflation Because substantially all of our cost of services and operating expenses are incurred inreais in Brazil, an increase in inflation has the effect of increasing our operating expenses and reducing our margins. Although we have taken significant measures to control and reduce operating expenses during the past three years, the benefits of these measures were reduced as a result of the countervailing impact of Brazilian inflation during that time. Although our regulated rates are subject to annual adjustment based on the rate of inflation as measured by the IST, the majority of our revenue is generated from services delivered at rates that are not regulated or that are provided at a discount to the regulated rates as a result of competitive pressures in the Brazilian telecommunications market. As a result, we may not be able to pass through our increased operating costs and expenses resulting from inflationary pressures to our customers as incurred in the form of higher tariffs for our services. As a result of the confirmation of the RJ Plan, our obligations under our debentures and restructured Brazilian credit agreements and CRIs have accrued interest based on the CDI rate, which could be adjusted in the event of a significant increase in inflation in Brazil, since the Brazilian Confirmation Date. As a result, inflation could potentially have an indirect impact on our interest expenses and debt service obligations. Effects of Investments in Africatel At the time of our acquisition of PT Portugal, PT Portugal held indirectly 75% of the outstanding share capital of Africatel which held 25% of the outstanding share capital of Unitel. We recognized this investment as a held-for-sale financial asset recognized at fair value. The fair value of the investment in Unitel of R$4,089 million was determined based on a valuation report of Pharol’s operating assets prepared by Banco Santander in connection with our acquisition of PT Portugal. On September 16, 2014, our board of directors authorized our management to take the necessary measures to market our shares in Africatel. As a result, as of December 31, 2020, 2019 and 2018, we have recorded the assets and liabilities of Africatel, including its investment in Unitel and the accounts receivable relating to declared and unpaid dividends of Unitel, as held-for sale, although we do not record Africatel as discontinued operations in our statement of operations due to the immateriality of the effects of Africatel on our results of operations. Due to the many risks involved in the ownership of these interests, particularly our interest in Unitel, we cannot predict when the sale of these assets may be completed. During the year ended December 31, 2020, we recorded a gain on held-for-sale financial assets of R$161 million, primarily as a result of our recorded gain on sales of PT Ventures in January 2020 and exchange rate gain during the period. During the year ended December 31, 2019, we recorded a loss on held-for-sale financial assets of R$238 million, primarily as a result of R$404 million loss recorded as a result of our revision of the fair value of the cash investment and dividends receivable from Unitel, the effects of which were primarily offset by a R$165 million exchange rate gain due to the 4.0% depreciation of the real against the U.S. dollar during the year ended December 31, 2019. During the year ended December 31, 2018, we recorded a gain on available-for-sale financial assets of R$293 million, primarily as a result of a R$829 million exchange rate gain due to the 17.1% depreciation of the real against the U.S. dollar during 2018 and R$142 million recorded with respect to our portion of dividends approved by Unitel related to Unitel’s 2017 fiscal year, the effects of which were partially offset by a R$678 million loss recorded based on our revision of the fair value of the cash investment in Unitel. On January 24, 2020, Africatel sold and transferred 100% of the share capital of PT Ventures to Sonangol for an aggregate purchase price of US$1 billion, of which US$61 million was paid to Africatel prior to the transfer of the shares, US$699 million was paid in cash on the closing date and US$240 million was paid in several installments between February 2020 and July 2020 by means of minimum monthly payments of US$40 million beginning in February 2020, totaling R$4.1 billion cash received in 2020. Pursuant to the Pharol Settlement Agreement, we deposited 34 million euros of the proceeds of this sale in an escrow account to cover losses relating to certain tax proceedings against Pharol.
The principal assets of PT Ventures included (1) a 25% stake in Unitel, (2) a 40% stake in Multitel Serviços de Telecomunicações Lda., (3) rights to dividends previously declared by Unitel, but not received by PT Ventures, and (4) all rights arising from a final award in the amount of approximately US$659 million in an arbitration proceeding initiated by PT Ventures against the other Unitel shareholders. As a result of this transaction, we are no longer party to any litigation involving PT Ventures, Unitel or the other Unitel shareholders. Principal Factors Affecting our Discontinued Operations Demand for Our Personal Mobility Services Our customer base for mobility services (including customers in our Personal Mobility Services and B2B Services) declined by 5.9% to 36.7 million as of December 31, 2020 from 39 million as of December 31, 2017. We believe that the primary reason for the decline in our Personal Mobility Services customer base is the reduction in the total number of mobile accesses in Brazil, reflecting the trend to consolidate mobile use into a single SIM card, following the launch of all-net plans in response to the successive reductions of the MTR tariffs, and the structural market migration from voice to data in response to the offering of more robust data packages. Additionally, we have implemented an intensive policy of disconnecting inactive users to reduce regulatory fees that we must make for each active account, which has also contributed to the decline in our Personal Mobility Services customer base. Finally, we believe that the number of our prepaid accounts has significantly declined over this period as a result of the increase in Brazil’s unemployment rate as our net additions of prepaid subscribers are closely correlated to movements in the unemployment rate. The market for mobile services is extremely competitive in each of the regions that we serve. As a result, (1) we incur selling expenses in connection with marketing and sales efforts designed to retain existing mobile customers and attract new mobile customers; and (2) from time to time the discounts that we offer in connection with our promotional activities lead to charges against our gross operating revenue from mobile services. Competitive pressures have required us to introduce service plans under which we offer unlimited voice calls tied to service offerings priced in relation to the amount of data usage offered. We have classified the operations related to the UPI Mobile Assets, which include our Personal Mobility Services, as discontinued operations for the year ended December 31, 2020, and we have revised our comparative statements of profit or loss, statements of comprehensive income and statements of cash flows for the years ended December 31, 2019 and 2018 accordingly. Effects of Expansion of FTTH Capacity We have engaged in a long-term capital expenditure project to upgrade portions of our fixed-line access networks with optical FTTH networks based on GPON technology to support our FTTH triple-play services. The implementation of this technology permits us to provide broadband with speeds up to 200 Mbps to residential customers and up to 1 Gbps to commercial customers. Our FTTH network has grown to reach more than 9.1 million homes passed in 134 municipalities as of December 31, 2020 compared to 4.6 million homes passed in 82 municipalities as of December 31, 2019. Subscriptions to our FTTH services have grown to approximately 2.1 homes connected as of December 31, 2020 from approximately 675,000 homes connected as of December 31, 2019. We expect to reach more than 14 million homes passed and an additional 1.5 million homes connected by the end of 2021. We expect that our FTTH network will be transferred to SPE InfraCo. Nevertheless, following the partial sale of UPI InfraCo, SPE InfraCo will become our associated company, and our fixed-line customers will continue to benefit from the expansion of SPE InfraCo’s FTTH capacity.
Seasonality Our primary business operations do not have material seasonal Recent Developments Sale of On December 11, 2020, following a hearing held in November 2020 in connection with a competitive bidding process carried out in accordance with the RJ Plan Amendment, the RJ Debtors executed a sale and purchase agreement, or the UPI Data Center SPA, to sell UPI Data Center to Titan Venture Capital e Investimentos Ltda., or Titan, for the amount of R$325 million. On March 12, 2021, after satisfying all contractual conditions precedent, the sale was completed, at which time all of the shares of SPE Data Center were transferred to Titan, which made a cash payment in the amount of R$250 million. The remaining amount is payable in installments in the form and terms provided for in the UPI Data Center SPA. Sale of UPI Towers On December 23, 2020, following a hearing held in November 2020 in connection with a competitive bidding process carried out in accordance with the RJ Plan Amendment, the RJ Debtors executed a sale and purchase agreement, or the UPI Towers SPA, to sell UPI Towers to Highline do Brasil II Infraestrutura de Telecomunicações S.A., or Highline, for the amount of approximately R$1.1 billion, subject to certain price adjustments as provided in the UPI Towers SPA. On March 30, 2021, after satisfying all contractual conditions precedent, the sale was completed, at which time all of the shares of SPE Towers were transferred to Highline, which made a cash payment in the amount of R$862 million. The remaining amount is subject to common price adjustments in the form and terms provided in the UPI Towers SPA. Sale of UPI Mobile Assets On January
Partial Sale of On February On April 12, 2021, RJ Debtors accepted a binding proposal from the InfraCo Prospective Buyers to purchase a portion of UPI InfraCo. Pursuant to the terms of the binding proposal, the InfraCo Prospective Buyers will acquire 57.9% of the voting and total capital stock of SPE InfraCo for
Consent Solicitation for 10.000%/12.000% Senior PIK Toggle Notes due 2025 On February 18, 2021, Oi announced that it was soliciting consents, or the The Proposed Amendments primarily seek to align certain provisions of the PIK Toggle Notes Indenture with the terms of RJ Plan Amendment in order to, among other things, increase the Company’s financial flexibility and operating efficiency, and include certain other changes as a result of discussion with holders of the PIK Toggle Notes. The Consent Solicitation expired at 5:00 p.m. (New York City time) on May 5, 2021, or the Expiration Date. As of the Expiration Date, the Company received consents from the holders of a majority in aggregate principal amount of the PIK Toggle Notes. Promptly following the Expiration Date, the Company, the guarantors party thereto and the
Results of Operations The following discussion of our results of operations is based on our audited consolidated financial statements prepared in accordance with IFRS. In the following discussion, references to increases or decreases in any period are made by comparison with the corresponding prior period, except as the context otherwise indicates. As a result of our decision to dispose of certain businesses and/or isolated assets in connection with the RJ Plan Amendment, we have revised our comparative statements of profit or loss, statements of comprehensive income and statements of cash flows for the years ended December 31, 2019 and 2018 and the corresponding notes thereto, in line with IFRS 5, which requires that an entity reclassify the disclosures related to all operations that have been discontinued as of the balance sheet date of the last reporting period presented. The effects of the reclassifications are set forth in note 31 to our audited consolidated financial statements included in this annual report. For additional information regarding our discontinued operations, see “Item 4. Information on the Company—V. Assets Held-For-Sale and Discontinued Operations.” Year Ended December 31, The following table sets forth the components of our consolidated income statement, as well as the percentage change from the prior year, for the years ended December 31,
Year ended December 31, 2020 2019 % Change (7,271) (7,983) 1,110 (484) (12,275) (5,377) 3,551 13 (10,535) (8,731) 7 (364) (10,528) (9,095) ______________ n.m. = not meaningful. Net Operating Revenue The following table sets forth the components of our net operating revenue from continuing operations, as well as the percentage change from the prior year, for the years ended December 31,
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Net operating revenue of our Telecommunications in Brazil segment declined by Net Operating Revenue from Residential Customer Services Net operating revenue from residential customer services represented Net Operating Revenue from Residential Fixed-Line Services Net operating revenue from residential fixed-line services declined by As we implement our fiber strategy and Net Operating Revenue from Broadband Services In the broadband services, our fiber strategy is even more noticeable. Net operating revenue from residential broadband services, which includes broadband services delivered through both our copper and fiber networks,
As of December 31, 2020, we had 1.9 million fiber RGUs that accounted for R$868 million of our net operating revenue As of December 31, 2020, our xDSL subscribers represented Net Operating Revenue from
Net operating revenue from B2B services represented
Operating Expenses Under the Brazilian Corporate Law, we are required to segregate cost of sales and services from operating expenses in the preparation of our statement of operations. However, in evaluating and managing our business, we prepare reports in which we review the elements included in cost of sales and services and operating expenses classified by nature, as presented in note 5 of our audited consolidated financial statements. We believe that this classification improves our ability to understand results and trends in our business and that financial analysts and other investors who review our performance rely on this classification in performing their own analysis. Therefore, we have presented the discussion below of our operating expenses based on the classification of operating expenses presented in note 5 of our audited consolidated financial statements. The following table sets forth the components of our operating expenses from continuing operations, as well as the percentage change from the prior year, for the years ended December 31, Year Ended December 31, 2020 2019 % Change 237 (1,225) 11,096 13,859 ______________ n.m. = not meaningful.
Operating expenses declined by
Depreciation and Amortization Depreciation and amortization costs Third-Party Services Third-party service costs declined by 9.9% during 2020, primarily as a result of our Impairment Losses (Reversals) During 2020, we performed an impairment test on our non-current assets under IAS 36 and recognized an impairment reversal of
Personnel Personnel expenses (including employee benefits and social charges and employee and management profit sharing) declined by Rental and Insurance Rental and insurance costs declined by 8.3% during 2020. This reduction was primarily due to contractual renegotiations that took place at the end of 2019, which resulted in lower rental costs during 2020. Network Maintenance Services Network maintenance services costs declined by
Advertising and Advertising and publicity expenses declined by 29.4% during 2020, primarily as a result of the confinement and social isolation measures imposed by the Brazilian government due to the COVID-19 pandemic, which Interconnection Interconnection costs declined by Provision for Contingencies Provision for contingencies declined by 35.8% during 2020, primarily as a result of the consistent declined in the number of lawsuits filed against us during 2020, which was due to our improved service quality, which was also reflected in the reduction of ANATEL complaints. Expected Losses on Trade Receivables Expected losses on trade receivables declined by 55.2% during 2020, primarily as a result of an improvement in collection actions and a reduction in delinquency across all products during the year, due to continuous improvements in sale and credit analysis processes. Handsets and Other Costs Handsets and other costs increased from R$1 during 2019 to R$10 during 2020, primarily due to the reduction in sales volume of handsets due to our policy of not subsidizing the sale of this product. Other Operating Expenses (Income), Net Other operating expenses, net was R$237 million during 2020, consisting primarily of non-recurring expenses primarily due to tax on revenue amounting to R$85 million and our expected losses on receivables from government customers of R$114 million. Other operating income, net was R$1,225 million during 2019, consisting primarily of the effects the accounting recognition during 2019 of R$1,518 million of PIS and COFINS credits as the result of a final and unappealable court decision permitting us to deduct ICMS from our tax base for the purposes of calculation PIS and COFINS and the recovery of previous overpayments of PIS and COFINS, the effects of which were partially offset by the derecognition during 2019 of R$167 million related to the reconciliation of tax credits and tax incentives from prior periods that we do not expect to be realized. Loss before Financial Income (Expenses), Net, and Taxes As a result of the foregoing, loss before financial income (expenses), net, and taxes of our Telecommunications in Brazil segment declined by 37.6% to R$2,030 million during 2020 from R$3,254 million during 2019. As a percentage of consolidated net operating revenue, loss before financial income (expenses), net, and taxes of our Telecommunications in Brazil segment was 21.9% during 2020 and loss before financial income (expenses), net, and taxes of our Telecommunications in Brazil segment was 31.0% during 2019.
Operating expenses of our other operations increased by 99.8% to R$1 million during 2020 from R$300 million during 2019. We recorded profit before financial income (expenses), net, and taxes of our other operations of R$218 million during 2020 compared to loss before financial income (expenses), net, and taxes of R$113 million during 2019. As a percentage of consolidated net operating revenue, profit (loss) before financial income (expenses), net, and taxes of our other operations was 2.4% during 2020 and (1.1)% during 2019. Our consolidated loss before financial income (expenses), net, and taxes declined by 46.2% to R$1,811 million during 2020 from R$3,367 million during 2019. As a percentage of consolidated net operating revenue, loss before financial income (expenses), net, and taxes was 19.5% during 2020 and 32.1% during 2019. Financial Expenses, Net Financial Income Financial income increased by 59.7%, or R$1,571 million, to R$4,202 million during 2020 from R$2,632 million during 2019, primarily due to an increase in monetary correction and foreign exchange differences on fair value adjustment of R$2,777 million, to R$3,160 million during 2020 from R$383 million during 2019, primarily as a result of the Financial Expenses Financial expenses increased by 105.7%, or R$8,469 million, to R$16,478 million during 2020 from R$8,009 million during 2019, as a result of:
The effects of
The effective tax rate applicable to our loss before taxes was 25.2% during 2020, resulting in a tax credit, primarily as a result of: (1) the tax effects of a valuation allowance for impairment losses on The effective tax rate applicable to our loss before taxes was 0.1% during 2019, resulting in a tax credit, primarily as a result of: (1) the tax effects of a valuation allowance for impairment losses on deferred tax assets that were recognized for the companies that as of December 31, 2019, do not expect to generate sufficient future taxable profits against which these tax assets could be offset, which resulted in a decline in our tax assets by R$2,474 million and reduced the effective tax rate applicable to our loss before taxes by 28.3 p.p.; (2) the tax effects of permanent add-backs, mostly as a result of the effects of the recognition of the amortization of deferred gains relating to the fair value adjustment due to the restructured liabilities after confirmation of the RJ Plan, which reduced the effective tax rate applicable to our loss before taxes by 2.0 p.p.; and (3) the tax effects of unrecognized deferred tax assets regarding foreign subsidiaries that are not eligible to recognize tax credits on tax loss carryforwards, which reduced the effective tax rate applicable to our loss before taxes by 3.5 p.p. Loss from Continuing Operations As a result of the foregoing, our loss from continuing operations declined by Profit (Loss) from Discontinued Operations, Net of Taxes Profit from discontinued operations, net of taxes, in 2020 consisted of profit from UPI Mobile Assets, UPI InfraCo, UPI TVCo and UPI Data Center in the amount of R$7 million. Loss from discontinued operations, net of taxes, in 2019 consisted of profit from UPI Mobile Assets, UPI InfraCo, UPI TVCo and UPI Data Center in the amount of R$364 million. Loss As a result of the foregoing, our consolidated loss increased by 15.8% to R$10,528 million during 2020 from R$9,095 million during 2019. As a percentage of net operating revenue, our consolidated loss was 113.4% during 2020 compared to 86.7% during 2019.
Year Ended December 31, 2019 Compared with Year Ended December 31, 2018 The following table sets forth the components of our consolidated income statement, as well as the percentage change from the prior year, for the years ended December 31, 2019 and 2018. Year ended December 31, 2019 2018 % Change (7,983) (9,168) (484) (4,419) (5,377) 26,691 13 3,292 (8,731) 23,220 (364) 1,396 (9,095) 24,616 ______________ n.m. = not meaningful.
Net Operating Revenue The following table sets forth the components of our net operating revenue from continuing operations, as well as the percentage change from the prior year, for the years ended December 31, 2019 and 2018.
______________ n.m. = not meaningful.
Net operating revenue of our Telecommunications in Brazil segment declined by 14.1% during 2019, principally due to a 10.1% decline in net operating revenue from B2B services and a 17.1% decline in net operating revenue from residential services. Net Operating Revenue from Residential Customer Services Net operating revenue from residential customer services represented 52.5% of our net operating revenue during 2019. Residential customer services include fixed telephony services, including voice services and data communication services (broadband). Net operating revenue from residential services declined by 17.1%, primarily due to our initiative to proactively reduce incentives for the sale of copper services, combined with the natural downward trend of these revenues. During 2019, we initiated our fiber strategy and directed efforts and investments to the execution of our fiber expansion plan.
Net Operating Revenue from Residential Fixed-Line Services Net operating revenue from residential fixed-line services declined by 21.3% during 2019, primarily due to a 15.4% decline in the number of residential fixed lines in service to 7.0 million as of December 31, 2019 from 8.3 million as of December 31, 2018, as a result of the general trend in the Brazilian telecommunications industry to substitute mobile services in place of local fixed-line services and the corresponding reduction in voice service traffic. The effects of these factors were partially offset by the migration of our fixed-line customer base to convergent service offerings and other plans offering unlimited minutes of usage, which generate greater revenue per user. As of December 31, 2019, we had 523,000 fiber RGUs that accounted for R$54 million of our net operating revenue from residential fixed-line services and 6.5 million copper voice RGUs that accounted for R$3,271 million of our net operating revenue from residential fixed-line services. As of December 31, 2018, we had 44,000 fiber RGUs that accounted for R$2 million of our net operating revenue from residential fixed-line services and 8.2 million copper voice RGUs that accounted for R$4,222 million of our net operating revenue from residential fixed-line services. During 2019, fiber was still an incipient process and was not a relevant substitute for copper in our residential fixed line services. Net Operating Revenue from Broadband Services Net operating revenue from residential broadband services, which includes broadband services delivered through both our copper and fiber networks, declined by 9.8% during 2019, primarily as a result of (1) a As of December 31, 2019, As of December 31, 2019, our xDSL subscribers represented 60.0% of our total residential fixed lines in service and subscribed to plans with an average speed of 33.3 Mbps as compared to Net Operating Revenue from B2B Services Net operating revenue from B2B services represented 42.3% of our net operating revenue during 2019. B2B services include corporate solutions offered to our small, medium-sized, large corporate customers, including voice services and corporate data solutions, and certain wholesale customers. Net operating revenue from B2B services declined by 10.1%, primarily as a result of (1) lower voice traffic, following the natural market trend, (2) the reduction in MTR tariffs and VC fixed-to-mobile tariffs in February 2019 and February 2018, and (3) the slow recovery of Brazilian economic activity, which has led to efforts by corporate and government customers to reduce costs, including telecommunications services costs, and has led to the downsizing or closing of many of our SME customers.
Operating Expenses Under the Brazilian Corporate Law, we are required to segregate cost of sales and services from operating expenses in the preparation of our statement of operations. However, in evaluating and managing our business, we prepare reports in which we review the elements included in cost of sales and services and operating expenses classified by nature, as presented in note 5 of our audited consolidated financial statements. We believe that this classification improves our ability to understand results and trends in our business and that financial analysts and other investors who review our performance rely on this classification in performing their own analysis. Therefore, we have presented the discussion below of our operating expenses based on the classification of operating expenses presented in note 5 of our audited consolidated financial statements. The following table sets forth the components of our operating expenses from continuing operations, as well as the percentage change from the prior year, for the years ended December 31, 2019 and 2018. Year Ended December 31, 2019 2018 % Change (1,225) 5,016 13,859 18,974 ______________ n.m. = not meaningful. Operating expenses declined by 27.0% during 2019, principally due to (1) a decline in other operating expenses (income), net to an income of R$1,225 million during 2019 from a expenses of R$5,016 million during 2018, and (2) a 38.5%, or R$1,010 million, decline in rental and insurance costs to R$1,616 million during 2019 from R$2,626 million during 2018. The effects of these factors was partially offset by (1) an increase in impairment losses to R$2,111 million during 2019 from R$292 million during 2018, and (2) a 13.1% increase in depreciation and amortization expenses to R$4,538 million during 2019 from R$4.014 million during 2018.
Third-Party Services Third-party service costs increased by 1.3% during 2019, primarily as a result of increased selling expenses due to the intensification of our
Impairment Losses We recorded impairment losses of R$2,111 million during 2019 as a result of our testing of ournon-current assets for impairment under IAS 36 as of December 31, 2019, primarily due to (1) the revision of our strategic plan, focused on improving operating and financial performance, using a sustainable business model that is designed to maximize the Company’s value in the context of our judicial reorganization; and (2) increased market competitiveness, mainly in the residential market, which accelerated the decline in the revenues from fixed-line services and DTH services. This impairment loss was fully allocated to the carrying value of our regulatory licenses. We recorded impairment losses of R$292 million during 2018, consisting of a supplementary adjustment to the recognized allowance for impairment losses related to expected future profitability of assets with finite useful lives. Personnel Personnel expenses (including employee benefits and social charges and employee and management profit sharing) declined by 5.4% during 2019, principally due to gains in operational efficiency and increased productivity. Rental and Insurance Rental and insurance costs declined by 38.5% during 2019, primarily as a result of our implementation of IFRS 16 on January 1, 2019, which resulted in a declined in lease expenses during 2019. Network Maintenance Services Network maintenance services costs declined by 13.0% during 2019, primarily as a result of (1) lower maintenance costs related to payphones following the approval of the PGMU, (2) the successful renegotiation of some of our maintenance contracts, and (3) a lower number of maintenance incidents as a result of our initiatives focused on preventive actions and productivity improvements, which have been increasing the efficiency of field operations, as well as efficiency gains arising from the digitalization of processes and customer service. Advertising and Publicity Advertising and publicity expenses increased by 35.3% during 2019, primarily as a result of an intensification of our advertising campaigns, particularly for our FTTH services. Expected Losses on Trade Receivables Expected losses on trade receivables declined by 25.6% during 2019, primarily as a result of a reduction in our level of customer defaults, particularly in our B2B business. Provision for Contingencies Provision for contingencies increased by 6.5% during 2019, primarily as a result of our revision of the methodology used to calculate the provisions for losses in labor lawsuits and civil lawsuits related to the financial interest agreements described under “Item 8. Financial Information—Legal Proceedings—Civil Claims Relating to Oi S.A. and Our Brazilian Operations—Financial Interest Agreements (PEX and PCT)” due to the revisions to our estimate model as a result of the history of terminations of lawsuits under the RJ Plan and our increased accumulated experience with estimating these losses. Interconnection Interconnection costs declined by 32.4% during 2019, primarily as a result of the declines in MTR tariffs and the TU-RL and TU-RIU interconnection tariffs that were implemented in February 2019 and February 2018, the effects of which were partially offset by an increase in interconnection traffic.
Taxes and Other Taxes and other Handsets and Other Costs Handsets and other costs increased by R$1 million during 2019, primarily due to the reduction in sales volume of handsets due to our policy of not subsidizing the sale of this product. Other Operating Other operating Other operating expenses, net was R$5,016 million during 2018 consisting primarily of (1) the recognition of R$4,884 million of expenses for provisions related to the recognition of onerous contract for the supply of submarine cable capacity, and (2) the recognition of R$109 million of revenue from the reversal of a provision for contingencies due to the reprocessing of the provision estimate model considering the new profile for closing the lawsuits in a new context after approval and ratification of the RJ Plan.
As a result of the foregoing, loss before financial income (expenses), net, and taxes of our Telecommunications in Brazil segment Operating expenses of our other operations increased by 6.1% to R$300 million during 2019 from R$283 million during 2018. Our consolidated Financial Expenses, Net Financial Income Financial income declined by
The effects of these factors was partially offset by our recording interest and Financial Expenses Financial expenses increased by
The effects of these factors were partially offset primarily by a 74.3%, or R$1,854 million, decline in inflation and exchange Income Tax and Social Contribution The composite corporate statutory income tax and social contribution rate was 34% during 2019 and 2018. We recorded an income tax and social contribution expense of R$
The effective tax rate applicable to our loss before taxes was The effective tax rate applicable to our income before taxes was Profit (Loss) from Continuing Operations As a result of the foregoing, we recorded loss from continuing operations of R$8,731 million during 2019 compared to profit from continuing operations of R$23,220 million during 2018. As a percentage of net operating revenue, our loss from continuing operations was 83.2% during 2019 compared to profit of 190.2% during 2018. Profit (Loss) from Discontinued Operations, Net of Taxes Loss from discontinued operations, net of taxes, in 2019 consisted of profit from UPI Mobile Assets, UPI InfraCo, UPI TVCo and UPI Data Center in the amount of R$364 million. Profit from discontinued operations, net of taxes, in 2018 consisted of profit from UPI Mobile Assets, UPI InfraCo, UPI TVCo and UPI Data Center in the amount of R$1,396 million. Profit (Loss) As a result of the foregoing, we recorded consolidated loss of R$9,095 million during 2019 compared to consolidated profit of R$24,616 million 2018. As a percentage of net operating revenue, our loss was
Liquidity and Capital Resources Our principal cash requirements have historically consisted of the following:
·capital expenditures related to investments in operations, expansion of our networks and enhancements of the technical capabilities and capacity of our networks; and ·dividends on our shares, including in the form of interest attributable to shareholders’ equity. Under ourby-laws, unless our board of directors deems it inconsistent with our financial position, payment of dividends is mandatory. Notwithstanding the requirements of ourby-laws, under Section 10.1 of the RJ Plan, Oi and the other RJ Debtors are prohibited from declaring or paying dividends, interest on shareholders’ equity or other forms of return on capital or making any other payment or distribution on or related to their shares (including any payment related to a merger or consolidation) until the sixth anniversary of the date of the Brazilian Confirmation Date. After the sixth anniversary of the Brazilian Confirmation Date, Oi and the other RJ Debtors will be permitted to declare or pay dividends, interest on shareholders’ equity or other forms of return on capital or make any other payment or distribution on or related to their shares (including any payment related to a merger or consolidation) if the ratio of Oi’s consolidated net debt (defined as Financial Credits, minus Cash Balance (in each case as defined in the RJ Plan)) to EBITDA (as defined in the RJ Plan) for the fiscal year ended immediately prior to any such declaration or payment is less than or equal to 2 to 1. The restrictions of the payment of dividends and other distributions described in this paragraph are subject to certain exceptions, as described under “Item 8. Financial Information—Dividends and Dividend Policy.” The restrictions of the payment of dividends and other distributions described above are subject to the following exceptions: ·dividends, return on capital or other distributions made between the RJ Debtors;; ·payments by Oi and the other RJ Debtors to dissenting shareholders, according to applicable law, carried out after the Brazilian Confirmation Date; and ·any payment of dividends made in accordance with the RJ Plan. There shall not be any restriction to the distribution of dividends under the RJ Plan after the full payment of the Financial Credits. Pursuant to Section 10.2.1 of the RJ Plan, if at any time any two of Standard & Poor’s, Moody’s and Fitch rate Oi as investment grade and no default occurs, the restrictions on distributions imposed by Section 10.1 of the RJ Plan will be suspended. However, if one of these rating agencies, or both of them, subsequently cancels or downgrades Oi’s rating, then the suspended restrictions will be reinstated. Our principal sources of liquidity have traditionally consisted of the following: ·cash flows from operating activities; ·short-term and long-term loans; and ·sales of debt securities in domestic and international capital markets.
As a result of the commencement of our RJ Proceedings in June 2016, our access to short-term and long-term loans and our ability to sell debt securities in domestic and international capital markets was substantially curtailed. However, in February 2020, we returned to the domestic capital markets with the subscription of an aggregate amount of R$2,500 million of Oi Mobile’snon-convertible debentures. Furthermore, on February 18, 2021, SPE InfraCo launched a private offering of secured convertible debentures, or the InfraCo Debentures, in the total amount of up to R$2,500 million. Our capital expenditures from continuing operations As of December 31,
We anticipate that we will be required to spend approximately R$ The RJ Plan permits us to seek to borrow up to R$2 billion under new export credit facilities. In the absence of funds obtained under new credit export facilities and from additionalnon-core asset sales, we may have insufficient funds to implement our capital expenditure program and modernize our infrastructure, which could result in a significant deterioration of our ability to generate cash flows from operating activities. We have prepared our audited consolidated financial statements under the assumption that we will continue as a going concern and in compliance with the legal requirements applicable to a judicial reorganization.
Cash Flow The following table sets forth certain information about our consolidated cash flows for the years ended December 31, 2020, 2019
Our primary source of operating funds has historically been cash flow generated from our operations, and we have financed our investments in property, plant and equipment through the use of bank loans, vendor financing, capital markets and other forms of financing. Our access to new funds to finance our investments in property, plant and equipment in the form of bank loans, vendor financing, capital markets and other forms of financing was substantially curtailed following the commencement of our RJ Proceedings in June 2016. However, in February 2020, we returned to the domestic capital markets with the Cash Flows for the Year Ended December 31, 2020 Cash Flows Provided by Operating Activities Net cash Net cash provided by operating activities from continuing operations was R$787 million during the year ended December 31, 2020, primarily as a result of: (1) the effects of our Net cash provided by operating activities from discontinued operations was R$3,619 million during Cash Flows Used in Investing Activities Net cash used in investing activities was R$3,144 million during the year ended December 31, 2020.
Net cash provided by investing activities from continuing operations was R$1,098 million during the year ended December 31, 2020, primarily consisting of: (1) our receipt of R$4,132 million in cash from the sale on January 24, 2020 by Africatel of all of its shares in PT Ventures; and Net cash used in investing activities Cash Flows Provided by Financing Activities Financing activities provided net cash of R$800 million during the year ended December 31, 2020. Financing activities from continuing operations provided net cash of R$1,677 million during the year ended December 31, 2020, primarily consisting of the R$2,486 million net proceeds of the issuance of Oi Mobile’s non-convertible debentures, the effects of which were partially offset by our incurrence of R$597 million of lease financing costs. Financing activities from discontinued operations used net cash of R$877 million during the year ended December 31, 2020. Cash Flows for the Year Ended December 31, 2019 Cash Flows Provided by Operating Activities Net cash provided by operating activities was R$ Net cash used in operating activities from continuing operations was R$2,168 million during the year ended December 31, 2019, Net cash provided by operating activities from discontinued operations was R$4,358 million during the year ended December 31, 2019. Cash Flows Used in Investing Activities Net cash used Net cash used in investing activities from continuing operations was R$3,580 million during the year ended December 31, 2019, primarily consisting of investments of R$ Net cash used in investing activities from discontinued operations was R$3,270 million
Cash Flows Provided by Financing Activities Financing activities provided net cash of R$ Financing activities from continuing operations provided net cash of R$3,306 million during the year ended December 31, 2019, primarily consisting of the R$4,000 million proceeds of our issuance and sale of 3,225,806,451 Financing activities from discontinued operations used net cash of R$949 million during the year ended December 31, 2019. Cash Flows for the Year Ended December 31, 2018 Cash Flows Provided by Operating Activities Net cash provided by operating activities was R$2,863 million during the year ended December 31, 2018. Net cash used in operating activities from continuing operations was R$655 million during the year ended December 31, 2018, The effects of these factors were partially offset Net cash provided by operating activities from discontinued operations was R$3,518 million during the year ended December 31, 2018. Cash Flows Used in Investing Activities Net cash used Net cash used in investing activities from continuing operations was R$3,328 million during the year ended December 31, 2018, primarily consisting of investments of R$ Net cash used in investing activities from discontinued operations was R$1,689 million during the year ended December 31, 2018. Cash Flows Used in Financing Activities Financing activities used net cash of R$424 million during the year ended December 31, 2018, primarily consisting of cash
Contractual Commitments The following table summarizes our significant contractual obligations and commitments as of December 31,
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We are also subject to contingencies with respect to tax, civil, labor and other claims and have made provisions for accrued liability for legal proceedings related to certain tax, civil, labor and other claims of R$ Indebtedness On a consolidated basis as of December 31,
Short-Term Indebtedness As of December 31, Long-Term Indebtedness Our principal long-term borrowings and financings are:
Our debt instruments with BNDES require that Oi complies with financial covenants relating to the maintenance of the following ratios on a quarterly basis:
Under these debt instruments, BNDES has the right to accelerate the debt if, at the date the financial covenants are tested, we are not in compliance with any two of these ratios.
The cross-default or cross-acceleration clauses instruments governing our other indebtedness (other than Oi Mobile’snon-convertible debentures) provide that an event of default under our debt instruments with BNDES do not trigger an event of default under our other indebtedness or enable the creditors under other indebtedness to accelerate that indebtedness. At December 31, Some of our debt instruments require that Oi or Telemar comply with financial covenants on a quarterly basis. As of December 31, The table below sets forth our long-term borrowings and financings as of December 31,
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| (1) | Represents four Restructured Export Credit Agreements. |
The following discussion briefly describes certain of our significant outstanding indebtedness.
PIK Toggle Notes
The PIK Toggle Notes are senior unsecured obligations of Oi denominated in U.S. dollars that mature in July 2025, with the principal amount to be fully paid at maturity. The PIK Toggle Notes are guaranteed, jointly and severally, by each of Telemar, Oi Mobile, Oi Coop and PTIF. The PIK Toggle Notes accrued and will accrue interest from February 5, 2018 until AugustFebruary 5, 2020 at a fixed rate of 10.0% per annum, payable in cash. Interest on the PIK Toggle Notes will thereafter accrue as follows:
from August
| · | from February 5, 2020 until August 5, 2021, at either (at the sole discretion of Oi): (1) a fixed rate of 10.0% per annum payable in cash on a semi-annual basis, or (2) a fixed rate of 12.0% per annum, of which 8.0% shall be payable in cash and 4.0% shall be payable by either increasing the principal amount of the outstanding PIK Toggle Notes or by issuing paid-in-kind notes, at the sole discretion of Oi, in each case, on a semi-annual basis; and |
| · | thereafter, at a fixed rate of 10.0% per annum payable in cash on a semi-annual basis. |
Consent Solicitation for 10.000%/12.000% Senior PIK Toggle Notes due 2025
On February 18, 2021, Oi announced that it was soliciting consents, or the Consent Solicitation, from holders of its PIK Toggle Notes for the adoption of certain proposed amendments, or the Proposed Amendments, to the indenture governing the PIK Toggle Notes, dated as of July 27, 2018, or the PIK Toggle Notes Indenture.
The Proposed Amendments primarily seek to align certain provisions of the PIK Toggle Notes Indenture with the terms of RJ Plan Amendment in order to, among other things, increase the Company’s financial flexibility and operating efficiency, and include certain other changes as a result of discussion with holders of the PIK Toggle Notes. The Consent Solicitation expired at 5:00 p.m. (New York City time) on May 5, 2021, or the Expiration Date. As of the Expiration Date, the Company received consents from the holders of a majority in aggregate principal amount of the outstandingPIK Toggle Notes. Promptly following the Expiration Date, the Company, the guarantors party thereto and the trustee executed the first supplemental indenture to the PIK Toggle Notes or by issuingpaid-in-kind notes, atIndenture to implement the sole discretion of Oi, in each case, on a semi-annual basis; andProposed Amendments.
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thereafter, at a fixed rate of 10.0% per annum payable in cash on a semi-annual basis.
Oi 12th Issuance of Debentures
Oi has issued its 12th issuance of simple, unsecured,non-convertible debentures. These debentures are denominated in reais. The principal amount of these debentures will be paid in 24 semi-annual installments beginning in August 2023, in the amount of 2.0% of the outstanding principal for the first 10 semi-annual installments, 5.7% of the outstanding principal for the next 13 semi-annual installments and the remainder at maturity in February 2035. The principal amount of these debentures will accrue interest at the rate of 80% of the CDI rate. Interest will be capitalized to increase the principal balance under these debentures on an annual basis until February 2023, and will be paid semi-annually in cash from August 2023 through the final maturity. Oi’s obligations under these debentures are guaranteed, jointly and severally, by each of Telemar, Oi Mobile, Oi Coop and PTIF.
Telemar 6th Issuance of Debentures
Telemar has issued its 6th issuance, simple, unsecured,non-convertible debentures. These debentures are denominated inreais. The principal amount of these debentures will be paid in 24 semi-annual installments beginning in August 2023, in the amount of 2.0% of the outstanding principal for the first 10 semi-annual installments, 5.7% of the outstanding principal for the next 13 semi-annual installments and the remainder at maturity in February 2035. The principal amount of these debentures will accrue interest at the rate of 80% of the CDI rate. Interest will be capitalized to increase the principal balance under these debentures on an annual basis until February 2023, and will be paid semi-annually in cash from August 2023 through the final maturity. Telemar’s obligations under these debentures are guaranteed, jointly and severally, by each of Oi, Telemar, Oi Mobile, Oi Coop and PTIF.
Oi Mobile Debentures
In February 2020, an investor subscribed for an aggregate amount of R$2,500 million of Oi Mobile’s non-convertible secured debentures, or the Oi Mobile Debentures. The Oi Mobile Debentures are guaranteed by Oi and Telemar and are secured by a pledge of cash flows from our receivables in an amount up to R$200 million per month and a first-priority lien on our right to use mobile frequencies. The Oi Mobile Debentures mature in January 2022 in the event that we raise more than R$5 billion from our divestments by July 31, 2020, and will amortize at a rate of R$100 million per month beginning in August 2020 through January 2022 in the event that we do not achieve this divestment target. The Oi Mobile Debentures bear PIK interest, capitalized monthly, through January 2021 at a rate of 12.66% per annum based on the daily U.S. dollar equivalent principal amount determined in accordance with the daily exchange rate between the U.S. dollar and the Brazilian real, and interest at a rate of 13.61% per annum, payable in cash, thereafter.
Restructured Export Credit Agreements
Oi has entered into one export credit agreement and Telemar has entered into three separate export credit agreements, which we refer to collectively as the Restructured Export Credit Agreements, documenting the recoveries due to the lenders under our novated export credit agreements. The obligations under the Restructured Export Credit Agreements are senior unsecured obligations of Oi and Telemar, respectively, denominated in U.S. dollars that mature in February 2035. Principal under each of the Restructured Export Credit Agreements is payable in 24 semi-annual installments beginning in the August 2023, in the amount of 2.0% of the principal amount for the first 10 semi-annual installments, 5.7% of the principal amount for the next 13 semi-annual installments and the remainder at maturity. Principal under each of the Restructured Export Credit Agreements accrues interest at the rate of 1.75% per annum. Interest will be capitalized on an annual basis until February 2023, and will be paid semi-annually in cash from August 2023 through the final maturity. Oi’s obligations under its Restructured Export Credit Agreement are guaranteed, jointly and severally, by each of Telemar and Oi Mobile, and Telemar’s obligations under its Restructured Export Credit Agreements are guaranteed, jointly and severally, by each of Oi and Oi Mobile.
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Restructured BNDES Credit Agreements
By operation of the RJ Plan and the Brazilian Confirmation Order, the credit agreements between BNDES and each of Oi, Telemar and Oi Mobile were novated and BNDES is entitled to receive as recovery for its claims under these credit facilities payment of 100% of the principal amount of the recognized claims inreais, adjusted by the interest/inflation adjustment rate. The principal amount of these claims will be paid in 108 monthly installments beginning in March 2024, in the amount of 0.33% of the outstanding principal for the first 60 monthly installments, 1.67% of the outstanding principal for the next 47 monthly installments and the remainder at maturity in February 2033. The principal amount of these claims accrue interest at the TJLP rate plus 2.946372%per annum. Interest will be capitalized to increase the principal balance under these claims on an annual basis until February 2022, and will be paid monthly in cash thereafter through the final maturity.
Restructured Brazilian Credit Agreements and CRIs
By operation of the RJ Plan and the Brazilian Confirmation Order, provided that Telemar’s unsecured line of credit and our obligations under CRIs backed by receivables representing all payments under leases entered into by Oi and Telemar of real estate owned by Copart 4 and Copart 5 were novated and the creditors under this unsecured line of credit and the holders of the CRIs are entitled to receive as recovery for their claims under these instruments payment of 100% of the principal amount of the recognized claims inreais, payable in 24 semi-annual installments beginning in August 2023, in the amount of 2.0% of the recognized claims for the first 10 semi-annual installments, 5.7% of the recognized claims for the next 13 semi-annual installments and the remainder at maturity in February 2035. The recognized amount of these claims accrue interest at the rate of 80% of the CDI rate. Interest will be capitalized to increase the recognized amount of these claims on an annual basis until February 2023, and will be paid semi-annually in cash from August 2023 through the final maturity.
Non-Qualified Credit Agreement
TheNon-Qualified Credit Agreement is a credit agreement 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). The obligations of Oi under theNon-Qualified Credit Agreement are guaranteed, jointly and severally, by each of Telemar, Oi Mobile, Oi Coop, and PTIF. Principal under theNon-Qualified Credit Agreement will be paid in 12 semiannual installments beginning in August 2024 in the amount of 4% of the outstanding principal for the first six semi-annual installments, 12.66% of the outstanding principal for the next five semi-annual installments and the remainder at maturity in February 2030. TheNon-Qualified Credit Agreement accrues interest at the rate of 6% per annum. Interest will be capitalized to increase the principal balance under theNon-Qualified Credit Agreement on an annual basis until February 2023, and will be paid together with the principal beginning in August 2024.
Default Recovery
Under the RJ Plan, certain of our creditors were entitled to elect forms of recovery other than the Default Recovery between February 5, 2018 and February 26, 2018. Creditors entitled to make these elections that elected the Default Recovery or failed to make the election are entitled to the Default Recovery with respect to their recognized claims. Holders of Defaulted Bonds that were not eligible to make an election with respect to the form of recovery on their claims are entitled to the Default Recovery with respect to their recognized claims.
Under the RJ Plan, the Default Recovery consists of an unsecured right to receive payment of 100% of the principal amount of the recognized claims represented by:
| · | Defaulted Bonds issued by Oi or Oi Coop in five annual, equal installments, commencing on July 22, 2038; |
| · | Defaulted Bonds issued by PTIF in five annual, equal installments, commencing on June 19, 2038; and |
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Defaulted Bonds issued by Oi or Oi Coop in five annual, equal installments, commencing on July 22, 2038;
Defaulted Bonds issued by PTIF in five annual, equal installments, commencing on June 19, 2038; and
Credits the holders of which were entitled to make recovery elections (other than the Defaulted Bonds), in five annual, equal installments, commencing on February 5, 2038, which, in each case, we refer to as the Default Recovery Entitlement.
| · | Credits the holders of which were entitled to make recovery elections (other than the Defaulted Bonds), in five annual, equal installments, commencing on February 5, 2038, which, in each case, we refer to as the Default Recovery Entitlement. |
A holder’s Default Recovery Entitlement is denominated in the currency of the recognized claim with respect to which the Default Recovery Entitlement relates. The Default Recovery Entitlement with respect to Defaulted Bonds denominated in U.S. dollars or euros, as well as the Default Recovery Entitlement for other credits denominated in U.S. dollars, will not bear any interest. The Default Recovery Entitlement with respect to Oi’s 9.75% senior notes due 2016 and other credits denominated inreais will bear interest at the Brazilian TR rate (payable together with the last installment of principal), which will accrue as additional principal amount of the Default Recovery Entitlement until July 22, 2038 (in the case of Oi’s 9.75% senior notes due 2016) or February 5, 2038 (with respect to other credits denominated inreais) and thereafter be payable together with payments of principal amount of the Default Recovery Entitlement. The principal and accrued interest with respect to the Default Recovery Entitlement may be redeemed at any time and from time to time, in whole or in part, by the RJ Debtors at a redemption price of 15% of the aggregate principal amount of the Default Recovery Entitlement.
Off-Balance Sheet Arrangements
As of the date of this annual report, we do not have any transactions involvingoff-balance sheet arrangements.
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| ITEM 6. | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES |
Oi’s board of directors (conselho de administração) and Oi’s board of executive officers(diretoria) are responsible for operating our business.
Board of Directors
General
Oi’s board of directors is a decision-making body responsible for, among other things, determining policies and guidelines for our business and Oi’s wholly-owned subsidiaries and controlled companies. Oi’s board of directors also supervises Oi’s board of executive officers and monitors its implementation of the policies and guidelines that are established from time to time by the board of directors. Under the Brazilian Corporate Law, Oi’s board of directors is also responsible for hiring independent accountants.
Oi’sby-laws provide for a board of directors of up to 11 members with no alternate members. Members who are absent at meetings will be entitled to appoint a substitute among the present members to vote in their stead. Pursuant to Oi’sby-laws, at least 20% of the members of the Oi’s board of directors must be independent as defined in the listing regulations of theNovo Mercado segment of the B3 and must be expressly declared as independent in the shareholders’ meeting that elects them, being also considered as independent the members elected as per article 141, paragraphs 4 and 5 of the Brazilian Corporate Law. All of the members of Oi’s board of directors are independent.
Directors are elected at general meetings of shareholders fortwo-year terms and are eligible for reelection. The terms of the members of Oi’s board of directors expire at the annual shareholders’ meeting in 2023. Generally, members of Oi’s board of directors are subject to removal at any time with or without cause at a general meeting of shareholders. The RJ Plan, however, provides certain corporate governance rules that apply to Oi’s board of directors during the effectiveness of the RJ Plan, superseding the provisions of Oi’sby-laws. As provided in the RJ Plan, until the expiration of the term of Oi’s current board of directors, which will occur on September 17, 2020, the members of Oi’s board of directors may not be removed from office, except due to gross mistake, willful misconduct, gross negligence, abuse of term of office or violation of fiduciary duties in accordance with applicable law. Following the expiration of the term of Oi’s current board of directors, the election of subsequent boards of directors will follow the rules established by Oi’sby-laws and the Brazilian Corporate Law. Oi’sby-laws do not contain any citizenship or residency requirements for members of Oi’s board of directors. However, a member’s tenure is conditioned on the appointment of a representative who resides in Brazil, with powers to receive service of process in proceedings initiated against such member based on the corporate legislation, by means of apower-of-attorney with a term of at least three years after the end of such member’s term of office.
Oi’s board of directors is presided over by the chairman of the board of directors and, in his or her absence, on an interim basis, by the vice-chairman of the board of directors and, in his or her absence, on an interim basis, by another member appointed by the chairman or, if no such member has been appointed, by another member appointed by the other members in attendance. Pursuant to Oi’sby-laws, the chairman and vice-chairman of Oi’s board of directors are elected by the members of the Oi’s board of directors during their first meeting following their election. Oi’sby-laws provide that the positions of chairman of Oi’s board of directors and Oi’s chief executive officer or principal executive may not be held by the same person.
The following table sets forth certain information with respect to the current members of Oi’s board of directors.
Name | Position | Member Since | Age | |||||
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Eleazar de Carvalho Filho | Chairman | January 2018 | 63 | |||||
Marcos Grodetzky | Vice-Chairman | January 2018 | 64 | |||||
Henrique José Fernandes Luz | Director | September 2018 | 65 | |||||
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Maria Helena dos Santos Fernandes de Santana | Director | September 2018 | 61 | |||||
Paulino do Rego Barros Jr. | Director | September 2018 | 64 | |||||
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Roger Solé Rafols | Director | December 2018 | 47 | |||||
Claudia Quintella Woods | Director | March 2020 | 45 | |||||
Armando Lins | Netto (1) | Director | March 2020 | 52 | ||||
| Luis Maria Viana Palha da Silva (2) | Director | October 2020 | 65 | |||||
| Mateus Affonso Bandeira (2) | Director | October 2020 | 51 | |||||
| Raphael Manhães Martins | Member | April 2021 | 38 | |||||
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| (1) | Mr. Netto’s tenure became effective on June 3, 2020. |
| (2) | Mr. Silva’s and Mr. Bandeira’s tenures became effective on January 20, 2021. |
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We summarize below the business experience, areas of expertise and principal outside business interests of Oi’s directors.
Directors
Eleazar de Carvalho Filho. Mr. Carvalho has served as the chairman of Oi’s board of directors since September 2018 and a member of Oi’s board of directors since January 2018. Mr. Carvalho works atHe is a founding partner of Virtus BR Partners where he is a- an independent financial consulting company - and Sinfonia Capital. Before founding partner. Mr. Carvalho also has served as a member of the board of directors at BrookfieldVirtus BR Partners, Renewables L.P., TechnipFMCEleazar was partner and Companhia Brasileira de Distribuição (Grupo Pão de Açúcar / Cnova N.V.). He is also chairman of the board of trustees of the Brazilian Symphony Orchestra Foundation. Previously, Mr. Carvalho was CEO of Unibanco Banco de Investimento,Investment Bank, President of BNDES, and CEO of UBS Brasil. HePreviously, Eleazar was head ofresponsible for the corporate financeCorporate Finance division of Banco Garantia inat the Rio de Janeiro directoroffice, Director and treasurerTreasurer of Alcoa Alumínio, and directorDirector of the international area of Crefisul (Citigroup). Mr. CarvalhoEleazar has extensive experience as a director of largemajor listed companies listed in Brazil and abroad. Heabroad, and was a member of the boards of directors ofBrookfield Renewable Partners L.P, Tele Norte Leste Participações, S.A, Petrobras, Companhia Vale do Rio Doce, Eletrobrás, Alpargatas, among others, and was also PresidentChairman of BHP Billiton Brasil.Brazil. Eleazar is currently a director at Brookfield Renewable Corporation, TechnipFMC plc and the Companhia Brasileira de Distribuição (Pão de Açúcar/Cnova N.V. Group). He holdsis also the president of the Brazilian Symphony Orchestra Foundation’s curator council. Eleazar has a bachelor’s degree in economicsEconomics from New York University, andwith a Master’s degreeDegree in international relationsInternational Relations from The Johns Hopkins University.
Marcos Grodetzky. Mr. Grodetzky has served as the vice-chairman of Oi’s board of directors since September 2018 and a member of Oi’s board of directors since January 2018. Previously, he served as an alternate member of Oi’s board of directors from September 2015 until July 2016 and as a member of Oi’s board of directors from July 2016 until September 2016. Mr. Grodetzky is an independent member of the board of directors of Constellation Oil Services Vicunha Aços and ElizabethCellera Farmacêutica S.A. Indústria Textil, and Chairman of the Board of Directors of Burger King Brasil. He is the founding partner of Mediator Assessoria Empresarial, engageda company that, since 2011, acts with mediation between companies and shareholders, in addition to offering strategic and financial advisory and mediation.consulting services. Until October 2013, Mr. Grodetzky served as CEOwas Executive Chairman of DGB S.A., a logistics holding company ofbelonging to Grupo Abril S.A. and parent company of the following companies: Dinap – Dist.Distribuidora– Nacional de Publicações, Magazine Express Comercial Imp e Exp de Revistas, Entrega Fácil Logística Integrada, FC Comercial e Distribuidora, Treelog S.A. – Logística e Distribuição, DGB Logística e Distribuição Geográfica, and TEX Courier (Total Express). In addition,From 2002 to 2011, he served aswas vice president of finance and investor relations vice-president offor Telemar/Oi, Aracruz Celulose/Fibria and Cielo S.A from 2002 until 2010.S.A. He holdsworked for 25 years in the Corporate, Investment Bank and International Banking areas at Citibank, Nacional, Unibanco, Safra and HSBC. He has a bachelor’s degree in economicsEconomics from Universidadethe Federal doUniversity of Rio de Janeiro in 1978 and attendedparticipated in the Senior Management Program at INSEAD/FDC.of INSEAD /FDC in 1993.
Henrique José Fernandes Luz. Mr. Fernandes Luz has served as a member of Oi’s boardthe Boards of directors since September 2018. He has been a member of the board of directors of the Maringá Group and a member of the board of directorsDirectors of Burger King do Brasil.Brasil, Maringá Group (composed of closed companies from the steel and energy sectors), Oi S.A. and IRB RE. Mr. Fernandes Luz serves as chairman of the board of the Brazilian Institute of Corporate Governance (Instituto Brasileiro de Governança Corporativa – IBGC). He was a partner of PricewaterhouseCoopers Auditores Independentes from 1988 to 2018, having previously worked various positions in that firm since 1975.a 43 year career until 2018. He holds a degree in Accounting Science in 1978 from Universidade Candido Mendes inthe School of Political and Economic Sciences of Rio de Janeiro and(Candido Mendes University Ensemble), attended variousseveral courses and executive programs at Harvard, University of Virginia,Darden, London (Ontario) Business School, University ofUniversidad de Buenos Aires and Singularity University. He also serves as a vice chairmanVice President of the boardBoard of IBEF—Instituto Brasileiro de Executivos de Finanças andSão Paulo’s Modern Art Museum. He is a member of Thethe boards of the Dorina Nowill Foundation for the Blind, and as board member of Thethe National ChildrenChildren’s and Youth Book Foundation and the Modern Art Museum – MAM Rio. Mr. Luz is also an academician and holder of The São Paulo and Rio de Janeiro Museums of Modern Art.
José Mauro Mettrau Carneiro da Cunha.Mr. Cunha has served as a member of Oi’s board of directors since February 2009, having served as its chairman until September 2018. Since December 2019, he has been Chairman of Odebrecht S.A., having served as a memberChair 59 of the boardBrazilian Academy of directors since October 2019. Mr. Cunha has also served as Chairman of Braskem S.A. since December 2019. From January 2013 until June 2013, Mr. Cunha served as Oi’s interim chief executive officer, during which time he resigned as chairman and member of Oi’s board of directors. He resumed his position as Oi’s chairman and a member of Oi’s board of directors in June 2013. Mr. Cunha has also served as chairman of the board of directors of Dommo Empreendimentos Imobiliários S.A. from 2007 until December 2016. He previously served as chairman of the board of directors of (1) TNL from April 1999 until March 2003 and from April 2007 until February 2012, where he also served as an alternate director in 2006; (2) Telemar from April 2007 until April 2012, where he served as a member of the board of directors from April 1999 until May 2012; (3) TNL PCS from April 2007 until April 2012; (4) Tele Norte Celular Participações S.A. from April 2008 until February 2012; and (5) Coari Participações S.A. from May 2007 until February 2012. In addition, Mr. Cunha was a director of Telemar Participações S.A. from April 2008 until September 2015. He has also served on the board of directors of Santo Antonio Energia S.A. since April 2008 and Pharol since May 2015. He was a member of the board of directors of Vale S.A. from April 2010 until April 2015. Mr. Cunha was an executive officer of Lupatech S.A. from April 2006 to April 2012, where he served as a member of the board of directors from April 2006 to April 2012. He has also held several executive positions at the BNDES, and was a member of its board of executive officers from 1991 to 2002. He was the vice president of strategic planning of Braskem S.A. from February 2003 to October 2005, and business consultant from November 2005 to February 2007. Mr. Cunha was a member of the board of directors ofLog-In Logistica Intermodal S.A. from April 2007 to March 2011, Braskem S.A. from July 2007 to April 2010, Banco do Estado do Espírito Santo S.A. from April 2008 to April 2009, Light Serviços de Eletricidade S.A. from December 1997 to July 2000, Aracruz Celulose S.A. from June 1997 to July 2002, FUNTTEL from December 2000 to January 2002, Fundação Centro de Estudos do Comércio Exterior from June 1997 to January 2002, and Politeno Indústria e Comércio S.A. from April 2003 to April 2004. Mr. Cunha holds a bachelor’s degree in mechanical engineering from Universidade Católica de Petrópolis in Rio de Janeiro and a Master’s degree in industrial and transportation projects from Instituto Alberto Luiz Coimbra dePós-Graduação (COPPE) at the Universidade Federal do Rio de Janeiro. He attended the Executive Program in Management at the Anderson School at the University of California in Los Angeles.Accounting Sciences.
Marcos Bastos Rocha.Mr. Rocha has served as a member of Oi’s board of directors since January 2018. He has also served as chairman of the board of directors of Paranapanema S.A. since March 2020, an independent member of the board of directors of IRB Brasil RE since March 2019, a member of the board of directors of Invepar S.A. since September 2019, a member of the board of directors of GRU Airport since November 2019 and a member of the board of directors of Brazil Fast Food Corporation since 2009. He has been a senior partner at DealMaker since July 2015 and served as anon-executive senior advisor at Roland Berger Strategy Consultants from September 2015 until December 2019. He served as a member of the board of directors of BC2 Construtora from April 2016 until May 2019 and alternate member of the board of directors of Light S.A. from September 2018 until April 2019. Between 2010 and 2015, Mr. Rocha was the vice president of finance and administration at Invepar – Investimentos e Participações em Infraestrutura and a member of the boards of directors of the companies in its portfolio. He was a member of the fiscal council of Abril Educação from 2012 to 2015. Between 2008 and 2009, Mr. Rocha was the CFO, investor relations officer, CIO, shared services officer and human resources officer at Globex Utilidades. Previously, he held the following positions: general executive officer at Banco Investcred Unibanco S.A. – Pontocred from 2005 until 2008; CFO and investor relations officer at Sendas S.A. from 2003 until 2005; CFO at the following companies: Horizon Telecom International from 2001 until 2002, GVT – Global Village Telecom in 2001, Global Telecom S.A. from 2000 until 2001 and Brazil Fast Food Corp. (Bob’s) from 1996 until 1998; administrative officer at Sony Music Entertainment from 1998 until 1999; and controller at Cyanamid Química do Brasil from 1991 until 1996. Mr. Rocha holds bachelor’s degree in electronic engineering from the Military Institute of Engineering (IME), a Master of Business Administration degree in finance fromPUC-RJ and an Executive MBA in management from PDG/EXEC – SDE/IBMEC.
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Maria Helena dos Santos Fernandes de Santana. Ms. Fernandes de Santana has served as a member of Oi’s board of directors since September 2018. She has beenserves as a member of the board of directors and chairman of the audit committee of XP Inc., a financial services company listed on NASDAQ and as a member of the board of directors of Grupo BIG SA, a holding company in the BME – Bolsas y Mercados Españoles since April 2016; a member of the audit committee of Itaú Unibanco Holding S.A. since June 2014 and a member of the board of directors and the chairman of the audit committee of XP Inc. Ms. Fernandes served asretail sector. She was a trustee of the International Financial Reporting Standards Foundation, frombetween January 2014 untiland December 2019. She was a member of the board of directors of Bolsas y Mercados Españoles – BME, a stock exchange in Spain, between April 2016 and June 2020; as a member of the audit committee of Itau Unibanco Holding S.A., financial services holding company between June 2014 and July 2020 and as a member of the board of directors of Companhia Brasileira de Distribuição, a retail company, between February 2013 and June 2017,2017; a member of the board of directors of Totvs S.A., anS.A, information technology company, between April 2013 and March 2017 and2017; a member of the board of directors of CPFL Energia S.A., an energy company, between April 2013 and April 2015. She previously worked at the CVM, where she served as Chairman,was president between July 2007 and July 2012, and Commissioner,director, between July 2006 and July 2007. She was chairwoman2007, of the executive committeeBrazilian Securities and Exchange Commission (“CVM”). She served as Chairperson of the Executive Committee of IOSCO –- International Organization of Securities CommissionCommissions between 2011 and 2012. She represented CVM on the Financial Stability Board – FSB between 2009 and 2012. She worked at the São Paulo Stock Exchange (Bolsa de Valores de São Paulo S.A. – BVSP), or the BOVESPA,B3 between July 1994 and May 2006, wheresince 2000 she washas been responsible for supervising listed company oversight,companies, attracting new companies and implementing the Novo Mercado. She holdswas vice-president of the IBGC between 2004 and 2006. She has a bachelor’s degree in Economics from the University of São Paulo.
Paulino do Rego Barros Jr. Mr. Barros has served as a member of Oi’s board of directors since September 2018.2018, a member of board of directors of Boa Vista Serviços (BOAS3.S.A.), since the IPO process that took place in October 2020, as a Coordinator of the Strategy, Operational Execution and Financial Risks Committee of the BVS. He was the Interim CEO of Equifax, INC,served from September 2017 to April 2018 having previouslyas interim CEO of Equifax, Inc. Headquartered in Atlanta, Equifax is a global leader in technology and information solutions, operating in 24 countries and employing approximately 10,000 people worldwide. Previously, Paulino led the company’s business in the Asia-Pacific region from(from July to September 2017, the company’s U.S. Information Solutions business2017) and, from OctoberNovember 2015 to June 2017, and its internationalled the company’s business unit, covering Latin America, Europe, Asia Pacific and Canada, fromof U.S. Information Solutions (USIS), Equifax’s largest business unit. From April 2010 to October 2015. Prior to2015, he led Equifax’s international business unit in charge of Latin America, Europe, Asia-Pacific, and Canada. Before joining Equifax, in November 2008, he founded PB&C – & C - Global Investments (LLC), an international consulting and investment and consulting firm, andwhich he has beenpresided since its President since November 2008.creation. From January 2007 untilto November 2008, he was the President of AT&T Global Operations.Operations at AT&T. He held variousseveral executive positions at BellSouth Corporation from December 2000 to January 2007, before BellSouth was acquired by AT&T in January 2007, including Corporate Product Officer,Director, President of BellSouth Latin America, Regional Corporate Regional Vice-President ofVice President Latin America, and Chief Planning and Operations Officer forDirector of BellSouth International. From February 1996 to December 2000 he worked forat Motorola Inc., having served ashe held the position of Corporate Vice President and General ManagerChief Executive Officer – Latin America Group and asthe position of Corporate Vice President and General Manager ofChief Operating Officer – Market Operations – Americas, for the Cellular Business Unit.mobile telephony business unit. He also held various positions at The NutraSweet Company, as well as atMonsanto Company in the U.S.US and Latin American divisions of Monsanto Company. HeAmerica. Between 2012 and 2015 he also served on the advisory boardAdvisory Board of Cingular Wireless, Converged Services Group, and on the board of Alianza – the- BellSouth Corporation Latino Association. Between 2012 and 2015, Mr. Barros served on the board ofAssociation - President, NII Holdings (NASDAQ: NIHD) - Adviser and is a member of the recentlyRisk Committee, and is currently part of the newly created McKinsey & Company, Inc. –- Crisis Response Advisory Board. From 2006 to 2010 he served on the Audit and Finance Committee of Westminster Schools and the Red Cross (Red Cross) Georgia-US chapter between 2005 and 2008, both non-profit organizations. He holdshas a degree in mechanical and electrical engineering from the School of Industrial Engineering and the CollegeSchool of Engineering of São José dos Campos, in São Paulo, and holds a master’s degree in business administration from(MBA) by Washington University in St. Louis.
Wallim Cruz de Vasconcellos Junior. Mr. Vasconcellos has served as a member of Oi’s board of directors since September 2018. He has approximately 30 years of experience in the financial sector, specifically in mergers and acquisitions, debt restructuring, private equity investments and public share issuances and has participated in various boards of directors in both Brazil and abroad. In 2004, he founded Iposeira Capital Ltda., an independent company specializing in corporate advisory in Brazil. He was a partner at Lakeshore Partners from March 2013 to December 2014 and a founding partner of the STK Capital from 2010 to 2013. From June 2003 to June 2008, he served as Senior Representative in Brazil of the Special Operations Area of the International Finance Corporation – IFC, where he worked on credit recovery and equity investments in Brazil and managed a portfolio of approximately US$300 million. From September 2002 to January 2003, he was Director of the BNDES Industry Segment, responsible for the bank’s projects with companies in the industry, commerce and services sectors, and from October 2001 to August 2002 he served as Superintendent of the BNDES Fixed Income Segment, where he oversaw the department’s restructuring. He served as director of BNDESPAR, a subsidiary of BNDES, from April 1998 to September 2001, where he was responsible for the areas of investments and divestitures, including corporate restructuring, asset portfolio management, development of structured operations in the domestic and international markets, structuring of private equity funds and governance. Mr. Vasconcellos is an independent member of the board of directors, audit committee, and nominating committee of Pilgrim’s Pride Corporation and has served as a member of the boards of directors of Cremer, Sendas, Aracruz Celulose, Vale, Marlim Participações, Companhia Distribuidora de Gas do Rio de Janeiro – CEG and Santos Brasil Participações. He also served as Vice President of Property from June 2014 until June 2015 and asVice-President of Finance until 2019 at Clube de Regatas do Flamengo. He holds a degree in Economics and a post-graduate degree in Finance from the Pontifical Catholic University of Rio de Janeiro. He also holds a masters in Sports Management from the Cruyff Institute.
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Roger Solé Rafols. Mr. Solé has more than 2023 years of experience in telecommunications, in the areas of marketing, product development, innovation, strategy and P&L management. He has been Vice-PresidentRafols is Vice President of Marketing at(CMO) of WeWork, since April 2020 and alternate member of BeMobi. Previously, he served as CMO for Sprint Corporation since 2015. Priorfrom 2015 to 2020, where he played a key role in the company’s turnaround and merger process with T-Mobile. Before that, time, he held the following positions: Vice-Presidentpositions of Vice President of Marketing from 2009 to 2015,(CMO) (2009-2015) and ManagerDirector of Consumer Marketing from 2009(2009-2011) at Tim Brasil. Previously, he was a Marketing Director (2006 to 2011 at TIM Brasil;2008) and Marketing Manager – Residential Segment from 2006 to 2008, and ManagerDirector of Value AddingValue-Added Products and Services from 2001(2001 to 20062006) at Vivo. HeVivo, having also worked at DiamondCluster (currently known today as Oliver Wyman,Wyman) from 1996 to 2001. Mr. Solé holdsHe has a bachelor’s degree in BusinessBachelor’s and a Master’s Degree in Business Administration from ESADE –- Escuela Superior de Administración y Dirección de Empresas, Barcelona, and a Master’s degreeGraduate Degree in Audiovisual Business Management of Audiovisual Companies fromby UPF –- Universitat Pompeu Fabra, Instituto Desarrollo ContinuoContinuuo (IDEC), Barcelona. He also completedattended an MBA exchange MBA program at UCLA –- University of California, Los Angeles; an Advanced Management Program (Senior Management Development Program) at IESE Business School, Universidad deUniversity of Navarra, SãoSao Paulo-Barcelona; and a short executive education program in Finance and Strategy for Value Creation Strategy at The Wharton, School at the University of Pennsylvania, Philadelphia.Pennsylvania.
Claudia Quintella Woods.Ms. Woods, has more than 20 years of experiencewith a background in strategic planning, marketing and sales, digitalstart-upsand multinational companies.proven expertise in digital start-ups and multinationals, is a Bachelor of Arts by Bowdoin College, with a double major in Environmental Sciences and Spanish, and secondary focus on Economics. She has a master’s degree in Business Administration from the COPPEAD institute of Universidade Federal do Rio de Janeiro (UFRJ) and completed the specialization program Building Ventures in Latin America, from Harvard Business School. She has been the General ManagerOfficer of Uber Brasil since February 2019, and hashaving also actedserved as the Retail DirectorOfficer of Banco Original and as the Executive Superintendent Officer of Digital Channels (Corporate(Corporative and Retail) of the aforementionedthat bank. Prior to that,Formerly, she held the positions of Chief Executive OfficerCEO of Webmotors.com, Marketing and Digital Product DirectorOfficer of Walmart.com, Chief Executive OfficerCEO of Netmovies, Chief Marketing and Intelligence Officer for Latin America of Clickon, General ManagerOfficer of Predicta, Senior Product GroupSenior Manager of L’Oréal Brazil, Marketing Relationship Marketing Manager of Ibest Company, and Senior ConsultantAdvisor of Kaiser Associates. Ms. Woods holds a Bachelor of Arts degree from Bowdoin College, with double major in Environmental Sciences and Spanish and minor in Economics. She holds a Master’s degree in Business Administration from the COPPEAD Institute of the Federal University of Rio de Janeiro (Universidade Federal do Rio de Janeiro – UFRJ) and a certificate of executive education on Building Ventures in Latin America from Harvard Business School.
Armando Lins Netto. Mr. Netto has been CEO of Fleetcor in Brazil since June 2014 responsible for all businesses and companies in the region. He wasNetto also Vice President ofworked at TIVIT, a Brazilian multinational digital solutions company based in digital services,Brazil, as Vice-President from December 2006 to May 2014 and also responsible for ITbusiness and technology services and businesses. Beforefrom December 2010 to May 2014. Prior to that, he was DirectorExecutive Officer in the banking sector of the Banking PracticeUnisys from August 2004 until November 2006 and a consultant at Unysis and management consultant with McKinsey & Company at the São Paulo and London offices.offices from October 1999 to January 2004. Mr. Netto holds a bachelor’s degree in Mechanical Engineering from Universidade Federal do Pará (UFPA –- 1990), a master’s degree in Mechanical Engineering from the Universidade Estadual de Campinas (UNICAMP –- 1993) and a PhD in Mechanical Engineering from the University of California, Berkeley (UCB - 1999).
Luis Maria Viana Palha da Silva. Mr. Silva previously served as a member of Oi’s Board of Directors between September 2015 and March 2018. He currently serves as the Chairman of the Board of Directors and Chief Executive Officer of Pharol, SGPS, S.A. He is Chairman of the General Meeting and member of the General and Supervisory Board of EDP, SA. He was a non-executive member of the Board of Directors of Kasmunaygas between 2019 and 2020. He was the Vice President of the Board of Directors and Executive Committee of GALP Energia from 2012 to 2015. Prior to that he was a non-executive member of the Board of Directors and Audit Committee of NYSE Euronext, from 2012 to 2013. He worked at Jerónimo Martins, SGPS, as CFO from 2001 to 2004, and as CEO from 2004 to 2010. He served as CFO of CIMPOR – Cimentos de Portugal from 1995 to 2001 and as Secretary of State for Commerce of the Government of Portugal, from 1992 to 1995, responsible for external economic relations – Commerce and Investment – and for the supervision of Domestic Commerce, food security and antitrust. Previously, he served as CFO of COVINA, Companhia Videira Nacional, from 1987 to 1992. He has a bachelor’s degree in Economics from Instituto Superior de Economia, 1978 and in Business Management from Universidade Católica Portuguesa, 1981. He has a specialization in Administration (Advanced Management Program) from University of Pennsylvania – Wharton School of Economics, 2005.
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Mateus Affonso Bandeira. Mr. Bandeira currently serves on the Board of Directors of BR Distribuidora, since 2019, and Hospital Moinhos de Vento, since 2016. At Falconi Consultores de Resultado, Mr. Bandeira was Partner-President and CEO (between 2011 and 2017). In addition, he has previously been a member of the Board of Directors of Banco Pan (2011 to 2018), PDG Realty (2012 to 2016), and Terra Santo Agro (2016 to 2018) and Banrisul (2008 to 2011). He was a member of the Deliberative Council of Fundação Estudar between 2012 and 2017. In addition he was President and Director of Investor Relations at Banco do Estado do Rio Grande do Sul – Banrisul (2010 to 2011), and Director / Under Secretary of the Treasury of the State of Rio Grande do Sul (2007 to 2008). He also held positions as Secretary of Management and Planning at State of Rio Grande do Sul (2008 to 2010). Mr. Bandeira has also held posts in the Federal Senate of Brazil (2006) as well as the Ministry of Finance (2004 to 2006), and served as the Secretariat of Finance for the State of Rio Grande do Sul (1993 to 1999). Mr. Bandeira holds a degree in Computing from Universidade Católica de Pelotas, as well as graduate degrees in Corporate Finance and Management from Getulio Vargas Foundation and Universidade Federal do Rio Grande do Sul. He also obtained an MBA at the University of Pennsylvania Wharton School and a specialization for company presidents from Harvard Business School.
Raphael Manhães Martins. Mr. Martins has been partner at Faoro Advogados since 2010. He has been a member of the Fiscal Council of Vale S.A. since 2015. Previously, Mr. Martins served as a member of Oi’s fiscal council from April 2019 to April 2021. He was a member of the Board of Directors of Light S/A, from 2018 to 2019 and Eternit S.A., from 2015 to 2020, and member of Fiscal Council of Light S.A., from 2014 to 2018 and Fibria Celulose S/A, from 2016 to 2017. In addition, he was a professor at the Federal University of Rio de Janeiro in 2010 and at UERJ between the years 2007 and 2009. Mr. Martins holds a degree at State University of Rio de Janeiro (UERJ).
Executive Officers
The board of executive officers is Oi’s executive management body. Oi’s executive officers are Oi’s legal representatives and are responsible for Oi’s internal organization andday-to-day operations and the implementation of the general policies and guidelines established from time to time by Oi’s board of directors.
Oi’sby-laws require that the board of executive officers consistconsists of between three and six members, including a chief executive officer, a chief financial officer, investor relations officer and chief legal officer. Oi’sby-laws provide that Oi’s chief executive officer may not serve as chairman of Oi’s board of directors. Each officer is responsible for business areas that Oi’s board of directors assigns to them and, other than Oi’s chief executive officer and Oi’s chief financial officer, need not have formal titles (other than the title of executive officer or “Diretor”).
Generally, the members of Oi’s board of executive officers are elected by Oi’s board of directors fortwo-year terms and are eligible for reelection. Oi’s board of directors may remove any executive officer from office at any time with or without cause. According to the Brazilian Corporate Law, executive officers must be residents of Brazil but need not be shareholders of Oi. Oi’s board of executive officers holds meetings when called by Oi’s chief executive officer or any two other members of Oi’s board of executive officers.
The following table sets forth certain information with respect to the current members of Oi’s board of executive officers.officers as of the date of this annual report.
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Name | Position | Date Elected/ Appointed | Age | |||||
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Rodrigo Modesto de Abreu | Chief Executive Officer | January 2020 | 52 | |||||
Camille Loyo Faria | Chief Financial Officer and Investor Relations Officer | October 2019 | 47 | |||||
Antonio Reinaldo Rabelo Filho | Chief Legal Officer | October 2019 | 45 | |||||
José Claudio Moreira Gonçalves | Executive Officer | March 2018 | 54 | |||||
Bernardo Kos Winik | Executive Officer | March 2018 | 53 | |||||
Summarized below is information regarding the business experience, areas of expertise and principal outside business interests of Oi’s current executive officers.
Rodrigo Modesto de Abreu. Mr. Abreu has served as Oi’s Chief Executive Officer since FebruaryJanuary 2020, having previously served as Chief OperationalOperating Officer since September 2019 and as a member of Oi’s board of directors from September 2018 to September 2019. Prior to joining Oi, he was Chief Executive Officer of Quod, a big data company focused on credit risk analysis, beginning in June 2017. He was Managing Partner of Giau Consultoria Empresarial Ltda, a boutique management consulting firm, from November 2016 to November 2017, and was at the same time member of the board of directors of Vogel Soluções em Telecomunicações e Informática S.A., which operates fiber optic telecommunication services. From March 2013 to May 2016, he was the Chief Executive Officer and Board Member of TIM Participações S.A. and Chief Executive Officer of TIM Celular S.A. From December 2008 to March 2013, he served as President of the Brazilian operations of Cisco Systems, one of the largest information technology companies globally. Prior to that, Mr. Abreu was also Managing Director of Cisco Systems for the North of Latin America and the Caribbean from May 2006 to December 2008, President of Nortel Networks Brazil, a telecommunications equipment company, from June 2004 to April 2006, and Chief Executive Officer of Promon Tecnologia Ltda., a technology services company, from July 2000 to June 2004. Mr. Abreu holds a degree in Electrical Engineering from the State University of Campinas and an MBA from the Stanford Graduate School of Business.
Camille Loyo Faria. Ms. Loyo Faria has served as Oi’s chief financial officer and investor relations officer since October 2019. Ms. Loyo Faria previously served as Director of Energy, Technology, Media, Telecom and Industries at Bank of America Merrill Lynch. Previously, she held director positions, through which she was responsible for energy, technology, media and telecom at Bradesco BBI and Morgan Stanley. Ms. Loyo Faria also has extensive executive experience in the telecommunications and infrastructure sector, having held positions as Chief Executive Officer of Multiner, Chief Financial Officer of Terna Participações and Strategy Leader at Embratel and Telecom Italia Group in Brazil and Latin America. Ms. Loyo Faria holds a degree in chemical engineering from PontíficaPontificia Universidade Católica in Rio de Janeiro, an MBA degree in finance from Ibmec in Rio de Janeiro and a master’s degree in industrial engineering from PontíficaPontificia Universidade Católica in Rio de Janeiro.
Antonio Reinaldo Rabelo Filho. Mr. Rabelo Filho has served as Oi’s chief legal officer since OctoberNovember 2019. Mr. Rabelo Filho began his career at PricewaterhouseCoopers Brasil, which he left for Oi in 2000, where he held financial and legal positions, most recently in the Tax Law Directorate from 2007 to 2017. Since 2017, Mr. Rabelo Filho has been a partner at Andrade Rabelo Advogados Associadoshis law firm and played an active role in Oi’s judicial reorganization process, and servedserving, as well, as the foreign representative of Oi’s Judicial Reorganization in the courts of New York and the United Kingdom. Mr. Rabelo Filho has also held leadership positions on the board of the main technical associations in the telecommunications sector and is a member of the National and State Commissions of Tax Law and Judicial Recovery and Bankruptcy of the Brazilian Bar Association. Mr. Rabelo Filho is also member of Fiscal Board of Fundação Atlântico social security foundation. Mr. Filho holds a law degree from the Federal University of Bahia, a graduate degree in Business Law from IBMEC/RJ and a master’s degree in Tax Law from PontíficaPontificia Universidade Católica in São Paulo.
José Claudio Moreira Gonçalves. Mr. Gonçalves has served as Oi’s chief operating officer since March 2018. He built his career in the telecommunications industry and has expertise in the operation, maintenance and technological development of Oi’s networks. Mr. Gonçalves previously served as Oi’s executive director of operations since June 2011. He joined Oi in March 2000, having served as operations manager, director of network deployment and director of engineering. Mr. Gonçalves holds a bachelor’s degree in mechanical production engineering from Pontifícia Universidade Católica(PUC-Rio), a master’s degree in business administration from Fundação Getúlio Vargas(FGV-RJ), an executive MBA from Fundação Dom Cabral (FDC) and a post-executive MBA from the Kellogg School of Management.
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Bernardo Kos Winik. Mr. Winik has served as Oi’s chief commercialclient officer since March 2018. He previously served as Oi’s director of retail since December 2014 and director of retail sales from September 2011 to December 2014. He has experience in the technology, consulting and telecommunications markets, having worked in companies such as Claro, BS Consulting, NCR and EDS do Brasil. Mr. Winik holds a bachelor’s degree in information technology form Universidade Mackenzie and a post-graduate degree in business from Escola de Administração de Empresas de São Paulo (EAESP/FGV).
Fiscal Council
The Brazilian Corporate Law requires Oi to establish a permanent ornon-permanent fiscal council(conselho fiscal).Oi’sby-laws provide for a permanent fiscal council composed of between three and five members and their respective alternate members. The fiscal council is a separate corporate body independent of Oi’s board of directors, Oi’s board of executive officers and Oi’s independent accountants. The primary responsibility of the fiscal council is to review Oi’s management’s activities and Oi’s financial statements and to report their findings to Oi’s shareholders.
The members of Oi’s fiscal council are elected by Oi’s shareholders at the annual shareholders’ meeting forone-year terms and are eligible for reelection. The terms of the members of Oi’s fiscal council expire at the annual shareholders’ meeting in 2020.2022. Under the Brazilian Corporate Law, the fiscal council may not contain members who are members of Oi’s board of directors or Oi’s board of executive officers, spouses or relatives of any memberofmember of Oi’s board of directors or Oi’s board of executive officers, or our employees. To be eligible to serve on Oi’s fiscal council, a person must be a resident of Brazil and either be a university graduate or have been a company officer or fiscal council member of another Brazilian company for at least three years prior to election to Oi’s fiscal council. Holders of Preferred Shares without voting rights andnon-controlling common shareholders that together hold at least 10.0% of Oi’s voting share capital are each entitled to elect one member and his or her respective alternate to the fiscal council.
The following table sets forth certain information with respect to the current members of Oi’s fiscal council and their alternates.
Name | Position | Member Since |
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Pedro Wagner Pereira Coelho | Chairman | April 2016 | 72 | |||||||||
Patricia Valente Stierli | Alternate | April 2019 | 64 | |||||||||
| Member | April 2016 | 70 | |||||||||
Wiliam da Cruz Leal | Alternate | April 2018 | 64 | |||||||||
Daniela Maluf Pfeiffer | Member | April 2018 | 50 | |||||||||
| Salete Garcia Pinheiro | Alternate | April 2021 | 66 | ||||||||
| Cristiane do Amaral Mendonça (1) | Member | April 2021 | 40 | ||||||||
| Marco Antônio de Almeida Lima (1) | Alternate | April 2020 | 28 | ||||||||
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| (1) | Elected by Oi’s preferred shareholders. |
We summarize below the business experience, areas of expertise and principal outside business interests of the current members of Oi’s fiscal council and their alternates.
Fiscal Council Members
Pedro Wagner Pereira Coelho. Mr. Coelho has served as chairman of Oi’s fiscal council since April 2017 and member since April 2016. He has also served as chairman ofwas the fiscal councilAudit Committee Chairman of Magnesita Refratários S.A. sinceS/A from April 2008 to March 2019, member of the Audit Committee of Parnaíba Gás Natural S/A from October 2015 to March 2017 member of the auditing group of PriceWaterhouseCoopers Auditores Independentes, from October 1978 to April 1981, and in the controllership department of Banco de Investimentos Garantia S/A from May 1982 to July 1997. He was also Chairman of the audit committee of Lojas Americanas S.A (sales and retail), Tele Norte Leste Participações S.A (telecommunications), Telemar Participações S.A (telecommunications), TAM S.A (transport), and Enersul – Energética do Matogrosso do Sul (power). In the last 5 years, he has served as member of the fiscal council of Parnaiba Gas Natural S.A. since October 2015 and as member of the supervisory board of Estácio Participações S.A. since April 2012. Mr. Coelho was also a partner of Carpe DiemConfisplan – Consultoria, Planejamento e Assessoria Empresarial Ltda. from 2011 until 2016.(company engaged in Tax and Accounting Counseling, Planning, Corporate Planning and Counseling, Enterprises, and Interest Holding). He worked as controller at Banco de Investimentos Garantia S/A., investment bank, from May 1982 until July 1997 and as an auditor at PricewaterhouseCoopers Auditores Independentes from October 1978 to April 1981. Previously, he was chairman of the fiscal council of Lojas Americanas S.A., Tele Norte Leste Participações S.A., Telemar Participações S.A., TAM S.A. and Empresa Energética de Mato Grosso do Sul S.A. (Enersul). Mr. Coelho holdshas a bachelor’s degree in business administrationBusiness Administration from the Sociedade Universitária Augusto Motta – SUAM, in 1978, and in accountingAccounting from Sociedade Madeira de LeyFaculdade – SOMLEY.SOMLEI, in 1980.
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ÁlvaroAlvaro Bandeira. Mr. Bandeira has served as a memberbeen the Chief Economist of Oi’s fiscal council since April 2017 and as an alternate member of Oi’s fiscal council since April 2016. He has also served as chief economist of BrokerageCorretora Modalmais since 2015, the year he joined the institution. Mr. Bandeira also served as chief economistBetween 2011 and 2015, he was the Chief Economist of Orama from 2011 to 2015 andÓrama, leading the analysis team. He held various positionsthe same position for more than ten years at Ágora Corretora, from April 2001 until December 2010.being also a Managing-Member. He was presidentPresident of Bolsa Brasileira de Futuros (BBF), President of APIMEC, both nationally and regionally, and five terms as Member of the Brazilian Futures Exchange, president of regional chapters of APIMEC for five administrations, DirectorBoard of BVRJ and BM&F, as well asin addition to being a former full member of the Supervisory BoardAudit Committee of Souza Cruz. Mr. BandeiraÁlvaro has spokengiven lectures in several conferences related to the capital markets and personal finance, and has developedin addition to giving lectures at universities and companies on topics related issues.to this market. He regularly contributes to publications regarding economics, andis also a regular columnist in several media vehicles of the economic area, as well as on websites on financial education, websites includingsuch as Dinheirama and Infomoney. Mr. Bandeira holdsIn the latter, he participated in a weekly interactive program on a forum with more than 400 logged individuals. Currently he is a daily columnist in two editions of Band News FM. With more than 40 years of expertise in capital markets, Alvaro has a bachelor’s degree in economicsEconomics from UFRJ and a graduate degree in administration from Coppe –RUFRJ.Coppe-UFRJ.
Daniela Maluf Pfeiffer.Mrs.. Mrs. Pfeiffer has served asbeen a member of Oi’s fiscal council since April 2018. She is a partner at DXA Investments, an asset management firm,company, since January 2018. She was a partner atmember of Canepa Asset Brasil, also funds management company, and wasan asset manager responsible for investors’ relationsthe relationship with investors from January 2014 to October 2017. She previously workedalso served as a partner atmember of Nova Gestão de Recursos, an investment firm,company, from October 2011 to June 2013. Mrs. PfeifferCurrently, Daniela is not a member of any public company management body of a publicly-held company. Sheentity. Previously, Daniela was previously a member of the fiscal councilAudit Committee of Banco Sofisa S.A., from April 2014 to April 2017; a member of the fiscal councilAudit Committee of Viver Incorporadora e Construtora S.A., from April 2011 to April 2017; a member of the fiscal councilAudit Committee of Banco Panamericano S.A., from September 2010 to April 2014; a member of the fiscal councilAudit committee of Santos Brasil S.A., from 2003 to 2005; a member of the Board of Directors of Brasil Telecom S.A., from 2003 to 2005; a member of the Board of Directors of Telemig Celular S.A., from 2003 to 2005; a member of the Board of Directors of Amazônia Celular S.A., or Amazônia, from 2003 to 2005; member of the Audit Committee of Amazônia Celular S.A from 1998 to 2002 and member of the Audit Committee of Telemig Celular S.A from 1998 to 2001. Member of the Audit Committee certified by IBGC; she has a bachelor’s degree in Business Administration from UFRJ in 1992, with an MBA in Business Management from FGV, concluded in 2019.
Cristiane do Amaral Mendonça. Mrs. Mendonça works in the compliance area of Vic DTVM S.A., where she is responsible for fraud control, information security, business continuity plan, fiscal and managerial accounting compliance, risk and people management, internal audit assistance, attending to regulatory bodies (CVM, Brazilian Central Bank, BSM) and monitoring the validation of internal processes. Between March 2017 and April 2020, she was a member of the Fiscal Council of Amazônia from 1998Eternit S.A. From January 2014 to 2002 and a member of the fiscal council of Telemig Celular S.A. from 1998 to 200. She is an IBGC-certified fiscal council member.2016, she worked as senior auditor at BKR Lopes Machado auditoria. Mrs. PfeifferMendonça holds a degree in administration by UFRJAccountancy from 1992Mackenzie Presbyterian University and an MBAa post degree in corporate managementaudit, controlling and finance from Getulio Vargas Foundation – FGV.
Raphael Manhães Martins.Mr. Martins has served as a member of Oi’s fiscal council since April 2019. He has been a partner at the law firm Faoro & Fucci since 2010. In 2010, he was a professor at UFRJ. From 2007 to 2009, he was a professor at Universidade do Estado do Rio de Janeiro (UERJ). Mr. Martins has served as a member of the board of directors of Eternit S.A. since 2015, Light S.A. since 2018 and Condor S.A. – Indústria Química since 2017. He has also served as a member of the fiscal council of Vale S.A. since 2015. Previously, Mr. Martins served as a member of the fiscal council of Light S.A. from 2014 to 2018 and Embratel Participações S.A. in 2014. Mr. Martins is a member of the Brazilian Bar Association, Rio de Janeiro Section(OAB-RJ).
Alternate Fiscal Council Members
Patricia Valente Stierli.Mrs.. Currently, Patricia Valente has served as an alternate member of Oi’s fiscal council since April 2019. Mrs. ValenteStierli is (i) a member of the fiscal councilFiscal Council of Eletrobras –- Centrais Elétricas S.A., acting as a financial specialist (since 2017),expert (2017 - 2019 Term); (ii) a member of the boardBoard of directorsDirectors of PPE Fios Esmaltados S.A. (since 2018), a(2018 - 2019 Term); (iii) member of the fiscal councilAudit Committee of Sociedade Beneficiente de Senhoras –Senhoras- Hospital Sírio Libanês (tenured from 2018 to 2021)(2018 - 2021 Term), and an alternate(iv) a substitute member of the fiscal councilAudit Committee of Centro de Integração Empresa Escola CIEE (since 2018)(2018 - 2019 Term). Mrs. Valente previouslyFormerly, Patricia served asas: (i) a member of the fiscal councilAudit Committee of Bardella S.A. Indústrias Mecânicas (from(Terms 2015, to2016, and 2017 until October 2018,2018); (ii) a member of the boardBoard of directorsDirectors of Pettenati S.A. Indústria Têxtil (during 2015), an alternate member(2015 Term); (iii) a Substitute Member of the fiscal councilAudit Committee of Dohler S.A. (from 2017 to 2018)(2017 - 2018 Term); and (iv) a member of the boardBoard of directorsDirectors and fiscal councilAudit Committee in public companies, representing minority shareholders (four years). Until June 2015 she held the position of publicly-held companies,Director of Banco Fator S.A., representative of the Management of Third-Party Resources Area before CVM and Central Bank and Head of the Management of Third-Party Resources Area. In addition, Patricia has a solid background in the area of third-party resource management, having acted as a minority shareholders’ representative. In addition, Mrs. Valente has experience managing third-party resources, after having been a statutory officer at Banco Fator S.A. and Sadefem EquipamentosStatutory Officer for six6 years, working infocused on management and being in charge of institutional and retail clients. She also worked as a financial officer at Montagens S.A., where shecustomers. Patricia was in charge ofFinancial Officer for 3 years, responsible for the accounting, fiscal,tax, budget, treasury, and human resources. Mrs. Valente holdsresource areas. Patricia has a bachelor’s degree in business administrationBusiness Administration from theEscola de Administração de Empresas de São Paulo - Fundação Getúlio Vargas Foundation (FGV) and, having completed a Management for Graduatesthe specialization course atprogram in Administration from CEAG Undergraduates (MBA)—EAESP / - EAESP/FGV and her specialization in controllership course atControllership from GVPEC.
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Wiliam da Cruz Leal. Mr. Leal has served as an alternate member of Oi’s fiscal council since April 2018. He has extensivevast experience in corporate governance, corporate sustainability, enterprise risk management, internal controls, technologyCorporate Governance, Corporate Sustainability, Enterprise Risk Management, Internal Controls, Technology, and information security.Information Security. Since 2011, he has been a managing partner atthe Managing-Member of Cruz Leal Gestão Empresarial Ltda., a consulting firm specialized in motivation, leadership, technology, corporate governance and sustainability. He has beenMember of the Board of Directors certified by the Brazilian Institute of Corporate Governance (IBGC – Instituto Brasileiro de Governança Corporativa, – IBGC) since 2009. Previously, Mr. LealHe worked at Tele Norte Leste Participações S.A., a company of the telecommunications area, from 2000 to 2009, having also served as executive managerthe Executive Manager of corporate governance, internal controls manager, budgetCorporate Governance, Manager of Internal Controls and special projects managerSpecial Projects, and systems audit manager. HeSystem Audit. William also worked at Banco do Brasil S.A., from 1975 to 2000, having served as executive manager of changesan Executive Change Manager and analyst information technology consultant. Mr. Leal holdsConsulting Information Technology Analyst. He has a bachelor’s degree in mechanical engineeringMechanical Engineering from Fundação de Ensino Superior de Itaúna, State of Minas Gerais.Gerais, in 1980.
Luiz Fernando Nogueira.Salete Garcia Pinheiro Mr. Nogueira has served. Ms. Pinheiro is a member of the board of directors and audit Committee of HPX Corp., member of the fiscal councils of BR Distribuidora and Jereissati Participações and member of the audit committees of BNDES, HDI Seguros and Icatu Seguros. She worked at PwC from 1979 to 2018, serving 23 years as an alternate memberaudit partner. She is certified by IBGC to serve on boards of Oi’sdirectors and fiscal council since April 2019. Since May 2016, Mr. Nogueira has served as chiefcouncils and CFC to audit financial officer of Neogas, having previously served as chief financial officer of Brookfield Renewable Energy, Ferroport, Concremat, Bematech and Timnet (a TIM group company). In addition, he also served as executive manager investor relations at Petrobras and planning and control manager for Latin America at IBM. Mr. Nogueirainstitutions. Ms. Garcia Pinheiro holds a bachelor’s degree in economics from Pontifícia Universidade Católica, a post-graduate degree in financial management from Fundação Getúlio Vargasaccounting Sciences and an MBA in finance from IBMEC, and he completedIBMEC. She also attended a business training course in conflict mediation at Mediare.the University of Ontario.
Domenica Eisenstein NoronhaMarco Antônio de Almeida Lima. Ms. NoronhaMr. Lima has served on Oi’s fiscal council since April 20182020 (as a member since April 2018 and as an alternate member since April 2019)member). Mrs. Noronha has more than 19 years of experience in the financial industry. Since 2010, sheMr. Lima has been a member of Tempo Capital Gestão de Recursos Ltda., an independent fund manager focused on the Brazilian equity market. Her responsibilities include economicAttorney at Law at Faoro & Fucci since November 2019, and financial analysis of investments, investor relations, supervision of compliance and regulatory review. Previously, Mrs. Noronha worked for 11 years at Morgan Stanley in New York, where she was involved in M&A for Latin American companies, and São Paulo, where she was executive director responsible for equity and debt capital markets transactions. She served as a member of the fiscal council of the following publicly-held companies in Brazil: Fibria Celulose S.A., from February 2017 to April 2018; Usinas SiderúrgicaBrazilian Bar Association, Rio de Minas Gerais S.A. – Usiminas, from April 2015 to April 2016Janeiro and from April 2017 to April 2018; and Embratel Participações S.A., from April 2012 to August 2014). Mr. Noronha holds a bachelor’s degree in business administration from Georgetown University, majoring in finance, international business and economics.São Paulo Sections.
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Compensation
According to Oi’sby-laws, Oi’s shareholders are responsible for establishing the aggregate compensation we pay to the members of Oi’s board of directors, board of executive officers and fiscal council. Oi’s shareholders determine this compensation at Oi’s annual shareholders’ meeting. Once aggregate compensation is established, Oi’s board of directors is responsible for distributing such aggregate compensation individually to the members of Oi’s board of directors and Oi’s board of executive officers in compliance with Oi’sby-laws.
The aggregate compensation paid by us to all members of Oi’s board of directors, board of executive officers and fiscal council for services in all capacities during 20192020 was R$64.573.3 million. This amount includes pension, retirement or similar benefits for Oi’s officers and directors. At Oi’s 2020 annual shareholders’ meeting, Oi’s shareholders established the following compensation for the year 2020:
board of directors: an aggregate limit of approximately R$8.2 million;
board of executive officers: an aggregate limit of approximately R$69.6 million; and
fiscal council: the minimum amount established under Paragraph 3 of Article 162 of the Brazilian Corporate Law.
Oi compensates alternate members of its fiscal council for each meeting of the fiscal council that they attend.
Oi’s executive officers receive the same benefits generally provided to our employees, such as medical (including dental) assistance, private pension plan and meal vouchers. Members of Oi’s board of directors and fiscal council are not entitled to these benefits.
Members of Oi’s board of directors, board of executive officers and fiscal council are not parties to contracts providing for benefits upon their termination. Somethe termination of ouremployment other than, in the case of executive officers, are entitled to severance payments in certain circumstances upon termination of their contracts.the benefits described above.
Long-Term Incentive Program
On March 13, 2015, Oi’s board of directors approved a long-term incentive plan for certain of Oi’s executives. The purpose of the long-term incentive plan is to encourage integration, align the interests of management with that of shareholders and retain our strategic executives in the medium- and long-term. The long-term incentive plan program ran from 2015 until 2017. Compensation under the long-term incentive plan, calculated based on Oi’s share price, and was paid in three annual installments in 2016, 2017 and 2018. During 2018 and 2017, we paid aggregate amounts of R$21.8 million and R$13.6 million, respectively, pursuant to the long-term incentive plan.
On April 26, 2019, Oi’s shareholders approved two share-based long-term incentive plans for the period from 2019 to 2021: one the members of Oi’s board of directors, and the other for certain executives. The purpose of the plan for the members of the board of directors is to promote high engagement levels of the members of the board of directors, to keep the members committed to supporting our meeting of our strategic goals, and to seek to align the members with our shareholders in the medium and long term. The purpose of the plan for the executives is to promote a high level of commitment of these executives, to keep them committed in order to ensure the achievement of our strategic goals, and to seek to align the executives with our shareholders for the medium and long term.
Under these plans, the board of directors is authorized to make annual grants of Common Shares to members of the board of directors and to our executives. The maximum number of Common Shares permitted to be granted is limited to 1.5% of the total capital stock of Oi as of April 26, 2019 under the plan for our executives, and 0.4% under the plan for the board of directors. Common Shares granted under these plans vest in equal amounts over a three year period, subject to conditions of continued employment and conditions related to the market valuation of our Common Shares.
At the time of the approval of these plans by our shareholders, our board of directors decided that we would refrain from implementing these plans until the RJ Court rendered a judgement regarding these plans. On December 20, 2019, the RJ Court ruled that the plan for members of our board of directors would be suspended until the conclusion of the RJ Proceedings. On December 30, 2019, we made grants of 33,704,937 Common Shares to our executives. executives pursuant to the first grant of the approved plan. On December 30, 2020, we made grants of 21,979,392 Common Shares to our executives pursuant to the second grant of the approved plan.
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Following the conclusion of the RJ Proceedings, the plan for members of our board of directors will be implemented in the form approved on April 26, 2019. In 2020, we provisioned for the maximum amount of grants to be made pursuant to the plan established on April 26, 2019.
Audit, Risks and Controls Committee
The Audit, Risks and Controls Committee (Comitê de Auditoria, Riscos e Controle), or the CARC, is a statutory advisory committee to our board of directors. According to its internal regulations, the CARC is responsible for:
advising our board of directors in connection with business risk assessment, internal control mechanisms and supervising internal audits;
promoting communications between the company’s administrative and supervisory bodies, independent auditors and the internal audit bodies;
supervising the management and control of contingencies; and
analyzing the quarterly information and the financial statements prepared periodically by the company, including the audited consolidated financial statements, as well as the management report and any analysis disclosed by management of our company’s financial condition and operating results.
| · | advising our board of directors in connection with business risk assessment, internal control mechanisms and supervising internal audits; |
| · | promoting communications between the company’s administrative and supervisory bodies, independent auditors and the internal audit bodies; |
| · | supervising the management and control of contingencies; and |
| · | analyzing the quarterly information and the financial statements prepared periodically by the company, including the audited consolidated financial statements, as well as the management report and any analysis disclosed by management of our company’s financial condition and operating results. |
The CARC must be composed of three to five members, all of whom must be members of Oi’s board of directors and meet the independence requirements of Rule10A-3 under the Exchange Act. According to articleArticle 32 of Oi’sby-laws, the members of the CARC are appointed by Oi’s board of directors.
Members of the CARC serve for atwo-year terms that coincide with the terms of the members of our board of directors. One of the members is designated as the chairmanCoordinator of the CARC. The current members of the CARC are: Henrique José Fernandes Luz (chairman)(Coordinator), Marcos Bastos Rocha, Marcos Grodetzky, Wallim Cruz de Vasconcellos Junior,Claudia Quintella Woods, and Maria Helena dos Santos Fernandes de Santana.
The CARC is responsible for performing the functions of an audit committee set forth in Rule10A-3 under the Exchange Act, other than the engagement and dismissal of our independent auditors. Under Brazilian law, the function of engaging independent auditors is reserved for the board of directors. As a result, as specified in Section 3(a)(58) of the Exchange Act, our board of directors functions as our audit committee for the purpose of approving any engagement of our independent auditors for audit andnon-audit services provided to us or our subsidiaries.
Share Ownership
As of April 24, 2020,May 4, 2021, the number of Common Shares and Preferred Shares held by the members of Oi’s board of directors and board of executive officers, supervisory or management bodies, including outstanding stock options, dodid not exceed 1% of either class of Oi’s outstanding shares.
Employees
As of December 31, 2019,2020, we had a total of 58,089 employees.46,624 employees from continuing and discontinued operations. All of our employees are employed on a full-time basis, divided into the following functions: network operations, sales and marketing, information technology, call center operations and support areas.
The table below sets forth a breakdown of our employees by main category of activity and geographic location as of the dates indicated:
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| December 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
Number of employees by category of activity: | ||||||||||||
Plant operation, maintenance, expansion and modernization | 36,149 | 34,620 | 33,019 | |||||||||
Sales and marketing | 4,808 | 5,131 | 5,069 | |||||||||
Call center operations | 15,046 | 14,993 | 13,202 | |||||||||
Support areas | 2,086 | 2,131 | 4,002 | |||||||||
Authorized agents | — | — | 154 | |||||||||
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Total | 58,089 | 56,875 | 55,446 | |||||||||
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Number of employees by geographic location: | ||||||||||||
Rio de Janeiro | 15,296 | 15,406 | 16,657 | |||||||||
Goiás | 7,708 | 7,666 | 6,795 | |||||||||
Paraná | 7,175 | 6,996 | 6,040 | |||||||||
Mato Gross do Sul | 3,542 | 3,818 | 3,077 | |||||||||
São Paulo | 1,470 | 1,630 | 1,612 | |||||||||
Minas Gerais | 1,437 | 1,544 | 1,506 | |||||||||
Rio Grande do Sul | 3,945 | 3,730 | 3,555 | |||||||||
Bahia | 4,115 | 3,345 | 3,439 | |||||||||
Federal District | 770 | 715 | 588 | |||||||||
Santa Catarina | 2,025 | 2,195 | 2,503 | |||||||||
Pernambuco | 2,185 | 2,108 | 1,756 | |||||||||
Ceará | 1,828 | 1,941 | 1,746 | |||||||||
Pará | 1,599 | 1,367 | 1,536 | |||||||||
Mato Grosso | 199 | 192 | 195 | |||||||||
Maranhão | 1,098 | 806 | 963 | |||||||||
Amazonas | 821 | 730 | 624 | |||||||||
Espírito Santo | 132 | 148 | 143 | |||||||||
Paraiba | 439 | 462 | 503 | |||||||||
Piauí | 601 | 522 | 572 | |||||||||
Rondônia | 88 | 89 | 86 | |||||||||
Rio Grande do Norte | 436 | 458 | 495 | |||||||||
Sergipe | 284 | 328 | 345 | |||||||||
Alagoas | 269 | 290 | 326 | |||||||||
Tocantins | 68 | 61 | 55 | |||||||||
Amapá | 251 | 154 | 153 | |||||||||
Acre | 39 | 40 | 40 | |||||||||
Roraima | 269 | 134 | 136 | |||||||||
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Total | 58,089 | 56,875 | 55,446 | |||||||||
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December 31, | |||
2020 | 2019 | 2018 | |
| Number of employees by category of activity: | |||
| Plant operation, maintenance, expansion and modernization | 27,804 | 36,149 | 34,620 |
| Sales and marketing | 4,274 | 4,808 | 5,131 |
| Call center operations | 12,472 | 15,046 | 14,993 |
| Support areas | 2,074 | 2,086 | 2,131 |
| Authorized agents | — | — | — |
| Total | 46,624 | 58,089 | 56,875 |
| Number of employees by geographic location: | |||
| Rio de Janeiro | 12,138 | 15,296 | 15,406 |
| Goiás | 6,377 | 7,708 | 7,666 |
| Paraná | 6,550 | 7,175 | 6,996 |
| Mato Gross do Sul | 2,740 | 3,542 | 3,818 |
| São Paulo | 1,328 | 1,470 | 1,630 |
| Minas Gerais | 1,260 | 1,437 | 1,544 |
| Rio Grande do Sul | 3,411 | 3,945 | 3,730 |
| Bahia | 3,086 | 4,115 | 3,345 |
| Federal District | 814 | 770 | 715 |
| Santa Catarina | 1,578 | 2,025 | 2,195 |
| Pernambuco | 1,380 | 2,185 | 2,108 |
| Ceará | 1,321 | 1,828 | 1,941 |
| Pará | 1,066 | 1,599 | 1,367 |
| Mato Grosso | 168 | 199 | 192 |
| Maranhão | 692 | 1,098 | 806 |
| Amazonas | 485 | 821 | 730 |
| Espírito Santo | 107 | 132 | 148 |
| Paraiba | 375 | 439 | 462 |
| Piauí | 419 | 601 | 522 |
| Rondônia | 80 | 88 | 89 |
| Rio Grande do Norte | 332 | 436 | 458 |
| Sergipe | 234 | 284 | 328 |
| Alagoas | 207 | 269 | 290 |
| Tocantins | 60 | 68 | 61 |
| Amapá | 183 | 251 | 154 |
| Acre | 32 | 39 | 40 |
| Roraima | 201 | 269 | 134 |
| Total | 46,624 | 58,089 | 56,875 |
We negotiate separate collective bargaining agreements with three union committees each representing the local unions in several Brazilian states. New collective bargaining agreements are negotiated every year. We maintain good relations with each of the unions representing our employees. As of December 31, 2019,2020, approximately 40.5%32.6%, respectively, of the employees of our company were members of state labor unions associated either with the National Federation of Telecommunications Workers (Federação Nacional dos Trabalhadores em Telecomunicações) or with the Interstate Federation of Telecommunications Workers (Federação Interestadual dos Trabalhadores em Telecomunicações). We have never experienced a strike that had a material effect on our operations.
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Employee Benefits
Pension Benefit Plans
Sistel
Sistel is anot-for-profit private pension fund created by Telebrás in November 1977 to supplement the benefits provided by the federal government to employees of the former Telebrás System. The following are pension plans managed by Sistel.
PBS-A Plan. Since the privatization of Telebrás, the Sistel Benefits Plan (Plano de Benefícios da Sistel – Assistidos), orPBS-A plan, a defined benefit plan, has been sponsored by the fixed-line telecommunications companies that resulted from the privatization of Telebrás, including our company and TNL. ThePBS-A plan is self-funded and has been closed to new members since January 2000. Contributions to thePBS-A plan are contingent on the determination of an accumulated deficit and we are jointly and severally liable, along with other fixed-line telecommunications companies, for 100% of any insufficiency in payments owed to members of thePBS-A plan. As of December 31, 2019,2020, thePBS-A plan had a surplus of R$1,6832,213 million. We were not required to make contributions to thePBS-A plan in 2019.2020.
PAMA Plan and PCE Plan.Since the privatization of Telebrás, the Medical Assistance Plan to the Retired (Plano de Assistência Médica ao Aposentado), or PAMA, a health-care plan managed by Sistel, has been sponsored by the fixed-line telecommunications companies that resulted from the privatization of Telebrás, including our company. The PAMA plan has been closed to new members since February 2000, other than new beneficiaries of current members and employees that are covered by thePBS-A plan who have not yet elected to join the PAMA plan. In December 2003, we and the other telecommunications companies that resulted from the privatization of Telebrás began sponsoring the PCE –Special Coverage Plan, or the PCE plan, a health-care plan managed by Sistel. The PCE plan is open to employees that are covered by the PAMA plan. From February to July 2004, December 2005 to April 2006, June to September 2008, July 2009 to February 2010, March to November 2010, February 2011 to March 2012 and March 2012 until today, we offered incentives to our employees to migrate from the PAMA plan to the PCE plan.
In October 2015, in compliance with a court order, Sistel transferred the R$3,042 million surplus in thePBS-A plan to the PAMA plan to ensure the solvency of the PAMA plan. Of the total amount transferred, R$2,127 million is related to the plans sponsored by the company, apportioned proportionally to the obligations of the defined benefit plan.
As of December 31, 2019,2020, the PAMA plan had a surplus of R$279million.361 million. We were not required to make contributions to the PAMA plan in the year ended December 31, 2019.2020.
Fundação Atlântico de Seguridade Social
FATL is anot-for-profit, independent private pension fund that manages pension plans for the employees of its plans’ sponsors.
PBS-TNCP Plan.Since the privatization of Telebrás, our subsidiary Tele Norte Celular Participações S.A., or TNCP, has sponsored the Sistel Benefits Plan – TNCP (Plano de Benefícios da Sistel – TNCP), orPBS-TNCP plan. ThePBS-TNCP plan has been closed to new members since April 2004. Contributions to thePBS-TNCP plan are contingent on the determination of an accumulated deficit. As a result of the corporate reorganization and TNL’s earlier acquisition of control of TNCP, we are liable for 100% of any insufficiency in payments owed to members of thePBS-TNCP plan. Since January 2016, thePBS-TNCP plan has been managed by FATL.
As of December 31, 2019,2020, thePBS-TNCP plan had a surplus of R$2422 million. The PBS-TNCP Plan has a portfolio of federal government securities (NTN-B) held to maturity, which allows a positive price adjustment on December 31, 2020. This position is recognized by Resolution No. 30/2018 of the National Council for Supplementary Pension (CNPC).
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We were not requiredunder no obligation to make contributionscontribute to thePBS-TNCP plan in the year endedon December 31, 2019.2020.
CELPREV Plan.In March 2004, Amazônia, a subsidiary of TNCP, began sponsoring the CelPrev Amazônia, or CELPREV plan, a defined contribution plan managed by Sistel. Since January 2016, the CELPREV plan has been managed by FATL. The CELPREV plan was offered to employees of Amazônia who did not participate in thePBS-TNCP plan, as well as to its new employees. Participants in thePBS-TNCP plan were encouraged to migrate to the CELPREV plan. Approximately 27.3% of participants in thePBS-TNCP plan migrated to the CELPREV plan. The CELPREV Plan has been closed to new members since January 2018. As of December 31, 2019,2020, the CELPREV plan had a surplus of R$43 million. We were not required to make contributions to the CELPREV plan in the year ended December 31, 2019.
TCSPREV Plan.In December 1999, we and the other companies that participate in the plans managed by Sistel agreed to withdraw sponsorship of these plans and each company agreed to establish its own separate new plan for these participants. In February 2000, we began sponsoring the TCSPREV plan, a private variable contribution pension plan and settled benefit plan. Approximately 80% of participants in thePBS-A plan migrated to the TCSPREV plan. In March 2005, Fundação 14 de Previdência Privada, or Fundação 14, a privatenot-for-profit pension fund created by Brasil Telecom Holding in 2004 to manage the TCSPREV plan, began managingthemanaging the TCSPREV plan. In January 2010, FATL began managingthemanaging the TCSPREV plan.
The TCSPREV plan offers three categories of benefits to its members: (1) risk benefits, which are funded according to the defined benefit method; (2) programmable benefits, which are funded according to the defined contribution method; and (3) proportional paid benefits, applicable to those employees who migrated to a defined contribution method with their rights reserved as contributors to the defined benefit system. This plan is closed to new entrants. We are liable for any deficits incurred by the TCSPREV plan according to the existing proportion of the contributions we make to this plan.
In November 2018, the BrTPREV benefit plan was effectively merged into the TCSPREV benefit plan, according to ordinance No.995 of the National Superintendency of Complementary Social Security (SuperintendêSuperintendência Nacional dePrevidê Previdência Complementar), dated October 24, 2018. With the recognition and registration of the merger, the participants and beneficiaries linked to BrTPREV automatically became participants and beneficiaries of TCSPREV, in accordance with the categories of beneficiaries existing on the day prior to the merger date.
The BrTPREV plan is a private defined contribution plan that we began sponsoring in October 2002. Approximately 96% of our active employees that were participants in the Fundador/Alternativo plan (for which we assumed liability in 2000 as a result of our acquisition of CRT—Companhia Riograndense de Telecomunicações) migrated to the BrTPREV plan. The BrTPREV plan was offered to our new employees from March 2003 to February 2005, when it was closed to new participants. In 2012, as sponsor of the BrTPREV plan,Plan, which was merged into the TCSPREV Plan, Oi entered into a financial obligation agreement with FATL with respect to deficits under the BrTPREV plan.Plan. We remain bound to this financial obligation contract. This obligation wasis classified as a Class I claim under the RJ Plan.
As a result of the RJ Proceedings, certain of our unfunded obligations under our post-retirement plans were novated. As of December 31, 2019,2020, we had recorded R$627694 on our balance sheet as “liability for pension benefits,” net of provision for unfunded status on our balance sheet, represented by the commitment under the terms of the RJ Plan related to the financial obligations agreement, entered into by Oi and FATL intended for the payment of the mathematical provision without coverage by the plan’s assets.
As of December 31, 2019,2020, the TCSPREV plan was balanced.had a surplus of R$324 million. The TCSPREV plan has a large portfolio of federal government securities (NTN-B) held to maturity. This position, is recognized by Resolution 16/2014No. 30/2018 of the National Council of Supplementary Pensionsfor Private Pension (CNPC)., is higher than the registered deficit, resulting in a positive net result on December 31, 2020. We made contributions to the incorporated BrTPREVmerged TCSPREV plan of less than R$1 million in the year ended December 31, 2019.2020.
PBS-Telemar Plan.In September 2000, Telemar began sponsoring thePBS-Telemar plan, a private defined benefit plan offered to Telemar’s employees. In February 2005, FATL began managing thePBS-Telemar plan. As a result of the corporate reorganization, we have assumed Telemar’s obligations under thePBS-Telemar plan. ThePBS-Telemar plan has the same characteristics as thePBS-A plan. ThePBS-Telemar plan was closed to new participants in September 2000. We are responsible for any deficits incurred by thePBS-Telemar plan according to the existing proportion of the contributions we make to this plan and those made by participants.
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AsThe PBS-Telemar Plan has a portfolio of federal government securities (NTN-B) held to maturity, which allows a positive price adjustment on December 31, 2019,2020. This position is recognized by Resolution No. 30/2018 of thePBS-Telemar plan had a surplus of R$65million. We made contributions to thePBS-Telemar plan of less than R$1 million in the year ended December 31, 2019. National Council for Supplementary Pension (CNPC).
TelemarPrev Plan.In September 2000, Telemar began sponsoring the TelemarPrev plan, a private variable contribution pension plan. Approximately 96% of participants in thePBS-Telemar plan migrated to the TelemarPrev plan. In February 2005, FATL began managing the TelemarPrev plan. As a result of the corporate reorganization, we have assumed Telemar’s obligations under the TelemarPrev plan.
The TelemarPrev plan offers two categories of benefits to its members: (1) risk benefits, which are funded according to the defined benefit method; and (2) programmable benefits, which are funded according to the defined contribution method. We are liable for any deficits incurred by the TelemarPrev plan according to the proportion of the contributions we make to this plan.
As of December 31, 2019,2020, the TelemarPrev plan had a surplus of R$32039 million. We were not required to make contributions to the TelemarPrev plan in the year ended December 31, 2019.2020.
Medical, Dental and Employee Assistance Benefits
We provide our employees with medical and dental assistance, pharmacy and prescription drug assistance, group life insurance and meal, food and transportation assistance. We and our employees cover the costs of these benefits on a shared basis. In 2019,2020, we contributed R$304315 million to the medical and dental assistance plans, R$3 million to the occupational medicine plans, R$333296 million for the Worker’s Food Program (Programa de Alimentação do Trabalhador) and R$8861 million to the other benefits programs.
Profit Sharing Plans
The operational targets are part of a profit sharing plan implemented by the Company as an incentive for employees to pursue our goals and to align employees’ interests with those of our shareholders. Profit sharing occurs if financial and operational targets defined annually by our board of directors are achieved. As of December 31, 2019,2020, we had provisioned R$247387.2 million to be distributed in variable compensation with respect to 2019.
We also have implemented a profit sharing plan as an incentive for employees to pursue our goals and to align employees’ interests with those of our shareholders. Profit sharing occurs if economic operational and financial targets defined annually by our board of directors are achieved.2020.
Education and Training
We contribute to the professional qualification of our employees by offering training for the development of organizational and technical skills. In 2019,2020, we offered approximately 4.93.1 million hours of training and we invested approximately R$23.519.1 million in the qualification and training of our employees.
| ITEM 7. | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS |
Major Shareholders
Oi has two outstanding classes of share capital: Common Shares and Preferred Shares with no par value. Generally, only Common Shares have voting rights. Preferred Shares have voting rights only in exceptional circumstances. As of the date of this annual report, Preferred Shares have full voting rights pursuant to Oi’sby-laws as a result of Oi’s failure to make mandatory dividend payments since 2014. For more information, see “Item 8. Financial Information—Dividends and Dividend Policy—Dividend Policy” and “Item 10. Additional Information—Description of Oi’sBy-laws—Voting Rights—Voting Rights of Preferred Shares.”
As of April 24, 2020,May 4, 2021, Oi had issued 5,954,205,0016,598,224,091 total shares, consisting of 5,796,477,7606,440,496,850 issued Common Shares and 157,727,241 issued Preferred Shares, including 30,595644,049,685 Common Shares and 1,811,755 Preferred Shares held in treasury.
As of April 24, 2020,May 4, 2021, Oi had approximately 1.41.55 million shareholders, including 5138 U.S. resident holders of Common Shares (including the depositary of the Common ADS program) and approximately 5two U.S. resident holders of Preferred Shares (including the depositary of the Preferred ADS program). As of April 24, 2020,May 4, 2021, there were approximately 1.3 billion60,000,000 Common Shares (including Common Shares represented by ADSs) and approximately 29 million14,000,000 Preferred Shares (including Preferred Shares represented by ADSs) held by U.S. resident holders.
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The following table sets forth information concerning the ownership of Common Shares and Preferred Shares as of April 24, 2020,May 4, 2021, by each person whom we know to be the owner of more than 5% of the outstanding shares of any class of Oi’s share capital, and by all of Oi’s directors and executive officers as a group. Except for the shareholders listed below, we are not aware of any other shareholder holding more than 5% of any class of Oi’s share capital. Oi’s principal shareholders have the same voting rights with respect to each class of Oi’s shares that they own as other holders of shares of that class.
We have not sought to verify any information provided to us by our principal shareholders. The principal shareholders may hold, acquire, sell or otherwise dispose of our Common Shares or Preferred Shares at any time and may have acquired, sold or otherwise disposed of Common Shares or Preferred Shares since the date of the information reflected herein. Other information about our principal shareholders may also change over time.
| Common Shares | Preferred Shares | Total | Common Shares | Preferred Shares | Total | |||||||||||||||||||||||||
Name | Number of Shares | % of Shares Outstanding (1) | Number of Shares | % of Shares Outstanding (1) | Number of Shares | % of Shares Outstanding (1) | Number of Shares | % of Shares Outstanding(1) | Number of Shares | % of Shares Outstanding (1) | Number of Shares | % of Shares Outstanding (1) | ||||||||||||||||||
Brookfield Funds(2) | 535,308,795 | 9.24 | — | — | 535,308,795 | 8.99 | 557,415,165 | 9.62 | — | 557,415,165 | 9.36 | |||||||||||||||||||
GoldenTree Funds(3) | 317,881,347 | 5.48 | — | — | 317,881,347 | 5.34 | ||||||||||||||||||||||||
Solus Funds(4) | 371,261,320 | 6.40 | 14,133,586 | 9.06 | 385,394,906 | 6.47 | ||||||||||||||||||||||||
Bratel S.à r.l.(5) | 312,827,844 | 5.40 | 1,800,000 | 1.15 | 314,627,844 | 5.29 | ||||||||||||||||||||||||
| Bratel S.à r.l.(3) | 314,490,159 | 5.43 | — | 314,490,159 | 5.28 | |||||||||||||||||||||||||
All directors, fiscal council members and their alternates, and executive officers as a group | 5,910 | * | 24 | * | 5,934 | * | 5,910 | * | 24 | * | 5,934 | * | ||||||||||||||||||
______________
| (1) | Based on the number of total shares outstanding (5,952,362,651 shares) as of |
(2)Collectively refers to certain funds managed by certain Brookfield Asset Management, Inc.
|
| (3) |
|
|
Bratel S.à r.l., a Luxembourg private limited liability company, is a wholly-owned subsidiary of Pharol. Excludes 8,538,277 Common Shares and 17,076,554 Preferred Shares which Pharol has the option to acquire from PTIF in accordance with the PT Option Agreement. See “—PT Option Agreement.” |
| * | less than 1% |
Changes in Share Ownership
Changes in GoldenTree Shareholding Interest
In August 2018, GoldenTree Asset Management LP, a Delaware limited partnership that serves as the investment manager or adviser to the GoldenTree Funds with respect to the Common Shares held by the GoldenTree Funds, GoldenTree Asset Management LLC, a Delaware limited liability company that serves as the general partner to GoldenTree Asset Management LP, and Mr. Steven A. Tananbaum, a United States citizen, who serves as the managing member to GoldenTree Asset Management LLC, jointly filed a Schedule 13D with the SEC disclosing the GoldenTree Funds’ ownership of 201,823,190 Common Shares as of July 27, 2018, which was equivalent to 9.39% of Oi’s outstanding common stock. Of these, the GoldenTree Funds acquired 187,339,290 Common Shares through their participation in the Capitalization of Credits Capital Increase. In addition, the GoldenTree Funds received 2,645,333 ADWs in the Capitalization of Credits Capital Increase, which they had the right to exercise to acquire 13,226,665 Common Shares.
In November 2018, GoldenTree Asset Management LP, GoldenTree Asset Management LLC, and Mr. Steven A. Tananbaum jointly filed a Schedule 13D/A with the SEC disclosing the GoldenTree Funds’ ownership of 258,592,500 Common Shares as of November 28, 2018, which was equivalent to 11.4% of Oi’s outstanding common stock.
In January 2019, GoldenTree Asset Management LP, GoldenTree Asset Management LLC, and Mr. Steven A. Tananbaum jointly filed a Schedule 13D/A with the SEC disclosing the GoldenTree Funds’ ownership of 593,920,753 Common Shares as of January 16, 2018, which was equivalent to 15.4% of Oi’s outstanding common stock.
In January 2019, the GoldenTree Funds acquired Common Shares through their participation in the preemptive rights offering and pursuant to their commitments under the Commitment Agreement.
In April 2019, GoldenTree Asset Management LP, GoldenTree Asset Management LLC, and Mr. Steven A. Tananbaum jointly filed a Schedule 13D/A with the SEC disclosing the GoldenTree Funds’ ownership of 865,512,751 Common Shares as of April 9, 2019, which was equivalent to 14.7% of Oi’s outstanding common stock.
In August 2019, GoldenTree Asset Management LP, GoldenTree Asset Management LLC and Mr. Steven A. Tananbaum jointly filed a Schedule 13D/A with the SEC disclosing the GoldenTree Funds’ ownership of 850,609,751 Common Shares as of August 19, 2019, which was equivalent to 12.8% of Oi’s outstanding common stock
In September 2019, GoldenTree Asset Management LP, GoldenTree Asset Management LLC and Mr. Steven A. Tananbaum jointly filed a Schedule 13D/A with the SEC disclosing the GoldenTree Funds’ ownership of 739,956,951 Common Shares as of September 17, 2019, which was equivalent to 12.8% of Oi’s outstanding common stock.
In January 2020, GoldenTree Asset Management LP, GoldenTree Asset Management LLC and Mr. Steven A. Tananbaum jointly filed a Schedule 13D/A with the SEC disclosing the GoldenTree Funds’ ownership of 567,482,776 Common Shares as of January 24, 2020, which was equivalent to 9.79% of Oi’s outstanding common stock.
In March 2020, GoldenTree Asset Management LP, GoldenTree Asset Management LLC and Mr. Steven A. Tananbaum jointly filed a Schedule 13D/A with the SEC disclosing the GoldenTree Funds’ ownership of 398,881,176 Common Shares as of March 13, 2020, which was equivalent to 6.88% of Oi’s outstanding common stock.
In April 2020, GoldenTree Asset Management LP, GoldenTree Asset Management LLC and Mr. Steven A. Tananbaum jointly filed a Schedule 13D with the SEC disclosing the GoldenTree Funds’ ownership of 317,881,347 Common Shares as of April 23, 2020, which was equivalent to 5.48% of Oi’s outstanding common stock.
Changes in Solus Shareholding Interest
In February 2019, Solus Alternative Asset Management LP, a Delaware limited partnership that serves as the investment manager to the Solus Funds with respect to the Preferred Shares held by the Solus Funds, Solus GP LLC, a Delaware limited liability company that serves as the general partner to Solus Alternative Asset Management LP, and Mr. Christopher Pucillo, a United States citizen, who serves as the managing member to Solus GP LLC, jointly filed a Schedule 13G with the SEC disclosing the Solus Funds’ ownership of 201,230,955 Common Shares, which was equivalent to 8.88% of Oi’s outstanding common stock as of December 31, 2018, and 14,145,359 Preferred Shares, which was equivalent to 9.07% of Oi’s outstanding preferred stock as of December 31, 2018.
In January 2019, the Solus Funds acquired Common Shares through their participation in the preemptive rights offering and pursuant to their commitments under the Commitment Agreement.
In February 2020, Solus Alternative Asset Management LP, Solus GP LLC and Mr. Christopher Pucillo jointly filed a Schedule 13G with the SEC disclosing the Solus Funds’ ownership of 371,261,320 Common Shares which was equivalent to 6.40% of Oi’s outstanding common stock as of December 31, 2019, and 14,133,586 Preferred Shares, which was equivalent to 8.96% of Oi’s outstanding preferred stock as of December 31, 2019.
Changes in Brookfield Shareholding Interest
In September 2018, Brookfield Asset Management, Inc. and certain funds managed by it, or the Brookfield Funds, jointly filed a Schedule 13D with the SEC disclosing the Brookfield Funds’ ownership of 123,396,285 Common Shares as of August 16, 2018, which was equivalent to 5.74% of Oi’s outstanding common stock. Of these, certain of the Brookfield Funds acquired 106,054,035 Common Shares through their participation in the Capitalization of Credits Capital Increase and 17,342,250 Common Shares through open market purchases. In addition, the Brookfield Funds received 1,515,232 ADWs in the Capitalization of Credits Capital Increase, which they had the right to exercise to acquire 7,576,160 Common ADSs.
In January 2019, Brookfield Asset Management, Inc. and the Brookfield Funds jointly filed a Schedule 13D/A with the SEC disclosing the Brookfield Funds’ ownership of 343,410,230 Common Shares as of January 11, 2019, which was equivalent to 9.0% of Oi’s outstanding common stock, all of which were held in the form of 68,682,046
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ADSs, which included Common Shares that the Brookfield Funds had the right to acquire through their participation in the preemptive rights offering and pursuant to their commitments under the Commitment Agreement.
In January 2019, the Brookfield Funds acquired Common Shares through their participation in the preemptive rights offering and pursuant to their commitments under the Commitment Agreement.
Changes in Bratel Shareholding Interest
As of January 1, 2017, Bratel B.V., a wholly-owned subsidiary of Pharol, owned 183,662,204 Common Shares.
On September 15, 2017 and September 29, 2017, Oi received letters from Bratel B.V. informing it that Bratel B.V. had transferred its shareholding interests in Oi to its wholly-owned subsidiary Bratel S.à r.l.
We believe that Bratel S.à r.l. acquired 110,597,655 Common Shares through its participation in the Capitalization of Credits Capital Increase and through open market purchases prior to the settlement of the Pharol Settlement Agreement on April 3, 2019.
In accordance with the Pharol Settlement Agreement, which was confirmed by the RJ Court in a decision that became final on April 3, 2019, Oi transferred to Bratel 32,000,000 Common Shares and 1,800,000 Preferred Shares held in treasury.
Based on records that we receive from the B3 related to current holdings of our share capital through the B3, we believe that Bratel S.à r.l. has disposed of 13,432,0151,662,315 Common Shares through open market purchases since the settlement of the Pharol Settlement Agreement on April 3, 2019.
Changes in Morgan Stanley Shareholding Interest
In December 2020, Morgan Stanley, an investment bank incorporated in Delaware, and its wholly-owned subsidiary, Morgan Stanley Uruguay Ltda., incorporated in Uruguay, together referred to as the Morgan Stanley Funds, jointly filed a Schedule 13G with the SEC disclosing the Morgan Stanley Funds’ ownership of 290,122,896 Common Shares, which was equivalent to 5.0% of Oi’s outstanding common stock as of December 10, 2020.
In February 2021, Morgan Stanley and Morgan Stanley Uruguay Ltda. jointly filed a Schedule 13G/A with the SEC disclosing the Morgan Stanley Funds’ ownership of 323,851,535 Common Shares, which was equivalent to 5.6% of Oi’s outstanding stock as of December 31, 2020.
On February 16, 2021, Morgan Stanley filed a Form 13F with the SEC on behalf of itself and its institutional investment managers, including Morgan Stanley Uruguay Ltda., disclosing that it had reduced its ownership in Oi to below 5% of Oi’s outstanding stock.
PT Option Agreement
In May 2014, Oi completed a capital increase in which it issued, among other things 104,580,393 Common Shares and 172,025,273 of Preferred Shares to Pharol in exchange for the contribution by Pharol to Oi of all of the outstanding shares of PT Portugal. However, prior to this capital increase, Pharol’s then wholly-owned subsidiaries PTIF and PT Portugal subscribed to an aggregate of €897 million principal amount of commercial paper of Rio Forte that matured in July 2014. As a result of our acquisition of PT Portugal as part of the Oi capital increase, we became the creditor under this commercial paper.
On July 15 and 17, 2014, Rio Forte defaulted on the commercial paper held by PTIF and PT Portugal. On September 8, 2014, we, TmarPart, Pharol and our subsidiaries PT Portugal and PTIF, entered into the PT Exchange Agreement and a stock option agreement, or the PT Option Agreement.
On March 24, 2015, PT Portugal assigned its rights and obligations under the PT Exchange Agreement and the PT Option Agreement to PTIF. On March 27, 2015, PT Portugal assigned the Rio Forte commercial paper that it owned to PTIF. Under the PT Exchange Agreement, on March 30, 2015, we transferred the defaulted Rio Forte commercial paper to Pharol and Pharol delivered to us an aggregate of 47,434,872 Common Shares and 94,869,744 Preferred Shares, representing 16.9% of Oi’s outstanding share capital, including 17.1% of Oi’s outstanding voting capital prior to giving effect to the PT Exchange. Under Brazilian law, these shares are deemed to be held in treasury.
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Under the PT Option Agreement, PTIF granted to Pharol an option, or the PT Option, to acquire 47,434,872 Common Shares and 94,869,744 Preferred Shares. Pharol iswas entitled to exercise the PT Option in whole or in part, at any time prior to March 31, 2021. The number of shares subject to the PT Option iswas reduced on each March 31 such that:
100% was available until March 31, 2016;
90% was available between March 31, 2016 and March 31, 2017;
72% was available between March 31, 2017 and March 31, 2018;
54% will be available between March 31, 2018 and March 31, 2019;
36% will be available between March 31, 2019 and March 31, 2020; and
18% will be available between March 31, 2020 and March 31, 2021,
| · | 100% was available until March 31, 2016; |
| · | 90% was available between March 31, 2016 and March 31, 2017; |
| · | 72% was available between March 31, 2017 and March 31, 2018; |
| · | 54% was available between March 31, 2018 and March 31, 2019; |
| · | 36% was available between March 31, 2019 and March 31, 2020; and |
| · | 18% will be available between March 31, 2020 and March 31, 2021, |
in each case, less the number of shares with respect to the PT Option has been previously exercised. As of March 31, 2020,2021, Pharol had not exercised the PT Option with respect to any of Oi’s shares and, as a result, the option over 38,896,595 Common Shares and 77,793,190 of Preferred SharesPT Option has lapsed. The exercise prices under the PT Option are R$20.104 per Common Share and R$18.529 per Preferred Share, in each case as adjusted by the CDI rateplus 1.5% per annum, calculatedpro rata temporis, from March 31, 2015 to the date of the effective payment of the exercise price.
Oi is not required to maintain the shares subject to the PT Option in treasury. In the event that, at the time of exercise of the PT Option, PTIF and/or any of Oi’s other subsidiaries do not hold, in treasury, the number of shares with respect to which Pharol exercises the PT Option, the PT Option may be financially settled through payment by PTIF of the amount corresponding to the difference between the market price of the shares and the exercise price corresponding to these shares.
We may terminate the PT Option if (1) theby-laws of Pharol are amended to remove or amend the provision of thoseby-laws that limits the voting right to 10% of all votes corresponding to the capital stock of Pharol, except if this removal or amendment is required by law or by order of a competent governmental authority; (2) Pharol directly or indirectly engages in activities that compete with the activities Oi or Oi’s subsidiaries in the countries in which we or they operate; or (3) Pharol violates certain obligations under the PT Option Agreement.
Prior to the earlier of the expiration or full exercise of the PT Option, Pharol may not purchase shares of Oi, directly or indirectly, in any manner other than by exercising the PT Option. If the PT Option is exercised, Pharol will undertake its best efforts to integrate the shareholder bases of Pharol and Oi in the shortest time possible.
Pharol may not directly or indirectly transfer or assign the PT Option, in whole or in part, nor grant any rights under the PT Option, including any security interest in the PT Option or the shares underlying the PT Option, without the consent of Oi. If Pharol issues, directly or indirectly, any derivative instrument that is backed by or references Oi’s shares, it shall immediately use all proceeds derived directly or indirectly from such derivative instrument to acquire shares pursuant to the exercise of the PT Option.
Related Party Transactions
The following summarizes the material transactions that we have engaged in with Oi’s principal shareholders and their affiliates since January 1, 2019.2020.
Under the Brazilian Corporate Law, Oi’s directors and Oi’s executive officers cannot vote on any matter in which they have a conflict of interest and such transactions can only be approved on reasonable and fair terms and conditions that are no more favorable than the terms and conditions prevailing in the market or offered by third parties.
Transactions with Hispamar
We own 19% of the capital stock of Hispamar. We lease transponders on the Amazonas 3 satellite from Hispamar, which we use to provide voice and data services. During 2019,2020, our total consolidated expenses under the lease agreements amounted to R$203202 million. As of December 31, 2019,2020, we had accounts payable to Hispamar of R$5061 million.
Transactions with AIX
Companhia AIX de Participações S.A., in which we own 50% of the outstanding share capital, renders services to us relating to the rental of ducts for transmission of traffic originated outside our local network in our service areas. During 2019,2020, our total consolidated expenses for services rendered by AIX amounted to R$2122 million.
| ITEM 8. | FINANCIAL INFORMATION |
Consolidated Statements and Other Financial Information
Reference is made to Item 19 for a list of all financial statements filed as part of this annual report.
Legal Proceedings
We are a party to certain legal proceedings arising in the normal course of business, including civil, administrative, tax, social security, labor, government and arbitration proceedings. We classify our risk of loss in legal proceedings as “remote,” “possible” or “probable,” and we only record provisions for reasonably estimable probable losses, as determined by our management.
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As of December 31, 2019,2020, the total estimated amount in controversy for those proceedings in respect of which the risk of loss was deemed probable or possible totaled R$36,13436,994 million, and we had established provisions of R$5,2525,810 million relating to these proceedings. Our provisions for legal contingencies are subject to monthly monetary adjustments. For a detailed description of our provisions for contingencies, see note 24 to our audited consolidated financial statements.
In certain instances, we are required to make judicial deposits or post financial guarantees with the applicable judicial bodies. As of December 31, 2019,2020, we had made judicial deposits in the aggregate amount of R$8,1667,294 million, and obtained financial guarantees from third parties in the aggregate amount of R$11,91011,705 million. During 2019,2020, we paid fees in the aggregate amount of R$251241 million to the financial institutions from which we had obtained these guarantees, and as of December 31, 2019,2020, we had pledged 1,811,755 Preferred Shares, representing 1.15% of our outstanding share capital, as security for one of these financial guarantees.
Tax Proceedings
As of December 31, 2019,2020, the total estimated contingency in connection with tax proceedings against us in respect of which the risk of loss was deemed probable or possible totaled R$29,46729,663 million, and we had recorded provisions of R$1,0511,244 million relating to these proceedings. In accordance with Brazilian law, our tax contingencies are not subject to the RJ Plan.
The Brazilian corporate tax system is complex, and as of the date of this annual report, we are involved in tax proceedings regarding, and have filed claims to avoid payment of, certain taxes that we believe are unconstitutional. These tax contingencies, which relate primarily to value-added tax, service tax and taxes on revenue, are described in detail in note 24 to our audited consolidated financial statements included in this annual report. We record provisions for probable losses in connection with these claims based on an analysis of potential results, assuming a combination of litigation and settlement strategies. As of the date of this annual report, we do not believe that the proceedings that we consider as probable losses, if decided against us, will have a material adverse effect on our financial position. It is possible, however, that our future results of operations could be materially affected by changes in our assumptions and the effectiveness of our strategies with respect to these proceedings.
Value-Added State Taxes (ICMS)
Under the regulations governing the ICMS, in effect in all Brazilian states, telecommunications companies must pay ICMS on every transaction involving the sale of telecommunications services they provide. We may record ICMS credits for each of our purchases of operational assets. The ICMS regulations allow us to apply the credits we have recorded for the purchase of operational assets to reduce the ICMS amounts we must pay when we sell our services.
We have received various tax assessments challenging the amount of tax credits that we recorded to offset the ICMS amounts we owed. Most of the tax assessments are based on two main issues: (1) whether ICMS is due on those services subject to the Local Service Tax (Imposto Sobre Serviços de Qualquer Natureza), or ISS; and (2) whether some of the assets we have purchased are related to the telecommunications services provided, and, therefore, eligible for an ICMS tax credit. A small part of the assessments that are considered to have a probable risk of loss are related to: (1) whether certain revenues are subject to ICMS tax or ISS tax; (2) offset and usage of tax credits on the purchase of goods and other materials, including those necessary to maintain the network; and (3) assessments related tonon-compliance with certain ancillary(non-monetary) obligations.
As of December 31, 2019,2020, we deemed the risk of loss as possible with respect to approximately R$13,47013,464 million of these assessments and had not recorded any provisions in respect of these assessments. As of December 31, 2019,2020, we had recorded provisions in the amount of R$746782 million for those assessments in respect of which we deemed the risk of loss as probable.
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Local Service Tax (ISS)
We have received various tax assessments claiming that we owe ISS taxes on supplementary services. We have challenged these assessments on the basis that ISS taxes should not be applied to supplementary services (such as, among others things, equipment leasing and technical and administrative services) provided by telecommunications service providers, because these services do not clearly fit into the definition of “telecommunications services.”
As of December 31, 2019,2020, we deemed the risk of loss as possible with respect to approximately R$2,8402,306 million of these assessments and had not recorded any provisions in respect of these assessments. As of December 31, 2019,2020, we had recorded provisions in the amount of R$6971 million for those assessments in respect of which we deemed the risk of loss as probable.
FUST and FUNTTEL
The FUST is a fund that was established to promote the expansion of telecommunications services tonon-commercially viable users. The FUNTTEL was established to finance telecommunications technology research. We are required to make contributions to the FUST and the FUNTTEL. Due to a change by ANATELAnatel in the basis for calculation of our contributions to the FUST and the FUNTTEL, we made provisions for additional contributions to the FUST and TNL made provisions for additional contributions to the FUST and the FUNTTEL. With respect to the calculation of the contribution to the FUST, the Brazilian Association of Fixed-Line Companies(Associação Brasileira das Empresas de Telefonia Fixa) of which we are members, filed a lawsuit to request a review of the applicable legislation.
As of December 31, 2019,2020, we deemed the risk of loss as possible with respect to approximately R$5,1345,222 million of these assessments and had not recorded any provisions in respect of these assessments. As of December 31, 2019,2020, we had recorded provisions in the amount of R$519 million for those assessments in respect of which we deemed the risk of loss as probable.
Contributions to the INSS
Pursuant to Brazilian social security legislation, companies must pay contributions to the National Social Security Institute (Instituto Nacional do Seguro Social), or INSS, based on their payroll. In the case of outsourced services, the contracting parties must, in certain circumstances, withhold the social contribution due from the third-party service providers and pay the retained amounts to the INSS. In other cases, the parties are jointly and severally liable for contributions to the INSS. Assessments have been filed against us primarily relating to claims regarding joint and several liability and claims regarding the percentage to be used to calculate workers’ compensation benefits and other amounts subject to social security tax.
As of December 31, 2019,2020, we deemed the risk of loss as possible with respect to approximately R$650626 million of these assessments. As of December 31, 2019,2020, we had recorded provisions of R$2437 million for those assessments in respect of which we deemed the risk of loss as probable.
PIS and COFINS
In 2006, the Brazilian federal tax authorities filed a claim in the amount of R$1,026 million related to the basis for the calculation of PIS/COFINS. In 2007, TNL obtained a partially favorable decision in a lower court that reduced the amount of this claim to R$585 million. Both TNL and the Brazilian federal tax authorities filed appeals, with respect to which decisions are pending. As of December 31, 2019,2020, we deemed the risk of loss as possible with respect to approximately R$2,1362,282 million of these assessments and had not recorded any provisions in respect of these assessments. As of December 31, 2019,2020, we had recorded provisions of R$23141 million for those assessments in respect of which we deemed the risk of loss as probable.
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Other Tax Claims
There are various federal taxes that have been assessed against us, largely relating to (1) assessments of taxes against our company that we do not believe are due and which we are contesting, and (2) our use of tax credits to offset certain federal taxes, which the federal tax authorities are contesting.
As of December 31, 2019,2020, we deemed the risk of loss as possible with respect to approximately R$4,1864,519 million of these assessments. As December 31, 2019,2020, we had recorded provisions in the amount of R$184186 million for those assessments in respect of which we deemed the risk of loss as probable.
Civil Claims Relating to Oi S.A. and Our Brazilian Operations
As of December 31, 2019,2020, the total estimated contingency in connection with civil claims against us in respect of which the risk of loss was deemed probable or possible, totaled R$3,8185,253 million, and we had recorded provisions of R$2,1502,788 million relating to these proceedings.
Administrative Proceedings
On an almost weekly basis, we receive inquiries from ANATEL requiring information from us on our compliance with the various service obligations imposed on us by our concession agreements. If we are unable to respond satisfactorily to those inquiries or comply with our service obligations under our concession agreements, ANATEL may commence administrative proceedings in connection with such noncompliance. We have received numerous notices of commencement of administrative proceedings from ANATEL, mostly due to our inability to achieve certain targets established in the RGQ and the PGMU.
At the time that ANATEL notifies us it believes that we have failed to comply with our obligations, we evaluate the claim and, based on our assessment of the probability of loss relating to that claim, may establish a provision. We vigorously contest a substantial number of the assessments made against us.
As of December 31, 2019,2020, we had recorded provisions in the amount of R$5701,264 million with respect to these claims.
Brazilian Antitrust Proceedings
We are subject to administrative proceedings and preliminary investigations conducted by the Brazilian antitrust authorities with respect to potential violations of the Brazilian antitrust law. Such investigations may result in penalties, including fines. During 2019,2020, no fines or penalties were levied against us. We deemed the risk of loss as possible that we will be fined in one or more of such proceedings and have not recorded any provisions for those claims.
Financial Interest Agreements (PEX and PCT)
Prior to the privatization of Telebrás, users of fixed-line telephony services in Brazil were required to purchase the right to use fixed telephone lines. These purchases could be made through two types of financial interest agreements: (1) Plan of Expansion (Plano de Expansão), or PEX, contracts; and (2) Community Telephone Program (Planta Comunitária de Telefonia), or PCT, contracts. Under PEX contracts, customers who purchased a telephone line acquired the right subscribe for a number of a telephone company’s shares. Under the PCT program, users who purchased a telephone line acquired a participation in an association formed by a local community that subcontracted the construction or expansion of necessary infrastructure, which was then sold to the telephone company, in exchange for shares of the company. The number of shares to be issued to each user was determined based on a formula that divided the contract value by the book value of the shares.
We are a defendant in several claims filed by users of telephone lines in the State of Rio Grande do Sul. Prior to our acquisition of control of CRT in July 2000, CRT entered into PEX contracts with its fixed-line subscribers. Beginning in June 1997, certain of CRT’s fixed-line subscribers began to file suits in which they claimed that the calculation used by CRT to arrive at the number of shares to be issued pursuant to the financial interest agreements was incorrect and resulted in the claimants receiving too few shares.
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In addition, as successor to various companies we acquired in the privatization of Telebrás and which were subsequently merged into our company, we are subject to various civil claims filed by PCT participants who also disagree with the value of their shares in those companies and who seek to recover the amounts they invested.
In 2009, two court decisions significantly changed the assumptions underlying our estimate of the potential losses relating to these suits. In March 2009, the Brazilian Supreme Court published a decision ruling that the financial interest agreements are subject to the twenty-year statute of limitations prescribed by the Brazilian Civil Code, as opposed to the three-year statute of limitations prescribed by the Brazilian Corporate Law. This decision increased the likelihood of an unfavorable outcome in a greater number of these pending cases than previously anticipated. Also in March 2009, the Superior Court of Justice ruled that the number of shares to be issued must be calculated using the book value of the shares listed on company’s balance sheet at the end of the first month in which the shares were issued.
As of December 31, 2019,2020, we had recorded provisions in the amount of R$398339 million for those claims in respect of which we deemed the risk of loss as probable.
Customer Service Centers
We are a defendant in 47 civil class actions filed by the Attorney General of the National Treasury jointly with certain consumer agencies demanding there-opening of customer service centers. The lower courts have rendered decisions in all of these proceedings, some of which have been unfavorable to us. As of the date of this annual report, all of these proceedings are under appeal. As of December 31, 2019,2020, we had recorded provisions in the amount of R$16.6 million for those claims in respect of which we deemed the risk of loss as probable.
Customer Service
We are a defendant in a civil class action lawsuit filed by the Brazilian Federal Prosecutor’s OfficeseekingOffice seeking recovery for alleged collective moral damages caused by TNL’s allegednon-compliance with the Customer Service (Serviço de Atendimento ao Consumidor –SAC)regulations established by the Ministry of Justice (Ministério da Justiça). TNL presentedrecently filed a petition presenting the new factual and jurisprudential scenario, since its last defense and asked for a change of venue to federal courtwas made in Rio de Janeiro, where we are headquartered.2009. Other defendants have been named and await service of process. The amount involved in this action is R$300 million. As a result of a corporate reorganization in 2012, we have succeeded to TNL’s position as a defendant in this action. As of December 31, 2019,2020, we deemed the risk of loss as possible with respect to these lawsuits and had not made any provisions with respect to this action since it was awaiting the court’s initial decision.
Special Civil Court Proceedings
We are party to proceedings in special civil courts relating to customer claims in connection with our basic subscription services. The value of any individual claim does not exceed 40 minimum wages. As of December 31, 2019,2020, we had recorded provisions in the amount of R$11998 million for these claims in respect of which we deemed the risk of loss as probable.
Other Claims
We are defendants in various claims involving contract termination, indemnification of former suppliers and contractors, review of contractual conditions due to economic stabilization plans and breach of contract. As of December 31, 2019,2020, we had recorded provisions in the amount of R$1,0631,087 million in respect of these claims.
Labor Claims Relating to Oi S.A. and Our Brazilian Operations
We are a party to a large number of labor claims arising out of the ordinary course of our businesses. We do not believe any of these claims, individually or in the aggregate would have a material effect on our business, financial condition or results of operations if such claims are decided against us. These proceedings generally involve claims for: (1) risk premium payments sought by employees working in dangerous conditions; (2) wage parity claims seeking equal pay among employees who do the same kind of work, within a given period of time, and have the same productivity and technical performance; (3) indemnification payments for, among other things, work accidents, occupational injuries, employment stability, child care allowances and achievement of productivity standards set forth in our collective bargaining agreements; (4) overtime wages; and (5) joint liability allegations by employees of third-party service providers.
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As of December 31, 2019,2020, the total estimated contingency in connection with labor claims against us in respect of which the risk of loss was deemed probable or possible totaled R$2,8492,095 million, and we had recorded provisions of R$2,0511,797 million relating to these proceedings.
Legal Proceedings Relating to Our Financial Restructuring
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.
On December 20, 2017, the RJ Plan was approved by a significant majority of creditors of each class present at a GCM. On January 8, 2018, the RJ Court entered the Brazilian Confirmation Order, ratifying and confirming the RJ Plan, but modifying certain provisions of the RJ Plan. The Brazilian Confirmation Order was published in the Official Gazette of the State of Rio de Janeiro on February 5, 2018, the Brazilian Confirmation Date.
During 2018, the restructuring of the RJ Debtor’s financial debt in accordance with the applicable terms and conditions set forth in the RJ Plan was concluded.
Extension of the Judicial Reorganization Proceedings
The Brazilian Bankruptcy Law provides that the RJ Proceedings and the judicial supervision of the RJ Debtors may be terminated on the second anniversary of the Brazilian Confirmation Date if the RJ Court determines that all obligations provided for in the RJ Plan have been satisfied based on the analysis of compliance with the RJ Plan.
On December 6, 2019, we filed a petition with the RJ Court requesting that the judicial supervision of the RJ Debtors not be terminated on February 5, 2020, the second anniversary of the Brazilian Confirmation Date, in order to allow us to continue to execute the RJ Plan and remain focused on our strategic transformation. Notwithstanding the conclusion of the restructuring of the RJ Debtor’s financial debt in accordance with the applicable terms and conditions set forth in the RJ Plan, we presented to the RJ Court circumstances related to the complexity inherent to the magnitude of the RJ Proceedings and the ongoing reforms in the legal-regulatory environment, which we believe require additional measures yet to be implemented under the RJ Proceedings.
On February 27, 2020, wethe RJ Debtors filed a petition with the RJ Court requesting that we be permitted to submit to our creditors for their consideration and deliberation at a new general creditors’ meeting a proposed amendment to the RJ Plan designed to achieve greater operational and financial flexibility for our company to continue with investments and the fulfillment of our strategic plan. At the new general creditors’ meeting, only creditors of the RJ Debtors that held credits and had voting rights at the time of the original GCM and who continued to hold an interest in the debt obligations or equity securities of the RJ Debtors on February 27, 2020 will be entitled to vote.Strategic Plan.
On March 6, 2020, the RJ Court issued a decision granting our request to hold a new general creditors’ meeting to deliberate on a proposed amendment to the RJ Plan. The RJ Court required that:
the RJ Debtors must submit the proposed amendment to the RJ Plan to the RJ Court on or prior to September 8, 2020; and
At the new general creditors’ meeting, organized byheld on September 8, 2020, only creditors that held credits and had voting rights at the Judicial Administrator must take place within 60 days from the date of submissiontime of the proposed amendmentoriginal general creditors meeting and who continued to hold an interest in the debt obligations or equity securities of the Company on February 27, 2020 were entitled to vote.
On September 8, 2020, a GCM was held to consider approval of the RJ Plan Amendment. The creditors present at the GCM approved the RJ Plan Amendment pursuant to the requirements under the Brazilian Bankruptcy Law. On October 5, 2020, the RJ Court entered the RJ Plan Amendment Confirmation Order, which ratified and confirmed the RJ Plan Amendment. The RJ Plan Amendment Confirmation Order was published in the Official Gazette on October 8, 2020, the RJ Plan Amendment Confirmation Date.
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The RJ Plan Amendment authorized us to carry out certain transactions, including, among other things, the following: (1) forming five UPIs for the disposal of certain businesses and/or isolated assets pursuant to the Brazilian Bankruptcy Law; (2) improving the payment terms and conditions for a significant portion of small creditors as a way of reducing litigation and speeding up the settlement of these claims, as required by the RJ Debtors.
We intend to seek to amendCourt; (3) allowing the RJ PlanDebtors to raise additional financing and other funding to allow them to maintain the necessary investments and pay their creditors; and (4) segregating some fiber optics assets and infrastructure through SPE InfraCo to create a more flexible and efficient corporate structure to accelerate investments in order to facilitate asset sales contemplated by our strategic plan, including the potential saleexpansion of our mobile businessfiber optics network and allowing SPE InfraCo to have access to financial and capital markets and raise additional funds at lower costs.
The RJ Plan Amendment provides that the RJ Proceedings and the proposed salesjudicial supervision of othernon-core assets. We continue to discussthe RJ Debtors will terminate on May 30, 2022. Notwithstanding the terms of the proposed amendment with various constituencies of our company and can provide no assurances with respect to the specific terms of the proposed amendment that will be presented toRJ Plan Amendment, the RJ Court.
ANATELPlan Amendment Confirmation Order stipulates that the RJ Proceedings
As a result of and the commencementjudicial supervision of the RJ Debtors will terminate 12 months from the RJ Plan Amendment Confirmation Date, which term may be extended if additional time is required to implement the asset dispositions provided under the RJ Plan Amendment. Accordingly, as of the date of this annual report, the RJ Proceedings and the judicial supervision of the RJ Debtors are scheduled to terminate on June 20, 2016,October 8, 2021. However, the RJ Debtors have filed an interlocutory appeal to overturn the provisions of the RJ Plan Amendment Confirmation Order related to the termination of the RJ Proceedings. This appeal is pending judgment.
Settlement of ANATEL Claims
During the last quarter of 2020, we entered into a settlement agreement with ANATEL relating to all outstandingnon-tax claims of ANATEL against the RJ Debtors as of that date became subject to compromise under our RJ Proceedings. As of December 31, 2017, the aggregate amount of the contingencies for claims of ANATEL recognized by the RJ Court was R$9,334 million.
Under the RJ Plan, claims of ANATEL were classified as Class III claims. Under the RJ Plan, liquidated claims of ANATEL outstanding as of June 20, 2016 have been novated and in calculating the recovery of ANATEL under these claims the amounts of all accrued interest included in these claims was reduced by 50% and the amounts of all late charges included in these claims was reduced by 25%. The remaining amount of these claims will be settled in 240 monthly installments, beginning on June 30, 2018, in the amount of 0.160% of the outstanding claims for the first 60 monthly installments, 0.330% of the outstanding claims for the next 60 monthly installments, 0.500% of the outstanding claims for the next 60 monthly installments, 0.660% of the outstanding claims for the next 59 monthly installments, and the remainder at maturity on June 30, 2038. Beginning on July 31, 2018, the amounts of each monthly installment have been be adjusted by the SELIC variation. Payments of monthly installments will be made through the application of judicial deposits related to these claims until the balance of these judicial deposits has been exhausted and thereafter will be payable in cash inreais.
Under the RJ Plan,non-liquidated claims of ANATEL outstanding as of June 20, 2016 have been novated and ANATEL is entitled to the Default Recovery with respect to these claims.
In the event that a legal rule is adopted in Brazil that regulates an alternative manner for the settlement of the claims of ANATEL outstanding as of June 20, 2016, the RJ Debtors may adopt the new regime, observing the terms and conditions set forth in Oi’sby-laws.
Notwithstanding the above, ANATEL has challenged the treatment of its outstanding claims for fines, interest and penalties in the RJ Proceedings. Concurrently with our negotiations with our financial creditors as part of our RJ Proceedings, we engaged in negotiation and litigation with ANATEL, our largest creditor, with respect to the treatment of outstanding claims for fines, interest and penalties in the RJ Proceedings. On November 24, 2016, a hearing was held with the goal of consensually resolving ANATEL’s claims against the RJ Debtors’ as part of a mediation procedure initiated under RJ Proceedings. However, ANATEL filed an appeal against the decision which ordered the mediation, which is pending judgement.
The revised list of creditors submitted to the RJ Court by the Judicial Administrator, or the Second List of Creditors, recognized claims of ANATEL in the aggregate amount of approximately R$11.1 billion. On June 9, 2017 ANATEL filed a challenge to the Second List of Creditors, objecting the inclusion of its claim. We disagree with the amount and are challenging some of the noncompliance events alleged by ANATEL, and are also challenging the fairness of the penalties, emphasizing the unreasonableness of the amount of the imposed fines in light of the alleged noncompliance events.
The inclusion of the claims of ANATEL in the RJ Debtor’s judicial reorganization plan does not require the consent of ANATEL, but instead depends on the recognition of the applicability of the RJ Proceedings to these claims.
On August 23, 2016, ANATEL filed an appeal against the decision of the RJ Court which granted the processing of the RJ Proceedings, stating that the RJ Proceedings did not apply to ANATEL’s claims. On August 29, 2017, the 8th Civil Chamber of the Rio de Janeiro State Court of Justice granted ANATEL’s appeal to maintain the name of the RJ Debtors in the databases of the credit protection agencies, but held that thepre-petition claims of ANATEL were not tax claims and, therefore, were subject to the RJ Proceedings. On October 20, 2017, ANATEL filed a special and an extraordinary appeals againstProceedings, in accordance with the decisionprovisions of the 8th Civil ChamberRJ Plan Amendment and Law No. 13,988 of April 4, 2020. Pursuant to this settlement agreement, ANATEL agreed to provide a 50% discount on the Rio de Janeiro State Courtprincipal amount of Justice. Judgments on these appealsfines owed to ANATEL by the Superior CourtRJ Debtors, payable in 84 installments beginning in July 2023. Accordingly, the principal amount of Justice andANATEL’s claims against us was reduced from R$14.3 billion to R$7.2 billion. In addition, we are permitted to make installment payments earlier than scheduled through the Supreme Courttransfer of Brazil are pending.judicial deposits. During 2020, we transferred R$200 million in judicial deposits to ANATEL in connection with these claims.
Non-Provisioned Contingencies
We are defendants in various proceedings with no legal precedent involving network expansion plans, compensation for moral and material damages, collections and bidding proceedings, intellectual property and supplementary pension plan, among others, for which we deem the risk of loss as possible and have not recorded any provisions. As of December 31, 2019,2020, we deemed the risk of loss as possible with respect to R$30,88231,184 million of these proceedings. This amount is based on total value of the damages being sought by the plaintiffs; however, the value of some of these claims, cannot be estimated at this time. Typically, we believe the value of individual claims to be beyond the merits of the case in question.
Dividends and Dividend Policy
Dividend Policy
Oi’s dividend distribution policy has historically included the distribution of periodic dividends, based on the annual financial statements approved by Oi’s board of directors, in accordance with the Brazilian Corporate Law and as set forth in Oi’sby-laws, which provide that, in general, a minimum amount of 25% of Oi’s consolidated net income for each fiscal year, as calculated and adjusted for amounts allocated to legal and other applicable reserves in accordance with the Brazilian Corporate Law, must be distributed to shareholders. We refer to this amount as the mandatory distributable amount. Oi may pay the mandatory distributable amount as dividends, interest attributable to shareholders’ equity (which is similar to a dividend but is deductible in calculating corporate income tax and social contribution on net profits, subject to certain limitations imposed by law as described in “Item 10. Additional Information—Taxation—Brazilian Tax Considerations—Interest on Shareholders’ Equity”). Payment of intermediate or interim dividends is also be permitted, subject to market conditions, Oi’s then-prevailing financial condition and other factors deemed relevant by Oi’s board of directors. Oi may set off any payment of interim dividends against the amount of the mandatory distributable amount to be paid in the year in which the interim dividends are paid.
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Notwithstanding the above, under Section 10.1 ofaccording to the amendment to the RJ Plan approved by the creditors’ meeting held on September 8, 2020, in which altered the term established in clause 10.1.1 and clause 10.1.2, 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 February 5, 2024. After February 5, 2024,December 31, 2025. From January 1, 2026, Oi and the other RJ Debtors will be permitted to declare or pay dividends, interest on shareholders’ equity or other forms of return on capital or make any other payment or distribution on or related to their shares (including any payment related to a merger or consolidation) if the ratio of Oi’s consolidated net debt (defined as Financial Credits, minus Cash Balance (in each case as defined in the RJ Plan)) to EBITDA (as defined in the RJ Plan) for the fiscal year ended immediately prior to any such declaration or payment is less than or equal to 2 to 1.
The restrictions of the payment of dividends and other distributions described above are subject to the following exceptions:
dividends, return on capital or other distributions made between the RJ Debtors;
payments by Oi and the other RJ Debtors to dissenting shareholders, according to applicable law, carried out after February5, 2018; and
any payment of dividends made in accordance with the RJ Plan.
| · | dividends, return on capital or other distributions made between the RJ Debtors; |
| · | payments by Oi and the other RJ Debtors to dissenting shareholders, according to applicable law, carried out after February 5, 2018; and |
| · | any payment of dividends made in accordance with the RJ Plan. |
There shall not be any restriction to the distribution of dividends under the RJ Plan after the full payment of the Financial Credits.
Pursuant to Section 10.2.1 of the RJ Plan, if at any time any two of Standard & Poor’s, Moody’s and Fitch rate Oi as investment grade and no default occurs, the restrictions on distributions imposed by Section 10.1 of the RJ Plan will be suspended. However, if one of these rating agencies, or both of them, subsequently cancels or downgrades Oi’s rating, then the suspended restrictions will be reinstated.
When Oi declares dividends, Oi is generally required to pay them within 60 days of declaring them, unless the shareholders’ resolution establishes another payment date. In any event, if Oi declares dividends, Oi must pay them by the end of the fiscal year for which they are declared. Under Article 9 of Law No. 9,249/95 and Oi’sby-laws, Oi also may pay interest attributable to shareholders’ equity as an alternative form of dividends upon approval of Oi’s board of directors.
Because Oi’s shares are issued in book-entry form, dividends with respect to any share are automatically credited to the account holding such share. Shareholders who are not residents of Brazil must register with the Brazilian Central Bank in order for dividends, sales proceeds or other amounts with respect to their shares to be eligible to be remitted outside of Brazil.
The Common Shares and Preferred Shares underlying our ADSs are held in Brazil by the depositary, which has registered with the Brazilian Central Bank as the registered owner of such Common Shares and Preferred Shares. Payments of cash dividends and distributions, if any, will be made in Brazilian currency to the depositary. The depositary will then convert such proceeds into dollars and will cause such dollars to be distributed to holders of our ADSs. As with other types of remittances from Brazil, the Brazilian government may impose temporary restrictions on remittances to foreign investors of the proceeds of their investments in Brazil, as it did for approximately six months in 1989 and early 1999, and on the conversion of Brazilian currency into foreign currencies, which could hinder or prevent the depositary from converting dividends into U.S. dollars and remitting these U.S. dollars abroad. See “Item 3. Key Information—Risk Factors—Risks Relating to the Common Shares, Preferred Shares and ADSs.”
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Distributions of dividends, including interest attributable to shareholders’ equity, in any year are made:
first, to the holders of Preferred Shares, up to the greaternon-cumulative amount of: (1) 6.0% per year of the amount resulting from Oi’s share capital divided by the number of Oi’s total issued shares, or (2) 3.0% per year of the book value of Oi’s shareholders’ equity divided by the number of Oi’s total issued shares, or the Minimum Preferred Dividend;
then, to the holders of Common Shares, until the amount distributed in respect of each Common Share is equal to the amount distributed in respect of each Preferred Share; and
| first, to the holders of Preferred Shares, up to the greater non-cumulative amount of: (1) 6.0% per year of the amount resulting from Oi’s share capital divided by the number of Oi’s total issued shares, or (2) 3.0% per year of the book value of Oi’s shareholders’ equity divided by the number of Oi’s total issued shares, or the Minimum Preferred Dividend; |
· | then, to the holders of Common Shares, until the amount distributed in respect of each Common Share is equal to the amount distributed in respect of each Preferred Share; and |
| · | thereafter, to the holders of Common Shares and Preferred Shares on apro rata basis. |
Under Oi’sby-laws, if the Minimum Preferred Dividend is not paid for a period of three years, holders of Preferred Shares are entitled to full voting rights. As a result of Oi’s failure to pay the Minimum Preferred Dividend for 2014, 2015 and 2016, holders of Oi’s Preferred Shares obtained full voting rights on April 28, 2017, the date that Oi’s annual shareholders’ meeting approved our financial statements for fiscal year 2016.
Historical Payment of Dividends
Oi has not paid any dividends and/or interest attributable to shareholders’ equity since January 1, 2014.
Taxation of Dividends
Under the current Brazilian tax law, dividends paid to persons who are not Brazilian residents, including holders of ADSs, are not subject to Brazilian withholding tax, except for dividends declared based on profits generated prior to December 31, 1995, which may be subject to Brazilian withholding income tax at varying tax rates. Any payment of interest attributable to shareholders’ equity to holders of Common Shares, Preferred Shares or ADSs, whether or not they are Brazilian residents, is subject to Brazilian withholding tax at the rate of 15%, except that a 25% withholding tax rate applies if the recipient is domiciled in a Favorable Tax Jurisdiction. For information regarding Brazilian tax implications of dividends and interest attributable to shareholders’ equity, see “Item 10. Additional Information—Taxation—Brazilian Tax Considerations.”
Holders of Common Shares, Preferred Shares or ADSs may also be subject to U.S. federal income taxation on dividends and interest attributable to shareholders’ equity. For more information on the U.S. federal income tax implications of dividends and interest attributable to shareholders’ equity, see “Item 10. Additional Information—Taxation—U.S. Federal Income Tax Considerations.”
Significant Changes
Other than as disclosed in this annual report, no significant change has occurred since the date of the audited consolidated financial statements included in this annual report.
| ITEM 9. | THE OFFER AND LISTING |
Markets for Oi’s Equity Securities
The principal trading market for Common Shares and Preferred Shares is the B3, where they are traded under the symbols “OIBR3” and “OIBR4,” respectively. Oi’s Common ADSs trade on the NYSE under the symbol “OIBR.C.” The OTC Markets Group, Inc. publishes quotations for Oi’s Preferred ADS in the “pink sheets” under the trading symbol OIBRQ.
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Regulation of Brazilian Securities Markets
The Brazilian securities markets are regulated by the CVM, which has regulatory authority over the stock exchanges and the securities markets generally, the National Monetary Council and the Brazilian Central Bank, which has, among other powers, licensing authority over brokerage firms and which regulates foreign investment and foreign exchange transactions. The Brazilian securities markets are governed by (1) Law No. 6,385, as amended and supplemented, which is the principal law governing the Brazilian securities markets, (2) the Brazilian Corporate Law, and (3) the regulations issued by the CVM, the National Monetary Council and the Brazilian Central Bank.
These laws and regulations provide for, among other things, disclosure requirements applicable to issuers of publicly traded securities, restrictions on insider trading (including criminal sanctions under the Brazilian Penal Code) and price manipulation, protection of minority shareholders and disclosure of transactions in a company’s securities by its insiders, including directors, officers and major shareholders. They also provide for the licensing and oversight of brokerage firms and the governance of Brazilian stock exchanges.
However, the Brazilian securities markets are not as highly regulated or supervised as U.S. securities markets or securities markets in some other jurisdictions. In addition, rules and policies against self-dealing or for preserving shareholder interests may be less well-defined and enforced in Brazil than in the United States, which may put holders of Common Shares and Common ADSs at a disadvantage. Finally, corporate disclosures also may be less complete than for public companies in the United States and certain other jurisdictions.
Under the Brazilian Corporate Law, a company is either publicly held (companhia aberta), as Oi is, or privately held (companhia fechada). All publicly held companies are registered with the CVM and are subject to reporting and regulatory requirements. A company registered with CVM may have its securities traded either on the B3 or in the Brazilianover-the-counter market. Shares of companies, such as Oi, that are listed on the B3 may not simultaneously trade on the Brazilianover-the-counter market. The shares of a publicly held company may also be traded privately, subject to certain limitations.
The Brazilianover-the-counter market consists of direct trades between individuals in which a financial institution registered with the CVM serves as intermediary. No special application, other than registration with the CVM, is necessary for securities of a public company to be traded in this market. The CVM requires that it be given notice of all trades carried out in the Brazilianover-the-counter market by the respective intermediaries.
Brazilian regulations also require that any person or group of persons representing the same interest that has directly or indirectly carried out a material transaction or set of transactions by which the equity interest held by such person or group of persons surpasses or falls below the thresholds of 5%, or any 5% multiple thereof, of a type or class of shares of a publicly traded company must provide such publicly traded company with information on such transaction and its purpose, and such company must transmit this information to the CVM. If this acquisition causes a change in the control of the company or in the administrative structure of the company, or if this acquisition triggers the obligation to make a public offering in accordance with CVM Instruction No. 361, as amended, then the acquirer must disclose this information to the applicable stock exchanges and the same means of communication usually adopted by the company.
Trading on the B3
Overview of the B3
In 2000, the BOVESPA was reorganized through the execution of memoranda of understanding by the Brazilian stock exchanges. Following this reorganization, the BOVESPA was anon-profit entity owned by its member brokerage firms and trading on the BOVESPA was limited to these member brokerage firms and a limited number of authorized nonmembers. Under the memoranda, all securities are now traded only on the BOVESPA, with the exception of electronically traded public debt securities and privatization auctions, which are traded on the Rio de Janeiro Stock Exchange.
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In August 2007, the BOVESPA underwent a corporate restructuring that resulted in the creation of BOVESPA Holding S.A., a public corporation, whose wholly-owned subsidiaries were (1) the BOVESPA, which is responsible for the operations of the stock exchange and the organizedover-the-counter markets, and (2) the Brazilian Settlement and Custodial Company (Companhia Brasileira de Liquidação e Custódia), or CBLC, which is responsible for settlement, clearing and depositary services. In the corporate restructuring, all holders of membership certificates of the BOVESPA and of shares of CBLC became shareholders of BOVESPA Holding S.A. As a result of the corporate restructuring, access to the trading and other services rendered by the BOVESPA is not conditioned on stock ownership in BOVESPA Holding S.A.
In May 2008, the BOVESPA merged with the Commodities and Futures Exchange (Bolsa de Mercadorias & Futuros) to form the BM&FBOVESPA. In November 2008, the CBLC merged with the BM&FBOVESPA. As a result, the BM&FBOVESPA now performs its own settlement, clearing and depositary services. In March 2017, BM&FBOVESPA merged with Cetip S.A. – Mercados Organizados, a settlement and clearing house in Brazil to form the B3 S.A. – Brasil, Bolsa, Balcão.
Trading and Settlement
Trading of equity securities on the B3 is conducted through an electronic trading system called Megabolsa every business day, typically from 10:00 a.m. to 5:00 p.m., São Paulo time. During certain months, however, to account for daylight saving time in Brazil and more closely align with trading hours in the United States, trading hours on the B3 are extended by one hour to 6:00 p.m., São Paulo time. When trading ends at 5:00 p.m. São Paulo time, trading of equity securities on the B3 is also conducted after market between 5:25 p.m. and 6:00 p.m., São Paulo time, in an after-market system connected to both traditional brokerage firms and brokerage firms operating on the internet. This after-market trading is subject to regulatory limits on price volatility of securities and on the volume of shares traded by investors operating on the internet. When trading ends at 5:00 p.m. São Paulo time, there is no after-market trading.
Since March 2003, market making activities have been allowed on the B3. As of the date of this annual report Credit Suisse (Brasil) S.A. Corretora de Títulos e Valores Mobiliários acts as market maker of the Common Shares and Preferred Shares on the B3. Trading in securities listed on the B3 may be effected off the exchange in the unorganizedover-the-counter market under certain circumstances, although such trading is very limited.
The trading of securities of a company on the B3 is automatically suspended when a Company announces a material event. It is also recommended that the company simultaneously make a request to suspend trading in any international stock exchange in which its securities are traded. The CVM and the B3 have discretionary authority to suspend trading in shares of a particular issuer, based on or due to a belief that, among other reasons, a company has provided inadequate information regarding a material event or has provided inadequate responses to inquiries by the CVM or the B3.
In order to reduce volatility, the B3 has adopted a “circuit breaker” mechanism under which trading sessions may be suspended for a period of 30 minutes or one hour whenever the Ibovespa index falls 10% or 15%, respectively, compared to the closing of the previous trading session. Also, if after the reopening of the market the Ibovespa falls 20% compared to the closing of the previous day, the operations are suspended for a certain period to be defined by the B3. This mechanism is not applied in the last half hour of the trading session.
Settlement of transactions on the B3 is effected two business days after the trade date, without adjustment of the purchase price for inflation. Delivery of and payment for shares is made through the facilities of the clearing and settlement chamber of the B3.
Regulation of Foreign Investments
Trading on the B3 by a holder not deemed to be domiciled in Brazil for Brazilian tax and regulatory purposes, or aNon-Brazilian Holder, is subject to certain limitations under Brazilian foreign investment regulations. With limited exceptions,Non-Brazilian Holder may trade on the B3 only in accordance with the requirements of Annex I of Resolution No. 4,373 of the National Monetary Council. Annex I of Resolution No. 4,373 requires that securities held byNon-Brazilian Holders be registered, maintained in the custody of, or maintained in deposit accounts with, financial institutions that are authorized by the Brazilian Central Bank and the CVM, as applicable. Subject to limited exceptions provided in the CVM regulation or previous CVM authorization, Annex I of Resolution No. 4,373 requiresNon-Brazilian Holders (1) to restrict their securities trading to transactions on the B3 or qualifiedover-the-counter markets; and (2) to not transfer the ownership of investments made under Annex I of Resolution No. 4,373 through private transactions. See “Item 10. Additional Information—Exchange Controls—Annex I of Resolution No. 4,373,” and “Item 10. Additional Information—Exchange Controls—Annex II of Resolution No. 4,373 – ADSs” for further information about Resolution No. 4,373, and “Item 10. Additional Information—Taxation—Brazilian Tax Considerations—Taxation of Gains” for a description of certain tax benefits extended toNon-Brazilian Holders who qualify under Resolution No. 4,373.
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B3 Corporate Governance Standards
In December 2000, the B3 introduced three special listing segments:
Level 1 of Differentiated Corporate Governance Practices;
Level 2 of Differentiated Corporate Governance Practices; and
| Level 1 of Differentiated Corporate Governance Practices; |
· | Level 2 of Differentiated Corporate Governance Practices; and |
| · | TheNovo Mercado (New Market). |
These special listing segments were designed for the trading of shares issued by companies that voluntarily undertake to abide by corporate governance practices and disclosure requirements in addition to those already required by Brazilian law. The inclusion of a company in any of the special listing segments requires adherence to a series of corporate governance rules. These rules were designed to increase shareholders’ rights and enhance the quality of information provided to shareholders.
Oi’s shares joined Level 1 of Differentiated Corporate Governance Practices on December 14, 2012. As a Level 1 company, Oi must, among other things:
ensure that shares representing 25% of its total share capital are effectively available for trading;
adopt offering procedures that favor widespread ownership of shares whenever Oi makes a public offering;
comply with minimum quarterly disclosure standards, including issuing consolidated financial information, a cash flow statement, and special audit revisions on a quarterly basis;
follow stricter disclosure policies with respect to contracts with related parties, material contracts and transactions involving its securities made by its controlling shareholders, if any, directors or executive officers;
make a schedule of corporate events available to its shareholders; and
hold public meetings with analysts and investors at least annually.
| · | ensure that shares representing 25% of its total share capital are effectively available for trading; |
| · | adopt offering procedures that favor widespread ownership of shares whenever Oi makes a public offering; |
| · | comply with minimum quarterly disclosure standards, including issuing consolidated financial information, a cash flow statement, and special audit revisions on a quarterly basis; |
| · | follow stricter disclosure policies with respect to contracts with related parties, material contracts and transactions involving its securities made by its controlling shareholders, if any, directors or executive officers; |
| · | make a schedule of corporate events available to its shareholders; and |
| · | hold public meetings with analysts and investors at least annually. |
Pursuant to the regulations of the B3, the members of Oi’s board of directors and board of executive officers are personally liable for its compliance with the rules and regulations of the B3’s Level 1 Listing Segment.
Moreover, in September 2015, Oi amended itsby-laws in order to comply with the rules of theNovo Mercado segment of the B3 even though Oi has not formally joined this special listing segment. These amendments include the requirement that at least 20% of the members of Oi’s board of directors be independent members as defined in the listing regulations of theNovo Mercado and Article 141, paragraphs 4 and 5 of the Brazilian Corporate Law.
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| ITEM 10. | ADDITIONAL INFORMATION |
Description of Oi’sBy-laws
The following is a summary of the material provisions of Oi’sby-laws and of the Brazilian Corporate Law. In Brazil, a company’sby-laws (estatuto social) are the principal governing document of a corporation (sociedade anônima). This summary also includes relevant provisions of the RJ Plan. In case of a conflict and/or discrepancy between the RJ Plan and Oi’sby-laws’ rules, the RJ Plan shall prevail.
General
Oi’s registered name is Oi S.A. – In Judicial Reorganization, and its registered office is located in the City of Rio de Janeiro, State of Rio de Janeiro, Brazil. Oi’s registration number with the Board of Trade of the State of Rio de Janeiro isNo. 33.3.0029520-8. Oi has been duly registered with the CVM under No. 11312 since March 27, 1980. Oi’s headquarters are located in City of Rio de Janeiro, State of Rio de Janeiro, Brazil. Oi has a perpetual existence.
As of December 31, 2019 and April 24, 2020, Oi had outstanding share capital of R$32,538,937,370.00, comprised of 5,954,205,001 total shares, consisting of 5,796,477,760 issued Common Shares and 157,727,241 issued Preferred Shares, including 30,595 Common Shares and 1,811,755 Preferred Shares held in treasury. At an extraordinary shareholders’ meeting held on April 30, 2021, our shareholders voted to approve the merger of Telemar with and into Oi, as a result of which Oi issued 644,019,090 common shares in treasury. Accordingly, as of May 4, 2021, Oi had outstanding share capital of R$32,538,937,370.00, comprised of 6,598,224,091 total shares, consisting of 6,440,496,850 issued Common Shares and 157,727,241 issued Preferred Shares, including 644,049,685 Common Shares and 1,811,755 Preferred Shares held in treasury.
All of Oi’s outstanding share capital is fully paid. All of Oi’s shares are without par value. Under the Brazilian Corporate Law, the aggregate number of Oi’snon-voting and limited voting preferred shares may not exceedtwo-thirds of Oi’s total outstanding share capital. In addition, Oi’s board of directors may increase Oi’s share capital to a number of Common Shares equivalent to R$38,038,701,741.49, provided that no Preferred Shares are issued by Oi in public or private subscriptions.
Corporate Purposes
Under Article 2 of Oi’sby-laws, Oi’s corporate purposes are:
are to offer all categories of telecommunications services and perform all activities required or useful for the operation of these services, in conformity with its concessions, authorizations and permits;
to participate in the capital of other companies;
to organize wholly-owned subsidiaries for the performance of activities that are consistent with its corporatepermits. For achieving those purposes, and recommended to be decentralized;
to import, or promote the importation of,Oi may include third parties’ goods, and services that are necessary to the performance of activities consistent with its corporate purposes;as well as:
| · | to participate in the capital of other companies; |
| · | to organize wholly-owned subsidiaries for the performance of activities that are consistent with its corporate purposes and recommended to be decentralized; |
| · | to promote the importation of goods and services that are necessary to the performance of activities consistent with its corporate purposes; |
| · | to provide services of maintenance and installation of network infrastructure and lease of physical means, including for the placement of equipment, as well as perform activities related to access, storage, presentation, movement, retrieval and transmission of information, including consulting, project development, execution, implementation, marketing, operation, maintenance (technical assistance) and billing of systems related to these activities and other value-added services; |
| · | to operate in the specialized retail and wholesale trade of telecommunication services and telephony, communication, information technology and computer products, supplies and equipment; |
to provide technical assistance services to other telecommunications companies engaged in activities of common interest;
| · | to carry out the rental, maintenance, resale, operation, marketing and distribution of equipment, appliances and accessories, as well as the management, security and monitoring of mobile appliances, always in accordance with the licenses that confer such exploitation rights; |
| · | to commercialize, including, but not limited to, dispose of, buy, sell, lend, lease for free, rent, donate goods and/or commodities necessary or useful for the operation of telecommunications services; |
to perform study and research activities aimed at the development of the telecommunications sector;
to enter into contracts and agreements with other telecommunications companies or other persons or entities to assure the operations of its services, with no loss of its attributions and responsibilities; and
to perform other activities related to the above corporate purposes.
| · | to perform study and research activities aimed at the development of the telecommunications and technology sector; |
| · | to enter into contracts and agreements with other telecommunications companies or other persons or entities to assure the operations of its services, with no loss of its attributions and responsibilities; |
| · | to develop, build and operate telecommunications networks and provide value added services, in particular: (i) alternative local access to data, video and voice ancillary services; (ii) internet access; and (iii) distribution of content in various formats, applications and additional services owned or provided by third parties; |
| · | to offer and manage content and connectivity solutions for data access, storage, presentation, movement and retrieval; |
| · | to sell, license and assign the use of software; |
| · | to provide online movie rental subscription service, owned by Oi and/or by third parties, via the internet; |
| · | to distribute video on demand content from any available technology; |
| · | to provide Electronic Mass Communication Packaging services on a subscription basis; |
| · | to transmit publicity and advertising via the Internet, as well as provide promotion and marketing services; |
| · | to provide billing and collection services against its customers and those of third parties; |
| · | to provide help-desk and customer support services, related to telecommunications and information technology and security, as well as maintain and manage any and all relationships with the end user and the user derived from Oi’s activities; |
| · | to offer and exploit integrated solutions, manage and provide services related to: (i) data center, including cloud, hosting and colocation; (ii) storage, processing and managing data, information, text, images, videos, applications and information systems and akin; (iii) information technology, (iv) information and communication security; (v) electronic security system, and (vi) internet of things; and |
| · | to perform other activities related to the above corporate purposes. |
Board of Directors
Oi’sby-laws provide for a board of directors of up to 11 members with no alternate members. Members who are absent at meetings will be entitled to appoint a substitute among the present members to vote in their stead. Under Oi’sby-laws, any matters subject to the approval of Oi’s board of directors can be approved only by a majority of votes of the members of Oi’s board of directors. In the event of a tie, the chairman of the board of directors shall cast the deciding vote. Under Oi’sby-laws, Oi’s board of directors may only deliberate if a majority of its members are present at a duly convened meeting.
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Oi’s board of directors is presided over by the chairman of the board of directors and, in his or her absence, on an interim basis, by the vice-chairman of the board of directors and, in his or her absence, on an interim basis, by another member appointed by the chairman or, if no such member has been appointed, by another member appointed by the other members in attendance. Pursuant to Oi’sby-laws, the chairman and vice-chairman of Oi’s board of directors are elected by the members of the Oi’s board of directors during their first meeting following their election. Oi’sby-laws provide that the positions of chairman of Oi’s board of directors and Oi’s chief executive officer or principal executive may not be held by the same person.
The following paragraphs describe the material provisions of Oi’sby-laws and of the Brazilian Corporate Law that apply to the members of Oi’s board of directors.
Election of Directors
The members of Oi’s board of directors are elected at general meetings of shareholders for concurrenttwo-year terms and are eligible for reelection.
Generally, members of Oi’s board of directors are subject to removal at any time with or without cause at a general meeting of shareholders. The RJ Plan, however, provides certain corporate governance rules that apply to Oi’s board of directors during the effectiveness of the RJ Plan, superseding the provisions of Oi’sby-laws. As provided in the RJ Plan, until the expiration of the term of Oi’s current board of directors, which will occur on September 17, 2020, the members of Oi’s board of directors may not be removed from office, except due to gross mistake, willful misconduct, gross negligence, abuse of term of office or violation of fiduciary duties in accordance with applicable law. Following the expiration of the term of Oi’s current board of directors, the election of subsequent boards of directors will followfollows the rules established by Oi’sby-laws and the Brazilian Corporate Law.
The tenure of the members of the board of directors and board of executive officers is conditioned on such members signing a Term of Consent (Termo de Anuência dos Administradores) in accordance with the Level 1 Corporate Governance Listing Segment of the B3 and complying with applicable legal requirements.
Qualification of Directors
There is no minimum share ownership or citizenship or residency requirement to qualify for membership on Oi’s board of directors. Oi’sby-laws do not require the members of its board of directors to be residents of Brazil. The Brazilian Corporate Law requires each of Oi’s executive officers to be residents of Brazil. The tenure of the members of the board of directors will be conditioned on the appointment of a representative who resides in Brazil, with powers to receive service of process in proceedings initiated against such member based on the corporate legislation, by means of apower-of-attorney with a validity term of at least three years after the end of such member’s term of office. Pursuant to Oi’sby-laws, Oi’s directors may not (1) hold positions, particularly positions in advisory, management or audit committees, of companies that compete with Oi or its subsidiaries, and (2) may not have conflicts of interest with Oi or its subsidiaries.
Pursuant to Oi’sby-laws, at least 20% of the members of Oi’s board of directors must be independent as defined in the listing regulations of theNovo Mercado segment of the B3 and must be expressly declared as independent in the shareholders’ meeting that elects them, being also considered as independent the members elected as per article 141, paragraphs 4 and 5 of the Brazilian Corporate Law. All of the members of Oi’s board of directors are independent.
Fiduciary Duties and Conflicts of Interest
All members of Oi’s board of directors owe fiduciary duties to Oi and all of Oi’s shareholders.
Under the Brazilian Corporate Law, if one of Oi’s directors or executive officers has a conflict of interest with Oi in connection with any proposed transaction, such director or executive officer may not vote in any decision of Oi’s board of directors or of Oi’s board of executive officers, as the case may be, regarding such transaction and must disclose the nature and extent of his or her conflicting interest for inclusion in the minutes of the applicable meeting.
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Any transaction in which one of Oi’s directors or executive officers may have an interest, including any financings, can only be approved on reasonable and fair terms and conditions that are no more favorable than the terms and conditions prevailing in the market or offered by third parties. If any such transaction does not meet this requirement, then the Brazilian Corporate Law provides that the transaction may be nullified and the interested director or executive officer must return to Oi any benefits or other advantages that he or she obtained from, or as result of, such transaction. Under the Brazilian Corporate Law and upon the request of a shareholder who owns at least 5.0% of Oi’s total share capital, Oi’s directors and executive officers must reveal to Oi’s shareholders at an ordinary meeting of Oi’s shareholders certain transactions and circumstances that may give rise to a conflict of interest. In addition, Oi or any shareholder who owns 5.0% or more of Oi’s share capital may bring an action for civil liability against directors and executive officers for any losses caused to Oi as a result of a conflict of interest.
Compensation
Under Oi’sby-laws, holders of Common Shares approve the aggregate compensation payable to Oi’s board of directors, board of executive officers and fiscal council. Subject to this approval, Oi’s board of directors establishes the compensation of its members and of Oi’s executive officers. See “Item 6. Directors, Senior Management and Employees—Compensation.”
Mandatory Retirement
Neither the Brazilian Corporate Law nor Oi’sby-laws establish any mandatory retirement age for Oi’s directors or executive officers.
Share Capital
Under the Brazilian Corporate Law, the number of Oi’s issued and outstandingnon-voting shares or shares with limited voting rights, such as Preferred Shares, may not exceedtwo-thirds of Oi’s total outstanding share capital.
Each Common Share entitles its holder to one vote at Oi’s annual and extraordinary shareholders’ meetings. Holders of Common Shares are not entitled to any preference in respect of dividends or other distributions or otherwise in case of Oi’s liquidation.
Preferred Shares arenon-voting, except in limited circumstances, and do not have priority over Common Shares in the case of Oi’s liquidation. See “—Voting Rights” for information regarding the voting rights of Oi’s preferred shares and “Item 8. Financial Information—Dividends and Dividend Policy” for information regarding the distribution preferences of Preferred Shares.
The issuance of new preferred shares by Oi is prohibited.
Shareholders’ Meetings
Under the Brazilian Corporate Law, Oi’s shareholders must hold their ordinary annual meeting by April 30 of each year in order to:
approve or reject the financial statements approved by Oi’s board of directors and board of executive officers, including any recommendation by Oi’s board of directors for the allocation of net profit and distribution of dividends; and
In addition to the annual shareholders’ meetings, holders of Common Shares have the power to determine any matters related to changes in Oi’s corporate purposes and to pass any resolutions they deem necessary to protect and enhance Oi’s development whenever Oi’s interests so require, by means of extraordinary shareholders’ meetings. Oi convenes shareholders’ meetings, including the annual shareholders’ meeting, by publishing a notice in the national edition ofValor Econômico, a Brazilian newspaper, and in the Official Oi’s board of directors may convene a shareholders’ meeting. Under the Brazilian Corporate Law, shareholders’ meetings also may be convened by Oi’s shareholders as follows: In addition, Oi’s fiscal council may convene a shareholders’ meeting if Oi’s board of directors does not convene an annual shareholders’ meeting within 30 days or at any other time to consider any urgent and serious matters. Each shareholders’ meeting shall be convened and presided over by the chairman of the board of directors or his or her valid proxy. In the case of absence of the chairman or his or her proxy, the meeting shall be convened and presided over by the vice-chairman of the board of directors or his or her valid proxy. In the case of absence of the vice-chairman or his or her proxy, the meeting shall be convened and presided by any director present at the meeting. The chairman of the meeting shall be responsible for choosing the secretary of the meeting. In order for a valid action to be taken at a shareholders’ meeting, shareholders representing at least 25% of Oi’s issued and outstanding voting share capital must be present on first call. However, shareholders representing at leasttwo-thirds of Oi’s issued and outstanding voting share capital must be present on first call at a shareholders’ meeting called to amend Oi’sby-laws. If a quorum is not present, Oi’s board of directors may issue a second call by publishing a notice as described above at least eight calendar days prior to the scheduled meeting. Except as otherwise provided by law, the quorum requirements do not apply to a meeting held on the second call, and the shareholders’ meetings may be convened with the presence of shareholders representing any number of shares (subject to the voting requirements for certain matters described below). A shareholder without a right to vote may attend a shareholders’ meeting and take part in the discussion of matters submitted for consideration.elect members of Oi’s board of directors (upon expiration of their· approve or reject the financial statements approved by Oi’s board of directors and board of executive officers, including any recommendation by Oi’s board of directors for the allocation of net profit and distribution of dividends; and · elect members of Oi’s board of directors (upon expiration of their two-year terms) and members of Oi’s fiscal council. 159 Gazette of the State of Rio de Janeiro.Gazette. Under the Brazilian Corporate Law, on the first call of any meeting, the notice must be published no fewer than three times, beginning at least 15 calendar days prior to the scheduled meeting date, and companies that have issued ADSs must publish their notice at least 30 days prior to the scheduled meeting date. Oi publishes notices of meetings 30 calendar days prior to the scheduled meeting date. The notice must contain the meeting’s place, date, time, agenda and, in the case of a proposed amendment to Oi’sby-laws, a description of the subject matter of the proposed amendment.by any of Oi’s shareholders if, under certain circumstances set forth in the Brazilian Corporate Law, Oi’s directors do not convene a shareholders’ meeting required by law within 60 days;by shareholders holding at least 5% of Oi’s total share capital if, after a period of eight days, Oi’s directors fail to call a shareholders’ meeting that has been requested by such shareholders; andby shareholders holding at least 5% of either Oi’s total voting share capital or Oi’s totalnon-voting share capital, if after a period of eight days, Oi’s directors fail to call a shareholders’ meeting for the purpose of appointing a fiscal council that has been requested by such shareholders.· by any of Oi’s shareholders if, under certain circumstances set forth in the Brazilian Corporate Law, Oi’s directors do not convene a shareholders’ meeting required by law within 60 days; · by shareholders holding at least 5% of Oi’s total share capital if, after a period of eight days, Oi’s directors fail to call a shareholders’ meeting that has been requested by such shareholders; and · by shareholders holding at least 5% of either Oi’s total voting share capital or Oi’s total non-voting share capital, if after a period of eight days, Oi’s directors fail to call a shareholders’ meeting for the purpose of appointing a fiscal council that has been requested by such shareholders.
Voting Rights
Under the Brazilian Corporate Law and Oi’sby-laws, each Common Share entitles its holder to one vote at Oi’s shareholders’ meetings. Preferred Shares generally do not confer voting rights, except in limited circumstances described below. Oi may not restrain or deny any voting rights without the consent of the majority of the shares affected. Whenever the shares of any class of share capital are entitled to vote, each share is entitled to one vote.
Voting Rights of Common Shares
Except as otherwise provided by law, resolutions of a shareholders’ meeting are passed by a simple majority vote of the holders of Common Shares present or represented at the meeting, without taking abstentions into account. Under the Brazilian Corporate Law, the approval of shareholders representing at least half of Oi’s outstanding voting shares is required for the types of action described below:
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reducing the mandatory dividend set forth in Oi’sby-laws;
changing its corporate purpose;
merging Oi with another company, or consolidating Oi, subject to the conditions set forth in the Brazilian Corporate Law;
| reducing the mandatory dividend set forth in Oi’s by-laws; |
· | changing its corporate purpose; |
| · | merging Oi with another company, or consolidating Oi, subject to the conditions set forth in the Brazilian Corporate Law; |
| · | transferring all of Oi’s shares to another company, known as an “incorporação de ações” under the Brazilian Corporate Law; |
participating in a centralized group of companies (grupo de sociedades) as defined under the Brazilian Corporate Law and subject to the conditions set forth in the Brazilian Corporate Law; |
dissolving or liquidating Oi or canceling any ongoing liquidation;
| dissolving or liquidating Oi or canceling any ongoing liquidation; |
· | creating any founders’ shares (partes beneficiárias) entitling the holders thereof to participate in Oi’s profits; and |
spinning-off of all or any part of Oi.
| · | spinning-off of all or any part of Oi. |
Decisions on the transformation of Oi into another form of company require the unanimous approval of Oi’s shareholders, including the holders of Preferred Shares.
Oi is required to give effect to shareholders’ agreements that contain provisions regarding the purchase or sale of Oi’s shares, preemptive rights to acquire Oi’s shares, the exercise of the right to vote Oi’s shares or the power to control Oi, if these agreements are filed at Oi’s headquarters in Rio de Janeiro. Brazilian Corporate Law requires the president of any meeting of shareholders or board of directors to disregard any vote taken by any of the parties to any shareholders’ agreement that has been duly filed with Oi that violates the provisions of any such agreement. In the event that a shareholder that is party to a shareholders’ agreement (or a director appointed by such shareholder) is absent from any meeting of shareholders or board of directors or abstains from voting, the other party or parties to that shareholders’ agreement have the right to vote the shares of the absent or abstaining shareholder (or on behalf of the absent director) in compliance with that shareholders’ agreement. No shareholders’ agreement affecting Oi’s shares has been filed at Oi’s headquarters in Rio de Janeiro.
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Under the Brazilian Corporate Law, neither Oi’sby-laws nor actions taken at a shareholders’ meeting may deprive any of Oi’s shareholders of certain specific rights, including:
the right to participate in the distribution of Oi’s profits;
the right to participate in any remaining residual assets in the event of Oi’s liquidation;
the right to supervise the management of Oi’s corporate business as specified in the Brazilian Corporate Law;
the right to preemptive rights in the event of an issuance of Oi’s shares, debentures convertible into Oi’s shares or subscription bonuses, other than as provided in the Brazilian Corporate Law; and
the right to withdraw from Oi under the circumstances specified in the Brazilian Corporate Law.
| · | the right to participate in the distribution of Oi’s profits; |
| · | the right to participate in any remaining residual assets in the event of Oi’s liquidation; |
| · | the right to supervise the management of Oi’s corporate business as specified in the Brazilian Corporate Law; |
| · | the right to preemptive rights in the event of an issuance of Oi’s shares, debentures convertible into Oi’s shares or subscription bonuses, other than as provided in the Brazilian Corporate Law; and |
| · | the right to withdraw from Oi under the circumstances specified in the Brazilian Corporate Law. |
Voting Rights of Minority Shareholders
Shareholders holding shares representing not less than 5% of Oi’s voting shares have the right to request that Oi adopt a cumulative voting procedure for the election of the members of Oi’s board of directors. This procedure must be requested by the required number of shareholders at least 48 hours prior to a shareholders’ meeting.
Under the Brazilian Corporate Law, shareholders that are not controlling shareholders, but that together hold either:
Preferred Shares representing at least 10% of Oi’s total share capital; or
Common Shares representing at least 15% of Oi’s voting capital,
| · | Preferred Shares representing at least 10% of Oi’s total share capital; or |
| · | Common Shares representing at least 15% of Oi’s voting capital, |
have the right to appoint one member to Oi’s board of directors at Oi’s annual shareholders’ meeting. If no group of holders of Common Shares or Preferred Shares meets the thresholds described above, shareholders holding Common Shares or Preferred Shares representing at least 10% of Oi’s total share capital are entitled to combine their holdings to appoint one member to Oi’s board of directors. In the event that minority holders of Common Shares and/or holders ofnon-voting Preferred Shares elect a director and the cumulative voting procedures described above are also used, Oi’s controlling shareholders, if any, always retain the right to elect at least one member more than the number of members elected by the other shareholders, regardless of the total number of members of Oi’s board of directors. The shareholders seeking to exercise these minority rights must prove that they have held their shares for not less than three months preceding the shareholders’ meeting at which the director will be appointed.
Under Oi’sby-laws, holders of Preferred Shares may appoint, by separate voting, one board member.
In accordance with the Brazilian Corporate Law, the holders of Preferred Shares are entitled to elect one effective member and the respective alternate to Oi’s fiscal council in a separate election. Minority shareholders have the same right as long as they jointly represent 10% or more of the voting shares. The other shareholders with the right to vote may elect the remaining members and alternates of the fiscal council, who, in any event, must exceed the number of members elected in the separate election by the holders of Preferred Shares and the minority shareholders.
Voting Rights of Preferred Shares
Holders of Preferred Shares are not entitled to vote on any matter, except:
| · | with respect to the election of a member of Oi’s board of directors by holders of Preferred Shares holding at least 10% of Oi’s total share capital as described above; |
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with respect to the election of a member of Oi’s board of directors by holders of Preferred Shares holding at least 10% of Oi’s total share capital as described above;
with respect to the election of a member and alternate member of Oi’s fiscal council as described above;
with respect to the approval of the contracting of foreign entities related to the controlling shareholders of Oi, if any, to provide management services, including technical assistance. In these cases, Preferred Shares will have the right to vote separately from the Common Shares;
with respect to the approval of the contracting of foreign entities related to the controlling shareholders of Oi, if any, to provide management services, including technical assistance, the remuneration for which shall not exceed 0.1% of Oi’s consolidated annual sales for fixed switched telephone service, net of taxes; and
in the limited circumstances described below.
| · | with respect to the election of a member and alternate member of Oi’s fiscal council as described above; |
| · | with respect to the approval of the contracting of foreign entities related to the controlling shareholders of Oi, if any, to provide management services, including technical assistance. In these cases, Preferred Shares will have the right to vote separately from the Common Shares; |
| · | with respect to the approval of the contracting of foreign entities related to the controlling shareholders of Oi, if any, to provide management services, including technical assistance, the remuneration for which shall not exceed 0.1% of Oi’s consolidated annual sales for fixed switched telephone service, net of taxes; and |
| · | in the limited circumstances described below. |
The Brazilian Corporate Law and Oi’sby-laws provide that our Preferred Shares will acquire unrestricted voting rights and will be entitled to vote together with our Common Shares on all matters put to a vote in Oi’s shareholders’ meetings if the Minimum Preferred Dividend (as determined in accordance with Oi’sby-laws and Brazilian Corporate Law) is not paid for a period of three years. As a result of Oi’s failure to pay the Minimum Preferred Dividend for 2014, 2015 and 2016, holders of our Preferred Shares obtained full voting rights on April 28, 2017, the date that Oi’s annual shareholders’ meeting approved our financial statements for fiscal year 2016.
This voting right will continue until the date on which Oi pays the Minimum Preferred Dividend for the then-most recently completed fiscal year. During the period during which holders of Preferred Shares are entitled to vote together with Common Shares, holders of Preferred Shares will not be entitled to the separate votes described above with respect to the election of a member of Oi’s board of directors, a member and alternate member of Oi’s fiscal council, the approval of the contracting of foreign entities, or decisions relating to the employment of foreign entities.
Liquidation
Oi may be liquidated in accordance with the provisions of Brazilian law. In the event of Oi’s extrajudicial liquidation, a shareholders’ meeting will determine the manner of Oi’s liquidation and appoint Oi’s liquidator and Oi’s fiscal council that will function during the liquidation period.
Upon Oi’s liquidation, Preferred Shares do not have a liquidation preference over Common Shares in respect of the distribution of Oi’s net assets, but shall be entitled to unrestricted voting rights. In the event of Oi’s liquidation, the assets available for distribution to Oi’s shareholders would be distributed to Oi’s shareholders in an amount equal to theirpro rata share of Oi’s legal capital. If the assets to be so distributed are insufficient to fully compensate all of Oi’s shareholders for their legal capital, each of Oi’s shareholders would receive apro rataamount (based on theirpro ratashare of Oi’s legal capital) of any assets available for distribution.
Preemptive Rights
Under the Brazilian Corporate Law, each of Oi’s shareholders has a general preemptive right to subscribe for Oi’s shares or securities convertible into Oi’s shares in any capital increase, in proportion to the number of Oi’s shares held by such shareholder.
Under Oi’sby-laws, Oi’s board of directors or Oi’s shareholders, as the case may be, may decide not to extend preemptive rights to Oi’s shareholders with respect to any issuance of Oi’s shares, debentures convertible into Oi’s shares or warrants made in connection with a public exchange made to acquire control of another company or in connection with a public offering or sale through a stock exchange. The preemptive rights are transferable and must be exercised within a period of at least 30 days following the publication of notice of the issuance of shares or securities convertible into Oi’s shares. Holders of ADSs may not be able to exercise the preemptive rights relating to Oi’s shares underlying their ADSs unless a registration statement under the Securities Act is effective with respect to those rights or an exemption from the registration requirements of the Securities Act is available. Oi is not obligated to file a registration statement with respect to the shares relating to these preemptive rights or to take any other action to make preemptive rights available to holders of ADSs, and Oi is not required to file any such registration statement.
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Redemption, Amortization, Tender Offers and Rights of Withdrawal
Oi’sby-laws or Oi’s shareholders at a shareholders’ meeting may authorize Oi to use its profits or reserves to redeem or amortize Oi’s shares in accordance with conditions and procedures established for such redemption or amortization. The Brazilian Corporate Law defines “redemption” (resgate de ações) as the payment of the value of the shares in order to permanently remove such shares from circulation, with or without a corresponding reduction of Oi’s share capital. The Brazilian Corporate Law defines “amortization” (amortização) as the distribution to the shareholders, without a corresponding capital reduction, of amounts that they would otherwise receive if Oi were liquidated. If an amortization distribution has been paid prior to Oi’s liquidation, then upon Oi’s liquidation, the shareholders who did not receive an amortization distribution will have a preference equal to the amount of the amortization distribution in the distribution of Oi’s capital.
The Brazilian Corporate Law authorizes Oi’s shareholders to approve in a shareholders’ meeting the redemption of Oi’s shares not held by Oi’s controlling shareholders, if any, if after a tender offer effected for the purpose of delisting Oi as a publicly held company, Oi’s controlling shareholders, if any, increase their participation in Oi’s total share capital to more than 95%. The redemption price in such case would be the same price paid for Oi’s shares in any such tender offer.
The Brazilian Corporate Law and Oi’sby-laws also require the acquirer of control (in case of a change of control) or the controller (in case of delisting or a substantial reduction in liquidity of Oi’s shares) to make a tender offer for the acquisition of the shares held by minority shareholders under certain circumstances described below under “—Mandatory Tender Offers.” The shareholder can also withdraw its capital from Oi under certain circumstances described below under “—Rights of Withdrawal.”
Mandatory Tender Offers
The Brazilian Corporate Law requires that if the Common Shares are delisted from the B3 or there is a substantial reduction in liquidity of the Common Shares, as defined by the CVM, in each case as a result of purchases by Oi’s controlling shareholders, Oi’s controlling shareholders must effect a tender offer for acquisition of the remaining Common Shares at a purchase price equal to the fair value of the Common Shares taking into account the total number of outstanding Common Shares. Oi’sby-laws require the cancellation of Oi’s registration as a public company with the CVM or Oi’s delisting from the Level 1 Corporate Governance Listing Segment of the B3 be preceded by a public tender offer for acquisition of the all of the capital stock of Oi based on a fair market valuation of Oi’s capital stock, in accordance with the Brazilian Corporate Law and the regulations issued by the CVM. The requirement to conduct a mandatory tender offer preceding Oi’s delisting from the Level 1 Corporate Governance Listing Segment of the B3 may be avoided if Oi instead joins theNovo Mercadoor Level 2 Corporate Governance Listing Segment of the B3 or, certain conditions being met, in the case of a voluntary withdrawal from the Level 1 Corporate Governance Listing Segment of the B3.
Oi’sby-laws require that any transaction or series of transactions that results in a change of control of Oi be preceded by a public offer for the purchase of all of Oi’s capital stock by the prospective purchaser in order to ensure the equitable treatment of all of Oi’s shareholders, in accordance with the rules of theNovo Mercadosegment of the B3.
Rights of Withdrawal
The Brazilian Corporate Law provides that, in certain limited circumstances, a dissenting shareholder may withdraw its equity interest from Oi and be reimbursed by Oi for the value of the Common Shares or Preferred Shares that it then holds.
This right of withdrawal may be exercised by the dissenting ornon-voting holders (including any holder of Preferred Shares) in the event that the holders of a majority of all outstanding Common Shares authorize:
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a reduction of the mandatory dividend set forth in Oi’sby-laws;
to create Preferred Shares or to increase the existing classes of Preferred Shares, without maintaining the proportion with the remaining classes of Preferred Shares, except if provided for and authorized in theby-laws, subject to the conditions set forth in the Brazilian Corporate Law;
changes in the preferences, advantages and conditions of redemption or amortization of one or more classes of Preferred Shares, or the creation of a new class with greater privileges, subject to the conditions set forth in the Brazilian Corporate Law;
Oi’s participation in a centralized group of companies;
to merge into another company or to consolidate with another company, subject to the conditions set forth in the Brazilian Corporate Law;
a change in Oi’s corporate purpose;
spinning off of all or any part of Oi, if suchspin-off results in (1) a change in Oi’s business purpose (except if thespun-off assets revert to a company whose main purpose is the same as Oi’s), (2) a reduction of the mandatory dividend set forth in Oi’sby-laws, or (3) Oi’s participation in a centralized group of companies; or
in one of the following transactions in which the shares held by such holders do not meet liquidity and dispersion thresholds under the Brazilian Corporate Law:
a reduction of the mandatory dividend set forth in Oi’s by-laws; |
| · | to create Preferred Shares or to increase the existing classes of Preferred Shares, without maintaining the proportion with the remaining classes of Preferred Shares, except if provided for and authorized in the by-laws, subject to the conditions set forth in the Brazilian Corporate Law; |
| · | changes in the preferences, advantages and conditions of redemption or amortization of one or more classes of Preferred Shares, or the creation of a new class with greater privileges, subject to the conditions set forth in the Brazilian Corporate Law; |
| · | Oi’s participation in a centralized group of companies; |
| · | to merge into another company or to consolidate with another company, subject to the conditions set forth in the Brazilian Corporate Law; |
| · | a change in Oi’s corporate purpose; |
| · | spinning off of all or any part of Oi, if such spin-off results in (1) a change in Oi’s business purpose (except if the spun-off assets revert to a company whose main purpose is the same as Oi’s), (2) a reduction of the mandatory dividend set forth in Oi’s by-laws, or (3) Oi’s participation in a centralized group of companies; or |
| · | in one of the following transactions in which the shares held by such holders do not meet liquidity and dispersion thresholds under the Brazilian Corporate Law: |
| Ø | the merger of Oi with another company, or the consolidation of Oi, in a transaction in which Oi is not the surviving entity; |
the transfer of all of the outstanding shares of another company to Oi in anincorporação de ações transaction; or |
Oi’s participation in a centralized group of companies. |
Dissenting ornon-voting shareholders are also entitled to withdraw in the event that the entity resulting from a merger orspin-off does not have its shares listed in an exchange or traded in the secondary market within 120 days from the shareholders’ meeting that approved the relevant merger orspin-off.
Notwithstanding the above, in the event that Oi is consolidated or merged with another company, becomes part of a centralized group of companies, or acquires the control of another company for a price in excess of certain limits imposed by the Brazilian Corporate Law, holders of any type or class of Oi’s shares or the shares of the resulting entity that have minimal market liquidity and are dispersed among a sufficient number of shareholders will not have the right to withdraw. For this purpose, shares that are part of the Ibovespa index are considered liquid, and sufficient dispersion will exist if the controlling shareholder, the parent company or other companies under its control hold less than half of the total number of outstanding shares of that type or class. In case of aspin-off, the right of withdrawal will only exist if (1) there is a change in the corporate purpose, (2) there is a reduction in the mandatory dividend, or (3) thespin-off results in Oi’s participation in a centralized group of companies.
Only shareholders who own shares on the date of publication of the first notice convening the relevant shareholders’ meeting or the material fact notice concerning the relevant transaction is published, whichever is earlier, will be entitled to withdrawal rights. Shareholders will only be entitled to exercise withdrawal rights with respect to the shares held by them from such date until the date withdrawal rights are exercised.
The redemption of shares arising out of the exercise of any withdrawal rights would be made at the book value of the shares, determined on the basis of Oi’s most recent audited balance sheet approved by Oi’s shareholders. If the shareholders’ meeting approving the action that gave rise to withdrawal rights occurred more than 60 days after the date of the most recent approved audited balance sheet, a shareholder may demand that its shares be valued on the basis of a balance sheet prepared specifically for this purpose.
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The right of withdrawal lapses 30 days after the date of publication of the minutes of the shareholders’ meeting that approved the action that gave rise to withdrawal rights, except when the resolution is approved pending confirmation by the holders of Preferred Shares (such confirmation to be given at an extraordinary meeting of such holders of Preferred Shares to be held within one year). In this event, the30-day period for dissenting shareholders begins at the date of publication of the minutes of the extraordinary meeting of such holders of Preferred Shares. Oi’s shareholders may reconsider any resolution giving rise to withdrawal rights within 10 days after the expiration of the exercise period of withdrawal rights if Oi’s management believes that the withdrawal of shares of dissenting shareholders would jeopardize Oi’s financial stability.
Liability of Oi’s Shareholders for Further Capital Calls
Neither Brazilian law nor Oi’sby-laws require any capital calls. Oi’s shareholders’ liability for capital calls is limited to the payment of the issue price of any shares subscribed or acquired.
Inspection of Corporate Records
Shareholders that own 5% or more of Oi’s outstanding share capital have the right to inspect Oi’s corporate records, including shareholders’ lists, corporate minutes, financial records and other documents of Oi, if (1) Oi or any of its officers or directors have committed any act contrary to Brazilian law or Oi’sby-laws, or (2) there are grounds to suspect that there are material irregularities in Oi. However, in either case, the shareholder that desires to inspect Oi’s corporate records must obtain a court order authorizing the inspection.
Disclosures of Share Ownership
Brazilian regulations require that (1) each of Oi’s direct or indirect controlling shareholders, if any, and (2) any person or group of persons representing a person that has directly or indirectly acquired or sold an interest that would result in an increase or decrease corresponding to 5%, or any 5% multiple thereof, of the total number of Oi’s shares of any type or class to disclose its or their share ownership or divestment to Oi, and Oi is responsible for transmitting such information to the CVM and the market. In addition, if a share acquisition results in, or is made with the intention of, change of control or company’s management structure, as well as acquisitions that cause the obligation of performing a tender offer, the persons acquiring such number of shares are required to publish a statement containing certain required information about such acquisition.
Oi’s controlling shareholders, if any, members of Oi’s board of directors, board of executive officers, fiscal council and members of other bodies created pursuant to Oi’sby-laws with technical or consulting functions must file a statement of any change in their holdings of Oi’s shares with the CVM and the Brazilian stock exchanges on which Oi’s securities are traded. Oi also must disclose any trading of its shares by Oi or Oi’s controlled or related companies.
Form and Transfer
Common Shares and Preferred Shares are in book-entry form, registered in the name of each shareholder or its nominee. The transfer of Oi’s shares is governed by Article 35 of the Brazilian Corporate Law, which provides that a transfer of shares is effected by Oi’s transfer agent, Banco do Brasil S.A., by an entry made by the transfer agent in its books, upon presentation of valid written share transfer instructions to Oi by a transferor or its representative. When Common Shares or Preferred Shares are acquired or sold on a Brazilian stock exchange, the transfer is effected on the records of Oi’s transfer agent by a representative of a brokerage firm or the stock exchange’s clearing system. The transfer agent also performs all the services of safe-keeping of Oi’s shares. Provided that the provisions of Resolution No. 4,373 are observed, transfers of Oi’s shares by anon-Brazilian investor are made in the same manner and are executed on the investor’s behalf by the investor’s local agent. If the original investment was registered with the Brazilian Central Bank pursuant to foreign investment regulations, thenon-Brazilian investor is also required to amend, if necessary, through its local agent, the electronic certificate of registration to reflect the new ownership.
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The B3 operates a central clearing system, the CSD. A holder of Oi’s shares may choose, at its discretion, to participate in this system, and all shares that such shareholder elects to be put into the clearing system are deposited in custody with the CSD (through a Brazilian institution that is duly authorized to operate by the Brazilian Central Bank and maintains a clearing account with the CSD). Shares subject to the custody of the CSD are noted as such in Oi’s registry of shareholders. Each participating shareholder will, in turn, be registered in the register of the CSD and will be treated in the same manner as shareholders registered in Oi’s books.
Material Contracts
We have not entered into any material contracts, other than those described in this annual report or entered into in the ordinary course of business.
Exchange Controls
There are no restrictions on ownership or voting of Oi’s capital stock by individuals or legal entities domiciled outside Brazil. However, the right to convert dividend payments, payments of interest on shareholders’ equity and proceeds from the sale of Oi’s share capital into foreign currency and to remit such amounts outside Brazil is subject to exchange control restrictions under foreign investment legislation and foreign exchange regulations, which generally require, among other things, the registration of the relevant investment with the Brazilian Central Bank and/or the CVM, as the case may be.
Investments in Common Shares or Preferred Shares by (1) aNon-Brazilian Holder who is registered with the CVM under Annex I of Resolution No. 4,373, or (2) the depositary, are eligible for registration with the Brazilian Central Bank. This registration (the amount so registered is referred to as registered capital) allows the remittance outside Brazil of foreign currency, converted at the market rate, acquired with the proceeds of distributions on, and amounts realized through, dispositions of Common Shares or Preferred Shares.
The registered capital per newly issued Common Share or Preferred Share purchased in the form of an ADS, or purchased in Brazil under Annex I of Resolution No. 4,373 and deposited with the depositary in exchange for an ADS, will be equal to its purchase price and to the market value of the corresponding shares on the date of the deposit, respectively.
The registered capital under Annex I of Resolution No. 4,373 per Common Share or Preferred Share withdrawn upon cancellation of a corresponding ADS will be the U.S. dollar equivalent of the market value of the Common Share or Preferred Share, as the case may be, on the B3 on the day of withdrawal. Such cancellation is also subject to the execution of simultaneous foreign exchange agreements without the actual inflow and outflow of funds to and from Brazil, or the Symbolic FX Agreements. The U.S. dollar equivalent will be determined upon the execution of the Symbolic FX Agreement.
Foreign Direct Investment and Portfolio Investment
Investors (individuals, legal entities, mutual funds and other collective investment entities) domiciled, residing or headquartered outside Brazil may register their investments in Oi’s shares as foreign portfolio investments under Annex I of Resolution No. 4,373 (described below) or as foreign direct investments under Law No. 4,131 (described below). Registration under Annex I of Resolution No. 4,373 or Law No. 4,131 generally enables the conversion of dividends, other distributions and sales proceeds received in connection with registered investments into foreign currency and the remittance of such amounts outside Brazil. Registration under Annex I of Resolution No. 4,373 affords favorable tax treatment tonon-Brazilian portfolio investors who are not resident in a Favorable Tax Jurisdiction, which is defined by Brazilian tax legislation as any country or location that: (1) does not tax income, or taxes income at a rate lower than 20% (or 17% in the case of countries or regimes abiding by the international policy for tax transparency); or (2) does not disclose or imposes restrictions on the disclosure of certain information concerning the shareholding composition of a legal entity, its ownership or the effective beneficiary of income attributable to the foreigners. See “—Taxation—Brazilian Tax Considerations.”
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Annex I of Resolution No. 4,373
All investments made by anon-Brazilian investor under Annex I of Resolution No. 4,373 are subject to an electronic registration with the Brazilian Central Bank. This registration permits the conversion of dividend payments, payments of interest on shareholders’ equity and proceeds from the sale of Oi’s share capital into foreign currency and the remission of such amounts outside Brazil.
Under Annex I of Resolution No. 4,373,non-Brazilian investors registered with the CVM may invest in almost all financial assets and engage in almost all transactions available to Brazilian investors in the Brazilian financial and capital markets without obtaining a separate Brazilian Central Bank registration for each transaction, provided that certain requirements are fulfilled. Under Annex I of Resolution No. 4,373, the definition of anon-Brazilian investor includes individuals, legal entities, mutual funds and other collective investment entities domiciled or headquartered outside Brazil.
Pursuant to Annex I of Resolution No. 4,373,non-Brazilian investors must:
| (i) | appoint at least one representative in Brazil with powers to take action relating to its investments, which must be a financial institution duly authorized by the Brazilian Central Bank; |
| (ii) | appoint an authorized custodian in Brazil for its investments, which must be an institution duly authorized by the CVM; |
| (iii) | complete the appropriate foreign investor registration forms; |
| (iv) | appoint a tax representative in Brazil; |
| (v) | through its representative, register as a non-Brazilian investor with the CVM; |
| (vi) | through its representative, register its investments with the Brazilian Central Bank; and |
| (vii) | obtain a taxpayer identification number from the Brazilian federal tax authorities. |
In August 2020, the National Monetary Council eased the requirements for investments by non-residents. Resolution No. 4,852 eliminated requirement (ii) above for individual non-resident investors and allowed CVM to dispense with requirement (v) above for individual non-resident investors, in Brazil with powersthis case subject to take action relating to its investments, which must be a financial institution duly authorized by the Brazilian Central Bank;further regulation.
appoint an authorized custodian in Brazil for its investments, which must be an institution duly authorized by the CVM;
complete the appropriate foreign investor registration forms;
appoint a tax representative in Brazil;
through its representative, register as anon-Brazilian investor with the CVM;
through its representative, register its investments with the Brazilian Central Bank; and
obtain a taxpayer identification number from the Brazilian federal tax authorities.
The securities and other financial assets held by anon-Brazilian investor pursuant to Annex I of Resolution No. 4,373 must be registered or maintained in deposit accounts or under the custody of an entity duly licensed by the Brazilian Central Bank or the CVM, as applicable, or be registered in registration, clearing and custody systems authorized by the Brazilian Central Bank or by the CVM, as applicable. Subject to limited exceptions provided in the CVM regulation or previous CVM authorization, the trading of securities held under Annex I of Resolution No. 4,373 is restricted to transactions carried out on stock exchanges or through organizedover-the-counter markets licensed by the CVM.
The offshore transfer or assignment of the securities or other financial assets held bynon-Brazilian investors pursuant to Annex I of Resolution No. 4,373 are prohibited, except for transfers (1) resulting from consolidation,spin-off, merger or merger of shares or occurring upon the death of an investor by operation of law or will; (2) resulting from a corporate reorganization effected abroad, as long as the final beneficiaries and the amount of the assets remain the same, or (3) authorized by the CVM.
Annex II of Resolution No. 4,373 – ADSs
Annex II of Resolution No. 4,373 of the National Monetary Council provides for the issuance of depositary receipts in foreign markets in respect of shares of Brazilian issuers. The Common ADS program was approved by the Brazilian Central Bank and the CVM prior to the issuance of the Common ADSs. Accordingly, as a general rule, the proceeds from the sale of Common ADSs bynon-Brazilian resident holders of Common ADSs outside Brazil are not subject to Brazilian foreign investment controls, and holders of Common ADSs who are not domiciled in a Favorable Tax Jurisdiction are entitled to favorable tax treatment. See “—Taxation—Brazilian Tax Considerations—Taxation of Gains.”
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Oi pays dividends and other cash distributions with respect to the Common Shares inreais. Oi has obtained electronic certificates of foreign capital registration from the Brazilian Central Bank in the name of the depositary of the Common ADS program to be maintained by the custodian of the Common ADS program. Pursuant to this registration, the ADS Custodian is able to convert dividends and other distributions with respect to Common Shares represented by Common ADSs into foreign currency and remit the proceeds outside Brazil to the depositary of the Common ADS program so that the depositary of the Common ADS program may distribute these proceeds to the holders of record of the Common ADSs.
In the event that a holder of Common ADSs exchanges those Common ADSs for the underlying Common Shares, the holder must:
convert its investment in those shares into a foreign portfolio investment under Annex I of Resolution No. 4,373, subject to the execution of Symbolic FX Agreements; or
convert its investment in those shares into a direct foreign investment under Law No. 4,131, subject to the execution of Symbolic FX Agreements.
| · | convert its investment in those shares into a foreign portfolio investment under Annex I of Resolution No. 4,373, subject to the execution of Symbolic FX Agreements; or |
| · | convert its investment in those shares into a direct foreign investment under Law No. 4,131, subject to the execution of Symbolic FX Agreements. |
The custodian of the Common ADS program is authorized to update the electronic registration of the depositary of the Common ADS program to reflect conversions of Common ADSs into foreign portfolio investments under Resolution No. 4,373.
If a holder of Common ADSs elects to convert its Common ADSs into a foreign portfolio investment under Annex I of Resolution No. 4,373 or into a foreign direct investment under Law No. 4,131, the conversion will be effected before the Brazilian Central Bank by the custodian after receipt of an electronic request from the depositary with details of the transaction. If a foreign direct investor under Law No. 4,131 elects to deposit its Common Shares into the Common ADS program in exchange for Common ADSs, such holder will be required to present to the ADS Custodian evidence of payment of capital gains taxes and of the execution of Symbolic FX Agreements. See “—Taxation—Brazilian Tax Considerations—Taxation of Gains” for details of the tax consequences to an investor residing outside Brazil of investing in Common Shares or Preferred Shares in Brazil.
If a holder of Common ADSs wishes to convert its investment in Common Shares into either a foreign portfolio investment under Annex I of Resolution No. 4,373 or a foreign direct investment under Law No. 4,131, it should begin the process of obtaining its own foreign investor registration with the Brazilian Central Bank or with the CVM, as the case may be, in advance of exchanging the Common ADSs for the underlying Common Shares. ANon-Brazilian Holder of Common Shares may experience delays in obtaining a foreign investor registration, which may delay remittances outside Brazil, which may in turn adversely affect the amount, in U.S. dollars, received by theNon-Brazilian Holder.
Unless the holder has registered its investment with the Brazilian Central Bank, the holder may not be able to convert the proceeds from the disposition of, or distributions with respect to, such Common Shares into foreign currency or remit those proceeds outside Brazil. In addition, if thenon-Brazilian investor is domiciled in a Favorable Tax Jurisdiction or is not an investor registered under Annex I of Resolution No. 4,373, the investor will be subject to less favorable tax treatment than a holder of Common ADSs. See “—Taxation—Brazilian Tax Considerations.”
Law 4,131
To obtain a certificate of foreign capital registration from the Brazilian Central Bank under Law No. 4,131, a foreign direct investor must:
| · | register as a foreign direct investor with the Brazilian Central Bank; |
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register as a foreign direct investor with the Brazilian Central Bank;
obtain a taxpayer identification number from the Brazilian tax authorities;
appoint a tax representative in Brazil; and
appoint a representative in Brazil for service of process in respect of suits based on the Brazilian Corporate Law.
| · | obtain a taxpayer identification number from the Brazilian tax authorities; |
| · | appoint a tax representative in Brazil; and |
| · | appoint a representative in Brazil for service of process in respect of suits based on the Brazilian Corporate Law. |
Foreign direct investors under Law No. 4,131 may sell their shares in either private or open market transactions, but these investors will generally be subject to less favorable tax treatment on gains with respect to Common Shares. See “—Taxation—Brazilian Tax Considerations.”
Taxation
The following discussion contains a description of the material Brazilian and U.S. federal income tax consequences of the acquisition, ownership and disposition of Common Shares, Preferred Shares or ADSs. The following discussion does not purport to be a comprehensive description of all the tax considerations that may be relevant to a decision to purchase, hold or dispose of Common Shares, Preferred Shares or ADSs. This discussion is based upon the tax laws of Brazil and the United States and regulations under these tax laws as currently in effect, which are subject to change.
Although there is at present no income tax treaty between Brazil and the United States, the tax authorities of the two countries have had discussions that may culminate in such a treaty. No assurance can be given, however, as to whether or when a treaty will enter into force or how it will affect the U.S. holders of Common Shares, Preferred Shares or ADSs.
Prospective purchasers of Common Shares, Preferred Shares or ADSs should consult their own tax advisors as to the tax consequences of the acquisition, ownership and disposition of Common Shares, Preferred Shares or ADSs in their particular circumstances.
Brazilian Tax Considerations
The following discussion contains a description of the material Brazilian tax consequences, subject to the limitations set forth herein, of the acquisition, ownership and disposition of Common Shares, Preferred Shares or ADSs by a holder not deemed to be domiciled in Brazil for Brazilian tax and regulatory purposes (a“Non-Brazilian “Non-Brazilian Holder”). This discussion is based on the tax laws of Brazil and regulations thereunder in effect on the date hereof, which are subject to change (possibly with retroactive effect).change. This discussion does not specifically address all of the Brazilian tax considerations that may be applicable to any particularNon-Brazilian Holder. Therefore, eachNon-Brazilian Holder should consult its own tax advisor about the Brazilian tax consequences of an investment in Common Shares, Preferred Shares or ADSs.
Individuals domiciled in Brazil and Brazilian companies are taxed in Brazil on the basis of their worldwide income which includes earnings of Brazilian companies’ foreign subsidiaries, branches and affiliates. The earnings of branches of foreign companies andnon-Brazilian residents, or nonresidents, in general are taxed in Brazil only on income derived from Brazilian sources.
Pursuant to Brazilian law, thenon-resident holder may invest in Common Shares, or Preferred Shares under Resolution 4,373, of September 2014, of the National Monetary Council (a “4,373 Holder”).
Dividends
As of the date of this annual report, dividends paid by a Brazilian corporation, such as Oi, in cash or in kind, including stock dividends and other dividends paid to aNon-Brazilian Holder of Common Shares, Preferred Shares or ADSs are not subject to withholding income tax in Brazil to the extent that such amounts are related to profits generated after January 1, 1996. Dividends paid from profits generated before January 1, 1996 may be subject to Brazilian withholding income tax at varying rates, according to the tax legislation applicable to each corresponding year.
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Law No. 11,638, dated December 28, 2007, significantly modified Brazilian Corporate Law in order to align the generally accepted Brazilian accounting standards to the IFRS. Nonetheless, Law No. 11,941, dated May 27, 2009, introduced the Transitory Tax Regime (regime tributário de transição – “RTT”), in order to render neutral, from a tax perspective, all changes provided by Law No. 11,638. Under the RTT, Brazilian companies, for tax purposes, should observe the accounting rules and criteria as in force on December 31, 2007.
Profits determined pursuant to Law 11,638(“IFRS Profits”), may differ from the profits calculated pursuant to the accounting methods and criteria as effective on December 31, 2007 (“2007 Profits”).
While it was general market practice to distribute exempted dividends with reference to the IFRS Profits, Normative Ruling No. 1,397, issued by the Brazilian tax authorities on September 16, 2013, has established that legal entities should observe the accounting methods and criteria in force on December 31, 2007, or 2007 Profits, in order to determine the amount of profits that could be distributed as exempted income to its beneficiaries.
Any profits paid in excess of said 2007 Profits (“Excess Dividends”), should, in the tax authorities’ view, and in the specific case ofnon-resident beneficiaries, be subject to the following rules of taxation: (1) 15% WHT, in case of beneficiaries domiciled abroad, but not in a Favorable Tax Jurisdiction (as defined below), and (2) 25% WHT, in the case of beneficiaries domiciled in a Favorable Tax Jurisdiction (as defined below).
In order to mitigate potential disputes on the subject, Law No. 12,973, dated May 13, 2014, in addition to revoking the RTT, introduced a new set of tax rules (“the New Brazilian Tax Regime”), including new provisions with respect to Excess Dividends. Under these new provisions: (1) Excess Dividends related to profits assessed from 2008 to 2013 are exempt; (2) potential disputes remain concerning the Excess Dividends related to 2014 profits, unless our company had voluntarily elected to apply the New Brazilian Tax Regime in 2014; and (3) as of 2015, as the New Brazilian Tax Regime is mandatory and has completely replaced the RTT, dividends calculated based on IFRS standards should be considered fully exempt.
Interest on Shareholders’ Equity
Law No. 9,249, dated December 26, 1995, as amended, allows a Brazilian corporation, such as Oi, to make distributions to shareholders of interest on shareholders’ equity on top of or as an alternative to making dividend distributions, and treat those payments as a deductible expense for purposes of calculating Brazilian corporate income tax, and, since 1998, social contribution on net profit as well, as long as the limits described below are observed and the payment is approved at a general meeting of shareholders. These distributions may be paid in cash. For tax purposes, such interest are calculated by multiplying the TJLP,Long Term Interest Rate (TJLP), as determined by the Brazilian Central Bank from time to time, by the sum of determined Brazilian company’s net equity accounts. The amount of the deduction may not exceed the greater of:
50% of net income (after the deduction of social contribution on net profit but before taking into account the provision for corporate income tax and the amounts attributable to shareholders as interest on shareholders’ equity) for the period in respect of which the payment is made; and
50% of the sum of retained profits and profits reserves as of the date of the beginning of the period in respect of which the payment is made.
| · | 50% of net income (after the deduction of social contribution on net profit but before taking into account the provision for corporate income tax and the amounts attributable to shareholders as interest on shareholders’ equity) for the period in respect of which the payment is made; and |
| · | 50% of the sum of retained profits and profits reserves as of the date of the beginning of the period in respect of which the payment is made. |
Payment of interest on shareholders’ equity to aNon-Brazilian Holder is subject to withholding income tax at the rate of 15%, or 25% if theNon-Brazilian Holder is domiciled in a country or location that is considered to be a Favorable Tax Jurisdiction.Jurisdiction (as defined below).
These payments of interest on shareholders’ equity may be included, at their net value, as part of any mandatory dividend. To the extent payment of interest on net equity is so included, Oi is required to distribute to shareholders an additional amount to ensure that the net amount received by them, after payment of the applicable withholding income tax, plus the amount of declared dividends, is at least equal to the mandatory dividend.
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Payments of interest on shareholders’ equity are decided by Oi’s shareholders, at its annual shareholders meeting, on the basis of recommendations of its board of directors. No assurance can be given that Oi’s board of directors will not recommend that future distributions of profits should be made by means of interest on shareholders’ equity instead of by means of dividends.
Discussion on Definition of Favorable Tax Jurisdiction and Privileged Tax Regime
Under Brazilian tax law, a Favorable Tax Jurisdiction is defined as a country or location that (a) does not impose taxation on income, or (b) imposes the income tax at a maximum rate lower than 20%, or 17% in certain cases as detailed below, or (c) local legislation does not allow access to information related to shareholding composition, ownership of investments, or the identity of the beneficial owners of earnings that are attributed to non-resident. Please note that the statutory definition of a Favorable Tax Jurisdiction for the purpose of income taxation on gains should differ depending on whether or not the holder is a 4,373 Holder. In the case of a 4,373 Holder, the definition of Favorable Tax Jurisdiction should not comprise jurisdictions mentioned in item (c). However, the list of Favorable Tax Jurisdictions provided for in Normative Instruction No. 1,037/10 does not seem to differ the Favorable Tax Jurisdiction definition for the purposes of 4,373 Holders.
On June 23, 2008, Law No. 11,727 introduced the concept of Privileged Tax Regimes (“PTRs”), which encompasses the countries and jurisdictions that: (1) do not tax income or tax it at a maximum rate lower than 20% or 17% in certain cases as detailed below; (2) grant tax advantages to anon-resident entity or individual (a) without the need to carry out a substantial economic activity in the country or a said territory or (b) conditioned on thenon-exercise of a substantial economic activity in the country or a said territory; (3) do not tax or taxes proceeds generated abroad or taxes such proceeds at a maximum rate lower than 20% or 17% in certain cases as detailed below; or (4) restrict the ownership disclosure of assets and ownership rights or restricts disclosure about economic transactions carried out within its territory. Normative Ruling No. 1,037/10, as amended, also provided a list of the PTRs.
In the past, it was not clear whether the concept of PTR was also applicable to interest payments made to residents outside Brazil. Notwithstanding, in December 2017, the Brazilian Federal Revenue Service published Ruling No. 575/2017, stating that only payments to countries deemed as Favorable Tax Jurisdictions by Normative Ruling No. 1,037 would be subject to withholding tax at a 25% rate. Nevertheless, we cannot assure you that subsequent legislation or interpretations by the Brazilian tax authorities regarding the definition of a PTR provided by Law No. 9,430, of December 27, 1996, altered by Law No. 11,727, will also apply to aNon-Brazilian Holder on payments of interest on shareholders’ equity.
Notwithstanding the above, we recommend that you consult your own tax advisors regarding the consequences of the implementation of Law No. 11,727, Normative Ruling No. 1,037/10 and of any related Brazilian tax law or regulation concerning Favorable Tax Jurisdictions or PTRs.
On November 28, 2014, the Ministry of Treasury issued Ordinance No. 488, which reduces the threshold income tax rate for determining a Favorable Tax Jurisdiction and PTRs from 20% to 17%. The reduced 17% threshold applies only to countries and regimes aligned with international standards of fiscal transparency in accordance with rules to be established by the Brazilian tax authorities in Normative Ruling No. 1,530, dated December 19, 2014. Normative Ruling No. 1,530/14 provides that compliance with such standards requires: (1) signature or negotiations completion for a treaty or agreement allowing the exchange of information related to identification of income beneficiaries, shareholding structure, ownership of goods or rights, or economic transactions that are carried out; and (2) commitment to the criteria set out in internationalanti-tax evasion forums of which Brazil is a member, such as the Global Forum on Transparency and Exchange of Information. Normative Ruling No. 1,037/10 is regularly updated by tax authorities.
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Taxation of Gains
Under Law No. 10,833, enacted on December 29, 2003, the gain on the disposition or sale of assets located in Brazil by aNon-Brazilian Holder, whether to anothernon-Brazilian resident or to a Brazilian resident, may be subject to withholding income tax on capital gains in Brazil.
With respect to the disposition of Common Shares or Preferred Shares, as they are assets located in Brazil, theNon-Brazilian Holder should be subject to withholding income tax on the gains assessed, following the rules described below, regardless of whether the transactions are conducted in Brazil or with a Brazilian resident.
With respect to Oi’sthe ADSs, although the matter is not entirely clear, arguably the gains realized by aNon-Brazilian Holder upon the disposition of ADSs will not be taxed in Brazil, on the basis that ADSs are not “assets located in Brazil” for the purposes of Law No. 10,833. We cannot assure you, however, that the Brazilian tax authorities or the Brazilian courts will agree with this interpretation, considering the general and unclear scope of Law No. 10,833 and the absence of judicial guidance in respect thereof. As a result, gains on a disposition of ADSs by aNon-Brazilian Holder to a Brazilian resident, or even to anon-Brazilian resident, in the event that courts determine that ADSs would constitute assets located in Brazil, may be subject to income tax in Brazil according to the rules applicable to Common Shares and Preferred Shares, described below.
As a general rule, gains realized as a result of a disposition of Common Shares, Preferred Shares or ADSs are the positive difference between the amount realized on the transaction and the acquisition cost of Common Shares, Preferred Shares or ADSs.
Under Brazilian law, however, income tax rules on such gains can vary depending on the domicile of theNon-Brazilian Holder, the type of registration of the investment by theNon-Brazilian Holder with the Brazilian Central Bank and how the disposition is carried out, as described below.
Gains realized on a disposition of shares carried out on a Brazilian stock exchange (which includes the organizedover-the-counter market) are:
exempt from income tax when realized by aNon-Brazilian Holder that (1) is a 4,373 Holder, and (2) is not a resident in a country or location which is defined as a Favorable Tax Jurisdiction (as described above); or
subject to income tax at a rate of up to 25% in any other case, including a case of gains assessed by aNon-Brazilian Holder that is a 4,373 Holder resident of a country or location defined as a Favorable Tax Jurisdiction (as described above). In these cases, a withholding income tax of 0.005% of the sale value will be applicable and can be later offset with the eventual income tax due on the capital gain. This 0.005% withholding income tax is not levied on day trade transactions, which are subject to a rate of 1%.
| · | exempt from income tax when realized by a Non-Brazilian Holder that (1) is a 4,373 Holder, and (2) is not a resident in a country or location which is defined as a Favorable Tax Jurisdiction (as described above); or |
| · | subject to income tax at a rate of up to 25% in any other case, including a case of gains assessed by a Non-Brazilian Holder that is a 4,373 Holder resident of a country or location defined as a Favorable Tax Jurisdiction (as described above). In these cases, a withholding income tax of 0.005% of the sale value will be applicable and can be later offset with the eventual income tax due on the capital gain. This 0.005% withholding income tax is not levied on day trade transactions, which are subject to a rate of 1%. |
Any other gains assessed on a disposition of Common Shares or Preferred Shares that is not carried out on a Brazilian stock exchange are subject to withholding income tax at a rate of up to 25%. In the case that these gains are related to transactions conducted on the Braziliannon-organizedover-the-counter market with intermediation, income tax withholding of 0.005% will also be applicable and can be offset against the eventual income tax due on the capital gain. This 0.005% income tax withholding is not levied in day trade transactions.
In the case of redemption of Common Shares or Preferred Shares or capital reduction by a Brazilian corporation, such as Oi, the positive difference between the amount effectively received by theNon-Brazilian Holder and the proportional acquisition cost of the redeemed assets is treated, for tax purposes, as capital gain derived from sale or exchange of shares not carried out on a Brazilian stock exchange market, and is therefore subject to withholding income tax at rates of up to 25%, as the case may be.
The deposit of Oi’s commonCommon Stock or preferred sharesPreferred Shares in exchange for ADSs may be subject to Brazilian income tax on capital gains at the rate up to 22.5%, or 25%, in case of a Non-Brazilian Holder located in a Favorable Tax Jurisdiction, if the acquisition cost of the sharesCommon Shares is lower than (1) the average price per share on a Brazilian stock exchange on which the greatest number of such shares were sold on the day of deposit, or (2) if no shares were sold on that day, the average price on the Brazilian stock exchange on which the greatest number of shares were sold in the 15 trading sessions immediately preceding such deposit.their corresponding market value. In such case, the difference between the market value and the acquisition cost and the average price of the shares calculated as above willmay be considered a capital gain. In some circumstances, there may be arguments to claim that this taxation is not applicable in the case of aNon-Brazilian Holder that is a 4,373 Holder and is not a resident in a Favorable Tax Jurisdiction. The availability of these arguments to any specific holder of Common Shares or Preferred Shares will depend on the circumstances of such holder. Prospective holders of Common Shares or Preferred Shares should consult their own tax advisors as to the tax consequences of the deposit Common Shares or Preferred Shares in exchange for ADSs.
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The withdrawal of ADSs in exchange for the underlying Common Shares or Preferred Shares is not subject to Brazilian income tax, as far as the regulatory rules in respect to the registration of the investment before the Brazilian Central Bank are duly observed.
Any exercise of preemptive rights relating to Common Shares, Preferred Shares or ADSs will not be subject to Brazilian taxation. Any gain on the sale or disposition or assignment of preemptive rights relating to Common Shares or Preferred Shares, including the sale or assignment carried out by the depositary, on behalf ofNon-Brazilian Holders of ADSs, will be subject to Brazilian income taxation according to the same rules applicable to the sale or disposition of Common Shares or Preferred Shares (see above). Tax authorities may attempt to tax such gains even when sale or assignment of such rights takes place outside Brazil, based on the provisions of Law No. 10,833/03.
There can be no assurance that the current favorable tax treatment to 4,373 Holders will continue in the future.
Tax on Foreign Exchange Transactions (IOF/Exchange Tax)
Brazilian law imposes a Tax on Foreign Exchange Transactions, or IOF/Exchange Tax, on the conversion ofreais into foreign currency and on the conversion of foreign currency intoreais. The currently applicable rate for most types of foreign exchange transactions is 0.38%. However, other rates apply to specific types of transactions.
Any inflow of funds related to investments carried out on the Brazilian financial and capital markets by a 4,373 Holders is currently subject to the IOF/Exchange Tax at a rate of zero percent. Foreign exchange transactions related to outflows of funds in connection with investments carried out on the Brazilian financial and capital markets are subject to the IOF/Exchange Tax at a rate of zero percent.
The IOF/Exchange Tax also levies at a zero percent rate in case of dividends and interest on shareholders’ equity paid by a Brazilian corporation toNon-Brazilian Holders.
The Brazilian government is permitted to increase the rate of the IOF/Exchange Tax at any time by up to 25% on the foreign exchange transaction amount. However, any increase in rates will only apply to transactions carried out after such increase in rates enters into force.
The purchase of ADSs by aNon-Brazilian Holder outside Brazil generally does not require the execution of a foreign exchange agreement with the Brazilian Central Bank. If this is the case, the IOF/Exchange Tax is not due. The IOF/Exchange Tax is levied at a zero percent rate in connection with foreign exchange agreements, without any actual flows of funds, which are required for a cancellation of ADSs and exchange for shares traded on a Brazilian stock exchange.
Tax on Transactions Involving Securities (IOF/ Securities Tax)
Brazilian law imposes a Tax on Transactions Involving Bonds and Securities, or IOF/Bonds and Securities, due on transactions involving bonds and securities, including those carried out on a Brazilian stock exchange, futures and commodities exchanges.
The rate of IOF/Bonds and Securities applicable to most transactions involving shares and ADSs is currently zero, although the Brazilian government may increase such rate at any time up to 1.5% of the transaction amount per day, but only in respect of future transactions.
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The transfer (cessão) of shares traded on a Brazilian stock exchange for the issuance of depositary receipts to be traded outside Brazil, such as ADSs, is currently subject to the IOF/Bonds and Securities at a zero percent rate.
Other Brazilian Taxes
There are no Brazilian inheritance, gift or succession taxes applicable to the ownership, transfer or disposition of Common Shares, Preferred Shares or ADSs by aNon-Brazilian Holder except for gift and inheritance taxes levied by some states in Brazil in the transfer of Common Shares, Preferred Shares or ADSs to residents of those states. There are no Brazilian stamp, issue, registration, or similar taxes or duties payable byNon-Brazilian Holders of Common Shares, Preferred Shares or ADSs.
U.S. Federal Income Tax Considerations
The following is a discussion of the material U.S. federal income tax consequences that may be relevant with respect to the acquisition, ownership and disposition of Common Shares, Preferred Shares or ADSs, which are evidenced by American Depositary Receipts, or ADRs. This description addresses only the U.S. federal income tax considerations of U.S. Holders (as defined below) that are initial purchasers of Common Shares, Preferred Shares or ADSs and that will hold such shares or ADSs as capital assets. This description does not address tax considerations applicable to holders that may be subject to special tax rules, such as banks, financial institutions, insurance companies, real estate investment trusts, grantor trusts, regulated investment companies, dealers or traders in securities or currencies,tax-exempt entities, pension funds, persons that received Common Shares, Preferred Shares or ADSs pursuant to an exercise of employee stock options or rights or otherwise as compensation for the performance of services, persons that will hold Common Shares, Preferred Shares or ADSs as a position in a “straddle” or as a part of a “hedging,” “conversion” or other risk reduction transaction for U.S. federal income tax purposes, persons that have a “functional currency” other than the U.S. dollar, persons that will own Common Shares, Preferred Shares or ADSs through partnerships or other pass through entities, holders subject to the alternative minimum tax, certain former citizens or long-term residents of the United States or holders that own (or are deemed to own) 10% or more (by combined voting power or combined value) of Oi’s shares.
This description does not address any state, local ornon-U.S. tax consequences of the acquisition, ownership and disposition of Common Shares, Preferred Shares or ADSs by U.S. Holders. Moreover, this description does not address the Medicare tax on net investment income or the consequences of any U.S. federal tax other than income tax, including but not limited to the U.S. federal estate and gift taxes. This description is based on (1) the Internal Revenue Code of 1986, as amended (the “Code”), existing and temporary U.S. Treasury Regulations and judicial and administrative interpretations thereof, in each case as in effect and available on the date of this annual report, as well as proposed Treasury Regulations available on the date of this annual report, and (2) in part, the representations of the depositary and the assumption that each obligation in the deposit agreement and any related agreement will be performed in accordance with its terms. All of the foregoing is subject to change, which change could apply retroactively and could affect the tax consequences described below. Holders should consult their tax advisersadvisors to determine the particular tax consequences to such holders of the acquisition, ownership and disposition of Common Shares, Preferred Shares or ADSs, including the applicability and effect of U.S. state, local andnon-U.S. tax laws.
As used herein, the term “U.S. Holder” means, for U.S. federal tax purposes, a beneficial owner of Common Shares, Preferred Shares or ADSs that is:
an individual citizen or resident of the United States;
a corporation organized under the laws of the United States, any state thereof or the District of Columbia;
an estate the income of which is subject to U.S. federal income taxation regardless of its source; or
| · | an individual citizen or resident of the United States; |
| · | a corporation organized under the laws of the United States, any state thereof or the District of Columbia; |
| · | an estate the income of which is subject to U.S. federal income taxation regardless of its source; or |
| · | a trust if (1) a court within the United States is able to exercise primary supervision over its administration, and (2) one or more United States persons have the authority to control all of the substantial decisions of such trust. |
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If a partnership (or any other entity treated as a partnership for U.S. federal income tax purposes) holds Common Shares, Preferred Shares or ADSs, the tax treatment of a partner in such partnership will generally depend on the status of the partner and the activities of the partnership. A partnership or its partners should consult their tax advisor as to its tax consequences.
Treatment of ADSs
In general, for U.S. federal income tax purposes, a holder of an ADR evidencing an ADS will be treated as the beneficial owner of Common Shares or Preferred Shares represented by the applicable ADS. The U.S. Treasury Department has expressed concern that depositaries for ADSs, or other intermediaries between the holders of shares of an issuer and the issuer, may be taking actions that are inconsistent with the claiming of U.S. foreign tax credits by U.S. Holders of such receipts or shares. Such actions include, for example, apre-release of an ADS by a depositary. Accordingly, the analysis regarding the availability of a U.S. foreign tax credit for Brazilian taxes, the sourcing rules described below and the availability of the reduced tax rate for dividends received by certainnon-corporate holders, each could be affected by future actions that may be taken by the U.S. Treasury Department.
Taxation of Dividends
Subject to the discussion below under “—Passive Foreign Investment Company Rules,” in general, the gross amount of a distribution made with respect to a common share, preferred shareCommon Share, Preferred Share or ADS of Oi (which for this purpose shall include distributions of interest attributable to shareholders’ equity before any reduction for any Brazilian taxes withheld therefrom) will, to the extent made from the current or accumulated earnings and profits of Oi, as determined under U.S. federal income tax principles, constitute a dividend to a U.S. Holder for U.S. federal income tax purposes.Non-corporate U.S. Holders may be taxed on dividends from a qualified foreign corporation at the lower rates applicable to long-term capital gains (i.e., gains with respect to capital assets held for more than one year). A foreign corporation is treated as a qualified foreign corporation with respect to dividends received from that corporation on shares or ADSs that are readily tradable on an established securities market in the United States. U.S. Treasury Department guidance indicates that the ADSs of Oi (which are listed on the NYSE), but not the commonCommon Shares or preferred shares of Oi,Preferred Shares, are readily tradable on an established securities market in the United States. Thus, subject to the discussion below under “—Passive Foreign Investment Company Rules,” as of the date of this annual report, dividends that Oi pays on the ADS, but not on the Common Shares or Preferred Shares of Oi, meet the trading conditions discussed above required for these reduced tax rates. However, there can be no assurance that the ADSs will be considered readily tradable on an established securities market in later years. Furthermore, a U.S. Holder’s eligibility for such preferential rate is subject to certain holding period requirements and thenon-existence of certain risk reduction transactions with respect to the ADSs and such preferential rate is not available if Oi is a PFIC for the taxable year in which such dividend is paid or was a PFIC for the taxable year preceding the taxable year in which such dividend is paid. Such dividends will not be eligible for the dividends received deduction generally allowed to corporate U.S. Holders. Subject to the discussion below under “—Passive Foreign Investment Company Rules,” if a distribution exceeds the amount of the current and accumulated earnings and profits of Oi, it will be treated as anon-taxable return of capital to the extent of the U.S. Holder’s tax basis in the common share, preferred shareCommon Share, Preferred Share or ADS of Oi on which it is paid and thereafter as capital gain. Oi does not maintain calculations of the earnings and profits of Oi under U.S. federal income tax principles. Therefore, U.S. Holders should expect that distributions by Oi generally will be treated as dividends for U.S. federal income tax purposes. Additionally, because Oi believes that it was a PFIC for the taxable year ended December 31, 2018, distributions, if any, paid during the 2019 taxable year are not be eligible for the preferential tax rates discussed above.
A dividend paid inreais will be includible in the income of a U.S. Holder at its value in U.S. dollars calculated by reference to the prevailing spot market exchange rate in effect on the day it is received by the U.S. Holder in the case of Common Shares or Preferred Shares or, in the case of a dividend received in respect of ADSs, of Oi, on the date the dividend is received by the depositary, whether or not the dividend is converted into U.S. dollars. Assuming the payment is not converted at that time, the U.S. Holder will have a tax basis in reais equal to that U.S. dollar amount, which will be used to measure gain or loss from subsequent changes in exchange rates. Any gain or loss realized by a U.S. Holder that subsequently sells or otherwise disposes of reais, which gain or loss is attributable to currency fluctuations after the date of receipt of the dividend, will be ordinary gain or loss. The amount of any distribution of property other than cash will be the fair market value of such property on the date of distribution.
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The gross amount of any dividend paid (which will include any amounts withheld in respect of Brazilian taxes) with respect to a common share, preferred shareCommon Share, Preferred Share or ADS of Oi will be subject to U.S. federal income taxation as foreign source dividend income, which may be relevant in calculating a U.S. Holder’s foreign tax credit limitation. Subject to limitations under U.S. federal income tax law concerning credits or deductions for foreign taxes and certain exceptions for short-term and hedged positions, any Brazilian withholding tax will be treated as a foreign income tax eligible for credit against a U.S. Holder’s U.S. federal income tax liability (or at a U.S. Holder’s election, may be deducted in computing taxable income if the U.S. Holder has elected to deduct all foreign income taxes for the taxable year). The limitation on foreign taxes eligible for the U.S. foreign tax credit is calculated separately with respect to specific “baskets” of income. For this purpose, the dividends should generally constitute “passive category income,” or in the case of certain U.S. Holders, “general category income.” The rules with respect to foreign tax credits are complex, and U.S. Holders are urged to consult their own tax advisors regarding the availability of the foreign tax credit under their particular circumstances.
Treatment of Preferred Stock
Section 305 of the Code provides special rules for the tax treatment of preferred stock. According to the U.S. Treasury Regulations under that section, the term preferred stock generally refers to stock which enjoys certain limited rights and privileges (generally associated with specified dividend and liquidation priorities) but does not participate in corporate growth to any significant extent. While Oi’s Preferred Shares have some preferences over its Common Shares, the Preferred Shares are not fixed as to dividend payments or liquidation value. Consequently, although the matter is not entirely clear, because the determination is highly factual in nature, it is more likely than not that the preferred shares of OiPreferred Shares will be treated as “common stock” within the meaning of section 305 of the Code. If the preferred sharesPreferred Shares are treated as “common stock” for purposes of section 305 of the Code, distributions to U.S. Holders of additional shares of such “common stock” or preemptive rights relating to such “common stock” with respect to their preferred sharesPreferred Shares or ADSs that are made as part of a pro rata distribution to all shareholders in most instances will not be subject to U.S. federal income tax. On the other hand, if the preferred sharesPreferred Shares are treated as “preferred stock” within the meaning of section 305 of the Code, and if a U.S. Holder receives a distribution of additional shares or preemptive rights as described in the preceding sentence, such distributions (including amounts withheld in respect of any Brazilian taxes), as discussed more fully below, will be treated as dividends to the same extent and in the same manner as distributions payable in cash. In that event, the amount of such distribution (and the basis of the new shares or preemptive rights so received) will equal the fair market value of the shares or preemptive rights on the date of distribution.
Sale, Exchange or Other Disposition of the Common Shares, Preferred Shares or ADSs of Oi
A deposit or withdrawal of common sharesCommon Shares or preferred sharesPreferred Shares by a U.S. Holder in exchange for the ADS that represent such shares will not result in the realization of gain or loss for U.S. federal income tax purposes. Subject to the discussion below under “—Passive Foreign Investment Company Rules,” a U.S. Holder generally will recognize capital gain or loss upon a sale, exchange or other disposition of a common share, preferred shareCommon Share, Preferred Share or ADS of Oi held by the U.S. Holder or the depositary, as the case may be, in an amount equal to the difference between the U.S. Holder’s adjusted basis in its common shares, preferred sharesCommon Shares, Preferred Shares or ADSs of Oi (determined in U.S. dollars) and the U.S. dollar amount realized on the sale, exchange or other disposition. If a Brazilian tax is withheld on the sale, exchange or other disposition of a share, the amount realized by a U.S. Holder will include the gross amount of the proceeds of that sale, exchange or other disposition before deduction of the Brazilian tax. In the case of anon-corporate U.S. Holder, the maximum marginal U.S. federal income tax rate applicable to capital gain generally will be lower than the maximum marginal U.S. federal income tax rate applicable to ordinary income (other than, as discussed above, certain dividends) if such holder’s holding period for such common share, preferred shareCommon Share, Preferred Share or ADS of Oi exceeds one year (i.e., such gain is a long-term capital gain). Capital gain, if any, realized by a U.S. Holder on the sale or exchange of a common share, preferred shareCommon Share, Preferred Share or ADS of Oi generally will be treated as U.S. source income for U.S. foreign tax credit purposes. Consequently, in the case of a disposition or deposit of a common share, preferred shareCommon Share, Preferred Share or ADS of Oi that is subject to Brazilian tax, the U.S. Holder may not be able to use the foreign tax credit for that Brazilian tax unless it can apply the credit against U.S. tax payable on other income from foreign sources in the appropriate income category, or, alternatively, it may take a deduction for the Brazilian tax if it elects to deduct all of its foreign income taxes. The deductibility of capital losses is subject to limitations under the Code.
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The initial tax basis of a U.S. Holder’s common shares, preferred sharesCommon Shares, Preferred Shares or ADSs of Oi will be the U.S. dollar value of the reais-denominated purchase price determined on the date of purchase. If the common shares, preferred sharesCommon Shares, Preferred Shares or ADSs of Oi are treated as traded on an “established securities market,” a cash basis U.S. Holder, or, if it elects, an accrual basis U.S. Holder, will determine the dollar value of the cost of such common shares, preferred sharesCommon Shares, Preferred Shares or ADSs by translating the amount paid at the spot rate of exchange on the settlement date of the purchase. The conversion of U.S. dollars to reais and the immediate use of that currency to purchase common shares, preferred sharesCommon Shares, Preferred Shares or ADSs generally will not result in taxable gain or loss for a U.S. Holder.
With respect to the sale or exchange of Common Shares, Preferred Shares or ADSs, the amount realized generally will be the U.S. dollar value of the payment received determined on the date of disposition. If Common Shares, Preferred Shares or ADSs are treated as traded on an “established securities market,” a cash basis taxpayer, or, if it elects, an accrual basis taxpayer, will determine the U.S. dollar value of the amount realized by translating the amount received at the spot rate of exchange on the settlement date of the sale.
Passive Foreign Investment Company Rules
Anon-U.S. corporation will be classified as a PFIC for U.S. federal income tax purposes in any taxable year in which, after applying certain look-through rules, either (1) at least 75 percent of its gross income is “passive income,” or (2) at least 50 percent of the average value of its gross assets is attributable to assets that produce “passive income” or is held for the production of passive income. Passive income for this purpose generally includes dividends, interest, royalties, rents and gains from commodities and securities transactions. For purposes of the PFIC asset test, the aggregate fair market value of the assets of a publicly traded foreign corporation generally is treated as being equal to the sum of the aggregate value of the outstanding stock and the total amount of the liabilities of such corporation (the “Market Capitalization”).
Based on certain estimates of the gross income and gross assets of Oi, the nature of its business, the size of its investment in certain subsidiaries, and its anticipated Market Capitalization, Oi believes that it was not classified as a PFIC for its taxable year ended December 31, 2019,2020, although Oi believes that it was a PFIC for the taxable year ended December 31, 2018. 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, 2020,2021, 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 Common 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. Moreover, Oi has not obtained an opinion from counsel regarding the PFIC status of Oi for any taxable period.
If Oi is a PFIC for any taxable year during which a U.S. Holder holds Common Shares, Preferred Shares or ADSs, Oi generally will continue to be treated as a PFIC with respect to such U.S. Holder for all succeeding years during which such U.S. Holder holds Common Shares, Preferred Shares or ADSs, unless Oi ceases to be a PFIC and such U.S. Holder makes a “deemed sale” election with respect to such Common Shares, Preferred Shares or ADSs. If such election is made, such U.S. Holder will be deemed to have sold such Common Shares, Preferred Shares or ADSs held by such U.S. Holder at their fair market value on the last day of the last taxable year in which Oi qualified as a PFIC, and any gain from such deemed sale would be subject to the consequences described in the following paragraph. After the deemed sale election, such U.S. Holder’s Common Shares, Preferred Shares or ADSs with respect to which the deemed sale election was made will not be treated as shares in a PFIC, and such U.S. Holder would not be subject to the rules described below with respect to any “excess distribution” such U.S. Holder receives from Oi or any gain from an actual sale or other disposition of such Common Shares, Preferred Shares or ADSs, unless Oi subsequently becomes a PFIC.The rules dealing with deemed sale elections are complex. U.S. Holders are encouraged to consult their tax advisor as to the possibility and consequences of making a deemed sale election.
For each taxable year that Oi is treated as a PFIC with respect to a U.S. Holder, any excess distribution (generally a distribution in excess of 125% of the average distribution over a three-year period or shorter holding period for Common Shares, Preferred Shares or ADSs) and realized gain will be treated as ordinary income and will be subject to tax as if (1) the excess distribution or gain had been realized ratably over the U.S. Holder’s holding period, (2) the amount deemed realized in each year had been subject to tax in each such year at the highest marginal rate for such year (other than income allocated to the current period or any taxable period before Oi became a PFIC, which would be subject to tax at the U.S. Holder’s regular ordinary income rate for the current year and would not be subject to the interest charge discussed below), and (3) the interest charge generally applicable to underpayments of tax had been imposed on the taxes deemed to have been payable in those years. U.S. Holders should consult their own tax advisors regarding the tax consequences of Oi being treated as a PFIC with respect to such U.S. Holders. The tax liability for amounts allocated to taxable years prior to the year of disposition or excess distribution cannot be offset by any net operating losses for such years, and gains (but not losses) realized on the sale or other disposition of Common Shares, Preferred Shares or ADSs cannot be treated as capital, even if a U.S. Holder holds Common Shares, Preferred Shares or ADSs as capital assets. In addition, a U.S. Holder’s tax basis in Common Shares, Preferred Shares or ADSs that are acquired from a decedent would not receive astep-up to fair market value as of the date of the decedent’s death but instead would be equal to the decedent’s basis, if lower.
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If Oi is treated as a PFIC with respect to a U.S. Holder for any taxable year, to the extent any of Oi’s subsidiaries are also PFICs or Oi makes direct or indirect equity investments in other entities that are PFICs, such U.S. Holder may be deemed to own shares in such lower-tier PFICs that are directly or indirectly owned by Oi in that proportion which the value of the common shares, preferred sharesCommon Shares, Preferred Shares or ADSs of Oi such U.S. Holder owns bears to the value of all of Common Shares, Preferred Shares and ADSs, and such U.S. Holder may be subject to the adverse tax consequences described in the preceding two paragraphs with respect to the shares of such lower-tier PFICs that such U.S. Holder would be deemed to own. U.S. Holders should consult their tax advisor regarding the application of the PFIC rules to any of Oi’s subsidiaries.
If Oi is treated as a PFIC with respect to a U.S. Holder of the common shares, preferred sharesCommon Shares, Preferred Shares or ADSs, of Oi, such U.S. Holder may be able to make certain elections that may alleviate certain of the tax consequences referred to above. Where a company that is a PFIC meets certain reporting requirements, a U.S. Holder can avoid certain adverse PFIC consequences described above by making a “qualified electing fund,” or QEF, election to be taxed currently on its proportionate share of the PFIC’s ordinary income and net capital gains. However, Oi does not intend to comply with the necessary accounting and record keeping requirements that would allow a U.S. Holder to make a QEF election with respect to Oi.
If Common Shares, Preferred Shares or ADSs are “regularly traded” on a “qualified exchange,” a U.S. Holder may make amark-to-market election with respect to the common shares, preferred sharesCommon Shares, Preferred Shares or ADSs, of Oi, as the case may be. If a U.S. Holder makes themark-to-market election, for each year in which Oi is a PFIC, the holder will generally include as ordinary income the excess, if any, of the fair market value of Common Shares, Preferred Shares or ADSs, as the case may be, at the end of the taxable year over their adjusted tax basis, and will be permitted an ordinary loss in respect of the excess, if any, of the adjusted tax basis of Common Shares, Preferred Shares or ADSs, over their fair market value at the end of the taxable year (but only to the extent of the net amount of previously included income as a result of themark-to-market election). If a U.S. Holder makes the election, the holder’s tax basis in Common Shares, Preferred Shares or ADSs, as the case may be, will be adjusted to reflect the amount of any such income or loss. Any gain recognized on the sale or other disposition of Common Shares, Preferred Shares or ADSs will be treated as ordinary income. Common Shares, Preferred Shares and ADSs will be considered “marketable stock” if they are traded on a qualified exchange, other than in de minimis quantities, on at least 15 days during each calendar quarter. The NYSE is a qualified exchange and the B3 may constitute a qualified exchange for this purpose provided the B3 meets certain trading volume, listing, financial disclosure, surveillance and other requirements set forth in applicable U.S. Treasury Regulations. However, Oi cannot be certain that its Common Shares, Preferred Shares or ADSs will continue to trade on the B3 or the NYSE, respectively, or that its Common Shares, Preferred Shares or ADSs will be traded on at least 15 days in each calendar quarter in other than de minimis quantities. U.S. Holders should be aware, however, that for each taxable year that Oi is treated as a PFIC with respect to a U.S. Holder, the interest charge regime described above could be applied to indirect distributions or gains deemed to be attributable to such U.S. Holder in respect of any of Oi’s subsidiaries that also may be determined to be a PFIC, and themark-to-market election generally would not be effective for such subsidiaries. Each U.S. Holder should consult its own tax advisor to determine whether amark-to-market election is available and the consequences of making an election if Oi were characterized as a PFIC.
If a U.S. Holder owns common shares, preferred sharesCommon Shares, Preferred Shares or ADSs of Oi during any year in which Oi was a PFIC, such U.S. Holder generally must file IRS Form 8621 with respect to Oi, generally with the U.S. Holder’s federal income tax return for that year.
Taxation of Dividends
Subject to the discussion above under “—Passive Foreign Investment Company Rules,” in general, the gross amount of a distribution made with respect to a common share, preferred share or ADS of Oi (which for this purpose shall include distributions of interest attributable to shareholders’ equity before any reduction for any Brazilian taxes withheld therefrom) will, to the extent made from the current or accumulated earnings and profits of Oi, as determined under U.S. federal income tax principles, constitute a dividend to a U.S. Holder for U.S. federal income tax purposes.Non-corporate U.S. Holders may be taxed on dividends from a qualified foreign corporation at the lower rates applicable to long-term capital gains (i.e., gains with respect to capital assets held for more than one year). A foreign corporation is treated as a qualified foreign corporation with respect to dividends received from that corporation on shares or ADSs that are readily tradable on an established securities market in the United States. U.S. Treasury Department guidance indicates that the ADSs of Oi (which are listed on the NYSE), but not the common or preferred shares of Oi, are readily tradable on an established securities market in the United States. Thus, subject to the discussion above under “—Passive Foreign Investment Company Rules,” as of the date of this annual report, dividends that Oi pays on the ADS, but not on the Common Shares or Preferred Shares of Oi, meet the trading conditions discussed above required for these reduced tax rates. However, there can be no assurance that the ADSs will be considered readily tradable on an established securities market in later years. Furthermore, a U.S. Holder’s eligibility for such preferential rate is subject to certain holding period requirements and thenon-existence of certain risk reduction transactions with respect to the ADSs and such preferential rate is not available if Oi is a PFIC for the taxable year in which such dividend is paid or was a PFIC for the taxable year preceding the taxable year in which such dividend is paid. Such dividends will not be eligible for the dividends received deduction generally allowed to corporate U.S. Holders. Subject to the discussion above under “—Passive Foreign Investment Company Rules,” if a distribution exceeds the amount of the current and accumulated earnings and profits of Oi, it will be treated as anon-taxable return of capital to the extent of the U.S. Holder’s tax basis in the common share, preferred share or ADS of Oi on which it is paid and thereafter as capital gain. Oi does not maintain calculations of the earnings and profits of Oi under U.S. federal income tax principles. Therefore, U.S. Holders should expect that distributions by Oi generally will be treated as dividends for U.S. federal income tax purposes.
A dividend paid inreais will be includible in the income of a U.S. Holder at its value in U.S. dollars calculated by reference to the prevailing spot market exchange rate in effect on the day it is received by the U.S. Holder in the case of Common Shares or Preferred Shares or, in the case of a dividend received in respect of ADSs of Oi, on the date the dividend is received by the depositary, whether or not the dividend is converted into U.S. dollars. Assuming the payment is not converted at that time, the U.S. Holder will have a tax basis in reais equal to that U.S. dollar amount, which will be used to measure gain or loss from subsequent changes in exchange rates. Any gain or loss realized by a U.S. Holder that subsequently sells or otherwise disposes of reais, which gain or loss is attributable to currency fluctuations after the date of receipt of the dividend, will be ordinary gain or loss. The amount of any distribution of property other than cash will be the fair market value of such property on the date of distribution.
The gross amount of any dividend paid (which will include any amounts withheld in respect of Brazilian taxes) with respect to a common share, preferred share or ADS of Oi will be subject to U.S. federal income taxation as foreign source dividend income, which may be relevant in calculating a U.S. Holder’s foreign tax credit limitation. Subject to limitations under U.S. federal income tax law concerning credits or deductions for foreign taxes and certain exceptions for short-term and hedged positions, any Brazilian withholding tax will be treated as a foreign income tax eligible for credit against a U.S. Holder’s U.S. federal income tax liability (or at a U.S. Holder’s election, may be deducted in computing taxable income if the U.S. Holder has elected to deduct all foreign income taxes for the taxable year). The limitation on foreign taxes eligible for the U.S. foreign tax credit is calculated separately with respect to specific “baskets” of income. For this purpose, the dividends should generally constitute “passive category income,” or in the case of certain U.S. Holders, “general category income.” The rules with respect to foreign tax credits are complex, and U.S. Holders are urged to consult their own tax advisors regarding the availability of the foreign tax credit under their particular circumstances.
Treatment of Preferred Stock
Section 305 of the Code provides special rules for the tax treatment of preferred stock. According to the U.S. Treasury Regulations under that section, the term preferred stock generally refers to stock which enjoys certain limited rights and privileges (generally associated with specified dividend and liquidation priorities) but does not participate in corporate growth to any significant extent. While Oi’s Preferred Shares have some preferences over its Common Shares, the Preferred Shares are not fixed as to dividend payments or liquidation value. Consequently, although the matter is not entirely clear, because the determination is highly factual in nature, it is more likely than not that the Preferred Shares of Oi will be treated as “common stock” within the meaning of section 305 of the Code. If the Preferred Shares are treated as “common stock” for purposes of section 305 of the Code, distributions to U.S. Holders of additional shares of such “common stock” or preemptive rights relating to such “common stock” with respect to their preferred shares or ADSs that are made as part of a pro rata distribution to all shareholders in most instances will not be subject to U.S. federal income tax. On the other hand, if the Preferred Shares are treated as “preferred stock” within the meaning of section 305 of the Code, and if a U.S. Holder receives a distribution of additional shares or preemptive rights as described in the preceding sentence, such distributions (including amounts withheld in respect of any Brazilian taxes), as discussed more fully below, will be treated as dividends to the same extent and in the same manner as distributions payable in cash. In that event, the amount of such distribution (and the basis of the new shares or preemptive rights so received) will equal the fair market value of the shares or preemptive rights on the date of distribution.
Sale, Exchange or Other Disposition of the Common Shares, Preferred Shares or ADSs of Oi
A deposit or withdrawal of common shares or preferred shares by a U.S. Holder in exchange for the ADS that represent such shares will not result in the realization of gain or loss for U.S. federal income tax purposes. Subject to the discussion above under “—Passive Foreign Investment Company Rules,” a U.S. Holder generally will recognize capital gain or loss upon a sale, exchange or other disposition of a common share, preferred share or ADS of Oi held by the U.S. Holder or the depositary, as the case may be, in an amount equal to the difference between the U.S. Holder’s adjusted basis in its common shares, preferred shares or ADSs of Oi (determined in U.S. dollars) and the U.S. dollar amount realized on the sale, exchange or other disposition. If a Brazilian tax is withheld on the sale, exchange or other disposition of a share, the amount realized by a U.S. Holder will include the gross amount of the proceeds of that sale, exchange or other disposition before deduction of the Brazilian tax. In the case of anon-corporate U.S. Holder, the maximum marginal U.S. federal income tax rate applicable to capital gain generally will be lower than the maximum marginal U.S. federal income tax rate applicable to ordinary income (other than, as discussed above, certain dividends) if such holder’s holding period for such common share, preferred share or ADS of Oi exceeds one year (i.e., such gain is a long-term capital gain). Capital gain, if any, realized by a U.S. Holder on the sale or exchange of a common share, preferred share or ADS of Oi generally will be treated as U.S. source income for U.S. foreign tax credit purposes. Consequently, in the case of a disposition or deposit of a common share, preferred share or ADS of Oi that is subject to Brazilian tax, the U.S. Holder may not be able to use the foreign tax credit for that Brazilian tax unless it can apply the credit against U.S. tax payable on other income from foreign sources in the appropriate income category, or, alternatively, it may take a deduction for the Brazilian tax if it elects to deduct all of its foreign income taxes. The deductibility of capital losses is subject to limitations under the Code.
The initial tax basis of a U.S. Holder’s common shares, preferred shares or ADSs of Oi will be the U.S. dollar value of the reais-denominated purchase price determined on the date of purchase. If the common shares, preferred shares or ADSs of Oi are treated as traded on an “established securities market,” a cash basis U.S. Holder, or, if it elects, an accrual basis U.S. Holder, will determine the dollar value of the cost of such common shares, preferred shares or ADSs by translating the amount paid at the spot rate of exchange on the settlement date of the purchase. The conversion of U.S. dollars to reais and the immediate use of that currency to purchase common shares, preferred shares or ADSs generally will not result in taxable gain or loss for a U.S. Holder.
With respect to the sale or exchange of Common Shares, Preferred Shares or ADSs, the amount realized generally will be the U.S. dollar value of the payment received determined on the date of disposition. If Common Shares, Preferred Shares or ADSs are treated as traded on an “established securities market,” a cash basis taxpayer, or, if it elects, an accrual basis taxpayer, will determine the U.S. dollar value of the amount realized by translating the amount received at the spot rate of exchange on the settlement date of the sale.
Other Brazilian Taxes
Any Brazilian IOF/Exchange Tax or IOF/Bonds and Securities Tax (as discussed under “—Brazilian Tax Considerations” above) may not be treated as a creditable foreign tax for U.S. federal income tax purposes, although a U.S. Holder may be entitled to deduct such taxes if it elects to deduct all of its foreign income taxes. U.S. Holders should consult their tax advisors regarding the U.S. federal income tax consequences of these taxes.
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3.8% Medicare Tax On “Net Investment Income”
Certain U.S. Holders who are individuals, estates or trusts may be required to pay an additional 3.8% tax on, among other things, dividends and capital gains from the sale or other disposition of Common Shares, Preferred Shares or ADSs.
Information Reporting and Backup Withholding
In general, information reporting will apply to dividends in respect of Common Shares, Preferred Shares or ADSs and the proceeds from the sale, exchange or redemption of Common Shares, Preferred Shares or ADSs that are paid to a U.S. Holder within the United States (and in certain cases, outside the United States) by a U.S. payor or U.S. middleman, unless such U.S. Holder is an exempt recipient such as a corporation. A backup withholding tax may apply to such payments if a U.S. Holder fails to provide a taxpayer identification number or certification of other exempt status or fail to report in full dividend and interest income.
Any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against a U.S. Holder’s U.S. federal income tax liability provided the required information is furnished to the Internal Revenue Service in a timely manner.
Certain U.S. Holders who are individuals are required to report information relating to an interest in Common Shares, Preferred Shares or ADSs, subject to certain exceptions (including an exception for Common Shares, Preferred Shares or ADSs held in accounts maintained by U.S. financial institutions). U.S. Holders are urged to consult their tax advisors regarding their information reporting obligations, if any, with respect to their acquisition, ownership and disposition of Common Shares, Preferred Shares or ADSs.
Documents on Display
Statements contained in this annual report regarding the contents of any contract or other document filed as an exhibit to this annual report summarize their material terms, but are not necessarily complete, and each of these statements is qualified in all respects by reference to the full text of such contract or other document.
We are subject to the information requirements of the Exchange Act, except that as a foreign issuer, we are not subject to the proxy rules or the short-swing profit disclosure rules of the Exchange Act. In accordance with these statutory requirements, we file with or furnish reports and other information to the SEC. Reports and other information filed or furnished by us to the SEC may be inspected and copied at the public reference facilities maintained by the SEC at Room 1024, 100 F Street, N.E., Washington, D.C. 20549. Copies of such material may also be inspected at the offices of the NYSE, 11 Wall Street, New York, New York 10005, on which our ADRs are listed. In addition, the SEC maintains a website that contains information which we have filed electronically with the SEC, which can be accessed over the Internet athttp://www.sec.gov.www.sec.gov.
We also file financial statements and other periodic reports with the CVM, which are available for investor inspection at the CVM’s offices located at Rua Sete de Setembro, 111, 2nd floor, Rio de Janeiro, RJ, and Rua Cincinato Braga, 340, 2nd, 3rd and 4th floors, São Paulo, SP. The CVM maintains an Internet website that contains reports and other information about issuers, like us, that file electronically with the CVM. The address of that website is http://www.cvm.gov.br. We also file consolidated financial statements and other periodic information with B3. The address of the B3 website is http://www.bmfbovespa.com.br.
Copies of Oi’s annual report on Form20-F and documents referred to in this annual report and Oi’sby-laws are available for inspection upon request at Oi’s headquarters at Rua do Lavradio, 71, 2 andar – Centro, CEP20.230-070 Rio de Janeiro, RJ, Brazil. Oi’s filings are also available to the public through the internet at Oi’s website at www.oi.com.br/ir. The information included on Oi’s website or that might be accessed through Oi’s website is not included in this annual report and is not incorporated into this annual report by reference.
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| ITEM 11. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We are exposed to market risks related to changes in foreign currency exchange rates and interest rates. We are exposed to foreign currency exchange rate risk mainly becausebecause: (1) a significant portion of our equipment costs, such as costs relating to switching centers and software used for upgrading network capacity, are primarily denominated in foreign currencies or linked to foreign currencies, primarily the U.S. dollar, other than those in which we earn revenues (primarilyreais),; and (2) a significant portion of our borrowings and financing are denominated in foreign currencies, primarily the U.S. dollar. We are subject to market risk deriving from changes in interest rates because a significant portion of our indebtedness bears interest at floating rates. We have historically entered into derivative transactions to manage certain market risks, mainly our foreign currency exchange rate risk and our interest rate risk. However, in connection with our RJ Proceedings, we reversed our derivative financial instruments during the second and third quarters of 2016. In 2016 prior to the commencement of the RJ Proceedings, we developed and approved with Oi’s board of directors a new hedging policy that modified the risk management objectives from earnings to cash flow at risk. With the conclusion of our RJ Proceedings, and, hence, the accurate measurement of our risk factors, we have recently approved the hedging strategy for 2020 in line with our hedging policy, focused on cash flows, and liquidity, while complying with the financial covenants contained in our debt instruments. As of December 31, 2019, we had derivative instruments designed to hedge our short term U.S. dollar-linked debt interest payments, as well as part of our operating expenses contractually denominated in U.S. dollars.
Exchange Rate Risk
During 2019, approximately 28.8% of our capital expenditures were U.S. dollar-denominated or linked to the U.S. dollar. A hypothetical, instantaneous 10.0% depreciation of the real against the U.S. dollar as of December 31, 2019 would have resulted in an increase of R$714 million in the cost of our capital expenditures during 2019, assuming that we would have incurred all of these capital expenditures notwithstanding the adverse change in the exchange rates.
Our financing cost and the amount of financial liabilities that we record are also exposed to exchange rate risk. As of December 31, 2019, R$9,521 million, or 52.2%, of our total consolidated borrowings and financings was denominated in foreign currency, after giving effect to the fair value adjustment to our borrowings and financing and debt issuance costs. We have recorded foreign currency and monetary restatement losses of R$640 million during 2019 with respect to our foreign currency-denominated financial liabilities and foreign currency and monetary restatement gains of R$334 million during 2019 with respect to the fair value adjustment related to our foreign currency denominated debt, based on exchange rates in effect at the end of 2019. The potential additional losses on foreign currency and monetary restatement during 2019 that would result from a hypothetical, instantaneous 10.0% depreciation of thereal against the U.S. dollar and the euro as of December 31, 2019 would be approximately R$914 million, assuming that the amount and composition of our debt instruments were unchanged. The potential increase in our total consolidated debt obligations that would result from a 10.0% depreciation of therealagainst the U.S. dollar and the euro as of December 31, 2019 would be approximately R$953 million.
Interest Rate Risk
As of December 31, 2019, we had total outstanding borrowings and financings of R$31,642 million, excluding the fair value adjustment and debt issuance costs, and R$18,227 million, after giving effect to the fair value adjustment and debt issuance costs. Of this outstanding balance after giving effect to the fair value adjustment and debt issuance costs, R$8,641 million, or 47.8%, wasreal-denominated indebtedness that bore interest at floating rates primarily based on the CDI rate or TJLP rate, R$42 million wasreal-denominated indebtedness that bore interest at fixed rates and R$23 million wasreal-denominated indebtedness that bore interest based at TR (currently at zero).
We invest our excess liquidity (R$2,299 million as of December 31, 2019) mainly in (1) in short-term instruments denominated inreais that generally pay interest at overnight interest rates based on the CDI rate which partially mitigates our exposure to Brazilian interest rate risk, (2) certificates of deposit and time deposits issued by global and domestic financial institutions with AAA and AA ratings from international rating agencies, and (3) in investment funds created by top Brazilian asset managers exclusively for us. The fund managers of the investment funds created for us are responsible for managing our funds, subject to the direction of our investment policy, approved by Oi’s board of directors. As of the date of this annual report, these funds are comprised mainly of government bonds and otherlow-risk financial instruments linked to the CDI and SELIC rates.
We recorded interest on borrowings payable to third parties and debentures of R$1,618 million during 2019. The potential additional interest on borrowings payable to third parties during 2019 that would have resulted from a hypothetical, instantaneous and unfavorable change of 100 basis points in the interest rates on December 31, 2019 would be approximately R$131 million considering the impact on our debt obligations. This sensitivity analysis is based on the assumption of an unfavorable 100 basis points movement of the interest rates applicable to each homogeneous category of financial liabilities and sustained over a period of one year. A homogeneous category is defined according to the currency in which financial assets and liabilities are denominated and assumes the same interest rate movement within each homogeneous category (e.g.,reais). As a result, our interest rate risk sensitivity model may overstate the impact of interest rate fluctuation for such financial instruments, as consistently unfavorable movements of all interest rates are unlikely.
Hedging Policy
We employ financial risk management strategies usingnon-deliverable forwards and U.S. dollar-denominated cash (natural hedge), and in the future, we may also employ cross-currency swaps, interest rate swaps and series swaps. Our financialHowever, we may be limited in reducing our market risk management strategy is designedexposure using derivatives due to protect us against devaluation of the real against foreign currencies, according to our foreign-currency exposure in connection with our financings.credit constraints. We do not enter into derivatives transactions for speculative reasons or any other purposes.
More specifically, during 2020, we maintained offshore a portion of the U.S. dollar-denominated proceeds we received from the sale of PT Ventures in January 2020, which served as a natural hedge against the payment of U.S. dollar-denominated debt interest and operating expenses during 2020. In addition, during 2020, we also hedged our U.S. dollar-denominated operating expenses using non-deliverable forwards. As of December 31, 2020, we held non-deliverable forwards to hedge our U.S. dollar-denominated debt interest due in February 2021, as well as U.S. dollar-denominated operating expenses for the beginning of 2021.
Our hedging strategy for 2020 was in line with our hedging policy, focused on cash flows and liquidity. We have maintained this strategy in 2021.
For more information about our risk management, including foreign exchange rate and interest rate risk sensitivity analyses, see note 3.2 to our audited consolidated financial statements included in this annual report.
| ITEM 12. | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES |
The depositary collects its fees for the delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs or from intermediaries acting for them. The depositary also collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect its annual fee for depositary services by deductions from cash distributions or by directly billing investors or by charging the book-entry system accounts of participants acting for them. The depositary may generally refuse to providefee-attracting services until its fees for those services are paid.
Persons depositing or withdrawing shares or holders of ADSs must pay:
| · | US$5.00 (or less) per 100 ADSs (or portion thereof) for the issuance of ADSs, including issuances resulting from a distribution of shares or rights or other property; |
| · | US$5.00 (or less) per 100 ADSs (or portion thereof) for the cancellation of ADSs for the purpose of withdrawal, including in the event of the termination of the applicable deposit agreement relating to our ADSs; |
| · | US$0.02 (or less) per ADS (or portion thereof) for any cash distribution; |
| · | US$0.02 (or less) per ADS (or portion thereof) per calendar year for depositary services; |
| · | in the event of distributions of securities, a fee equivalent to the fee for the execution and delivery of ADSs referred to above, which would have been charged, as a result of the deposit of such securities (treating such securities as Common Shares or Class A Preferred Shares, as the case may be, for the purposes of this fee); |
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US$5.00 (or less) per 100 ADSs (or portion of 100 ADSs) for the issuance of ADSs, including issuances resulting from a distribution of shares or rights or other property;
US$5.00 (or less) per 100 ADSs (or portion of 100 ADSs) for the cancellation of ADSs for the purpose of withdrawal, including in the event of the termination of the applicable deposit agreement relating to our ADSs;
US$0.02 (or less) per ADS (or portion thereof) for any cash distribution;
US$0.02 (or less) per ADS (or portion thereof) per calendar year for depositary services;
in the event of distributions of securities (other than Oi’s Class A Preferred Shares), a fee equivalent to the fee for the execution and delivery of ADRs referred to above, which would have been charged, as a result of the deposit of such securities (treating such securities as Class A Preferred Shares for the purposes of this fee);
registration or transfer fees for the transfer and registration of shares on Oi’s share register to or from the name of the depositary or its agent when you deposit or withdraw shares;
expenses of the depositary for (1) cable, telex and facsimile transmissions (when expressly provided in the applicable the deposit agreements relating to our ADSs), and (2) converting foreign currency to U.S. dollars;
taxes and other governmental charges the depositary or the custodian have to pay on any ADS or share underlying an ADS, for example, stock transfer taxes, stamp duty or withholding taxes, as necessary; and
any charges incurred by the depositary or its agents for servicing the deposited securities, as necessary.
| · | registration or transfer fees for the transfer and registration of shares on Oi’s share register to or from the name of the depositary or its agent when you deposit or withdraw shares; |
| · | expenses of the depositary for (1) cable, telex and facsimile transmissions (when expressly provided in the applicable deposit agreements relating to our ADSs), and (2) converting foreign currency to U.S. dollars; |
| · | taxes and other governmental charges the depositary or the custodian have to pay on any ADS or share underlying an ADS, for example, stock transfer taxes, stamp duty or withholding taxes, as necessary; and |
| · | any charges incurred by the depositary or its agents for servicing the deposited securities, as necessary. |
Subject to certain terms and conditions, the depositary has agreed to reimburse Oi for certain expenses it incurs that are related to establishmentadministration and maintenance expenses of the ADS program, including but not limited to investor relations expenses or any other ADS program-related expenses. In addition, the Depositary has agreed to pay its standardout-of-pocket maintenance costs expenses for the ADRs, which consist of theproviding services to registered DR holders, including but not limited to expenses of postage and envelopes for mailing annual and interim financial reports, printing and distributing dividend checks, electronic filing of U.S. FederalIRS tax information,reporting, mailing required tax forms, stationery, postage, facsimile, and telephone calls. There are limits on the amount of expenses for which the depositary will reimburse us, but the amount of reimbursement available to Oi is not necessarily tied to the amount of fees the depositary collects from investors.
During the year ended December 31, 2019,2020, we received US$103 million in reimbursements from the depositary of our ADSs.
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| ITEM 13. | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES |
Not applicable.
| ITEM 14. | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS |
Not applicable.
| ITEM 15. | CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
Our chief executive officer, or CEO, and chief financial officer, or CFO, are responsible for establishing and maintaining our disclosure controls and procedures. These controls and procedures were designed to ensure that information that we are required to disclose in the reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms of the SEC, and that it is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
We performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 20192020 under the supervision of our CEO and CFO (as defined in rules 13a-15(e) or 15(d)-15(e) under the Exchange Act). There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective controls and procedures can only provide reasonable assurance of achieving their control objectives.
Based on our evaluation, our CEO and CFO concluded that our disclosure controls and procedures were not effective as of December 31, 2019, and that2020, because of the design and operation ofmaterial weaknesses in our disclosure controls and procedures were effective to provide reasonable assurance that all material information relating to our company was reportedinternal control over financial reporting as required.described below.
Management’s Annual Report on Internal Control over Financial Reporting and Report of Independent Registered Public Accounting Firm
Our management is responsible for establishing and maintaining adequate internal controls over financial reporting, as defined in Exchange Act Rules 13a-15(f) and 15d-15(f).
Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with applicable generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets, (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with applicable generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors, and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness of internal control to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
1 NTD: To be updated upon receipt of Management’s Report on Internal Controls.
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Under the supervision and with the participation of our CEO and CFO, our management conducted an assessment of the effectiveness of our internal control over financial reporting as of December 31, 20192020 based on the criteria established in “Internal Control —Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"(“COSO”). Based on this assessment, our management concluded that as of December 31, 2019,2020, our internal control over financial reporting was effective.not effective because of the material weaknesses described below.
A material weakness is a control deficiency, or combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the annual consolidated financial statements will not be prevented or detected on a timely basis. The material weaknesses identified as of December 31, 2020 were:
| 1. | Discontinued Operations. During the application of IFRS 5, our non-routine controls over integrity and completeness of underlying data used to report discontinued operations did not operate effectively. These controls did not identify certain allocations of a portion of other operating expenses and a portion of financial expenses which should have been included in the results of the discontinued operations in our consolidated statement of operations. |
| 2. | Impairment Assessment. Our controls over assessment of the reasonableness of certain inputs and assumptions used in the impairment analysis did not operate effectively. This resulted in a material adjustment to the amount of the impairment reversal recorded in our consolidated statement of operations. |
Our independent registered public accounting firm, BDO RCS Auditores Independentes S.S., has issued an opinion on the effectiveness of our internal control over financial reporting as of December 31, 20192020 as stated in their report beginning on page F-3.
Remediation of Prior Material WeaknessWeaknesses
DuringWe have implemented and continue to implement measures designed to remediate the material weaknesses and, in the short term, to mitigate the potential adverse effects of the material weaknesses.
We are committed to continuing to improve our management’s assessmentinternal control processes and will continue to diligently review our financial reporting controls and procedures in order to ensure our compliance with the requirements of the Sarbanes-Oxley Act of 2002 and the related rules promulgated by the SEC.
Actions taken and planned to be taken by management to improve the internal control over financial reporting as of December 31, 2018, our management identified a material weakness. The material weakness was that we did not design, establish or maintain effective controls overinclude the integrity and accuracy of prior years’ related party transactions, which affected the current year balance sheet, including reconciliation, review and elimination of such transactions, in the consolidation process.following:
| 1. | Discontinued Operations. We implemented additional procedures of controls to verify the integrity and accuracy of the information used to account for non-current assets held for sale and discontinued operations. |
| 2. | Impairment Assessment. We are in the process of implementing additional procedures related to the assessment of inputs used in the development of the discount rate used in the impairment assessment. |
During 2019, we implemented and reinforced controls to ensure correct and timely registration of related party transactions and adequate review of such transactions as controls to ensure the proper impact on the elimination and consolidation process.
Based upon the measures adopted, our management concluded that the actions implemented represented an improvement in the mitigation of risks in the control environment over this process and concluded that this deficiency was remediated as of December 31, 2019.
Changes in Internal Control over Financial Reporting
Other than as set forth above, there have been no changes in our internal controls over financial reporting that occurred during the year ended December 31, 20192020 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting as of December 31, 2019.
2020.
| ITEM 16A. | AUDIT COMMITTEE FINANCIAL EXPERT |
As of the date of this annual report, Oi’s Audit, Risks and Controls Committee includes an “audit committee financial expert” within the meaning of this Item 16A. Oi’s Audit, Risks and Controls Committee has determined that Henrique José Fernandes Luz is Oi’s audit committee financial expert. Mr. Fernandes Luz’s biographical information is included in “Item 6. Directors, Senior Management and Employees.” Mr. Fernandes Luz is independent, as that term is defined in Rule10A-3 under the Exchange Act and 303A.02 of the NYSE’s Listed Company Manual.
| ITEM 16B. | CODE OF ETHICS |
We have adopted a code of ethics that applies to members of Oi’s board of directors, fiscal council and board of executive officers, as well as to our other employees.
A copy of our code of ethics may be found on Oi’s website at http://ri.oi.com.br/conteudo_en.asp?idioma=1&conta=44&tipo=43644. The information included on Oi’s website or that might be accessed through Oi’s website is not included in this annual report and is not incorporated into this annual report by reference.
| ITEM 16C. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
Audit andNon-Audit Fees
The following tables set forth the fees billed to Oi by Oi’s independent registered public accounting firm, BDO RCS Auditores Independentes S.S., during the fiscal yearyears ended December 31, 2020 and 2019.
| Year ended December 31, | ||
2020 | 2019 | |
| (in millions of reais) | ||
| Audit fees(1) | 5.2 | 5.2 |
| Audit-related fees(2) | 0.7 | 4.4 |
| Tax fees | — | — |
| All other fees(3) | — | 0.4 |
| Total fees | 5.9 | 10.0 |
Year ended December 31, | ||||
2019 | 2018 | |||
| (in millions ofreais) | ||||
Audit fees(1) | R$5.2 | R$5.0 | ||
Audit-related fees(2) | 4.4 | — | ||
Tax fees | — | — | ||
All other fees(3) | 0.4 | 0.3 | ||
|
| |||
Total fees | R$10.0 | R$5.3 | ||
|
| |||
______________
| (1) | Audit fees consist of the aggregate fees billed by BDO RCS Auditores Independentes S.S. in connection with the audits of Oi’s annual financial statements. |
| (2) | Audit-related fees consist of the aggregate fees billed by BDO RCS |
| (3) | All other fees consist of the aggregate fees billed by BDO RCS Auditores Independentes S.S. in connection with the issuance of comfort letters. |
| 184 |
Pre-Approval Policies and Procedures
Prior to May 26, 2019, Oi’s fiscal council served as its audit committee in reliance on the general exemption from the listing standards relating to audit committees contained in Rule 10A-3(c)(3) under the Exchange Act. Since May 26, 2019, Oi’s Audit, Risks and Controls Committee has served as its audit committee in reliance on the general exemption from the listing standards relating to audit committees contained in Rule 10A-3(c)(3) under the Exchange Act:Act.
Under Brazilian law, Oi’s board of directors is prohibited from delegating its responsibilities regarding the appointment, retention and oversight of the work of any registered public accounting firm engaged for the purpose of preparing or issuing an audit report or performing other audit, review or attestation services for Oi. Instead, Oi’s fiscal council or Audit, Risks and Controls Committee, as applicable, makes recommendations to Oi’s board of directors regarding the appointment, retention and oversight of the work of any registered public accounting firm engaged for such purposes and Oi’s board of directors is deemed to be its audit committee for such purposes. Before the engagement of any registered public accounting firm by Oi or its subsidiaries for such purposes, the engagement is approved by Oi’s board of directors. Before the engagement of any accountant by Oi or its subsidiaries to render non-audit services, the engagement was approved by Oi’s fiscal council prior to May 26, 2019 or has been approved by Oi’s Audit, Risks and Controls Committee subsequent to May 26, 2019.
| ITEM 16D. | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES |
Oi is relying on the general exemption from the listing standards relating to audit committees contained in Rule10A-3(c)(3) under the Exchange Act. Oi is a foreign private issuer that has an Audit, Risks and Controls Committee, which is aan advisory committee of its board of auditors (or similar body)directors, established and selected pursuant to and as expressly permitted under Brazilian law and otherwise meets the requirements of Rule10A-3(c)(3) under the Exchange Act, except that Oi’s Audit, Risks and Controls Committee, in accordance with its own charter as approved by the full board of directors, makes recommendations to Oi’s board of directors regarding the appointment, retention and oversight of the work of any registered public accounting firm engaged (including the intermediation of disagreements between Oi’s management and Oi’s independent auditors regarding financial reporting) for the purpose of preparing or issuing an audit report or performing other audit, review or attestation services for Oi as these powers are reserved to Oi’s board of directors under Brazilian law.
Oi, however, does not believe that its reliance on this general exemption will materially adversely affect the ability of its Audit, Risks and Controls Committee to act independently and to satisfy the other requirements of the listing standards relating to audit committees contained in Rule10A-3 under the Exchange Act.
| ITEM 16E. | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS |
Not Applicable.
| ITEM 16F. | CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT |
Not Applicable.
| ITEM 16G. | CORPORATE GOVERNANCE |
| 185 |
According to the corporate governance rules of the NYSE, foreign private issuers that are listed on the NYSE, such as Oi, are subject to a more limited set of corporate governance requirements than those imposed on U.S. domestic issuers. As a foreign private issuer, Oi must comply with the following four requirements imposed by the NYSE:
Oi must satisfy the audit committee requirements of Rule10A-3 under the Exchange Act;
Oi’s Chief Executive Officer must promptly notify the NYSE in writing if any executive officer of Oi becomes aware of any materialnon-compliance with any of the applicable NYSE corporate governance rules;
Oi must provide a brief description of any significant ways in which Oi’s corporate governance practices differ from those required to be followed by U.S. domestic issuers under the NYSE corporate governance rules; and
Oi must submit an executed written affirmation annually to the NYSE and an interim written affirmation to the NYSE each time a change occurs to Oi’s board of directors or any committees of Oi’s board of directors that are subject to section 303A, in each case in the form specified by the NYSE.
| · | Oi must satisfy the audit committee requirements of Rule 10A-3 under the Exchange Act; |
| · | Oi’s Chief Executive Officer must promptly notify the NYSE in writing if any executive officer of Oi becomes aware of any material non-compliance with any of the applicable NYSE corporate governance rules; |
| · | Oi must provide a brief description of any significant ways in which Oi’s corporate governance practices differ from those required to be followed by U.S. domestic issuers under the NYSE corporate governance rules; and |
| · | Oi must submit an executed written affirmation annually to the NYSE and an interim written affirmation to the NYSE each time a change occurs to Oi’s board of directors or any committees of Oi’s board of directors that are subject to section 303A, in each case in the form specified by the NYSE. |
Significant Differences
The significant differences between Oi’s corporate governance practices and the NYSE’s corporate governance standards are mainly due to the differences between the U.S. and Brazilian legal systems. Oi must comply with the corporate governance standards set forth under the Brazilian Corporate Law, the rules of the CVM and the applicable rules of the B3, as well as those set forth in Oi’sby-laws.
The significant differences between Oi’s corporate governance practices and the NYSE’s corporate governance standards are set forth below.
Independence of Directors and Independence Tests
In general, the NYSE corporate governance standards require listed companies to have a majority of independent directors and set forth the principals by which a listed company can determine whether a director is independent. In general, listed companies are required to comply with the following NYSE corporate governance standards:
have a majority of independent directors;
have a nominating/corporate governance committee composed of independent directors with a charter that complies with the NYSE corporate governance rules; and
have a compensation committee composed of independent directors with a charter that complies with the NYSE corporate governance rules.
| · | have a majority of independent directors; |
| · | have a nominating/corporate governance committee composed of independent directors with a charter that complies with the NYSE corporate governance rules; and |
| · | have a compensation committee composed of independent directors with a charter that complies with the NYSE corporate governance rules. |
Although Brazilian Corporate Law and Oi’sby-laws establish rules in relation to certain qualification requirements of its directors, neither Brazilian Corporate Law nor Oi’sby-laws require that Oi have a majority of independent directors nor require Oi’s board of directors or management to test the independence of Oi’s directors before such directors are appointed.
Executive Sessions
The NYSE corporate governance standards requirenon-management directors of a listed company to meet at regularly scheduled executive sessions without management.
| 186 |
According to the Brazilian Corporate Law, up toone-third of the members of Oi’s board of directors can be elected to management positions. The remainingnon-management directors are not expressly empowered to serve as a check on Oi’s management, and there is no requirement that those directors meet regularly without management. Notwithstanding the foregoing, Oi’s board of directors consists entirely ofnon-management directors; therefore Oi believes it would be in compliance with this NYSE corporate governance standard.
Nominating/Corporate Governance and Compensation Committees
The NYSE corporate governance standards require that a listed company have a nomination/corporate governance committee and a compensation committee, each composed entirely of independent directors and each with a written charter that addresses certain duties.
Although not required under Brazilian law, Oi has a People, Nomination and Corporate Governance Committee to assist its board of directors, with the purpose of (1) supervising human resources strategies and matters related to the organizational structure and attracting and retaining talent for Oi and its subsidiaries; (2) monitoring the succession program, the processes of selecting members of the management bodies and internal committees and special programs for human resources, at the discretion of the chairman of the board of directors;bodies; (3) analyzing and defining the total remuneration strategy and evaluating the performance of the members of the administrative bodies and the internaladvisory committees of Oi’s board of directors and the employees of Oi and its subsidiaries; (4) making an annual evaluation of performance, based on defined goals, of the members of the administrative bodies and internaladvisory committees of Oi; (5) monitoring the policies for corporate governance, maintaining the level of governance adopted by Oi and its subsidiaries and ensuring the effective adoption of best practices; (6) monitoring compliance with the directives established in the Listing Regulations of the Level 1 of the B3 and other policies adopted by Oi, as well as other applicable legislation, regulations and foreign good practices, including, among others, conditions for maintaining Oi’s listing on the NYSE; and (7) monitoring the corporate culture based on the principles, values and purpose defined by Oi’s board of directors, using, among other practices, internal surveys and indicators of the internal communications and whistleblower channels established by Oi.
Oi believes that the People, Nomination and Corporate Governance Committee substantially serves the functions of the committees required under NYSE corporate governance standards, although the terms of reference of this committee may not include each of the duties required under the NYSE corporate governance standards. The members of the People, Nomination and Corporate Governance Committee satisfy the independence requirements of section 303A.02 of the NYSE’s Listed Company Manual.
Audit Committee and Audit Committee Additional Requirements
The NYSE corporate governance standards require that a domestic listed company have an audit committee with a written charter that addresses certain specified duties and that is composed of at least three members, all of whom satisfy the independence requirements of Rule10A-3 under the Exchange Act and section 303A.02 of the NYSE’s Listed Company Manual.
As a foreign private issuer, the members of Oi’s Audit, Risks and Controls Committee are not subject to the independence requirements of section 303A.02 of the NYSE’s Listed Company Manual, although they are subject to the independence requirements of Rule10A-3 under the Exchange Act. In addition, Oi’s Audit, Risks and Controls Committee is not required to have a written charter that addresses the duties specified in section 303A.07(b) of the NYSE’s Listed Company Manual although Oi’s Audit, Risks and Controls Committee does have a written charter that addresses these duties.
Shareholder Approval of Equity Compensation Plans
The NYSE corporate governance standards require that shareholders of a listed company must be given the opportunity to vote on all equity compensation plans and material revisions thereto, subject to certain exceptions.
Under Brazilian Corporate Law, shareholderpre-approval is required for the adoption and revision of any equity compensation plans.
| 187 |
Corporate Governance Guidelines
The NYSE corporate governance standards require that a listed company must adopt and disclose corporate governance guidelines that address certain minimum specified standards which include: (1) director qualification standards; (2) director responsibilities; (3) director access to management and independent advisors; (4) director compensation; (5) director orientation and continuing education; (6) management succession; and (7) annual performance evaluation of the board of directors.
Oi must comply with certain corporate governance standards set forth under Brazilian Corporate Law, CVM rules and the applicable rules of the B3 for Level 1 companies. See “Item 9. The Offer and Listing—Regulation of Brazilian Securities Markets” and “Item 9. The Offer and Listing—Trading on the B3—B3 Corporate Governance Standards.” The Level 1 rules do not require Oi to adopt and disclose corporate governance guidelines covering the matters set forth in the NYSE’s corporate governance standards. However, certain provisions of Brazilian Corporate Law that are applicable to Oi address certain aspects of director qualifications standards and director responsibilities.
Code of Business Conduct and Ethics
The NYSE corporate governance standards require that a listed company must adopt and disclose a code of business conduct and ethics for directors, officers and employees and promptly disclose any waivers of the code for directors or officers. Each code of business conduct and ethics should address the following items: conflicts of interest; corporate opportunities; confidentiality; fair dealing; protection and proper use of company assets; compliance with laws, rules and regulations (including insider trading laws); and encouraging the reporting of any illegal or unethical behavior.
Although the adoption of a code of ethics is not required by Brazilian law, Oi has adopted a code of ethics applicable to its directors, officers and employees, which addresses each of the items listed above. See “Item 16B. Code of Ethics.”
| ITEM 16H. | MINE SAFETY DISCLOSURE |
Not Applicable.
| 188 |
| ITEM 17. | FINANCIAL STATEMENTS |
We have responded to Item 18 in lieu of responding to this item.
| ITEM 18. | FINANCIAL STATEMENTS |
Reference is made to Item 19 for a list of all financial statements filed as part of this annual report.
| ITEM 19. |
|
| (a) | Financial Statements |
Oi S.A. – In Judicial Reorganization
| (b) | List of Exhibits |
| 189 |
| 2.07 | ||
| 2.08 | Form of 10.000% / 12.000% Senior PIK Toggle Notes due 2025 (included in Exhibit 2.07). | |
| 4.01 | ||
| 4.02 | ||
| 4.03 | ||
| 4.04 | ||
| 4.05 | ||
| 4.06 | ||
| 4.07 | ||
| 4.08 | ||
| 4.09 | ||
| 4.10 | ||
| 4.11 | ||
| 4.12 | ||
| 4.13 |
| 190 |
| 4.14 | ||
| 8.01* | ||
| 12.01* | ||
| 12.02* | ||
| 13.01* | ||
| 101.INS | XBRL Instance Document. | |
| 101.SCH | XBRL Taxonomy Extension Schema Document. | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document. | |
| 101.PRE | XBRL Taxonomy Extension |
______________
| * | Filed herewith. |
|
There are numerous instruments defining the rights of holders of long-term indebtedness of Oi S.A. – In Judicial Reorganization and its consolidated subsidiaries, none of which authorizes securities that exceed 10% of the total assets of Oi S.A. – In Judicial Reorganization and its subsidiaries on a consolidated basis. Oi S.A. – In Judicial Reorganization hereby agrees to furnish a copy of any such agreements to the SEC upon request.
| 191 |
The registrant hereby certifies that it meets all of the requirements for filing on Form20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
| Date: | Oi S.A. – In Judicial Reorganization | |
| /s/ Rodrigo Modesto de Abreu | ||
| Name: Rodrigo Modesto de Abreu | ||
| Title: Chief Executive Officer |
| Date: May 11, 2021 | ||
Oi S.A. – In Judicial Reorganization | ||
| /s/ Camille Loyo Faria | ||
| Name: Camille Loyo Faria | ||
| Title: Chief Financial Officer and Investor Relations Officer |
| 192 |
INDEX TO FINANCIAL STATEMENTS
Oi S.A. – In Judicial Reorganization
F-1
MANAGEMENT’S REPORT ON INTERNAL CONTROLS OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal controls over financial reporting.
Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with applicable generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets, (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with applicable generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors, and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our CEO and CFO, our management conducted an assessment of our internal control over financial reporting as of December 31, 20192020 based on the criteria established in “Internal Control—Integrated Framework (2013)” issued by COSO.
As a result of management’s assessment of our internal control over financial reporting as of December 31, 2019,2020, management has concluded that the following material weaknesses in our internal control over financial reporting existed:
| 1. | Discontinued Operations. During the application of IFRS 5, our non-routine controls over integrity and completeness of underlying data used to report discontinued operations did not operate effectively. These controls did not identify certain allocations of a portion of other operating expenses and a portion of financial expenses which should have been included in the results of the discontinued operations in our consolidated statement of operations. |
| 2. | Impairment Assessment. Our controls over assessment of the reasonableness of certain inputs and assumptions used in the impairment analysis did not operate effectively. This resulted in a material adjustment to the amount of the impairment reversal recorded in our consolidated statement of operations. |
Because of the existence of this material weakness, management has concluded that our internal control over financial reporting was effectiveineffective as of December 31, 2019.2020.
Our independent registered public accounting firmThe effectiveness of our internal control over financial reporting has been audited by BDO RCS Auditores Independentes S.S as stated in their report included in this Annual Report on Form 20-F, which expresses an adverse opinion on the effectiveness of our internal control over financial reporting as stated in their report as of December 31, 2019, which is2020. Our independent registered public accountants, BDO RCS Auditores Independentes S.S, audited the consolidated financial statements included herein.in this Annual Report on Form 20-F, and their adverse opinion on the effectiveness of our internal control did not affect their audit report to our financial statements.
April 30, 2020May 11, 2021
| /s/ Rodrigo Modesto de Abreu | /s/ Camille Loyo Faria | |||||||
| Name: | Rodrigo Modesto de Abreu | Name: | ||||||
|
| Title: |
|
| ||||
|
|
| Chief Financial Officer and Investor Relations Officer | |||||
F-2
 | Tel.: +55 21 2210 5166 Fax: + 55 21 2224 5285
| Rua Buenos Aires, 48 4º andar - Centro Rio de Janeiro/RJ 20070-022 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
Stockholders and Board of Directors of
Oi S.A. – Under Judicial Reorganization
Rio de Janeiro-RJ, Brazil.Brazil
Opinion on Internal Control over Financial Reporting
We have audited Oi S.A. – Under Judicial Reorganization and its subsidiaries (the(the “Company”) internal control over financial reporting as of December 31, 2019,2020, based on criteria establishedinInternal Control – Integrated Framework(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In our opinion, the Company maintained,did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2019,2020, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheet of the Company as of December 31, 20192020 and 2018,2019, the related consolidated statements of incomeoperations and comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2019,2020, and the related notes (collectively referred to as “the financial statements”) and our report dated April 30, 2020May 11, 2021 expressed an unqualified opinion on those consolidated financial statements.thereon.
Basis for Opinionopinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 15, Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
BDO RCS Auditores Independentes, uma empresa brasileira da sociedade simples, é membro da BDO Internacional Limited, uma companhia limitada por garantia do Reino Unido, e faz parte da rede internacional BDO de firmas-membro independentes. BDO é nome comercial para a rede BDO e cada uma das firmas da BDO.
F-3
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. Material weaknesses regarding management’s failure to design and maintain controls over certain non-routine transactions have been identified and described in management’s assessment including (i) controls over reversal of previously recorded impairment loss related to long-lived assets; and (ii) controls over presentation and disclosure of certain expenses related to discontinued operations. These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2020 consolidated financial statements, and this report does not affect our report dated May 11, 2021 on those financial statements.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
April 30, 2020,
May 11, 2021, Rio de Janeiro-RJ, Brazil.
/s/ BDO RCS Auditores Independentes SS
BDO RCS Auditores Independentes SS
F-4
| Tel.: +55 21 2210 5166 Fax: + 55 21 2224 5285
| Rua Buenos Aires, 48 4º andar - Centro Rio de Janeiro/RJ 20070-022 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
Stockholders and Board of Directors of
Oi S.A. – Under Judicial Reorganization
Rio de Janeiro-RJ, Brazil.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of Oi S.A. – Under Judicial Reorganization and its subsidiaries (the “Company”) as of December 31, 20192020 and 2018,2019, the related consolidated statements of incomeoperations and comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2019,2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20192020 and 2018,2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 20192020, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB)(“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2019,2020, based on criteria established inInternal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated April 30, 2020May 11, 2021 expressed an unqualifiedadverse opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019.2020.
Change in accounting principle
As discussed in Note n°2(d.1) to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019 as provided by IFRS 16, Leases. This matter is also described in the “Critical Audit Matters” section of our report.
Going Concern Uncertainty
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company continues to operate under Judicial Reorganization Plan (“PRJ”JRP”) in accordance with the requirements set forth in Law No. 11.101/2005 as well asand has suffered recurring losses from operations, has a net accumulated deficit and expects to continue to incur losses for at least the next twelve months. These events and conditions raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. This matter is also described in the “Critical Audit Matters” section of our report.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”)PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
F-5
Critical audit mattersAudit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Going concern assessment
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company continues to operate under the PRJJRP in accordance with the requirements set forth in Law No. 11.101/2005 as well asand has suffered recurring losses from operations, has a net accumulated deficit and expects to continue to incur losses for at least the next twelve months. This matter is also described in the “Emphasis of Matter – Going Concern” section of our report.
We identified management’s judgments and assumptions used to assess the Company’s ability to continue as a going concern as a critical audit matter due to inherent complexities and uncertainties related to the Company’s projections of operations under the PRJ.JRP. Auditing these judgments and assumptions involved especially challenging auditor judgment due to the nature and extent of audit evidence and effort required to address these matters.
The primary procedures we performed to address this critical audit matter included the following:included:
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§ Assessing the reasonableness of assumptions underlying management’s forecasted operating cash flows, including revenue growth and gross margin assumptions;
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§ Assessing management’s plans in the context of other audit evidence obtained during the audit to determine whether it supported or contradicted the conclusions reached by management.
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Recoverability of long-term assets
As described in Notes 16 and 17 to the consolidated financial statements, the Company recorded property, plant and equipment and intangible assets of R$ 38,910,83424,135,058 thousand and R$ 3,997,8653,697,821 thousand, respectively. The Company tests these assets for impairment whenever events or changes in circumstances indicate that their carrying amounts might be impaired. These calculations require the use of judgments and assumptions that may be influenced by different external and internal factors, such as economic trends, industry trends, interest rates, changes in business strategies, and changes in the type of services and products provided by the Company. The use of different assumptions in the Company’s discounted cash flow analysis could have a significant impact on the recoverable amounts of respective assets. In July 2019, the Company disclosed its new Strategic Plan, focused on improving operating and financial performance, using a sustainable business model that aims at maximizing the Company’s value in the context of judicial reorganization. As a result of the 2019 impairment testing of fixed and intangible assets, the Company identified and recognized ana reversal of impairment loss ofpreviously recognized for intangible assets amounting to R$ 2,111,0221,129,708 thousand.
We identified management’s judgments and assumptions used to perform impairment testing over long-term assets including property, plant and equipment and intangible assets as a critical audit matter. The judgments and assumptions used in the discounted cash flow analysis includeincluded the Company’s forecasted assumptions of future revenues, gross margins, and discount rates. Auditing these judgments and assumptions involved especially challenging auditor judgment due to the nature and extent of audit evidence and effort required to address these matters, including the extent of specialized skills or knowledge needed.
The primary procedures we performed to address this critical audit matter included the following:included:
F-6
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Evaluating the reasonableness of assumptions used in management’s discounted cash flow analysis by comparing the forecasts to: (i) historical results, and (ii) Company’s internal communications to management and the Board of |
Utilizing personnel with specialized knowledge and skills in valuation to assist in: (i) evaluating the reasonableness of |
Provision for tax and civil contingencies
As described in Note 24 to the consolidated financial statements, the Company is a party to legal and administrative proceedings at civil, labor, and tax levels, which arise from the normal course of its business. The Company has recorded tax provisions of R$ 1,050,9481,225,417 thousand and has disclosed tax contingent liabilities with possible unfavorable outcomes of R$ 28,416,09728,419,340 thousand as of December 31, 2019.2020. In addition, the Company has recorded provisions for civil matters of R$ 2,149,7002,788,426 thousand and has disclosed civil contingent liabilities with possible unfavorable outcomes of R$ 1,667,9902,464,987 thousand as of December 31, 2019.2020. The Company recognizes provision in the consolidated financial statements for the resolution of pending litigation when the Company has a present obligation as a result of a past event and management determines that a loss is probable, and the amount of the loss can be reasonably estimated. No provision for tax litigation is recognized in the consolidated financial statements for unfavorable outcomes when, after assessing the information available: (i) management concludes that it is not probable that a loss has been incurred in any of the pending litigation or (ii) management is unable to estimate the loss of the pending matters. In the case of income tax pending litigation, management determines whether it is probable that the respective taxation authority will accept the uncertain tax treatment.
We identified management’s judgments related to the assessment of tax and civil provisions and contingencies as a critical audit matter due to the complex and significant auditor judgments required to assess the magnitude and probability of potential losses identified and evaluate the progress of and changes to expected outcomes. Auditing these judgments involved especially challenging auditor judgment due to the nature and extent of audit evidence and effort required to address these matters, including the extent of specialized skills or knowledge needed.
The primary procedures we performed to address this critical audit matter included:
With respect to the civil provisions and contingencies: |
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(i)Evaluating the methodology, assumptions and criteria used by the Company in the recognition, measurement and disclosure of the related provisions and contingencies in the consolidated financial statements;
| (ii) | Reviewing external confirmation letters from the legal counselors with knowledge of civil proceedings to evaluate: (i) the existence and current status of the proceedings, and; (ii) the respective assessment of ranges of loss involved based on the appropriateness of legal positions asserted by the Company; |
With respect to the tax provisions and contingencies, utilizing personnel with specialized skills and knowledge in tax matters to assist in: |
| (i) | Evaluating the methodology, assumptions and criteria used by the Company in the recognition, measurement and disclosure of tax related provisions and contingencies in the consolidated financial statements; |
| (ii) | Reviewing external confirmation letters from the legal counselors with knowledge of tax proceedings to evaluate: (i) the existence and current status of the proceedings, and; (ii) the respective assessment of ranges of loss involved based on the appropriateness of legal positions asserted by the Company; |
Evaluating the reasonableness of the defense nature, grounds and thesis, and possible changes in the potential outcome of loss for certain relevant tax proceedings, which involve complex judgments and subjectivity in evaluation, as well as obtaining, with the assistance of management, legal opinions from tax experts for certain proceedings with relevant changes in loss estimates.
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Recoverability of deferred tax assets
Revenue recognition - unbilled
As described in Notes 4 and 9Note 10 to the consolidated financial statements, at December 31, 2019 the Company and its controlled companies have deferred taxes recorded R$ 842,726 thousand of gross revenues related to services rendered and not yet billed. Thein the amount of revenue recognized for unbilled services is dependent onR$ 3,671,070 thousand in the Company’s information technology infrastructure which requires the use of various applications and systems to process, measure, and record large volumes of transactionsconsolidated financial statements, arising from the Company’s core operations of rendering telecommunication services.Income and Social Contribution tax losses, as well as from temporary differences nondeductible and/or taxable.
F-7
We identified management’s judgments and assumptions used to assess the recognitionrecoverability of unbilled revenuedeferred tax assets as a critical audit matter because ofmatter. The judgments required by management in estimating the amount of earned but unbilled revenues. This in turn led to a high degree of auditor judgment and effort in performing audit procedures to evaluate unbilled revenue recognition.
The primary procedures we performed to address this critical audit matter included:
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Federal tax credits originated from legal proceedings with final and unappealable decisions
As described in Note 11 to the consolidated financial statements, during 2019 the Company recognized federal tax credits totaling approximately R$ 3 billion. The Company filed legal proceedings to claim the right to deduct ICMS from the PIS and COFINS tax bases and for the recovery of past paid amounts, within the relevant statute of limitations. In 2019, the 1st and 2nd Region Federal Courts (Brasĺlia and Rio de Janeiro) issued final and unappealable decisions favorable to the Company on two of the three primary lawsuits filed by the Company relating to the deduction of ICMS (State VAT) from the calculation bases of PIS and COFINS (taxes on sales).
We identified management’s calculations related to the federal tax credits as a critical audit matter because of the complexity of significant judgments required in the periodprojection of recognition.future taxable income analysis included the Company’s forecasted assumptions of future revenues, gross margins, and discount rates. Auditing these judgments and assumptions involved especially challenging auditor judgment due to the nature and extent of audit evidence and effort required to address these matters, including the extent of specialized skills or knowledge needed.
The primary procedures we performed to address this critical audit matter included:
| Assessing the reasonableness of assumptions underlying management’s forecasted operating cash flows, including revenue growth and gross margin assumptions. |
§ | Assessing management’s plans in the context of other audit evidence obtained during the audit to determine whether it supported or contradicted the conclusions reached by management. |
| § | Utilizing personnel with specialized |
Amendment to the Judicial Reorganization Plan – Extinguishment of Liability |
|
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Adoption of IFRS 16 Leases
As described in Note 2(d.1)Notes 1 (3.3), 6 and 32(h and c) to the consolidated financial statements, in accordance with the terms and conditions provided for in the amendment to the JRP the Company adoptedrenegotiated the claims of Regulatory Agencies. The Company recognized the new liability payable to Regulatory Agency ANATEL according to the requirements of IFRS 16, Leases, using9, equivalent to the modified retrospective approach, with the cumulative effect of the early implementation recognizedpresent value on the date of adoption. As at January 1, 2019, the initial adoptionexecution of the standard resulted inTransaction Agreement. The new liability was calculated based on an management’s internal valuation that took into consideration the recognitionexpected cash flows of right-of-use assets withinseven-year term (84 installments), and assumptions related to the noncurrent assets and corresponding lease liabilities totaling R$ 8,167,932 thousand.
We identified management’s judgments related to the adoptiondetermination of IFRS 16the discount rate used to calculate the fair value of the new liability as a critical audit matter. Implementing the new accounting standard required management’s judgment related to: (i) evaluation of the new accounting standard and establishment of new accounting policies and practices, (ii) determining the completeness and accuracy of in scope lease contracts as of the adoption date, and (iii) evaluating inputs and assumptions used in recording the impact of the adoption including application of available practical expedients and the determination of the appropriate incremental borrowing rate. Auditing the Company’s adoption of IFRS 16 was especially challenging and complex due to the audit effort required to analyze the effect of the adoption on the significant number of lease contracts and the specialized skills and knowledge needed to assess the reasonableness of the incremental borrowing rates utilized.discount rate involved a high degree of auditor judgment including the extent of specialized skills or knowledge needed.
The primary procedures we performed to address this critical audit matter included:
| § | Assessing the terms of the Judicial Reorganization Plan and the terms of the Transaction Agreement with Regulatory Agency ANATEL; |
| § | Evaluating the appropriateness of management’s analysis of the extinguishment of the Regulatory Agency ANATEL liability; |
Evaluating management’s accounting policies and practices, including the reasonableness of management’s judgments and assumptions related to: (i) evaluation of the appropriate incremental borrowing rate, and (ii) evaluation of practical expedients elected.
Testing a sample of lease contracts by evaluating the appropriateness of relevant inputs and assumptions, including lease term and incremental borrowing rate, utilized by management to calculate the operating lease right-of-use asset and corresponding operating lease liability balances.
Testing the completeness and accuracy of lease contracts, included in management’s adoption procedures.
Utilizing personnel with specialized knowledgeskills and skillsknowledge in valuation to assist in assessingevaluating the reasonableness of the incremental borrowing ratesdiscount rate used to calculatedetermine the operating lease liability asfair value of the adoption date.new liability.
Amendment to the Judicial Reorganization Plan – Discontinued Operations
Legal investigations in the context of “Operação Mapa da Mina”
As described in Note 32(c)Notes 2 and 31(a.1 and a.2) to the consolidated financial statements, on December 10, 2019,in accordance with the Brazilian Federal Police launchedterms and conditions provided for in the 69th phase Operation: Lava Jato (Car Wash), named “Operation: Mapa da Mina” (Mine Plan). In responseamendment to allegations,the JRP the Company has created a Multidisciplinary Committee consistingdetermined that certain of members from different departments, includingits businesses met the legal, compliance, internal auditheld-for-sale criteria and accounting department, to determine proceduresthe criteria to be performed, and set a schedulepresented as discontinued operations as these businesses represented components of relevant activities in response to the allegations of the investigation involving the Company and its subsidiaries. The Company’s Audit Committee oversees the activitiesare an integral part of the Multidisciplinary Committee on a continuous basis.coordinated divestment plan. The Company revised the comparative balances of the consolidated statement of operations, consolidated of statement of comprehensive income, and consolidated statement of cash flows to reflect discontinued operations.
We identified management’s judgments related to the accounting assessment of pending legal investigationthe held-for-sale criteria and the presentation of the discontinued operations as a critical audit matter. Auditing management’s positions and procedures performed in response to the alleged illegal acts committed by the Company, the uncertainties inherent to the investigations still in progress by the MPF and PFthese judgments involved especially challenging auditor judgment due to the nature and extent of audit evidence and effort required to address these matters, including the extent of specialized skills or knowledge needed.matters.
F-8
The primary procedures we performed to address this critical audit matter included:
Utilizing personnel with specialized skills and knowledge in forensic matters to assist in:
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| § | Testing the completeness and accuracy of the underlying data used in the presentation and disclosure related to the held-for-sale assets and liabilities and the |
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We have served as the Company’sCompany's auditor since 2018.
April 30, 2020,
May 11, 2021, Rio de Janeiro-RJ, Brazil.
/s/ BDO RCS Auditores Independentes SS
BDO RCS Auditores Independentes SS
F-9
Oi S.A. – Underunder Judicial Reorganization –Debtor-in-Possessionand Subsidiaries
Consolidated Balance Sheets
(In thousands of Brazilian Reais –reais - R$, unless otherwise stated)
| Note | December 31, 2020 | December 31, 2019 | ||||
| Current assets | ||||||
| Cash and cash equivalents | 8 | 4,107,941 | 2,081,945 | |||
| Short-term investments | 8 | 193,715 | 183,850 | |||
| Accounts receivable | 9 | 3,974,238 | 6,334,526 | |||
| Inventories | 378,462 | 326,934 | ||||
| Recoverable income taxes | 10 | 358,121 | 542,726 | |||
| Other taxes | 11 | 1,823,451 | 1,089,391 | |||
| Judicial Deposits | 12 | 1,095,827 | 1,514,464 | |||
| Pension plan assets | 27 | 7,618 | 5,430 | |||
| Prepaid expenses | 13 | 330,131 | 670,344 | |||
| Held-for-sale assets | 31 | 20,771,942 | 4,391,090 | |||
| Other assets | 14 | 754,292 | 852,581 | |||
| Total current assets | 33,795,738 | 17,993,281 | ||||
| Non-current assets | ||||||
| Long-term investments | 8 | 10,341 | 33,942 | |||
| Deferred tax assets | 10 | 3,671,070 | 99,175 | |||
| Other taxes | 11 | 1,447,166 | 2,995,559 | |||
| Judicial Deposits | 12 | 6,198,008 | 6,651,383 | |||
| Pension plan assets | 27 | 36,917 | 54,615 | |||
| Prepaid expenses | 13 | 128,385 | 583,736 | |||
| Other assets | 14 | 595,704 | 437,667 | |||
| Investments | 15 | 123,579 | 133,765 | |||
| Property, plant and equipment, net | 16 | 24,135,058 | 38,910,834 | |||
| Intangible assets | 17 | 3,697,821 | 3,997,865 | |||
| Total non-current assets | 40,044,049 | 53,898,541 | ||||
| Total assets | 73,839,787 | 71,891,822 | ||||
| Current liabilities | ||||||
| Trade payables | 18 | 2,742,395 | 4,794,309 | |||
| Trade payables – Subject to the JRP | 18 | 533,524 | 799,631 | |||
| Payroll, related taxes and benefits | 742,378 | 852,585 | ||||
| Derivative financial instruments | 3 | 10,967 | 1,152 | |||
| Borrowings and financing | 19 | 424,957 | 326,388 | |||
| Assignment of receivables | 20 | 196,720 | ||||
| Income taxes payable | 10 | 12,382 | 66,654 | |||
| Other taxes | 11 | 1,189,145 | 886,763 | |||
| Licenses and concessions payable | 21 | 43,415 | 58,582 | |||
| Leases payable | 22 | 654,662 | 1,510,097 | |||
| Tax financing program | 23 | 93,715 | 86,721 | |||
| Provisions | 24 | 781,942 | 547,996 | |||
| Liabilities associated to held-for-sale assets | 31 | 9,195,376 | 494,295 | |||
| Other payables | 25 | 1,391,530 | 1,410,744 | |||
| Total current liabilities | 18,013,108 | 11,835,917 | ||||
| Non-current liabilities | ||||||
| Trade payables – Subject to the JRP | 18 | 5,020,972 | 3,293,427 | |||
| Borrowings and financing | 19 | 25,918,777 | 17,900,361 | |||
| Assignment of receivables | 20 | 180,327 | ||||
| Other taxes | 11 | 1,324,000 | 1,224,038 | |||
| Leases payable | 22 | 2,327,016 | 6,639,929 | |||
| Tax financing program | 23 | 252,502 | 330,782 | |||
| Provisions | 24 | 5,028,521 | 4,703,684 | |||
| Provision for pension plans | 27 | 702,058 | 633,012 | |||
| Other payables | 25 | 7,302,596 | 7,534,166 | |||
| Total non-current liabilities | 48,056,769 | 42,259,399 | ||||
| Total liabilities | 66,069,877 | 54,095,316 | ||||
| Shareholders’ equity | 26 | |||||
| Share capital | 32,538,937 | 32,538,937 | ||||
| Share issuance costs | (801,073) | (801,073) | ||||
| Capital reserves | 3,906,771 | 3,906,771 | ||||
| Treasury shares | (33,315) | (33,315) | ||||
| Accumulated losses | (28,257,917) | (17,727,954) | ||||
| Other comprehensive loss | 398,089 | (233,040) | ||||
| Shareholders’ equity attributable to the Company and subsidiaries | 7,751,492 | 17,650,326 | ||||
| Non-controlling interest | 18,418 | 146,180 | ||||
| Total shareholders’ equity | 7,769,910 | 17,796,506 | ||||
| Total liabilities and shareholders’ equity | 73,839,787 | 71,891,822 |
The accompanying notes are an integral part of these consolidated financial statements.
F-10
| Table of Contents |
| Note | December 31, 2019 | December 31, 2018 | ||||||||||
Current assets | ||||||||||||
Cash and cash equivalents | 8 | 2,081,945 | 4,385,329 | |||||||||
Short-term investments | 8 | 183,850 | 201,975 | |||||||||
Accounts receivable | 9 | 6,334,526 | 6,516,555 | |||||||||
Inventories | 326,934 | 317,503 | ||||||||||
Recoverable income taxes | 10 | 542,726 | 621,246 | |||||||||
Other taxes | 11 | 1,089,391 | 803,252 | |||||||||
Judicial Deposits | 12 | 1,514,464 | 1,715,934 | |||||||||
Dividends and interest on capital | 29 | 426 | ||||||||||
Pension plan assets | 27 | 5,430 | 4,880 | |||||||||
Prepaid expenses | 13 | 670,344 | 743,953 | |||||||||
Held-for-sale assets | 31 | 4,391,090 | 4,923,187 | |||||||||
Other assets | 14 | 852,155 | 1,079,670 | |||||||||
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Total current assets | 17,993,281 | 21,313,484 | ||||||||||
Non-current assets | ||||||||||||
Long-term investments | 8 | 33,942 | 36,987 | |||||||||
Deferred tax assets | 10 | 99,175 | 23,050 | |||||||||
Other taxes | 11 | 2,995,559 | 715,976 | |||||||||
Judicial Deposits | 12 | 6,651,383 | 7,018,786 | |||||||||
Pension plan assets | 27 | 54,615 | 64,253 | |||||||||
Prepaid expenses | 13 | 583,736 | 522,550 | |||||||||
Other assets | 14 | 437,667 | 250,862 | |||||||||
Investments | 15 | 133,765 | 117,840 | |||||||||
Property, plant and equipment, net | 16 | 38,910,834 | 28,425,563 | |||||||||
Intangible assets | 17 | 3,997,865 | 6,948,446 | |||||||||
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| |||||||||
Totalnon-current assets | 53,898,541 | 44,124,313 | ||||||||||
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| |||||||||
Total assets | 71,891,822 | 65,437,797 | ||||||||||
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Current liabilities | ||||||||||||
Trade payables | 18 | 4,794,309 | 5,024,260 | |||||||||
Trade payables – Subject to the JRP | 18 | 799,631 | 201,602 | |||||||||
Payroll, related taxes and benefits | 852,585 | 906,655 | ||||||||||
Derivative financial instruments | 19 | 1,152 | ||||||||||
Borrowings and financing | 20 | 326,388 | 672,894 | |||||||||
Income taxes payable | 10 | 66,654 | 27,026 | |||||||||
Other taxes | 11 | 886,763 | 1,033,868 | |||||||||
Dividends and interest on capital | 5,731 | 6,168 | ||||||||||
Licenses and concessions payable | 21 | 58,582 | 85,619 | |||||||||
Leases payable | 22 | 1,510,097 | ||||||||||
Tax financing program | 23 | 86,721 | 142,036 | |||||||||
Provisions | 24 | 547,996 | 680,542 | |||||||||
Liabilities associated toheld-for-sale assets | 31 | 494,295 | 526,870 | |||||||||
Other payables | 25 | 1,405,013 | 1,381,919 | |||||||||
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See accompanying notes to consolidated financial statements.
Oi S.A. – Underunder Judicial Reorganization –Debtor-in-Possessionand Subsidiaries
Consolidated Balance Sheets
(In thousands of Brazilian Reaisreais - R$, unless otherwise stated)
| Total liabilities | 66,069,877 | 54,095,316 | ||||
| Shareholders’ equity | 26 | |||||
| Share capital | 32,538,937 | 32,538,937 | ||||
| Share issuance costs | (801,073) | (801,073) | ||||
| Capital reserves | 3,906,771 | 3,906,771 | ||||
| Treasury shares | (33,315) | (33,315) | ||||
| Accumulated losses | (28,257,917) | (17,727,954) | ||||
| Other comprehensive loss | 398,089 | (233,040) | ||||
| Shareholders’ equity attributable to the Company and subsidiaries |
7,751,492 |
17,650,326 | ||||
| Non-controlling interest | 18,418 | 146,180 | ||||
| Total shareholders’ equity | 7,769,910 | 17,796,506 | ||||
| Total liabilities and shareholders’ equity | 73,839,787 | 71,891,822 |
The accompanying notes are an integral part of these consolidated financial statements.
F-11
Oi S.A. – under Judicial Reorganization and Subsidiaries
Consolidated Statements of Operations
For the Years Ended December 31, 2020 and 2019
(In thousands of Brazilian reais - R$, unless otherwise stated)
| Note | December 31, 2019 | December 31, 2018 | ||||||||||
Total current liabilities | 11,835,917 | 10,689,459 | ||||||||||
Non-current liabilities | ||||||||||||
Trade payables – Subject to the JRP | 18 | 3,293,427 | 3,593,008 | |||||||||
Borrowings and financing | 20 | 17,900,361 | 15,777,012 | |||||||||
Other taxes | 11 | 1,224,038 | 628,716 | |||||||||
Leases payable | 22 | 6,639,929 | ||||||||||
Tax financing program | 23 | 330,782 | 411,170 | |||||||||
Provisions | 24 | 4,703,684 | 4,358,178 | |||||||||
Provision for pension plans | 27 | 633,012 | 579,122 | |||||||||
Other payables | 25 | 7,534,166 | 6,505,321 | |||||||||
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|
| |||||||||
Totalnon-current liabilities | 42,259,399 | 31,852,527 | ||||||||||
|
|
|
| |||||||||
Total liabilities | 54,095,316 | 42,541,986 | ||||||||||
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|
| |||||||||
Shareholders’ equity | 26 | |||||||||||
Share capital | 32,538,937 | 32,038,471 | ||||||||||
Share issuance costs | (801,073 | ) | (377,429 | ) | ||||||||
Capital reserves | 3,906,771 | 11,532,995 | ||||||||||
Treasury shares | (33,315 | ) | (2,803,250 | ) | ||||||||
Accumulated losses | (17,727,954 | ) | (17,530,108 | ) | ||||||||
Other comprehensive loss | (233,040 | ) | (208,359 | ) | ||||||||
|
|
|
| |||||||||
Shareholders’ equity attributable to the Company and subsidiaries | 17,650,326 | 22,652,320 | ||||||||||
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|
|
| |||||||||
Non-controlling interest | 146,180 | 243,491 | ||||||||||
|
|
|
| |||||||||
Total shareholders’ equity | 17,796,506 | 22,895,811 | ||||||||||
|
|
|
| |||||||||
Total liabilities and shareholders’ equity | 71,891,822 | 65,437,797 | ||||||||||
|
|
|
| |||||||||
| Notes | 2020 | 2019
| 2018
| |||||
| Net operating revenue | 4 and 5 | 9,284,303 | 10,492,096 | 12,210,060 | ||||
| Cost of sales and/or services | 5 | (7,271,335) | (7,982,595) | (9,167,739) | ||||
| Gross profit | 2,012,968 | 2,509,501 | 3,042,321 | |||||
| Operating income (expenses) | ||||||||
| Share of results of investees | 5 and 15 | 31,624 | (5,174) | (13,492) | ||||
| Selling expenses | 5 | (2,217,796) | (2,607,049) | (2,638,889) | ||||
| General and administrative expenses | 5 | (2,748,473) | (2,781,460) | (2,734,148) | ||||
| Other operating income | 5 | 4,727,424 | 4,096,067 | 2,033,320 | ||||
| Other operating expenses | 5 | (3,616,966) | (4,578,728) | (6,452,688) | ||||
| (3,824,187) | (5,876,344) | (9,805,897) | ||||||
| Loss before financial income (expenses) and taxes | (1,811,219) | (3,366,843) | (6,763,576) | |||||
| Financial income | 5 and 6 | 4,202,220 | 2,631,713 | 30,919,269 | ||||
| Financial expenses | 5 and 6 | (16,477,660) | (8,009,046) | (4,227,995) | ||||
| Financial income (expenses) | 5 and 6 | (12,275,440) | (5,377,333) | 26,691,274 | ||||
| Profit (loss) before taxes | (14,086,659) | (8,744,176) | 19,927,698 | |||||
| Income tax and social contribution | ||||||||
| Current | 7 | (20,975) | (56,303) | 132,217 | ||||
| Deferred | 7 | 3,571,895 | 69,041 | 3,159,711 | ||||
| Profit (loss) from continuing operations | (10,535,739) | (8,731,438) | 23,219,626 | |||||
| Discontinued operations | ||||||||
| Profit (loss) for the year from discontinued operations (net of taxes) | 31 | 7,240 | (363,669) | 1,395,929 | ||||
| Profit (loss) for the year | (10,528,499) | (9,095,107) | 24,615,555 | |||||
| Profit (loss) attributable to Company owners | (10,529,963) | (9,000,434) | 24,591,140 | |||||
| Profit (loss) attributable to non-controlling interests | 1,464 | (94,673) | 24,415 | |||||
| Profit (loss) allocated to common shares - basic and diluted | (10,254,142) | (8,764,803) | 22,036,079 | |||||
| Profit (loss) allocated to preferred shares – basic and diluted | (275,821) | (235,631) | 2,555,061 | |||||
Weighted average number of outstanding shares (in thousands of shares) | ||||||||
| Common shares - basic and diluted | 5,796,448 | 5,788,447 | 1,344,686 | |||||
| Preferred shares – basic and diluted | 155,915 | 155,915 | 155,915 | |||||
| Basic and diluted profit (loss) per share: | 26(e) | |||||||
| Common shares – basic and diluted (R$) | (1.77) | (1.51) | 16.39 | |||||
| Preferred shares – basic and diluted (R$) | (1.77) | (1.51) | 16.39 | |||||
| Basic and diluted profit (loss) per share - continuing operations: | 26(e) | |||||||
| Common shares – basic and diluted (R$) | (1.77) | (1.45) | 15.46 | |||||
| Preferred shares – basic and diluted (R$) | (1.77) | (1.45) | 15.46 | |||||
| Basic and diluted profit (loss) per share - discontinued operations: | 26(e) | |||||||
| Common shares – basic and diluted (R$) | - | (0.06) | 0.93 | |||||
| Preferred shares – basic and diluted (R$) | - | (0.06) | 0.93 | |||||
See
The accompanying notes toare an integral part of these consolidated financial statements.
F-12
Oi S.A. – Underunder Judicial Reorganization –Debtor-in-Possessionand Subsidiaries
Consolidated Statements of OperationsComprehensive Income
For the Years Ended December 31, 2020 and 2019
(In thousands of Brazilian Reais –reais - R$, unless otherwise stated)
| Note | December 31, 2019 | December 31, 2018 | December 31, 2017 | |||||||||||||
Net operating revenue | 4 | 20,136,183 | 22,060,014 | 23,789,654 | ||||||||||||
Cost of sales and services | 5 | (15,314,814 | ) | (16,179,100 | ) | (15,668,653 | ) | |||||||||
|
|
|
|
|
| |||||||||||
Gross profit | 4,821,369 | 5,880,914 | 8,121,001 | |||||||||||||
|
|
|
|
|
| |||||||||||
Operating (expenses) income | ||||||||||||||||
Selling expenses | 5 | (3,547,684 | ) | (3,853,002 | ) | (4,102,556 | ) | |||||||||
General and administrative expenses | 5 | (2,782,300 | ) | (2,738,718 | ) | (3,136,808 | ) | |||||||||
Other operating income | 5 | 4,527,710 | 2,204,134 | 1,985,101 | ||||||||||||
Other operating expenses | 5 | (5,996,465 | ) | (6,761,586 | ) | (5,227,766 | ) | |||||||||
|
|
|
|
|
| |||||||||||
| (7,798,739 | ) | (11,149,172 | ) | (10,482,029 | ) | |||||||||||
|
|
|
|
|
| |||||||||||
Loss before financial income (expenses) and taxes | (2,977,370 | ) | (5,268,258 | ) | (2,361,028 | ) | ||||||||||
Financial income | 6 | 2,662,463 | 30,950,461 | 7,136,459 | ||||||||||||
Financial expenses | 6 | (8,772,181 | ) | (4,341,595 | ) | (10,332,971 | ) | |||||||||
|
|
|
|
|
| |||||||||||
Financial income (expenses) | (6,109,718 | ) | 26,608,866 | (3,196,512 | ) | |||||||||||
|
|
|
|
|
| |||||||||||
Profit (loss) before taxes | (9,087,088 | ) | 21,340,608 | (5,557,540 | ) | |||||||||||
Income tax expense (current and deferred) | ||||||||||||||||
Current | 7 | (77,060 | ) | 115,706 | (906,080 | ) | ||||||||||
Deferred | 7 | 69,041 | 3,159,241 | (192,542 | ) | |||||||||||
|
|
|
|
|
| |||||||||||
Profit (loss) for the year | (9,095,107 | ) | 24,615,555 | (6,656,162 | ) | |||||||||||
|
|
|
|
|
| |||||||||||
Profit (loss) attributable to owners of the Company | (9,000,434 | ) | 24,591,140 | (6,365,019 | ) | |||||||||||
Profit (loss) attributable tonon-controlling interests | (94,673 | ) | 24,415 | (291,143 | ) | |||||||||||
Profit (loss) allocated to common shares – basic and diluted | (8,764,803 | ) | 22,036,074 | (4,896,241 | ) | |||||||||||
Profit (loss) allocated to preferred shares—basic and diluted | (235,631 | ) | 2,555,066 | (1,468,778 | ) | |||||||||||
Weighted average number of outstanding shares (in thousands of shares) | ||||||||||||||||
Common shares – basic and diluted | 5,788,447 | 1,344,686 | 519,752 | |||||||||||||
Preferred shares – basic and diluted | 155,615 | 155,915 | 155,915 | |||||||||||||
Profit (loss) per share from continuing operations: | ||||||||||||||||
Common shares—basic and diluted | 26 | (1.51 | ) | 16.39 | (9.42 | ) | ||||||||||
Preferred shares—basic and diluted | 26 | (1.51 | ) | 16.39 | (9.42 | ) | ||||||||||
See
| 2020 | 2019 | 2018 | ||||
| Profit (loss) for the year | (10,528,499) | (9,095,107) | 24,615,555 | |||
| Hedge accounting loss | (2,409) | (1,152) | ||||
| Actuarial gains (losses) | 579,956 | (9,904) | 104,848 | |||
| Exchange gains (losses) on investment abroad | 99,966 | (16,372) | (110,098) | |||
| Comprehensive income (loss) for the year from continuing operations | (9,850,986) | (9,122,535) | 24,610,305 | |||
| Effect of taxes on other comprehensive income: Actuarial loss | (35,875) | |||||
| Discontinued operations | ||||||
| Comprehensive income of discontinued operations | 178 | 109 | 667 | |||
| Total comprehensive income (loss) for the year | (9,850,808) | (9,122,426) | 24,575,097 | |||
| Comprehensive income (loss) attributable to owners of the Company | (9,898,834) | (9,025,115) | 24,625,063 | |||
| Comprehensive income (loss) attributable to non-controlling interests | 48,026 | (97,311) | (49,966) |
The accompanying notes toare an integral part of these consolidated financial statements.
F-13
Oi S.A. – Underunder Judicial Reorganization –Debtor-in-Possessionand Subsidiaries
Consolidated Statements Comprehensive Income
(In thousands of Brazilian Reais – R$, unless otherwise stated)
| 2019 | 2018 | 2017 | ||||||||||
Profit (loss) for the year | (9,095,107 | ) | 24,615,555 | (6,656,162 | ) | |||||||
Hedge accounting loss | (1,152 | ) | ||||||||||
Actuarial gains (losses) | (9,795 | ) | 105,515 | 30,253 | ||||||||
Exchange losses on investment abroad | (16,372 | ) | (110,098 | ) | 163,770 | |||||||
|
|
|
|
|
| |||||||
Pre-tax comprehensive income | (9,122,426 | ) | 24,610,972 | (6,462,139 | ) | |||||||
|
|
|
|
|
| |||||||
Effect of taxes on other comprehensive income: | ||||||||||||
Actuarial loss | (35,875 | ) | (10,371 | ) | ||||||||
|
|
|
|
|
| |||||||
Total comprehensive income (loss) for the year | (9,122,426 | ) | 24,575,097 | (6,472,510 | ) | |||||||
|
|
|
|
|
| |||||||
Comprehensive income (loss) attributable to owners of the Company | (9,025,115 | ) | 24,625,063 | (6,203,313 | ) | |||||||
Comprehensive loss attributable tonon-controlling interests | (97,311 | ) | (49,966 | ) | (269,197 | ) | ||||||
See accompanying notes to consolidated financial statements.
Oi S.A. – Under Judicial Reorganization –Debtor-in-Possession and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity / (Deficit)
(In thousands of Brazilian Reais –reais - R$, unless otherwise stated)
| Attributable to owners of the Company | Total controlling interests | Non-controlling interests | Total shareholders’ equity | ||||||
| Share capital | Share issue costs | Capital reserves | Treasury shares | Accumulated losses | Other comprehensive income | ||||
| Balance at January 1, 2018 | 21,438,374 | (377,429) | 13,242,374 | (5,531,092) | (42,053,790) | (242,282) | (13,523,845) | 293,457 | (13,230,388) |
| Capital increase | 10,600,097 | 1,013,883 | 11,613,980 | 11,613,980 | |||||
| Delivery of treasury shares as per the JRP | (2,727,842) | 2,727,842 | |||||||
| Share subscription warrants | 4,580 | 4,580 | 4,580 | ||||||
| Profit for the year | 24,591,140 | 24,591,140 | 24,415 | 24,615,555 | |||||
| Other comprehensive income | (67,458) | 33,923 | (33,535) | (74,381) | (107,916) | ||||
| Balance at December 31, 2018 | 32,038,471 | (377,429) | 11,532,995 | (2,803,250) | (17,530,108) | (208,359) | 22,652,320 | 243,491 | 22,895,811 |
| Capital increase | 500,466 | 3,837,009 | 4,337,475 | 4,337,475 | |||||
| Share issue costs | (423,644) | (423,644) | (423,644) | ||||||
| Share buyback | (2,572) | (2,572) | (2,572) | ||||||
| Pharol Agreement (Note 1) | (2,462,799) | 2,772,507 | (197,846) | 111,862 | 111,862 | ||||
| Loss for the year | (9,000,434) | (9,000,434) | (94,673) | (9,095,107) | |||||
| Absorption of capital reserves | (9,000,434) | 9,000,434 | |||||||
| Other comprehensive loss | (24,681) | (24,681) | (2,638) | (27,319) | |||||
| Balance at December 31, 2019 | 32,538,937 | (801,073) | 3,906,771 | (33,315) | (17,727,954) | (233,040) | 17,650,326 | 146,180 | 17,796,506 |
| Profit (loss) for the year | (10,529,963) | (10,529,963) | 1,464 | (10,528,499) | |||||
| Other comprehensive income | 631,129 | 631,129 | 46,562 | 677,691 | |||||
| Decrease of non-controlling interests | (175,788) | (175,788) | |||||||
| Balance at December 31, 2020 | 32,538,937 | (801,073) | 3,906,771 | (33,315) | (28,257,917) | 398,089 | 7,751,492 | 18,418 | 7,769,910 |
| Attributable to owners of the Company | Total controlling interest | Non-controlling interest | Total shareholders’ equity | |||||||||||||||||||||||||||||||||
| Share capital | Share issuance costs | Capital reserves | Treasury shares | Accumulated losses | Other comprehensive loss | |||||||||||||||||||||||||||||||
Balance at December 31, 2017 | 21,438,374 | (377,429 | ) | 13,242,374 | (5,531,092 | ) | (42,335,925 | ) | (242,282 | ) | (13,805,980 | ) | 293,457 | (13,512,523 | ) | |||||||||||||||||||||
Effects of the first-time adoption of IFRS 9 and 15 | 282,135 | 282,135 | 282,135 | |||||||||||||||||||||||||||||||||
Balance at January 1st, 2018 | 21,438,374 | (377,429 | ) | 13,242,374 | (5,531,092 | ) | (42,053,790 | ) | (242,282 | ) | (13,523,845 | ) | 293,457 | (13,230,388 | ) | |||||||||||||||||||||
Capital increase | 10,600,097 | 1,013,883 | 11,613,980 | 11,613,980 | ||||||||||||||||||||||||||||||||
Delivery of treasury shares as per the JRP | (2,727,842 | ) | 2,727,842 | |||||||||||||||||||||||||||||||||
Share subscription warrants | 4,580 | 4,580 | 4,580 | |||||||||||||||||||||||||||||||||
Profit for the year | 24,591,140 | 24,591,140 | 24,415 | 24,615,555 | ||||||||||||||||||||||||||||||||
Other comprehensive income | (67,458 | ) | 33,923 | (33,535 | ) | (74,381 | ) | (107,916 | ) | |||||||||||||||||||||||||||
Balance at December 31, 2018 | 32,038,471 | (377,429 | ) | 11,532,995 | (2,803,250 | ) | (17,530,108 | ) | (208,359 | ) | 22,652,320 | 243,491 | 22,895,811 | |||||||||||||||||||||||
Capital increase | 500,466 | 3,837,009 | 4,337,475 | 4,337,475 | ||||||||||||||||||||||||||||||||
Share issuance costs | (423,644 | ) | (423,644 | ) | (423,644 | ) | ||||||||||||||||||||||||||||||
Share buyback | (2,572 | ) | (2,572 | ) | (2,572 | ) | ||||||||||||||||||||||||||||||
Pharol Agreement (Note 1) | (2,462,799 | ) | 2,772,507 | (197,846 | ) | 111,862 | 111,862 | |||||||||||||||||||||||||||||
Loss for the year | (9,000,434 | ) | (9,000,434 | ) | (94,673 | ) | (9,095,107 | ) | ||||||||||||||||||||||||||||
Absorption of capital reserves | (9,000,434 | ) | 9,000,434 | |||||||||||||||||||||||||||||||||
Other comprehensive loss | (24,681 | ) | (24,681 | ) | (2,638 | ) | (27,319 | ) | ||||||||||||||||||||||||||||
Balance at December 31, 2019 | 32,538,937 | (801,073 | ) | 3,906,771 | (33,315 | ) | (17,727,954 | ) | (233,040 | ) | 17,650,326 | 146,180 | 17,796,506 | |||||||||||||||||||||||
See
The accompanying notes toare an integral part of these consolidated financial statements.
F-14
Oi S.A. – Underunder Judicial Reorganization –Debtor-in-Possessionand Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2020 and 2019
(In thousands of Brazilian Reais –reais - R$, unless otherwise stated)
| December 31, 2019 | December 31, 2018 | December 31, 2017 | ||||||||||
Cash flows from operating activities | ||||||||||||
Profit (loss) before taxes | (9,087,088 | ) | 21,340,608 | (5,557,540 | ) | |||||||
Non-cash items | ||||||||||||
Loss (gain) on financial instruments (Note 6) | 3,606,618 | (2,043,357 | ) | 5,120,203 | ||||||||
Fair value adjustment to borrowings and financing (Note 6) | 527,465 | (13,928,659 | ) | |||||||||
Present value adjustment to other liabilities (Note 6) | 59,214 | (1,167,043 | ) | (4,873,000 | ) | |||||||
Gain on the restructuring of third-party borrowings (Note 6) | (11,054,800 | ) | ||||||||||
Transaction with derivative financial instruments (Note 6) | (55,025 | ) | ||||||||||
Depreciation and amortization (Note 5) | 6,873,945 | 5,811,123 | 5,109,292 | |||||||||
Onerous obligation (Note 5) | 1,230,820 | 4,883,620 | ||||||||||
Expected credit losses on receivables (Note 5) | 489,396 | 851,271 | 784,403 | |||||||||
Impairment losses (reversal) (Note 5) | 2,111,022 | 291,758 | (4,747,141 | ) | ||||||||
Provisions/(reversals) (Note 5) | 216,438 | 93,026 | 7,362,304 | |||||||||
Earnings of equity investees | 5,174 | 13,492 | 433 | |||||||||
Loss on disposal of capital assets | 235,535 | 215,398 | 211,735 | |||||||||
Concession Agreement Extension Fee – ANATEL | 359,465 | 68,333 | 88,658 | |||||||||
Employee and management profit sharing | 260,207 | 237,253 | 298,789 | |||||||||
Tax Recovery (Notes 5 and 6) | (3,617,919 | ) | ||||||||||
Monetary correction to provisions/(reversals) (Note 6) | 1,620,378 | 226,870 | 674,668 | |||||||||
Monetary correction to tax refinancing program (Note 6) | 16,159 | 28,079 | 27,294 | |||||||||
Other | (538,974 | ) | (637,251 | ) | 450,281 | |||||||
|
|
|
|
|
| |||||||
| 4,312,830 | 5,229,721 | 4,950,379 | ||||||||||
Changes in assets and liabilities | ||||||||||||
Accounts receivable | (306,240 | ) | (365,771 | ) | (253,469 | ) | ||||||
Inventories | (21,113 | ) | (48,280 | ) | 173,283 | |||||||
Taxes | 1,322,267 | 121,951 | 477,164 | |||||||||
Investment and redemption of financial assets | 40,141 | (87,744 | ) | 174,256 | ||||||||
Trade payables | (678,046 | ) | (860,900 | ) | (374,003 | ) | ||||||
Payroll, related taxes and benefits | (313,169 | ) | (253,902 | ) | (42,727 | ) | ||||||
Licenses and concessions | (127,313 | ) | ||||||||||
Provisions | (462,299 | ) | (434,974 | ) | (426,649 | ) | ||||||
Changes in assets and liabilities held for sale | (29,829 | ) | (257,643 | ) | 701,416 | |||||||
Other assets and liabilities | (252,683 | ) | 525,660 | (467,067 | ) | |||||||
|
|
|
|
|
| |||||||
| (828,284 | ) | (1,661,603 | ) | (37,796 | ) | |||||||
Financial charges paid – debt | (926,910 | ) | (19,215 | ) | (1,412 | ) | ||||||
Financial charges paid – other | (352 | ) | (2,884 | ) | (2,515 | ) | ||||||
Income tax and social contribution paid – Company | (85,680 | ) | (495,038 | ) | (314,162 | ) | ||||||
Income tax and social contribution paid – third parties | (159,966 | ) | (188,445 | ) | (192,736 | ) | ||||||
|
|
|
|
|
| |||||||
| (1,172,908 | ) | (705,582 | ) | (510,825 | ) | |||||||
|
|
|
|
|
| |||||||
Net cash generated by operating activities | 2,311,638 | 2,862,536 | 4,401,758 | |||||||||
See
| 2020 | 2019
|
2018
| ||||
| Cash flows from operating activities of continuing operations | ||||||
| Pre-tax profit (loss) | (14,086,659) | (8,744,176) | 19,927,697 | |||
| Non-cash items | ||||||
| Loss (gain) on financial instruments (Note 6) | 10,512,510 | 2,762,400 | (2,043,170) | |||
| Gain on the restructuring of third-party borrowings (Note 6) | (11,054,800) | |||||
| Fair value adjustment to borrowings and financing (Note 6) | (1,746,789) | 527,465 | (13,928,659) | |||
| Present value adjustment to other liabilities (Note 6) | 193,248 | 59,214 | (1,167,043) | |||
| Transaction with derivative financial instruments (Note 6) | 134,987 | (55,025) | ||||
| Depreciation and amortization (Note 5) | 4,341,705 | 4,537,583 | 4,014,467 | |||
| Onerous obligation (Note 5) | 4,883,620 | |||||
| Expected credit losses on trade receivables (Note 5) | 133,684 | 299,102 | 401,749 | |||
| Impairment (reversals) / losses (Note 5) | (1,129,708) | 2,111,022 | 291,758 | |||
| Provisions/(Reversals) (Note 5) | 578,239 | 211,690 | 90,089 | |||
| Share of results of investees (Note 5) | (31,624) | 5,174 | 13,492 | |||
| Gain on the sale of investments | (79,114) | |||||
| Gain (loss) on the disposal of assets | (119,921) | 129,438 | 215,398 | |||
| Concession Agreement Extension Fee - ANATEL | 313,798 | 374,752 | 80,550 | |||
| Employee and management profit sharing | 345,556 | 190,187 | 176,873 | |||
| Recovered taxes (Notes 5 and 6) | (391,461) | (3,617,919) | ||||
| Monetary corrections to provisions/(reversals) (Note 6) | 879,178 | 1,589,551 | 226,022 | |||
| Monetary corrections to tax refinancing program (Note 6) | 6,800 | 16,135 | 28,036 | |||
| Other | (244,190) | (432,909) | (632,817) | |||
| (389,761) | (36,316) | 1,523,262 | ||||
| Changes in assets and liabilities | ||||||
| Accounts receivable | 848,659 | (376,241) | (177,133) | |||
| Inventories | (51,982) | (21,113) | (48,280) | |||
| Taxes | 1,416,573 | 1,322,267 | 121,951 | |||
| Increases/decreases of cash investments | 21,801 | 40,141 | (87,744) | |||
| Trade payables | 105,315 | (678,046) | (860,900) | |||
| Payroll, related taxes and benefits | (245,315) | (313,169) | (253,902) | |||
| Assignment of receivables | 459,014 | |||||
| Licenses and concessions | (41,209) | (127,313) | ||||
| Provisions | (640,505) | (462,299) | (434,974) | |||
| Changes in assets and liabilities held for sale | 485,858 | (29,829) | (257,643) | |||
| Other assets and liabilities | (111,625) | (252,683) | 525,660 | |||
| 2,246,584 | (898,285) | (1,472,965) | ||||
| Financial charges paid - debt | (805,975) | (926,910) | (19,215) | |||
| Financial charges paid - other | (151,639) | (60,909) | (2,884) | |||
| Income tax and social contribution paid - Company | (33,436) | (85,680) | (495,038) | |||
| Income tax and social contribution paid - third parties | (78,540) | (159,966) | (188,445) | |||
| (1,069,590) | (1,233,465) | (705,582) | ||||
| Cash flows from operating activities - continuing operations | 787,233 | (2,168,066) | (655,285) | |||
| Cash flows from operating activities - discontinued operations | 3,619,470 | 4,358,169 | 3,517,821 | |||
| Net cash generated by operating activities | 4,406,703 | 2,190,103 | 2,862,536 | |||
The accompanying notes toare an integral part of these consolidated financial statements.
F-15
| Table of Contents |
Continued Cash flows from investing activities Capital expenditures Proceeds from the sale of investments, tangibles and intangibles Dividends received from investments abroad (Note 33) Judicial deposits Redemption of judicial deposits Net cash used in investing activities Cash flows from financing activities Repayment of principal of borrowings, financing, and derivatives Proceeds from derivative financial instrument transactions Capital increase Commitment to investors premium Payments of obligation for licenses and concessions Payments of obligation for tax refinancing program Payment of dividends and interest on capital Payment of Leases Exercise of warrants Share buyback Net cash used in financing activities Foreign exchange differences on cash equivalents Cash flows for the year Cash and cash equivalents Closing balance Opening balance Changes in the year December 31,
2019 December 31,
2018 December 31,
2017 (7,425,513 ) (5,246,241 ) (4,344,238 ) 106,097 22,276 5,016 226,525 (477,010 ) (775,953 ) (425,563 ) 719,223 1,083,043 343,129 (6,850,678 ) (4,916,875 ) (4,421,656 ) (11,824 ) (161,884 ) (659 ) 72,113 4,000,000 (58,489 ) (1,491 ) (104,449 ) (151,862 ) (265,495 ) (226,776 ) (437 ) (54 ) (59,462 ) (1,611,273 ) 4,580 (2,572 ) (300,429 ) 2,235,656 (424,344 ) (691,775 ) 1,328 11,105 (2,303,384 ) (2,477,355 ) (700,568 ) 2,081,945 4,385,329 6,862,684 4,385,329 6,862,684 7,563,252 (2,303,384 ) (2,477,355 ) (700,568 )
Oi S.A. – under Judicial Reorganization and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2020 and 2019
(In thousands of Brazilian reais - R$, unless otherwise stated)
| (continued) | ||||||
| 2020 | 2019 |
2018 | ||||
| Cash flows from investing activities - continuing operations | ||||||
| Purchases of tangibles and intangibles | (3,455,136) | (4,157,318) | (3,557,544) | |||
| Proceeds from the sale of investments and capital assets | 144,422 | 106,097 | 22,276 | |||
| Cash received on the sale of investments - PT Ventures | 4,132,422 | |||||
| Decrease in non-controlling interests | (175,788) | |||||
| Dividends received from investments abroad | 226,525 | |||||
| Judicial deposits | (194,651) | (472,111) | (775,647) | |||
| Redemptions of judicial deposits | 646,875 | 716,344 | 1,083,043 | |||
| Cash flows from investing activities - continuing operations | 1,098,144 | (3,580,463) | (3,227,872) | |||
| Cash flows from investing activities - discontinued operations | (4,241,818) | (3,270,215) | (1,689,003) | |||
| Net cash used in investing activities | (3,143,674) | (6,850,678) | (4,916,875) | |||
| Cash flows from financing activities | ||||||
| Borrowings net of costs | 2,485,898 | |||||
| Repayment of principal of borrowings and financing | (11,267) | (11,824) | (161,884) | |||
| Proceeds from (repayments of) derivative financial instrument transactions | (119,551) | 72,113 | ||||
| Capital increase | 4,000,000 | |||||
| Commitment to investors premium | (58,489) | |||||
| Payments of obligation for licenses and concessions | (1,491) | |||||
| Tax refinancing program | (81,671) | (151,720) | (265,359) | |||
| Payment of dividends and interest on capital | (437) | (54) | ||||
| Leases | (596,597) | (540,838) | ||||
| Exercise of warrants | 4,580 | |||||
| Share buyback | (2,572) | |||||
| Cash flows from financing activities - continuing operations | 1.676,812 | 3,306,233 | (424,208) | |||
| Cash flows from financing activities - discontinued operations | (877,182) | (949,042) | (136) | |||
| Net cash used in financing activities | 799,630 | 2,357,191 | (424,344) | |||
| Foreign exchange differences on cash equivalents | 205,014 | 1,328 | ||||
| Cash and cash equivalents transferred to held for sale | (241,677) | |||||
| Cash flows for the year | 2,025,996 | (2,303,384) | (2,477,355) | |||
| Cash and cash equivalents | ||||||
| Closing balance | 4,107,941 | 2,081,945 | 4,385,329 | |||
| Opening balance | 2,081,945 | 4,385,329 | 6,862,684 | |||
| Changes in the year | 2,025,996 | (2,303,384) | (2,477,355) | |||
The accompanying notes are an integral part of these consolidated financial statements.
F-16
Oi S.A. – under Judicial Reorganization and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2020 and 2019
(In thousands of Brazilian reais - R$, unless otherwise stated)
Additional Disclosures Relating to the Statement Ofof Cash Flows
Non-cash transactions
| December 31, 2019 | December 31, 2018 | December 31, 2017 | ||||||||||
Acquisition of Property, Plant and Equipment and Intangible assets (incurring liabilities) | 490,395 | 1,034,475 | 1,451,068 | |||||||||
Offset of judicial deposits against provision for contingencies | 395,143 | 845,088 | 382,071 | |||||||||
Shares issued to backstop investors | 337,475 | |||||||||||
Settlement of payables for own shares (Pharol Agreement - Notes 1 and 26 (b)) | 46,680 | |||||||||||
Conversion of debt into shares | 11,613,980 | |||||||||||
| 2020 | 2019 |
2018 | |
| Acquisition of Property, Plant and Equipment and Intangible assets (incurring liabilities) | 174,223 | 465,899 | 1,034,475 |
| Offset of judicial deposits against provisions | 376,376 | 395,143 | 845,088 |
| Offsetting of recoverable taxes against taxes payable | 4,377,247 | 4,554,108 | |
| Shares issued to the backstop investors | 337,475 | ||
| Settlement of payables for own shares (Notes 1 and 26 (b)) | 46,680 | ||
| Conversion of debt into shares | 11,613,980 |
Reconciliation of liabilities resulting from financing activities
The changes in financial charges and the settlement of the debt resulting from financing activities are presented in Note 20.19.
See accompanying notes to consolidated financial statements.
| F-17 |
Table of contents
Oi S.A. – under Judicial Reorganization (“Company” or “Oi”), is a Switched Fixed-line Telephony Services (“STFC”) concessionaire, operating since July 1998 in Region II of the General Concession Plan (“PGO”), which covers the Brazilian states of Acre, Rondônia, Mato Grosso, Mato Grosso do Sul, Tocantins, Goiás, Paraná, Santa Catarina and Rio Grande do Sul, and the Federal District, in the provision of STFC as a local and intraregional long-distance carrier. The Company is headquartered in Brazil, in the city of Rio de Janeiro, at Rua do Lavradio, 71 – 2º andar. The Company also holds: (i) through its wholly-owned subsidiary Telemar Norte Leste S.A. – In Africa, the Company provides fixed and mobile telecommunications services through own subsidiaries and the subsidiaries of Africatel Holdings B.V. (“Africatel”), and in Asia the Company provides fixed, mobile, and other telecommunications services basically related through its subsidiary Timor Telecom (Note 31). The Company is registered with the Brazilian Securities and Exchange Commission (“CVM”) and the U.S. Securities and Exchange Commission (“SEC”). Its shares are traded on B3 S.A. – Brasil, Stock Exchange, OTC (“B3”) and its American Depositary Receipts (“ADRs”) representing Oi common shares and preferred shares are traded on the New York Stock Exchange (“NYSE”). Concession agreements The local and nationwide STFC long-distance concession agreements entered into by the Company and its subsidiary Telemar with ANATEL are effective until December 31, 2025. These concession agreements provide for reviews on a five-year basis and in general have a higher degree of intervention in the management of the business than the licenses to provide private services. At the end of 2018, ANATEL published Public Hearing No. 51/2018 to address the revision of the Concession Agreements for the concession’s last five-year period (2021-2025) and the new General Universal Service Targets Plan (PGMU V). The contribution period to the Public Hearing ended on March 26, 2019 and after being processed by ANATEL, it was approved under Decision 619/2020, PGMU amendment proposal, sent to the Ministry of Communications (Official Letter 478/2020/GPR-ANATEL, of Dec 1, 2020), in addition to the new wording of the Concession Agreements (Resolution 737/2020).
In December 2020, Oi filed a Cancellation Request against Ruling No. 619/2020 and Resolution No. 737/2020, which jointly approved the PGMU V proposal and the draft Concession Agreements for the Switched Fixed-line Telephony Service (“STFC”) for 2021-2025, as stated in On January 28, 2021, the Government enacted Decree 10610/2021, which repeals Decree 9619/2018 and approves the PGMU V, applicable to 2021-2025. Among the provisions of the new PGMU we highlight the introduction of the backhaul obligation, under which carriers may use the balance resulting from the changes in targets of the previous PGMU. The PGMU V also provides for the end of the obligation to build fixed wireless new access facilities required by It is worth noting that As a result, ANATEL issued Resolution 741/2021, which approves the Regulation for the Adaptation of the On December With the approval of the Judicial Reorganization Plan (“
On February 10, 2020, as reported in the Notice to the Market released by the Company, ANATEL’s Board of Directors concluded there was no longer the need for special monitoring based on the decision issued in May 2019 as it considers that the Company’s and its subsidiaries’ short-term liquidity risk has been extinguished and revoked the obligations previously imposed on the Oi Group companies.
Judicial Reorganization On June 20, 2016, the Company On December 19, 2017, after confirming that the required quorum of classes I, II, III, and IV creditors was in attendance, the General Creditors’ Meeting was held and the Oi Companies’ On January 8, 2018, the judicial reorganization court (“Judicial Reorganization Court”) issued a decision that ratified the JRP and granted the judicial reorganization to the Oi Companies, which was published on February 5, 2018. On July 31, 2018, the restructuring of the Oi Companies’ financial debt was completed with the implementation of the applicable terms and conditions provided for in the JRP, including the completion of the first capital increase provided for in the JRP, Capital Increase – Claim Capitalization. On January 25, 2019 the Company completed the second capital increase provided for in the JRP (“Capital Capital Increase – New Funds Exercise of Subscription Warrants and American Depositary Warrants (“ADWs”) On October 28, 2018, Preferential offer and completion of the Capital Increase – New Funds, pursuant to the commitment agreement terms As contemplated by Section 6 of the JRP, on November 13, 2018 the Company commenced a preemptive offering of common shares that was registered with the SEC under the Securities Act
under which holders of common shares and preferred shares, including the ADS Depositary and The Bank of New York Mellon, as depositary of the Preferred ADS program, received transferable rights for each common share or preferred share held as of November 19, 2018, which refers to as subscription rights. The subscription rights expired on January 4, 2019. On January 16, 2019, the Company issued 1,530,457,356 common shares to holders of subscription rights that had exercised those subscription rights with respect to the initial common shares. On January 21, 2019, the Company issued 91,080,933 common shares to holders of subscription rights that had requested subscriptions for excess common shares. The proceeds of these subscriptions totaled R$2,011 million.
On January 25, 2019, the Company issued 1,604,268,162 common shares, representing the total number of common shares that were offered in the preemptive offering less the total number of initial common shares and excess common shares, to the Backstop Investors in a private placement under the terms of the commitment agreement for the aggregate amount of R$1,989 million (“Share Balance”). Because of the subscription and payment of the Share Balance, the Company completed, on this date, the Capital Increase – New Funds, through the subscription and payment of all 3,225,806,451 New Common Shares issued as part of the Capital Increase – New Funds, representing a contribution of new funds for the Company totaling R$4.0 billion. In addition, under the terms of the commitment agreement, on that date the Company issued, as compensation for their commitments under the commitment agreement, 272,148,705 common shares in a private placement to the Backstop Investors and paid US$13 million to the Backstop Investors. As a result of the outcome of the subscription and payment of the Capital Increase – New Funds and the Commitment Shares, the Company’s share capital increased to R$32,538,937,370.00, represented by 5,954,205,001 shares, divided into 5,796,477,760 registered common shares and 157,727,241 registered preferred shares, without par value. Litigation discontinuation settlement between the Company and Pharol On February 8, 2019, in order to discontinue any disputes that might harm the implementation of the JRP, the Company disclosed a Material Fact Notice informing that its Board of Directors approved, in accordance with CVM Instruction 567/2015, the acquisition of 1,800,000 preferred shares issued by the Company to ensure the compliance of the commitment assumed by the Company to transfer its treasury shares to Bratel, wholly-owned subsidiary of Pharol SGPS, S.A., in the context of the settlement entered into, subject matter of the Material Fact Notice of January 8, 2019 (“Settlement”), in transactions conducted in B3’s OTC to deliver the treasury shares to Bratel, which would be made within four business days from the confirmation of the settlement by the Judicial Reorganization Court. On February 18, 2019, the Court issued a decision suspending conflict of jurisdiction injunction No. 157.099 during the period requested by the parties. On April 3, 2019, the Company disclosed a notice to the market to inform on the confirmation of the settlement, referred to above, because thefifteen-day term for the publication of the related court decision has run out. Accordingly, as determined in the Settlement, the term for the compliance with the second part of the obligations established by both parties to the Settlement started on this same date, including: (a) the request to discontinue all the litigation involving the parties named in the
Agreement and (b) the delivery to Bratel of 33.8 million Oi shares there were held in treasury, including 32 million common shares and 1.8 million preferred shares. In addition, several obligations and rights of the parties described in the Material Fact Notice released by Oi and the Communication released by Pharol, both on January 9, 2019, were fully clearly established.
Default Payment Method provided for by Clause 4.3.6 of the On May 20, 2019, in strict compliance with the decision issued under Chapter 15 that determined that the cancelation of the notes regulated by New York Law should take place on June 14, 2019, the Company announced that it started the procedure so that the holders of the notes (a) Portugal Telecom International Finance B.V.’s €500,000,000 in 4.375% notes maturing in 2017 (ISIN No.: XS0215828913); (b) Portugal Telecom International Finance B.V.’s €750,000,000 in 5.875% notes maturing in 2018 (ISIN No.: XS0843939918); (c) Portugal Telecom International Finance B.V.’s €750,000,000 in 5.00% notes maturing in 2019 (ISIN No.: XS0462994343); (d) Portugal Telecom International Finance B.V.’s €1,000,000,000 in 4.625% notes maturing in 2020 (ISIN No.: XS0927581842); (e) Portugal Telecom International Finance B.V.’s €500,000,000 in 4.5% notes maturing in 2025 (ISIN No.: XS0221854200); (f) Oi Brasil Holdings Coöperatief U.A.’s €600,000,000 in 5.625% notes maturing in 2021 (ISIN No.: XS1245245045); (g) Oi Brasil Holdings Coöperatief U.A.’s US$1,500,000,000 in 5.75% notes maturing in 2022 (ISIN No.: US10553MAD39); (h) Oi S.A.’s €750,000,000 in 5.125% notes maturing in 2017 (ISIN No.: XS0569301327); (i) Oi S.A.’s US$750,000,000 9.500% maturing in 2019 (ISIN No.: 87944LAD1); (j) Oi S.A.’s BRL1,100,000,000 in 9.75% maturing in 2016 (ISIN No. US10553MAC55); and (k) Oi S.A.’s US$1,000,000,000 in 5.500% maturing in 2020 (ISIN No. 144A: US87944LAE92) (the “Legacy Notes”) are able to support their claims to receive on a future date or on the Company’s payment dates pursuant to Clause 4.3.6 of the Original Plan.On June 14, 2019, the Legacy Notes were duly cancelled. The procedure detailed above is not applicable for the holders of the 6.25% Notes issued by Portugal Telecom International Finance B.V. – in Judicial Reorganization maturing in 2016 (ISIN No.: PTPTCYOM0008). The Company will provide at the appropriate time the information on the procedure to register the beneficiaries of the Default Payment Method provided for by Clause 4.3.6 of the Original Plan with regard to such series. Prepetition Financing – Clause 5.3 of the Original Plan On December 23, 2019, the Company disclosed a Material Fact Notice informing that its subsidiary Oi Móvel entered into a
The Oi Móvel Issue was approved based on the provisions of Clause 5.3 of the Original Plan and is part of the context of Subsequently to the Material Fact Notice disclosed on December 23, 2019, the Company disclosed a Notice to the Market on February 4, 2020 informing shareholders and the general market that the subscription and payment of the Oi Móvel Issue had been completed
Non-termination of the Judicial Reorganization On December 6, 2019, the Company released a Material Fact Notice informing that the Oi Companies had filed a petition with the Judicial Reorganization Court requesting that the court oversight of the Oi Companies not to
Thenon-termination of the judicial oversight Notwithstanding the good progress of the Plan implementation, which has already concluded most of the steps provided for in the proceeding, which were important for the Company’s recovery, said petition On February 28, 2020, the Company released a Material Fact Notice informing its shareholders and the general market that on February 28, 2020 the Oi Companies filed with the Judicial Reorganization Court a petition exposing its interest in submitting for deliberation to a new general creditors’ meeting (“New GCM”) an amendment to the Plan (“Amendment to Plan” or “Amendment to the JRP”) aimed at achieving greater operating and financial flexibility to continue its investment project and the compliance with its strategic transformation plan (“Strategic Plan”), both broadly disclosed to the market. In line with the foregoing, on March 6, 2020, the Company disclosed a Material Fact Notice informing that the Judicial Reorganization Court awarded a decision, on the same date, granting the Company’s request for a New General Creditors’ Meeting to deliberate on an amendment to the Plan, prescribing that:
Amendment to the On June 15, 2020, the
On August 13, 2020, the Oi Companies filed with the Judicial Reorganization Court an updated draft of the Amendment to the JRP that adjusts certain terms and conditions. This proposal reflected the several discussions with creditors, potential investors, and other stakeholders, including discussions held with the mediator appointed by the Judicial Reorganization Court, for the purpose of discussing improvements to the Amendment to the JRP. The Amendment to the JRP was submitted to a vote by the creditors and approved at the New GCM held on September 8, 2020, the date of the first notice to convene and was confirmed by the Judicial Reorganization Court in a decision issued on October 5, 2020 and published on October 8, 2020 that rejected all the allegations of procedural nullity of the New GCM, ruled out the allegation of unequal treatment among creditors and rejected the requests for nullity of the voting and approval quorum of the Amendment to the JRP because it did not include any drafting and unresolved issues and, among other measures, has set a twelve-month period for ending the Debtors’ judicial reorganization, beginning on the date that the decision was published, which may be extended, should there be a need to complete the acts relating to the disposals provided for in the Amendment to the JRP.
The Amendment to the JRP, approved by the creditors and ratified by the Judicial Reorganization Court, as referred to above, aims at allowing the Oi Companies and their subsidiaries (“Oi Group”) to implement their long-term plan, with the necessary resolution of their debt, in the current context, and their continuity as going concerns by following said JRP and their Strategic Plan. The main purpose of the Oi Group’s strategy is transforming its business model by focusing on the use and rapid expansion of its extensive fiber optics infrastructure as a competitive edge, including its transportation networks (backbone, backhaul and data network), and primary and secondary access networks (dedicated links, metropolitan rings, and FTTH access networks), enabling and supporting the high-speed connection and service provision needs of its residential, business, corporate, and government customers, and the provision of infrastructure services for other telecommunication service providers in the country, including the facilitation of connections for the new 5G technology. This strategy will be implemented by proceeding with the asset divestiture process, the possibility of taking part of moves toward consolidation in the industry and divesting its mobile communications operation and adopting of the model known as structural separation, which allows incorporating separate entities dedicated to investing, the operation and the maintenance of the telecommunications infrastructure and the provision of services to its end customers, including the product development, marketing, sales and customer service activities. This aims at making the Oi Group’s business model more sustainable, focused on its main competitive advantages, structured in an efficient and focused manner, and ensuring the continuity of the Oi Group and the consequent compliance with the means of recovery and payment of all prepetition claims.
The Amendment to the JRP aims at introducing flexibility in meeting the Company’s strategic goals described above and its main purposes include:
The Amendment to the JRP provides for the creation of five (5) UPIs separate from the assets, liabilities and rights of the Debtors and associated with (a) the operation of telecommunications networks (“UPI InfraCo”); (b) the telephony and data operation in the mobile communications market (“UPI Mobile Assets”); (c) the passive infrastructure (“UPI Towers” and “UPI Datacenter”); and (d) the TV business (“UPI TVCo”). The UPIs are established as special purpose corporations (“SPCs”) and may be sold under different models for each type of UPI described above, to ensure the debt payment and generate the funds necessary for the expansion of its fiber infrastructure and associated services, which are the key focus of Oi Group’s strategy. The divestment of the UPIs would allow Oi to maximize the business value of its investments by expanding its residential and business access services nationwide, exploit more efficiently its network components, and create new business opportunities for the exploitation of these networks by offering them to other carriers and service providers in the telecommunications industry, in light with the governing laws, regulations and the required permits from competent authorities, where applicable. The Amendment to the JRP contains detailed information on the composition of each UPI and the terms and conditions applicable to their disposal, including information on their structure and minimum price, available at www.recjud.com.br, for consultation purposes.
InfraCo SPC will concentrate infrastructure and fiber assets related to the Oi Group’s access and transportation networks already contributed to its capital, whether when they are directly assigned or even when they are assigned as right of use, in the form of Indefeasible Rights of Use (IRUs), as well as new infrastructure investments to be made in the future for the purpose of accelerating investments in the expansion of its fiber optics networks, based on a more flexible and efficient capital structure and greater possibility of attracting and using new funds. InfraCo SPC is seeking in the market the necessary funds to finance its investments in order to expand Oi Group’s operations in fiber optics and serve a larger number of customers from these segments nationwide. The Amendment to the JRP establishes that Oi shall retain a material interest in the capital of InfraCo SPC through measures to ensure its active participation in the creation and expansion of a local leader in fiber optics infrastructure. As in other countries, the creation of InfraCo SPC followed a logic of structural separation between the services company and the infrastructure company for the purpose of maximizing business value through greater efficiency and innovation, with clear strategies focused on customer experience and product and service innovation on one hand and mass access to fiber infrastructures and optimization of its technical operation on the other. The UPI InfraCo consists of 100% of the SPC shares, which concentrates the assets and liabilities related to the fiber optics and infrastructure activities described in Annex 5.3.4 to the Amendment to the JRP. Clause 5.3.9.4 of the Amendment to the JRP provides for the partial divestiture of the UPI InfraCo through a bidding process, under the terms of the Business Recovery and Bankruptcy Law, by submitting sealed bids for the disposal of the majority of the voting shares of InfraCo SPC, representing its shareholding control. This bid should ensure the Company the payment of at least R$6.5 billion, in addition to the guarantee from the acquirer that there will be adequate funds for the payment of possible remaining debts of InfraCo SPC, including the full payment of InfraCo’s debt outlined in Clause 5.3.8.1 to the Amendment to the JRP and the compliance with its investment plan, according to certain parameters to be established in the related UPI InfraCo Invitation to Bid Notice. At the completion of the partial sale of the UPI InfraCo, the buyer will be assured an interest equivalent to 51.0% of the voting capital stock, not exceeding 51.0% of the total capital stock of InfraCo SPC, and the Debtors are reserved the right to, at their sole discretion, determine the division of the capital stock of InfraCo SPC into common and preferred shares of InfraCo in the sale, within the limits established by law, thus guaranteeing that the Company shall retain a significant equity interest in SPC InfraCo, which might be possibly liable for the Debtors’ obligations to JRP creditors. As a result of the large demand for the asset during the preliminary market analysis conducted by a financial advisor, the minimum economic value (EV) of InfraCo SPC (as at December 31, 2021) to be considered in the proposals will be R$20 billion, within the previous reference range of 25.5% to 51% of the economic value, in order to ensure an active bid dispute among the different stakeholders for the control of InfraCo (51% of the voting capital of InfraCo SPC) until the auction. The interested parties must also assume the commitment to pay a secondary installment of the acquisition price of not less than R$6.5 billion and a primary installment of the acquisition price amounting up to R$5 billion, to guarantee the payment of any remaining debts of InfraCo SPC, including the payment of the amount of InfraCo SPC’s debt provided for in Clause 5.3.8.1 of the Amendment to the JRP and the implementation of the planned investment plan, in exchange for receiving new common shares
issued by InfraCo SPC, at the price per share paid in the partial sale of UPI InfraCo, adjusted as provided for in the Amendment to the JRP. The Oi Group may, by the date of publication of the UPI InfraCo Notice, accept the binding bid with the highest economic value (EV) assigned to InfraCo SPC for the partial acquisition of UPI InfraCo, pursuant to the terms of the Amendment to the JRP, undertaking to grant such bidder the right to top, at its sole discretion, any offer per share issued by InfraCo SPC above its own biding bid, provided it submits an offer for an amount higher than at least 1% of the price per share issued by InfraCo SPC set in the best offer made during the bidding process for partial sale of the UPI InfraCo. The Amendment to the JRP also provides for mechanisms for evaluating binding bids for the partial acquisition of the UPI InfraCo that take into consideration not only the price per share offered and its minimum price of the economic value (EV) of InfraCo SPC, but also the possibility of evaluating better conditions for determining the best bid to be taken into consideration as the preferential bid for the judicial bidding process. On January 25, 2021, Oi released a Material Fact Notice informing its shareholders and the market in general that on January 22, 2021 it had received binding proposals from third parties for the partial acquisition of the UPI InfraCo, all above the minimum price set in the Amendment to the JRP and that the proposals received are under analysis by the Company, which may engage in negotiations with the bidder of the best offer, on an exclusive basis, for the purpose of negotiating the final agreements that will be disclosed during the bidding process, by means of the corresponding Invitation to Bid Notice to be published in due course. On February 4, 2021, Oi released a Material Fact Notice informing its shareholders and the market in general that, in view of the binding offer terms and conditions for partial acquisition of the UPI InfraCo jointly submitted by Globenet Cabos Submarinos S.A., BTG Pactual Economia Real Fundo de Investimento em Participações Multiestratégia, and other investment funds managed or controlled by companies belonging to the BTG Group (the “Offer” and the “Bidders”), on this same date entered into an Exclusivity Agreement (“Agreement”) with the Bidders, for a limited period of time, for the purpose of negotiating exclusively with the Bidders the sale terms and conditions, as well as the documentation and appendices relating to the Offer. The purpose of the Agreement was to grant the negotiations underway between the parties the necessary security and agility, and, if the negotiations between the parties regarding the terms and documentation are satisfactorily concluded, allow that Oi is in a position to grant the Bidders the right to top other bids received in the course of the bidding process for the sale of the UPI InfraCo, pursuant to Clause 5.3.9.4.6 of the Amendment to the JRP confirmed by the JRP. The Agreement was initially effective until March 6, 2021 and was automatically renewed for an additional period of thirty (30) days, unless otherwise stated by any of the parties. The initial effective date was March 6, 2021, which was automatically renewed for another thirty-day period, to become effective until April 5, 2021, as reported by Oi in a Notice to the Market disclosed on March 5, 2021 and, subsequently, it was extended until 10:00 a.m. on April 9, 2021, as informed by Oi in the Notice to the Market released on April 6, 2021. On April 12, 2021, Oi released a Material Fact Notice informing its shareholders and the market in general that, in the context of the negotiations held with the Bidders, the Company accepted, on this date, the revised binding proposal submitted jointly by the Proponents (the "Binding Proposal") for the acquisition of a portion of the interest held by the Company in Brasil Telecom Comunicação Multimídia S.A., the isolated production unit which owns the Company's fiber optic infrastructure assets (Special Purpose Company, or the "SPC InfraCo", and the "Transaction"), pursuant to Clause 5.3.9.4 of the Amendment to the JRP. Notwithstanding the other terms and conditions provided therein, the Binding Proposal, pursuant to Clause 5.3.9.4 of the Amendment to the JRP, provides for the firm economic value (EV) of InfraCo SPC of twenty billion and twenty million Brazilian reais (R$20,020,000,000.00) on December 31, 2021, taking into account a net debt of four billion, one hundred and seven million, three hundred and fifty-three thousand, five hundred and ninety-eight Brazilian reais and fifty-nine cents (R$4,107,353,598.59), as provided in Clause 5.3.8.1 of the Amendment to the JRP, fully due to the Company and to be paid within ninety (90) days from the closing of the Transaction. The Binding Proposal contemplates the contribution of a Primary Tranche to InfraCo SPC, the payment of a Secondary Tranche to the Company and the contribution of an Additional Primary Tranche to InfraCo SPC, in addition to the Globenet Merger.
The Binding Proposal and related instruments further contemplate the execution of capacity and other operating agreements between InfraCo SPC and Oi and/or its associates, as well as an InfraCo SPC shareholders’ agreement between the Proponents and the Company, pursuant to Section 5 combined with Clause 5.3. 9.4.4, of the Amendment to the JRP. The transaction price, considering the sum of the Primary Tranche; the Secondary Tranche; the Additional Primary Tranche; and the price of the Globenet merger, pursuant to the Binding Proposal, totals twelve billion, nine hundred twenty-three million, three hundred thirty-eight thousand, two hundred ninety reais and sixty-eight cents (R$12,923,338,290.68), which will be subject to adjustment mechanisms based on certain performance, financial and operational metrics of SPC InfraCo, in accordance with its business plan (such as indebtedness, working capital, number of HPs and HCs, OPEX and CAPEX, among others), as agreed between Oi and the Bidders. By accepting the Binding Offer, the Bidders were granted the right, at their sole discretion, to top the highest bid that may be submitted in the competitive process for the partial disposal of the UPI InfraCo, pursuant to Section 5.3.9.4.6 of the Amendment to the JRP. The transaction described above is in line with the implementation of the Strategic Plan for the transformation of the operations of the Oi Companies, which provides for the partial sale of the UPI InfraCo in a bidding proceeding pursuant to the LFR. Debentures of Infraco SPC based on Section 5 of the Amendment to the JRP On February 18, 2021, Oi disclosed a Material Fact Notice informing that its subsidiary BrT Multimídia had entered into an indenture for the issue of collateralized, simple, nonconvertible debentures, backed by collaterals, for private placement, in the total amount of up to R$ 2,500,000,000.00 (“InfraCo Debentures” and “InfraCo Issue”, respectively). The main features of the InfraCo Issue and the Infraco Debentures are as follows: (i) Term and Maturity Date: twenty-four (24) months from the issue date, except in the case of early redemption and early maturity of the InfraCo Debentures set forth in the Debenture Indenture; (ii) Interest: unit par value adjusted using the accumulated National Broad Consumer Price Index (IPCA) variance, plus interest of 11% per year; (iii) Guarantees: the InfraCo Debentures shall be backed by collateral and a trust security provided by InfraCo; (iv) Conversion: the InfraCo Debentures shall be convertible into redeemable preferred shares representing the majority of InfraCo’s voting shares; and (v) Subscription: the InfraCo Debentures must be subscribed and paid-in by April 15, 2021 (“Subscription and Payment Deadline”). On April 15, 2021, Oi released a Notice to the Market informing that the Subscription and Payment Deadline for the InfraCo Debentures was extended to April 29, 2021, as mutually agreed by the parties.
On April 29, 2021, a Notice to the Market was released, informing that the Subscription and Payment Deadline for the InfraCo Debentures was extended to May 17, 2021. The leading underwriter of the Debentures is Brookfield Asset Management and the other underwriters are Farallon Latin America Investimentos and Prisma Capital. The InfraCo Issue was approved pursuant to the provisions of Section 5 of the Amendment to the JRP. As provided for by the Amendment to the JRP and the InfraCo Issue indenture, Oi, through its subsidiaries Oi Móvel and Telemar, shall hold a call option on all the preferred shares held by the Debentureholders as a result of the Conversion. Alternatively, and at the sole discretion of Oi and its subsidiaries Oi Móvel and Telemar, InfraCo SPC may redeem all of the preferred shares held by the Debentureholders as a result of Conversion. The actual InfraCo Issue is subject to the authorizations and the compliance with certain conditions precedent set forth in the relevant InfraCo Issue indenture.
The Amendment to the JRP provides for the sale of UPI Mobile Assets in a bidding process, under the terms of the LRF, by submitting sealed bids for the acquisition of 100% of the shares of Mobile SPC, with payment of at least R$15.7 billion in cash. On November 10, 2020, the Bid Notice (“UPI Mobile Assets Bid Notice”) submitted by the Debtors was published for the sale of the UPI Mobile Assets, which consisted of (i) 100% of the shares of Cozani RJ Infraestrutura e Redes de Telecomunicações S.A., a joint stock company with corporate taxpayer identification number (CNPJ/ME) 36.012.579/0001-50 and registered with the Rio de Janeiro State Division of Corporations under NIRE 33.300.333.291, with registered head offices at Rua do Lavradio, 71, sala 201/801, Centro, CEP 20230-070, in the City of Rio de Janeiro, State of Rio de Janeiro; (ii) 100% of the shares of Garliava RJ Infraestrutura e Redes de Telecomunicações S.A., a joint stock company with CNPJ/ME number 37.178.485/0001-18 and registered with the Rio de Janeiro State Division of Corporations under 33.300.334.441, with registered head offices at Lavradio, 71, sala 201/801, Centro, CEP 20230-070, na Cidade do Rio de Janeiro, Estado do Rio de Janeiro; and (iii) 100% of the shares of Jonava RJ Infraestrutura e Redes de Telecomunicações S.A., a joint stock company with CNPJ/ME number 37.185.266/0001-66 and registered with the Rio de Janeiro State Division of Corporations under NIRE 33.300.334.467, with registered head offices at Rua do Lavradio, 71, sala 201/801, Centro, CEP 20230-070, in the City of Rio de Janeiro, State of Rio de Janeiro (“Mobile SPCs”) wholly owned by Oi Móvel, free and clear of any liens or encumbrances (“Mobile SPC Shares”), to the capital of which Oi Móvel will contribute, through one or more corporate transactions, the Assets, Liabilities and Rights of the UPI Mobile Assets described in Appendix 5.3.1 to the Amendment to the JRP and in the UPI Mobile Assets Bid Notice. On December 14, 2020, the Company released a Material Fact Notice informing its shareholders and the market in general that a hearing was held in the Judicial Reorganization Court for opening the sealed bids submitted as part of the bidding process for the disposal of the UPI Mobile Assets, in the manner and terms provided for in the Amendment to the JRP and in the UPI Mobile Assets Bid Notice. During said hearing, it was verified that there was only one bid for the acquisition of the UPI Mobile Assets, which was submitted jointly by Telefônica Brasil S.A., TIM S.A., and Claro S.A. (the “Bidders”) pursuant to the precise terms and conditions of the binding proposal for the acquisition of the UPI Mobile Assets submitted by the Bidders, amounting to R$16.5 billion, of which R$756 million relates to transition services to be provided by Oi to the Bidders for up to 12 months, plus a commitment to enter into long-term take-or-pay agreements for transmission capacity services with Oi, whose net present value (NPV), calculated for purposes and in the manner provided in the Amendment to the JRP, is R$819 million, which shall be paid in cash, subject to the terms and
conditions provided for in the related binding proposal and the related Share Purchase Agreement set forth in Annex 5.3.9.1 to the Amendment to the JRP. Due to the submission of a single sealed bid for the acquisition of the UPI Mobile Assets, the Judicial Reorganization Court confirmed the Bidders’ proposal as the winning bid of the bidding process for the sale of the UPI Mobile Assets, after securing the favorable opinions of the State of Rio de Janeiro Public Prosecution Office and the Trustee. On January 29, 2021, the Company released a Notice to the Market informing its shareholders and the market in general that on January 28, 2021, the Company, Telemar and Oi Móvel entered with into the Bidders Agreement the Purchase and Sale of Shares and Other Covenants (“Agreement”) for the purpose of selling Mobile Assets SPC, under the terms and conditions set forth in the proposal of the Bidders confirmed by the Judicial Reorganization Court, as described earlier in this item. The actual completion of the Transaction, with the transfer of the Mobile Assets SPCs’ shares to the Buyers, is subject to the approval of the CADE (Brazilian antitrust agency) and preapproval by Anatel, as well as compliance of conditions precedent usual for this type of transaction, as provided for in the Agreement.
The Amendment to the JRP provides for the sale of the UPI Towers in a bidding process, under the terms of the LRF, by submitting sealed bids for the acquisition of 100% of the shares of Towers SPC held by the Debtors. On October 19, 2020, the Bid Notice (“UPI Towers Bid Notice”) submitted by the Debtors was published for the sale of the UPI Towers, which consisted of 100% of the shares issued by special purpose corporation Caliteia RJ Infraestrutura e Redes de Telecomunicações S.A., a joint stock company with CNPJ/ME 35.978.982/0001-75 and registered with the Rio de Janeiro State Division of Corporations under NIRE 33.300.333.215, with registered head offices at Rua do Lavradio, 71, sl. 201/801, Centro, CEP 20230-070, in the City of Rio de Janeiro, State of Rio de Janeiro (“Towers SPC”), wholly owned by Telemar and Oi Móvel, specifically incorporated for being sold as a UPI as part of the Judicial Reorganization Proceeding, and with share capital paid in by the Assets, Liabilities and Rights of the UPI Towers, described in Annex 5.3.2 to the Amendment to the JRP and in the UPI Towers Bid Notice. On November 26, 2020, the Company released a Material Fact Notice informing its shareholders and the market in general that a hearing was held in the Judicial Reorganization Court for opening the sealed bids submitted as part of the bidding process for the disposal of the UPI Towers, in the manner and terms provided for in the Amendment to the JRP and in the UPI Towers Bid Notice. During the hearing, it was verified that there was only one sealed bid for the acquisition of the UPI Towers, which was submitted by Highline do Brasil II Infraestrutura de Telecomunicações S.A. (“Highline”) pursuant to the precise terms and conditions of the binding proposal for the acquisition of the UPI Towers submitted by the latter, amounting to one billion, sixty-six million, nine hundred and two thousand, eight hundred and twenty-seven Brazilian reais (R$1,066,902,827.00) to be paid in cash, as described in the Material Fact Notice released on August 13, 2020, subject to the terms and conditions provided for in the related binding proposal and the related Stock Purchase Agreement set forth in Annex 5.3.9.2 to the Amendment to the JRP.
Due to the submission of a single sealed bid for the acquisition of the UPI Towers, the Judicial Reorganization Court confirmed Highline’s proposal as the winning bid of the bidding process for the sale of the UPI Towers, after securing the favorable opinions of the State of Rio de Janeiro Public Prosecution Office and the Trustee. On December 23, 2020, the Company released a Notice to the Market informing its shareholders and the market in general that the Company, Telemar and Oi Móvel entered into the Share Purchase and Sale Agreement Through a UPI and Other Covenants (“Agreement”) with Highline for the sale of the UPI Towers to Highline and that the actual completion of the transaction with the transfer of Towers SPC’s shares to Highline was subject to the compliance with the conditions precedent usual for this type of transaction, as provided for in the Agreement. Against this background, on March 30, 2021, the Company disclosed a Material Fact Notice informing that, after compliance with all previous contractual obligations, the sale of UPI Towers to Highline was completed on the same date, with the transfer of all Towers SPC shares to Highline, which, in turn, paid the cash portion, with remaining balance payable after the usual calculations and adjustments for this type of transaction, pursuant to the Agreement and the Amendment to the JRP. The completion of the Transaction represents the implementation of yet another stage of the JRP and Strategic Plan, aimed at granting the Company greater financial flexibility and efficiency, and the long-term sustainability of the Company by its market repositioning and its conversion into the largest telecommunications infrastructure provider in Brazil, based on the massification of fiber optics and high-speed internet, the provision of corporate solutions, and the preparation for the evolution to 5G, focused on business lines with higher added value and good growth prospects and forward looking.
The Amendment to the JRP provides for the sale of UPI Datacenter in a bidding process, under the terms of the LRF, by submitting sealed bids for the acquisition of 100% of the shares of Datacenter SPC held by the Debtors.
On October 19, 2020, the Bid Notice (“UPI Datacenter Bid Notice”) submitted by the Debtors was published for the sale of the UPI Datacenter, which consisted of 100% of the shares issued by special purpose corporation Drammen RJ Infraestrutura e Redes de Telecomunicações S.A., a joint stock company with CNPJ/ME 35.980.592/0001-30 and registered with the Rio de Janeiro State Division of Corporations under NIRE 33.300.333.231, with registered head offices at Rua do Lavradio, 71, sl. 201/801, Centro, CEP 20230-070, in the City of Rio de Janeiro, State of Rio de Janeiro (“Datacenter SPC”), the shares of which will be held by Oi, Telemar and Oi Móvel, specifically incorporated to be sold as a UPI as part of the Judicial Reorganization Proceeding, and with capital stock paid in exclusively and necessarily by the Assets, Liabilities and Rights of the UPI Datacenter, described in Annex 5.3.3 to the Amendment to the JRP and in the UPI Datacenter Bid Notice. On November 26, 2020, the Company released a Material Fact Notice informing its shareholders and the market in general that a hearing was held in the Judicial Reorganization Court to open the sealed bids submitted as part of the bidding process for the disposal of the UPI Datacenter, in the manner and terms provided for in the Amendment to the JRP and in the UPI Datacenter Bid Notice. During the hearing, it was verified that there was only one sealed bid for the acquisition of the UPI Datacenter, which was submitted by Titan Venture Capital e Investimentos Ltda. (“Titan”) pursuant to the precise terms and conditions of the binding proposal for acquisition of UPI Datacenter submitted by the latter, as described in the Material Fact Notice dated June 15, 2020, amounting to three hundred and twenty-five million Brazilian reais (R$325,000,000.00) to be paid as follows: (i) a cash installment in the amount of two hundred and fifty million Brazilian reais (R$250,000,000.00); and (ii) the remaining amount of seventy-five million Brazilian reais (R$75,000,000.00) in installments to be paid in the manner and within the deadline set forth in the related binding proposal and the related Share Purchase and Sale Agreement contained in Exhibit 5.3.9.3 to the Amendment to the JRP. Due to the submission of a single sealed bid for the acquisition of the UPI Datacenter, the Judicial Reorganization Court confirmed Titan’s proposal as the winning bid of the bidding process for the sale of the UPI Datacenter, after securing the favorable opinions of the State of Rio de Janeiro Public Prosecution Office and the Trustee. On December 14, 2020, the Company released a Notice to the Market informing that on December 11, 2020 the Company, Telemar, and Oi Móvel had entered into the Agreement for the Purchase and Sale of Shares Through a UPI and Other Covenants (“Agreement”) with Titan, for the purpose of selling the UPI Datacenter to Titan for the total amount R$325,000,000.00, which will be paid after the compliance with certain conditions precedent, as follows: (i) a cash installment of R$250,000,000.00 (“Cash Installment”) paid at sight; and (ii) R$ 75,000,000.00 (“Remaining Amount”), in installments to be paid in the manner and timeframe set forth in the Agreement. Accordingly, on March 15, 2021, the Company released a Material Fact Notice informing that, after compliance with all the contractual conditions precedent on March 12, 2021, it sold the UPI Data Center to Titan and transferred all the shares issued by Datacenter SPC to Titan, which, in turn, paid the Cash Installment, with the Remaining Amount to be paid in installments, in the manner and timeframe set forth in the Agreement. The completion of the sale of the UPI Datacenter represents the implementation of yet another stage of the JRP and Strategic Plan, aimed at ensuring greater financial flexibility and efficiency, and the
long-term sustainability of the Company by its market repositioning and its conversion into the largest telecommunications infrastructure provider in Brazil, based on the massification of fiber optics and high-speed internet, the provision of corporate solutions, and the preparation for the evolution to 5G, focused on business lines with higher added value and good growth prospects and forward looking.
UPI TVCo will consist of 100% of TVCo SPC shares which will concentrate the assets, liabilities, and rights related to the pay TV business, described in Annex 5.3.5 to the Amendment to the JRP, which provides for the disposal of the UPI TVCo in a bidding process, under the terms of the LRF, by submitting sealed bids for the acquisition of 100% of TVCo SPC shares held by the Debtors, considering that the acquisition of the UPI TVCo will involve (i) the payment, in a single cash installment, of a minimum amount of R$20 million and (ii) the obligation of the corresponding acquirer to share with the Debtors and/or their associates 50% of the net revenue of the IPTV service to be offered to TVCo SPC customers using the FTTH network, under the terms and conditions to be established in the Bidding Notice for the disposal of the UPI TVCo.
The Amendment to the JRP provides for the possibility of making adjustments to the payment terms and conditions of the prepetition creditors and also mechanisms that would allow or require the Company to pay certain claims subject to the Plan within a term shorter than the term provided for in the ratified Plan. The Amendment to the JRP contains detailed information on the payment proposals for each class of creditors.
The Amendment to the JRP also prescribes that labor creditors whose claims had not been fully settled by the date of the New GCM would have their claims up to a total of R$50,000 paid within 30 days of ratification of the Amendment to the JRP, provided that said labor claims (i) were listed in the trustee’s list of creditors; (ii) were the subject of a final and unappealable court decision that terminated the underlying lawsuit and ratified the amount due to the related creditor; or (iii) in the case of creditors entitled to recover lawyers’ fee, a decision was rendered in the event of claim qualification or challenge filed by the date of the New GCM, provided that they elect this form of payment.
The Amendment to the JRP prescribes that, in the event of the disposal of the UPI Mobile Assets, part of the funds to be paid by the winning bidder of the related bidding process and the buyer of the UPI Mobile Assets will, at the risk and expense of the Debtors and using the Debtors’ full instructions on the amount due to each Creditor with collateralized claims and the related data for payment, directly assigned by the buyer to the Creditors with collateralized claims for the prepayment of 100.0% of the remaining amount of Collateralized Claims (as defined in the Amendment to the JRP).
In light of the Amendment to the JRP, approved at the CGM held on September 8, 2020 and ratified by a court decision issued on October 5, 2020, the claims of Regulatory Agencies will be paid as provided for by Law 13988. This law allows the negotiation of all amounts established under Noncompliance Investigation Proceedings (PADOS) registered as enforceable debt, payable in 84 installments, after a 50% discount on the consolidated claim limited to the principal, a six-month grace period, and with the possible use of judicial deposits made as guarantee of the processed claims, fully transferable to ANATEL for the early settlement of as many initial installments as possible to be paid with the total amount of the deposits.
Pursuant to the Amendment to the JRP, Class III Unsecured Creditors (as defined in the Plan), with claims of up to R$3,000 that have not yet been fully settled by the date of the New GCM and that have filed a claim qualification or challenge by the date of the New GCM, may elect to receive the full claim, via the on-line platform to be made available by the Oi Group www.credor.oi.com.br within 45 days after the New GCM. The option to receive R$3,000 may be exercised, within the same term, by the Class III Unsecured Creditors with claims higher than R$3,000 provided that (i) the claims had not yet been fully paid by the date of the New GCM; (ii) they had already filed a claim qualification or challenge by the date of the New GCM; and (iii) at the time the option is exercised, such creditors granted the Debtors, on the same platform, a receipt of full payment of their claims. The Amendment to the JRP prescribes that the payment of the related claims is made through a deposit, in Brazilian legal tender, in a bank account in Brazil to be indicated by the corresponding Class III Unsecured Creditors, within no more than ninety (90) calendar days beginning on (a) the date of the Court Ratification of the Amendment to the JRP; or (b) the issue date of the final decision that, in the event the claim in not claimed or is disputed, determined the inclusion of their related Unsecured Claims in the General List of Creditors.
The Amendment to the JRP includes an amendment to Clause 5.2 of the Original Plan to provide for the obligation of prepayment at a discount, by the Debtors, of the Unsecured Creditors that have elected Restructuring Options I or II, pursuant to Clauses 4.3.1.2 or 4.3.1.3 thereof, respectively, also when there is one or more Liquidity Events (as defined in the Amendment to the JRP) in the first five years from the court ratification of the JRP. Accordingly, the Amendment to the JRP establishes that the Oi Group shall allocate 100.0% of the Net Revenue from Liquidity Events (as defined in the Amendment to the JRP) exceeding R$6.5 billion to, in up to the payment rounds, anticipate the payment of the claims held by the Unsecured Creditors provide for in said Clause, at a discount of fifty-five percent (55%) on the related Total Balance of the Unsecured Claims, as described in Clause 5.4 of the Amendment to the JRP.
The Amendment to the JRP allows the Debtors, at any time, during the five-year period after the ratification of the Amendment to the JRP, to hold one or more prepayment rounds to the Unsecured Creditors that offer the highest discount rate of their claims in each round held (“Reverse Auction”). In each Reverse Auction, the winning bidder shall be the Unsecured Creditors that successively offer the lowest amount novated unsecured claims under the terms of the Plan in each round, under the terms provided for in Clause 4.7.1 of the Amendment to the JRP. The specific terms of each Reverse Auction, including the rules, the net present value (NPV) of the future payment flows of the related unsecured claims, as provided for in the Plan, to be taken into consideration, which cannot be lower than one hundred percent (100%) of the NPV of the related unsecured claims at any Reverse Auction, and the maximum amount of the related unsecured claims to be paid by the Debtors, including possible restrictions, will be detailed in the related notice to be disclosed prior to the Reverse Auction, at www.recjud.com.br, and subsequently sent to the interested Unsecured Creditors that complete their registration, as provided for in Clause 4.7.4 of the Amendment to the JRP.
The Amendment to the JRP allows the Debtors to seek in the market a credit limit for hiring bank guarantees to be provided to the Unsecured Creditors. Clause 5.6.6 and following of the Amendment to the JRP provides for the possibility of the Unsecured Creditors to offer bank guarantee lines to the benefit of the Debtors, within the limit of their restructured claims, to be drawn on the condition that the Debtors reduce their exposure under guarantee in relation to the position as at December 31, 2017, while guaranteeing the reduction of the prepayment discount from 55% to 50%, to be applied at each Exercise Round of the Purchase Obligation, to volumes equivalent to those offered in new guarantee lines, as provided for in the Plan.
Pursuant to the Amendment to the JRP, Small Businesses with Unsecured Claims listed in Class IV (as defined in the Plan), with claims of up to R$150,000 that have not yet been fully settled by the date of the New GCM and that have filed have filed a claim qualification or challenge by the date of the New GCM, may elect to receive the full claim, via the on-line platform to be made available by the Oi Group at www.credor.oi.com.br, within 45 days after the New GCM. The option to receive R$150,000 may be exercised, within the same term, by the Small Businesses with Unsecured Claims listed in Class IV with claims higher than R$150,000 provided that (i) the claims have not yet been fully paid by the date of the New GCM; (ii) they have already filed a claim qualification or challenge by the date of the New GCM; and (iii) at the time the option is exercised, such creditors grant the Debtors, on the same platform, a receipt of full payment of their claims. The Amendment to the JRP prescribes that the payment of the related claims to be made through a deposit, in Brazilian legal tender, in a bank account in Brazil to be indicated by the corresponding Unsecured Small Business Creditor, within no more than ninety (90) calendar days beginning on (a) the date of the Court Ratification of the Amendment to the JRP; or (b) the issue date of the final decision that, in the event the claim in not claimed or is disputed, determined the inclusion of their related Unsecured Small Business Claims in the General List of Creditors.
The decision to ratify the Amendment to the JRP set a twelve-month period to terminate the judicial reorganization, beginning on the publication date of such decision, i.e., October 8, 2020, and may be extended if there is a need to finalize the acts related to the disposals of the assets provided for in the Amendment to the JRP. The Debtors have filed an appeal against this part of the Amendment to the JRP ratification decision, requesting that the termination date of the proceeding be the one set forth in the Amendment to the JRP, i.e., May 30, 2022. The appeal is still pending a final decision.
If the corporate restructuring carried out to segregate the UPIs and the sale of these UPIs as provided for by the Amendment to the JRP is implemented, the Company will retain all activities, assets, rights and obligations not expressly transferred to the UPIs, including certain fiber optics, fiber backbone and copper backhaul assets related to the Oi Group’s transportation network, residential, business and corporate customers (including utility assets), in addition to the Digital and IT services (Oi Soluções), as well as the field maintenance and installation operations at Serede - Serviços de Rede S.A. (“Serede”) and customer service operations at Brasil Telecom Call Center S.A. (“BrT Call Center”). With these measures, the goal is to ensure that this set of assets is sufficient to guarantee the continuity of the Company as a going concern and the payment of its debts under the terms of the Amendment to the JRP. For more information regarding the Amendment to the JRP and the implementation of the measures set forth therein refer to the documents disclosed on this date by the Company and available on its website (www.oi.com.br/ri or http://www.recjud.com.br/).
The full Amendment to the JRP is available to the Company’s shareholders at the Company’s headquarters and on its website (www.oi.com.br/ri or http://www.recjud.com.br/). Company subsidiaries The table below shows the equity interests held in the capital of the Company’s subsidiaries:
Companies related to the continuing operations
Companies/businesses classified as assets held for sale and related to discontinued operations
(*) Only the Mobility business (UPI Mobile Assets) and the TV business (UPI TVCo) of Oi Móvel
Companies classified as assets held for sale
The equity interests in joint arrangements and interests in associates are measured using the equity method and are as follows:
Going concern The consolidated financial statements for the year ended December 31, The continuity of the Company as a going concern
The Company has been successfully discharging the obligations set forth in the judicial reorganization proceedings and even though there are no indications in this regard, we emphasize that
On January 31, 2020, the World Health Organization announced that COVID-19 was a global health emergency and on March 3, 2020, the World Health Organization categorized COVID-19 as a pandemic.
By the closing date of
Statement of compliance The Company’s consolidated financial statements have been prepared and are being presented in accordance with the pronouncements, guidelines and interpretations issued by International Financial Reporting Standards (IFRSs) issued by the International Accounting Standards Board (IASB). All relevant information part of the Consolidated Financial Statements, and only this
The
The preparation of consolidated financial statements requires the use of certain critical accounting estimates and the exercise of judgment by the Company’s management in the application of the
Consolidation criteria of subsidiaries by the full consolidation method Full consolidation was prepared in accordance with IFRS
Functional and presentation currency The Company and its subsidiaries operate mainly as telecommunications industry operators in Brazil, Africa, and Asia, and engage in activities typical of this industry. The items included in the consolidated financial statements Transactions and balances Foreign currency-denominated transactions are translated into the functional currency using the exchange rates prevailing on the transaction dates. Foreign exchange gains and losses arising on the settlement of the transaction and the translation at the exchange rates prevailing at yearend, related foreign currency-denominated monetary assets and liabilities are recognized in the income statement, except when qualified as hedge accounting and, therefore, deferred in equity as cash flow hedges. Group companies with a different functional currency The profit or loss and the financial position of all Group entities, none of which uses a currency from a hyperinflationary economy, whose functional currency is different from the presentation currency are translated into the presentation currency as follows:
As at December 31,
Segment reporting The Management monitors and tracks the performance of
Cash and cash equivalents Comprise cash and imprest cash fund, banks, and highly liquid short-term investments (usually maturing within less than three months), immediately convertible into a known cash amount, and subject to an immaterial risk of change in value, which are stated at fair value at the end of the reporting period and which do not exceed their market value, and whose classification is determined as shown below (Note 8).
Financial assets Financial assets are classified according to their purpose into: (i) amortized cost; (ii) fair value through other comprehensive income; and (iii) fair value through profit or loss.
The Company classifies its financial assets into the following measurement categories: (1) assets measured at amortized cost—i.e., financial assets that meet the following conditions: (i) the business model under which financial assets are held to obtain contractual cash flows; and (ii) the contractual terms of the financial asset generate, on specified dates, cash flows that are only payments of principal and interest on the outstanding principal (accounts Accounts receivable Accounts receivable derive mainly from billed telecommunications services and services provided
The Company recognizes the Non-current assets held for sale and discontinued operations Non-current assets are classified as assets held for sale when their carrying amount is recoverable, principally through a sale, and when such sale is highly probable. These assets are stated at the lower of their carrying amount and their fair value less costs to sell. Any impairment loss on a group of assets held for sale is initially allocated to goodwill and, then, to the remaining assets and liabilities on a pro rata basis. A discontinuing operation is a component of an entity or a business unit that can be clearly distinguished operationally from the rest of the Company. The classification of a discontinuing operation is made when the operation is sold or meets the criteria to be classified as held for sale. We emphasize that in 2020, the Amendment to the JRP (Note 1) provides for the creation and sale The Company revised the comparative balances of the consolidated statement of operations, consolidated of statement of comprehensive income, consolidated statement of cash flows, in line with IFRS 5, which requires that an entity reclassify the disclosures related to all operations that have been discontinued at the balance sheet date of the last reporting period presented. The effects of the revisions are shown in Note 31.
Property, plant and equipment Property, plant and equipment are stated at cost of purchase or construction, less accumulated depreciation. Historical costs include expenses directly attributable to the acquisition of assets. They also include certain costs on facilities, when it is probable that the future economic benefits related to such costs will flow into the Company, and asset dismantlement, removal and restoration costs. The borrowings and financing costs directly attributable to the purchase, construction or production of a qualifying asset are capitalized in the initial cost of such asset. Qualifying assets are those that necessarily require a significant time to be ready for use. Subsequent costs are added to the carrying amount as appropriate, when, and only when, these assets generate future economic benefits and can be reliably measured. The residual balance of the replaced asset is derecognized. Maintenance and repair costs are recorded in profit or loss for the period when they are incurred, and they are capitalized when, and only when, they clearly represent an increase in installed capacity or the useful lives of assets. Assets under finance leases are recorded in property, plant and equipment at the lower of fair value or the present value of the minimum lease payments, from the initial date of the agreement. Depreciation is calculated on a straight-line basis, based on the estimated useful lives of the assets, which are annually reviewed by the Company (Note 16).
Intangible assets Acquired intangible assets with finite useful lives are recognized at cost, less amortization and accumulated impairment losses. Amortization is recognized on a straight-line basis over the asset’s estimated useful life. The estimated useful life and method of amortization are reviewed at the end of each annual reporting period, and the effect of any changes in estimates is accounted for on a prospective basis. Intangible assets with indefinite useful lives are carried at cost less accumulated impairment losses. Software licenses purchased are capitalized based on the costs incurred to purchase the software and make it ready for use. Software maintenance costs are expensed as incurred. Regulatory licenses related to the merged capital gains are amortized over the STFC concession period. The other regulatory licenses for the operation of the mobile telephony services are recognized at cost of acquisition and amortized over the effective period of the related licenses (Note 17).
Impairment of
Long-lived assets are tested for impairment whenever events or changes in circumstances indicate that their carrying amounts might be impaired. Impairment losses, if any, are recognized in the amount by which the carrying amount of an asset exceeds its recoverable value. and the value in use. For impairment test purposes, assets are grouped into the smallest identifiable group for which there is a cash-generating unit (CGU), which is identified pursuant to the operating
These calculations required the use of judgments and assumptions that may be influenced by different external and internal factors, such as economic trends, industry trends and interest rates, changes in business strategies, and changes in the type of services and products provided by the Company to the market. The use of different assumptions can significantly change the financial information.
For impairment test purposes, the Company
remaining CGUs. The Pursuant to IAS 36, Adjustment to present value The Company Generally, when applicable, the discount rate used is the average return rate on investments for financial assets or interest charged on Company borrowings for financial liabilities. The balancing item is the asset or liability that has originated the financial instrument, when applicable, and the deemed borrowing costs are allocated to the Company’s profits over the transaction term. Under the terms and conditions of the Original JRP and the Amendment to the JRP, certain balances of
The present value of the lease agreements is measured by discounting fixed future payment flows, which do not take into account projected inflation, using the incremental interest rate, according to market conditions, Additionally, assets acquired under lease agreements, as well as unrecognized revenue generated by the assignment of communication towers are adjusted to present value. Impairment of financial assets
The Company assesses at In the case of equity investments classified as available for sale, a significant or prolonged decline in their fair value below cost is also objective evidence of impairment.
Borrowings and financing Borrowings and financing are stated at amortized cost, plus monetary On the A borrowing and financing financial liability is derecognized when the debt is extinct or there is a substantial changes in the contractual terms. Under the terms and conditions of the Amendment to the JRP, there is the obligation to prepay the claims of class II and III creditors at discount if one or more liquidity events occur (Note 1). Such prepayment obligations do not meet the liability derecognition or substantial change in the contractual terms criteria since they depend on the compliance with certain conditions precedent provided for by the Plan and which are beyond of the Company’s control. Transaction costs incurred are measured at amortized cost and recognized in liabilities, as a reduction to the balance of borrowings and financing, and are expensed over the relevant agreement term. Leases The Company recognizes aright-to-use asset and a lease liability in its balance sheet with respect to the leased assets. Theright-to-use asset is measured at cost, which consists of the initial amount of the lease liability measurement, plus initial direct costs incurred, estimated costs to decommission and remove the asset at the end of the lease, other payments made before the lease commencement date, and calculated at present value, discounted by the incremental lending rate. The discount rates
used by the Company were obtained in accordance with market conditions, estimated using the Company-specific risk spread. Financial liabilities and equity instruments Debt or equity instruments issued the Company and its subsidiaries are classified as financial liabilities or equity instruments, according to the contractual substance of the transaction. Provisions The amount recognized as provision is the best estimate of the disbursement required to settle the present obligation at the end of the reporting period, based on the opinion of the management and itsin-house and outside legal counsel, and the amounts are recognized based on the cost of the expected outcome of ongoing lawsuits (Note For measuring the amount of the provisions to be recognized, the Company basically adopts two methodologies: (i) the statistical measurement model and (ii) the individual measurement model. In order to choose the methodology to be used, the Company takes into consideration, among other criteria, the number of lawsuits, the lawsuit amount, the estimated amount of a possible payment, and the nature of the lawsuit. The statistical measurement model is usually used in situations where there are (i) a significant volume of administrative or judicial proceedings with similar nature; (ii) individually the proceedings have The individual measurement model is usually used in situations where (i) the proceeding involves a high amount; (ii) it is reasonably possible to make an individual assessment of likelihood that a disbursement will be required; and (iii) there is no similarity in the nature of the proceedings. In this model the Company uses opinions from outside specialists in the involved areas to assess the likelihood of a loss. The main contingencies measured under this model are tax and strategic civil proceedings. The increase in the obligation as a result of the passage of time is recognized as financial expenses.
Onerous obligation The Company recognizes a present obligation when events render the contracting of services onerous. A contract becomes onerous when: (i) the obligations under the contract exceed the economic benefits expected to be received over the contract period; and (ii) the costs are unavoidable.
The Company measures the onerous obligation according to the lower net cost of fulfilling the contract, which is determined based on the lower of: (i) the cost of fulfilling the contract or (ii) the cost of any compensation or penalties derived from the noncompliance of the contract. The base assumptions used to calculate the onerous obligation must be periodically reviewed and measured whenever there are significant changes of these assumptions. Employee benefits Pension The Company and its subsidiaries have defined benefit and defined contribution plans. In the defined contribution plan, the sponsor makes fixed contributions to a fund managed by a separate entity. The contributions are recognized as employee benefit expenses as incurred. The sponsor does not have the legal or constructive obligation of making additional contributions, in the event the fund lacks sufficient assets to pay all employees the benefits related to the services provided in the current year and prior years. The defined benefit is annually calculated by independent actuaries, who use the projected unit credit method. The present value of the defined benefit is determined by discounting the estimated future cash outflows, using the projected inflation rate plus long-term interest. The obligation recognized in the balance sheet as regards the defined benefit pension plans presenting a deficit, corresponds to the present value of the benefits defined at the balance sheet date, less the fair value of the plan’s assets. The actuarial gains and losses resulting from the changes in the actuarial valuations of the pension plans, whose actuarial obligations or actuarial assets are recorded by the Company, are fully recognized in other comprehensive income, in equity (Note The asset recognized in balance sheet corresponds to the present value of available economic benefits, consisting of refunds or reductions in future contributions to the plan. Employee profit
At the end of the reporting period, the Company revisits the estimated number of vesting shares taking into account non-market vesting conditions and length of service conditions. The Company recognizes the impact of the revision of the initial estimates, if any, in the statement of profit or loss, with a contra entry in equity. The amounts received, net of any directly attributable transaction costs, are credited to share capital (nominal value) when the shares are exercised. Payroll taxes payable in connection with the grant of stock options are considered an integral part of the grant itself, and their collection is treated as a cash-settled transaction.
Revenue recognition Revenues correspond basically to the amount of the payments received or receivable from sales of services in the regular course of the Company’s and its subsidiaries’ activities. Revenue is recognized The Company applied the judgments that significantly affect the determined amount and the recognition timing of the revenue from a contract with a customer, taking into account the five-step recognition model: (i) identify the contract; (ii) identify the separate performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations; and (v) recognition da revenue when (or as) the entity satisfies a performance obligation.
Service revenue is recognized when services are
Revenue from sales of handsets and accessories
Revenue arising from the receipt of trade
Revenue is Expense recognition Expenses are recognized on the accrual basis, considering their relation with revenue realization. Prepaid expenses attributable to future years are deferred over the related periods. The incremental costs to obtain
a contract with a customer (contract compliance costs), consisting basically of sales, Financial income and expenses Financial income is recognized on an accrual basis and comprises interest on receivables settled after the due date, gains on short-term investments and gains on derivative instruments. Financial expenses consist primarily of interest effectively incurred, adjustments to present value, and other charges on borrowings, financing, and financial derivative contracts. They also include banking fees and costs, financial intermediation costs on the collection of trade receivables, and other financial transactions (Notes 5 and 6).
Current and deferred income tax and social contribution Income tax and social contribution are recorded on an accrual basis. Taxes attributed to temporary differences and tax loss carryforwards are recorded in assets or liabilities, as applicable, only under the assumption of future realization or payment. The Company prepares technical studies that consider the future generation of taxable income, based on management expectations, considering the continuity of the companies as going concerns. The Company writes down the carrying amount of deferred tax assets to the extent it is no longer probable that sufficient taxable income will be available to allow the utilization of all or part of the deferred tax assets. Any write-down of deferred tax assets is reversed when it is probable that sufficient taxable income will be available. The technical studies are updated annually, approved by the Board of Directors and reviewed by the Supervisory Board, and the tax credits are adjusted based on the results of these reviews. Deferred tax assets and liabilities are measured using the tax rates applicable for the period in which the liability is expected to be settled or the asset is expected to be realized, based on the tax rates set forth in the tax law prevailing at the end of each reporting period, or when new legislation has been substantially enacted. The measurement of deferred tax assets and liabilities reflects the tax consequences that would follow from the manner in which the Company expects, at the end of each reporting period, to recover or settle the carrying amount of these assets and liabilities (Note 7). Earnings per share Basic earnings per share are calculated through profit or loss for the year attributable to the owners of the Company, divided by the weighted average number of common and preferred shares outstanding in the year. Diluted earnings per share are calculated using said weighted average number of outstanding shares adjusted by potentially dilutive instruments convertible into shares in the reporting years, pursuant to IAS 33. (Note
The Company’s management uses estimates and assumptions based on historical experience and other factors, including expected future events, which are considered reasonable and relevant, and also requires judgments related to these matters. Actual results of operations and the financial position may differ from these estimates. The estimates that represent a significant risk of causing material adjustments to the carrying amounts of assets and liabilities are as follows:
Revenue recognition and accounts The Company’s revenue recognition policy is significant as it is a material component of operating results. Determining the amount and the timing of revenue recognition by Management, collection ability, and the rights to receive certain network usage revenue is based on judgment related to the nature of the tariff collected for the services provided, the price of certain products, and the right to collect this revenue. If changes in conditions cause management to conclude that such criteria are not met in certain operations, the amount of trade receivables might be affected. In addition, the Company depends on guidelines to measure certain revenue set by ANATEL (Brazilian telecommunications industry regulator). Expected credit losses on trade receivables The recognition of expected credit losses on trade receivables There are cases of agreements with certain customers to collectpast-due receivables, including agreements that allow customers to settle their debts in installments. The actual amounts not received may be different from the allowance recognized, and additional accruals might be required.
Depreciation and amortization of assets with finite useful lives Property, plant and equipment items and intangible assets with finite useful lives are depreciated and amortized, respectively, on a straight-line basis, over the useful lives of the related asset. The depreciation and amortization rates of the most significant assets are shown in Notes 16 and 17, respectively. The useful lives of certain assets may vary as they are used in the fixed-line or mobile telephony segments. The Company reviews the useful lives of assets annually. Impairment of long-lived assets The recoverable amounts of long-lived assets are determined by comparing the calculations of their value in use and their sales prices. These calculations required the use of judgments and assumptions that may be influenced by different external and internal factors, such as economic trends, industry trends and interest rates, changes in business strategies, and changes in the type of services and products sold by the Company to the market. The use of different assumptions may significantly change our consolidated financial statements. For CGU impairment
After measuring value in use, the Company updated the projections used to determine the value in use of
These forecasts cover aten-year period, taking into account the useful lives of the assets and are consistent with prior years’ cash flows. The discount rate used Pursuant to IAS 36, an impairment loss is allocated to reduce the carrying amount of the assets of a cash-generating unit, firstly to reduce the carrying amount of any goodwill based on expected future profitability and, subsequently, the other assets of the cash-generating unit proportionately to the carrying amount of each asset of the cash-generating units. In 2020, as a result of the asset impairment test, the Company recognized a reversal of previously recognized impairment losses related to the expected future profitability of assets with finite useful lives of the CGU Assets from continuing operations, due to developments in the financial scenarios and indicators taken into account to estimate in the cash flows in the amendment to the JRP, and recognized an impairment loss of CGU TV. Impairment losses, recognized in 2019, taking into account the cash flow projections at the time, was fully allocated to the Leases The assumptions related to the appropriated discount rates used in the fair value calculation of the present value of the lease payments are subject to significant fluctuations due to different external and internal factors, including economic trends and the Company’s financial performance. The use of different assumptions to measure the present value of our leases may have a material impact on the estimated present value of theright-of-use asset and the lease liability in the balance sheet. Fair value of financial liabilities The assumptions
Pursuant IAS 37, the Company recognized provisions for contingencies basically originated at the juridical and administrative levels, with labor, tax, and civil nature, as detailed in Note
Depending on the nature of the contingency, the Company’s management uses the statistical measurement or the individual measurement methodology to calculate provisions for contingencies. In any of these methodologies, the Company uses a set of assumptions, information, an internal and external risk assessment, and statistical models that management considers to be appropriate, including the successful implementation of the Judicial Reorganization Plan; however, it is possible that these change in the future, which could result in change in the future provisions for losses. Deferred income tax and social contribution The Company recognizes and settles taxes on income based on the results of operations determined in accordance with the Brazilian corporate law, taking into consideration the provisions of the tax law, which are materially different from the amounts calculated for IFRS purposes. Pursuant to IAS 12, the Company recognizes deferred tax assets and liabilities based on the differences between the carrying amounts and the taxable bases of the assets and liabilities. The Company regularly tests deferred tax assets for impairment and recognizes an allowance for impairment losses when it is probable that these assets may not be realized, based on the history of taxable income, the projection of future taxable income, and the time estimated for the reversal of existing temporary differences. These calculations require the use of estimates and assumptions. The use of different estimates and assumptions could result in the recognition of an allowance for impairment losses for the entire or a significant portion of the deferred tax assets. Employee benefits The actuarial valuation is based on assumptions and estimates related to interest rates, return on investments, inflation rates for future periods, mortality indices, and an employment level projection related the pension fund benefit liabilities. The accuracy of these assumptions and estimates will determine the creation of sufficient reserves for the costs of accumulated pensions and healthcare plans, and the amount to be disbursed annually on pension benefits. These assumptions and estimates are subject to significant fluctuations due to different internal and external factors, such as economic trends, social indicators, and our capacity to create new jobs and retain our employees. All assumptions are reviewed at the end of the reporting period. If these assumptions and estimates are not accurate, there may be the need to revise the reserves for pension benefits, which could significantly impact Company results.
Reclassifications of the comparative period’s accounting balances The Company made some reclassifications in the note on financial income (expenses) for the year ended December 31, 2019 for better comparability and understanding of the transactions and balances in the Consolidated Financial Statements for the period ended December 31, 2020. These reclassifications do not affect the Company’s or Consolidated Statements of Changes in Shareholders’ Equity as at December 31, 2019 and Consolidated Statements of Operations for the year then ended. We highlight below the stated reclassifications:
The
d.2) The new and revised standards and interpretations issued by the IASB that are effective in future reporting periods and that the Company decided not to early adopt are the following, effective for periods beginning on or after January 1,
The Company
IFRS 13 defines fair value as the price for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties, in an arm’s length transaction on measurement date. The standard clarifies that the fair value must be based on the assumptions that market participants would consider in pricing an asset or a liability, and establishes a hierarchy that prioritizes the information used to build such assumptions. The fair value measurement hierarchy attaches more importance to available market inputs (i.e., observable data) and a less weight to inputs based on data without transparency (i.e., unobservable data). Additionally, the standard requires that an entity consider all nonperformance risk aspects, including the entity’s credit, when measuring the fair value of a liability. IFRS 7 establishes a three-level hierarchy to measure and disclose fair value. The classification of an instrument in the fair value measurement hierarchy is based on the lowest level of input significant for its measurement. We present below a description of the three-level hierarchy: Level 1—inputs consist of prices quoted (unadjusted) in active markets for identical assets or liabilities to which the entity has access on measurement Level 2—inputs are different from prices quoted in active markets used in Level 1 and consist of directly or indirectly observable inputs for the asset or liability. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical assets or liabilities in markets that are not active; or inputs that are observable for the asset or liability or that can support the observed market inputs by correlation or otherwise for substantially the entire asset or liability. Level 3—inputs used to measure an asset or liability are not based on observable market variables. These inputs represent management’s best estimates and are generally measured using pricing models, discounted cash flows, or similar methodologies that require significant judgment or estimate.
The Company and its subsidiaries have measured their financial assets and financial liabilities at their market or actual realizable values (fair value) using available market inputs and valuation techniques appropriate for each situation. The interpretation of market inputs for the selection of such techniques requires considerable judgment and the preparation of estimates to obtain an amount considered appropriate for each situation. Accordingly, the estimates presented may not necessarily be indicative of the amounts that could be obtained in an active market. The use of different assumptions for the calculation of the fair value may have a material impact on the amounts obtained.
The carrying amounts and the estimated fair values of our main financial assets and financial liabilities as at December 31,
For the closing of the year ended December 31,
The levels of the financial assets, cash and cash equivalents and cash investments,held-for-sale assets, and derivative financial instruments at fair value as at December 31,
There were no transfers between levels in the years ended December 31, The Company and its subsidiaries have measured their financial assets and financial liabilities at their market or actual realizable values (fair value) using available market inputs and valuation techniques appropriate for each situation, as follows:
Foreign currency-denominated cash equivalents and cash investments are basically kept in checking deposits denominated in euro and US The fair value of securities traded in active markets is equivalent to the amount of the last closing quotation available at the end of the year, multiplied by the number of outstanding securities. For the remaining contracts, the Company carries out an analysis comparing the current contractual terms and conditions with the terms and conditions effective for the contract when they were originated. When terms and conditions are dissimilar, fair value is calculated by discounting future cash flows at the market rates prevailing at the end of the year, and when similar, fair value is similar to the carrying amount on the reporting date.
As at December 31, 2019, held-for-sale assets represented the indirect interest held by PT Ventures in the dividends receivable and the fair value of the financial investment in Unitel, both classified as held for sale. The assets from the investment held in PT Ventures
The Company conducts derivative transactions to manage certain market risks, mainly the foreign exchange risk. At the closing date of
It is worth noting that the Company does not use derivatives for
The Company’s and its subsidiaries’ activities expose them to several financial risks, such as: market risk (including currency fluctuation risk, interest rate risk on fair value, interest rate risk on cash flows), credit risk, and liquidity risk. According to their nature, financial instruments may involve known or unknown risks, and it is important to assess to the best judgment the potential of these risks. The Company and its subsidiaries may use derivative financial instruments to mitigate certain exposures to these risks. The Company’s risk management process is a three-step process, taking into account its consolidated structure: strategic, tactical, and operational. At the strategic level, the Company’s executive committee agrees with the Board of Directors the risk guidelines to be The Financial Risk Management Committee meets on a monthly basis and currently consists of the Chief Finance and Investor Relations Officer, The Hedging and Cash Investments Policies, approved by the Board of Directors, document the management of exposures to market risk factors generated by the financial transactions of the Oi Group companies.
Financial assets The Company is not exposed to any material foreign exchange risk involving foreign currency-denominated financial assets as at December 31, Financial liabilities The Company and its subsidiaries have foreign currency-denominated or foreign currency-indexed borrowings and financing. The risk associated with these liabilities is related to the possibility of fluctuations in foreign exchange rates that could increase the balance of such liabilities. The Company’s and its subsidiaries’ borrowings and financing exposed to this risk represent
approximately To minimize this type of risk, after the sale of PT Ventures was completed in January 2020, the Company
the year.
The currency hedging percentage for purposes of covenant compliance and the financial expenses of the existing borrowings and financing, including the impacts of changes in foreign exchange rates on the fair value adjustment gain, is Foreign currency-denominated financial assets and financial liabilities are presented in the balance sheet as
The amounts of the derivative financial instruments as at December 31, 2020 and 2019 are summarized as follows:
As at December 31, 2020 and 2019, the main hedging transactions conducted with financial institutions with the objective minimizing the foreign exchange risk Non-deliverable Forward (NDF) contracts US$/R$: Refer to future dollar purchase transactions using NDFs to hedge against the depreciation of the Brazilian real against the US dollar. The key strategy for these contracts is to eliminate foreign exchange differences during the contract period, mitigating unfavorable changes in foreign exchange rates on dollar-denominated debts or operating expenses. As at December 31, 2020 and 2019, the Company recognized as result of derivative transactions the amounts shown below:
And the movements in foreign exchange hedges designated for hedge accounting were recognized in other comprehensive income.
Foreign exchange risk sensitivity analysis
Pursuant to IFRS 7, as at December 31, The foreign exchange rates used for the probable scenario
The impacts of foreign exchange exposure on the foreign currency-denominated debt,
Financial assets Cash equivalents and cash investments in local currency are substantially maintained in financial investment funds exclusively managed for the Company and its subsidiaries, and investments in private securities issued by prime financial institutions. Most of the portfolio of exclusive funds consists of repurchase agreements pegged to the SELIC rate (Central Bank’s policy rate). The interest rate risk linked to these assets arises from the possibility of decreases in these rates and consequent decrease in the return on these assets.
Financial liabilities The Company and its subsidiaries have borrowings and financing subject to floating interest rates, based on the Long-term Interest Rate (TJLP), the CDI, or the Benchmark Rate in the case of real-denominated debt as at December 31, As at December 31,
These assets and liabilities are presented in the balance sheet as follows:
Interest rate fluctuation risk sensitivity analysis
Management believes that the most material risk related to interest rate fluctuations arises from its liabilities pegged to the CDI and TJLP. This risk is associated to an increase in those rates. Pursuant to IFRS 7, Management estimated the fluctuation scenarios of the
The rates
Such sensitivity analysis considers payment outflows in future dates. Thus, the aggregate of the amounts for each scenario is not equivalent to the fair values, or even the fair values of these liabilities.
The impacts of exposure to interest rates, in the sensitivity scenarios estimated by the Company, are shown in the table below:
The concentration of credit risk associated to trade receivables is immaterial due to the diversification of the portfolio. Transactions with financial institutions (cash investments and borrowings and financing) are made with prime entities, avoiding the concentration risk. The credit risk of financial investments is assessed by setting caps for investment in the counterparts, taking into consideration the ratings released by the main international risk rating agencies for each one of such counterparts. As at December 31,
The liquidity risk also arises from the possibility of the Company being unable to discharge its liabilities on maturity dates and obtain cash due to market liquidity restrictions. Management uses its resources mainly to fund capital expenditures incurred on the expansion and upgrading of the network, invest in new businesses. The Company’s management monitors the continual forecasts of the liquidity requirements to ensure that the company has sufficient cash to meet its operating needs and fund capital expenditure to modernize and expand its network.
Capital management The Company seeks to manage its equity structure according to best market practices. The objective of the Company’s capital management strategy is to ensure that liquidity levels and financial leverage allow the sustained growth of the Group, the compliance with the strategic investment plan, and generation of returns to our shareholders. We may change our capital structure, according to existing economic and financial conditions, to optimize our financial leverage and debt management. The indicators used to measure capital structure management are: gross debt to accumulated twelve-month EBITDA (earnings before interest (financial income and expenses), taxes, depreciation, and amortization), and the interest coverage ratio, as shown below:
denominated cash to pay interest thereon. However, the next instalment maturing in February 2021 is hedged by NDFs.
At the end of
It is worth emphasizing that, in line with the provisions of the Plan, as amended, BNDES (Brazilian development bank) agrees that, as of the Court Ratification of the Amendment to the
Income taxes encompass the income tax and the social contribution. The income tax rate is 25% and the social contribution rate is 9%, generating aggregate nominal tax rate of 34%. The provision for income tax and social contribution is broken down as follows:
Cash investments and cash investments made by the Company and its subsidiaries in the years ended December 31,
The Company and its subsidiaries hold cash investments in Brazil and abroad for the purpose of earning interest on cash, benchmarked to CDI in Brazil, LIBOR for the US dollar-denominated portion, and EURIBOR for the euro-denominated portion.
The aging list of trade receivables is as follows:
The movements in the expected credit losses on trade receivables are as follows:
1See movements table
Movements in deferred income tax and social contribution
The stock of tax loss carryforwards in Brazil and foreign subsidiaries is approximately R$
Movements in leases payable
Maturity of long-term lease payments
The present value of leases payable was calculated based on a projection of future fixed payments, which do not take into consideration the projected Contracts not recognized as leases payable The Company elected
Supplemental information
¹Source: Anbima
23.TAX REFINANCING PROGRAM
The outstanding balance of the Tax Debt Refinancing Program is broken down as follows:
The amounts of the tax refinancing program created under Law 11941/2009, Provisional Act (MP) 766/2017, and Law 13469/2017, divided into principal, fine and interest, which include the debt declared at the time the deadline to join the program (Law 11941/2009 installment plan) was reopened as provided for by Law 12865/2013 and Law 12996/2014, are broken down as follows:
The payment schedule is as follows:
The tax debts, as is the case of the debts included in tax refinancing programs, are not subject to the terms of the judicial reorganization terms.
The Company elected to include in and settle through PERT only tax debts that in aggregate do not exceed the fifteen million Brazilian reais (R$15,000,000.00) ceiling set by Article 3 of Law 13496/2017. The tax debts included in said program were those being disputed at the administrative level in proceedings classified with a low likelihood of the Company winning and which, in the event of an unfavorable outcome, would result in a lawsuit—and entail all the associated costs—, the reason why the cost effectiveness of joining the program was quite positive, because of the benefits offered by PERT (especially the payment of just 5% of the debt in cash).
Balance breakdown
Pursuant to the laws applicable to labor, tax, and civil lawsuits, amounts disputed in lawsuits are adjusted for inflation on a monthly basis using the relevant adjustment indices, including the General Market Price Index (IGPM), Benchmark Rate (TR) and SELIC.
Summary of movements in provision balances
Breakdown of contingent liabilities, per nature The breakdown of contingent liabilities with a possible unfavorable outcome and, therefore, not recognized in accounting, is as follows:
Summary of the main matters related to the recognized provisions and contingent liabilities Provisions Labor
The Company is a party to a large number of labor lawsuits and calculates the related provision based on a statistical methodology that takes into consideration, but not limited to, the total number of existing lawsuits, the claims make in each lawsuit, the amount claimed in each lawsuit, the history of payments made, and the technical opinion of the legal counsel.
Tax The provisions for tax lawsuits are calculated individually taking into consideration Management and the legal counsel’s risk assessment. These contingencies are not included in the Judicial Reorganization Plan.
Civil
In light of the Amendment to the JRP, approved at the CGM held on September 8, 2020 and ratified by a court decision issued on October 5, 2020, the claims of Regulatory Agencies will be paid as provided for by Law 13988/2020. This law allows the negotiation of all the claims resulting from PADOS recognized as enforceable debt, to be payable in 84 installments, at a 50% discount of statutory fines, and with a six-month grace period. As such, the Company has once again reviewed the criteria for recognizing regulatory contingencies arising from
The Company disagrees and is challenging some of the alleged noncompliance events, and is also challenging the unfairness and unreasonableness of the amount of imposed fines in light of the pinpointed noncompliance event and has kept in balance sheet the amount it deems a probable loss.
The Company used to recognize a provision for the risk of unfavorable outcome in these lawsuits based on certain legal doctrine. In 2009 the Superior Court of Justice issued an Abstract—ruling that summarizes the majority understanding of a court on given matter—that led the Company to revise its assessment of the amount and the level of risk attributed to the lawsuits that discuss the matter. The Company, considering obviously the peculiarities of each decision and based on the assessment made by its legal department and outside legal counsel, changed its estimate on the likelihood of an unfavorable outcome from possible to probable. In 2009, the Company’s management, based on the opinions of its legal department and outside legal counsel, revised the measurement criteria of the provision for contingencies related to the financial interest agreements. Said revision contemplated additional considerations regarding the dates and the arguments of the final and unappealable decisions on ongoing lawsuits, as well as the use of statistical criteria to estimate the amount of the provision for those lawsuits. Based on a methodology prepared with the support of itsin-house and outside consultants, currently the Company provides for the lawsuits discussing this matter taking into consideration primarily, for purposes of calculating the amounts involved in the lawsuits within or the lawsuits out of the statute of limitations period, the following variables: (i) the number of lawsuits without payment; (ii) the average amount of historic losses; (iii) the average number of court settlements; and (iv) the effects of paying these contingencies At the end of 2010, the Superior Court of Justice set compensation criteria to be followed by the Company to the benefit of the shareholders of the former CRT for those cases new shares, possibly due, could not be issued because of the sentence issued. The criteria must be based on (i) the definition of the number of shares that each claimant would be entitled, measuring the capital invested at the book value of the share reported in CRT’s monthly trial balance on the date it waspaid-in, (ii) after said number of shares is determined, it must be multiplied
by its quotation on the stock exchange at the closing of the trading day the final and unappealable decision is issued, when the claimant becomes entitled to sell or disposed of the shares, and (iii) the result obtain must be adjusted for Based on the new profile and history of the termination of the judicial processes, in the context of the JRP, and, using the loss risk assessment, Management adjusted the estimate of the provisioning made in 2019. In addition, there may be significant changes in the items above, mainly regarding the market price of Company shares.
The Company is a party to a large number of lawsuits filed in small claims courts and calculates the related provision based on a statistical methodology that takes into consideration, but not limited to, the total number of existing lawsuits, the claims make in each lawsuit, the amount claimed in each lawsuit, the history of payments made, and the technical opinion of the legal counsel and the impacts of the Judicial Reorganization Plan ratified on January 8, 2018.
The provisions for these contingencies are calculated individually taking into consideration Management and the legal counsel’s risk assessment.
Contingent liabilities The Company and its subsidiaries are also parties to several lawsuits in which the likelihood of an unfavorable outcome is classified as possible, in the opinion of their legal counsel, and for which no provision for contingent liabilities has been recognized. The main contingencies classified with possible likelihood of an unfavorable outcome, according to the Company´s management’s opinion, based on its legal counsel’s assessment, are summarized below: Labor Refer to several lawsuits claiming, but not limited to, the payment of salary differences, overtime, hazardous duty and health hazard premium, and joint liability, which total approximately R$299,178 (R$797,927
Tax The main ongoing lawsuits have the following matters:
Civil The Fenapas Guarantees The Company has bank guarantee letters and guarantee insurance granted by several financial institutions and insurers to guarantee commitments arising from lawsuits, contractual obligations, and biddings with ANATEL. The adjusted amount of contracted bonds and guarantee insurances, effective
at December 31,
The Capital Increase – Claim Capitalization amounting to R$10,600,097 with the issue of 1,514,299 new book-entry, registered common shares without par value was approved at the Company’s Extraordinary Shareholders’ Meeting held on September 17, 2018. The fair value of the shares issued was R$11,613,980. On October 28, 2018, the Company commenced the issuance and delivery of warrants and ADWs exercised by their holders and issued 115,914 common shares. The process was completed on January 4, 2019. The Subscription Warrants that had not been exercised by January 2, 2019 were cancelled. On January 25, 2019, the Company completed the capital increase provided for by the JRP (Capital
without par value. The capital increase attributed to the capital and the capital reserves was R$500,466 and R$3,837,009, Subscribed andpaid-in capital is R$32,538,937 (R$
As at December 31, The Company is authorized to increase capital, through a Board of Directors’ decision, either in common or preferred shares, until its share capital totals R$ By decision of the Shareholders’ Meeting or the Board of Directors, the Company’s share capital can be increased by capitalizing either retained earnings or prior reserves, allocated to this purpose by the Shareholders’ Meeting. Under these terms, a capitalization can be made without changing the number of shares. Issued capital is represented by common and preferred shares, without par value, and in case of capital increases there is not constraint to keep the current ratio between these two types of shares.
By decision of the Shareholders’ Meeting or the Board of Directors, preemptive rights over the issue of shares, subscription warrants, or convertible debentures can be suspended in the cases provided for by Article 172 of the Brazilian Corporate Law. At the Company’s Annual Shareholders’ Meeting held on April
On July 27, 2018, the Company delivered 116,251,405 common shares, previously held by PTIF, to the Qualified Bondholders, as part of the restructuring of the qualified bonds. The fair value related
to the conversion of the Senior Notes settled with the delivery of treasury shares of R$773,072. The treasury shares delivered were written off as a contra entry to capital reserves, amounting to R$2,727,842. In February 2019, the Company bought back 1,800,000 preferred shares, in trades in the stock market, at a total cost of R$2,572 to ensure the compliance of the obligation assumed by the Company to transfer own shares held in treasury to shareholder Bratel, wholly-owned subsidiary da Pharol, in the context of the settlement entered into by both companies (Note 1). In April 2019, due to confirmation of the settlement entered into by Oi and Pharol, 32,000,000 common shares and 1,800,000 preferred shares were delivered to Bratel, totaling 33,800,000 shares as provided for by the settlement entered into by the parties (Note 1).
The capital reserves consist mainly of the reserves described below and according to the following practices: Special merger goodwill reserve: represents the net amount of the balancing item to Special merger Other capital reserves: represented mainly by: (i) R$1,933,200 arising from the capitalization of the earnings reserves in February 2015; (ii) R$3,837,009 related to the capital increase with new funds
As mentioned in item (a) of this Note, under the commitment agreement entered into with the backstoppers, the Company issued 272,148,705 new common shares, as compensation for the commitments assumed in said agreement, at a cost of R$337,464, recognized in share issuance cost as a contra entry to the capital increase, plus R$86,180 related to expenses incurred in the issue process.
On January 16, 2019, the Company issued 1,530,457,356 common shares to the holders of subscription warrants. On January 21, 2019, the Company issued 91,080,933 common shares to the holders of subscription rights that requested subscriptions of the excess common shares. On January 25, 2019, 1,604,268,162 New Common Shares were subscribed and paid in. The end of the capital increase process, through the subscription and payment of all 3,225,806,451 New Common Shares issued as part of the Capital
The common and preferred shareholders have different rights in terms of dividends, voting rights, and liquidation, as prescribed by the Company’s bylaws. Accordingly, basic and diluted earnings (losses) per share were calculated based on profit (loss) for the year available to the common and preferred shareholders. Basic Basic earnings Diluted Diluted earnings (loss) per share are calculated by adjusting the weighted average number of outstanding common and preferred shares, to estimate the dilutive effect of all convertible securities. The table below shows the calculations of basic and diluted earnings per share:
Preferred shares will become voting shares if the Company does not pay minimum dividends to which preferred shares are entitled under the Company’s Bylaws during three consecutive years.
The Company and its subsidiaries sponsor retirement benefit plans (“Pension Funds”) for their employees, provided that they elect to be part of such plan, and current beneficiaries. The table below shows the benefit plans existing at December 31,
SISTEL – Fundação Sistel de Seguridade Social FATL – Fundação Atlântico de Seguridade Social Whenever mentioned in this Note, for purposes of the pension plans, the Company may also be referred to as the “Sponsor”. The sponsored plans are valued by independent actuaries at the end of the annual reporting period. For the year ended December 31, The sponsored defined benefit plans are closed to new entrants because they areclose-end pension funds. Participants’ and the sponsors’ contributions are defined in the funding plan. Actuarial liabilities are recognized for the sponsored defined benefit plans that report an actuarial deficit. For the plans that report an actuarial surplus, assets are recorded when there is an express authorization for offsetting them against future employer contributions. Provisions for pension plans Refer to the recognition of the actuarial deficit of the defined benefit plans, as shown below:
Assets recognized to be offset against future employer contributions The Company recognized TCSPREV Plan assets related to: (i) sponsor contributions which participants that left the Plan are not entitled to redeem; and (ii) part of the Plan’s surplus attributed to the sponsor. The assets recognized are used to offset future employer contributions. These assets are broken down as follows:
Characteristics of the sponsored pension plans
FATL,close-end, multiple sponsor, multiple plan pension fund, is a nonprofit, private pension-related entity, with financial and administrative independence, headquartered in Rio de Janeiro, State of Rio de Janeiro, engaged in the management and administration of pension benefit plans for the employees of its sponsors. Plans
Defined The contributions from Active Participants of thePBS-Telemar Benefit Plan correspond to the sum of: (i) 0.5% to 1.5% of the Contribution Salary (according to the participant’s age on enrollment date); (ii) 1% of Contribution Salary that exceeds half of one Standard Unit; and (iii) 11% of the Contribution Salary that exceeds one Standard Unit. The Sponsors’ contributions are equivalent to 8% of the payroll of active participants of the plan. The plan is funded under the capital formation approach.
Variable contribution pension
A participant’s regular contribution is comprised of two portions: (i)
from participants are optional and can be made in multiples of 0.5% of the Contribution Salary, for a period of not less than six (6) months. Nonrecurring extraordinary contributions from a participant are also optional and cannot be lower than 5% of the Contribution Salary ceiling. The Plan’s Charter requires the parity between participants’ and sponsors’ contributions, up to the limit of 8% of the Contribution Salary, even though a sponsor is not required to match Extraordinary Contributions made by participants. The plan is funded under the capital formation approach.
Variable contribution pension On November 30, 2018, date of the actual merger, TCSPREV Benefits Plan merged the BrTPREV Benefits Plan (CNPBNo. 2002.0017-74) to become the full successor of this Plan’s rights and obligations, assuming all its assets and liabilities. This merger was approved by PREVIC Administrative Rule 995, of October 24, 2018, published on Federal Official Gazette No. 208 of October 29, 2018. With the recognition and registration of the merger, the Participants and Beneficiaries linked to BrTPREV automatically became Participants and Beneficiaries TCSPREV, in accordance with the categories of Beneficiaries existing on the day prior to the merger date. The monthly, mandatory Basic Contribution of the Active Participants of the TCSPREV and BrTPREV corresponds to the outcome obtained by applying a percentage that may range from 3% to 8% on the Contribution Salary, pursuant to the age and option of each Participant. The Plan’s Charter provides for contribution parity by the Participants and the Sponsors. The monthly Contribution of the Fundador/Alternativo Plan Participants, previously merged with and into BrTPREV, corresponds to the sum of: (i) 3% charged on the Contribution Salary; (ii) 2% charged on the Contribution Salary that exceeds half of the highest Official Pension Scheme Contribution Salary, and (iii) 6.3% charged on the Contribution Salary that that exceeds the highest Official Pension Scheme Contribution Salary. The Plan’s Charter provides for contribution parity by the Participants and the Sponsors. In accordance with regulatory criteria, the Sponsors’ contributions, related to TCSPREV and BrTPREV Participants are automatically cancelled on the month subsequent to the month when the same Participant reaches the age of 60 years old, 10 years of Credited Services, and 10 years of Plan membership. For participants who migrated from thePBS-TCS Plan to the TCSPREV Plan, the Sponsors’ contributions are cancelled on the month subsequent to the month when a Participant reaches the age of 57 years old, 10 years of uninterrupted membership ofPBS-TCS and the TCSPREV Plan, 10 years of Credited Services at the Sponsor, and 35 years of registration with the official Social Security scheme.
The TCSPREV and BrTPREV The Sporadic Contribution is optional and both its amount and frequency are freely chosen by the Participant, as defined by the TCSPREV or BrTPREV Plan, provided it is not lower than one (1) UPTCS (TCSPREV Pension Unit) or one (1) UPBrT (BrT’s Pension Unit), respectively. The Sponsor does not make any counterpart contribution to the Participant’s Voluntary or Sporadic contribution. The plan is funded under the capital formation approach.
Defined The contributions from Active Participants of thePBS-TNC Benefit Plan correspond to the sum of: (i) 0.28% to 0.85% of the Contribution Salary (according to the participant’s age on enrollment date); (ii) 0.57% of Contribution Salary that exceeds half of one Standard Unit; and (iii) 6.25% of the Contribution Salary that exceeds one Standard Unit. The Sponsors’ contributions are equivalent to a percentage of the payroll of the employees who are Active Plan Participants, as set on an annual basis in the Costing Plan. The contribution of the Current Beneficiaries (only those who receive a retirement allowance) is equivalent to a percentage to be set on an annual basis in the Costing Plan, applied on the overall benefit, limited to the amount of the allowance. The plan is funded under the capital formation approach.
Defined Contribution Pension Benefit Plan, enrolled with the On January 12, 2018, pursuant to Administrative Rule 22, published on the Federal Official Gazette of January 16, 2018, PREVIC approved the new text of the Plan’s Charter, which closes the number of CELPREV participants and prevents new entrants. The Participant’s Basic Regular Contribution corresponds to the product obtained by applying a percentage, 0%, 0.5%, 1%, 1.5% or 2%, depending on each participant’s option, to his or her Contribution Salary (SP). The Sponsors contribute with an amount equivalent to such contribution, less the monthly, mandatory contribution of each Sponsor required to fund risk costs (Sick Pay Benefit). The Additional Regular Contribution corresponds The Participant’s Basic Regular Contribution corresponds to the product obtained by applying a percentage ranging from 0% to 6%, in multiples of
0.5%, as elected by each participant, on the Contribution Salary exceeding 10 Plan Benchmark Units (URPs). The Sponsors contribute with an equivalent amount. The Participant’s Voluntary Contribution corresponds to a whole number percentage, freely elected by each participant, applied on the Contribution Salary. The Sponsor does not make any counterpart contribution to this contribution. The Sponsor’s Nonrecurring Contribution is voluntarily and corresponds to applying a percentage ranging from 50% to 150% of the aggregate Basic Regular and Additional Regular Contributions of the Sponsor, pursuant to consistent,non-discriminatory criteria, made with the frequency set by the Sponsor. The Sponsor’s Special Contribution is specific for new Plan members who have joined the plan within 90 days starting March 18, 2004. The Sponsor’s monthly, mandatory Risk Contribution, required to fund the Sick Pay Benefit, corresponds to percentage ofNon-migrating Participants’ Contribution Salary payroll. The plan is funded under the capital formation approach.
SISTEL is a nonprofit, private welfare and pension entity, established in November 1977, which is engaged in creating and operating private plans to grant benefits in the form of lump sums or annuities, supplementary or similar to the government retirement pensions, to the employees and their families who are linked to SISTEL’s sponsors.
Plans
Defined benefit plan jointly sponsored with other sponsors associated to the provision of telecommunications services and offered to participants who held the status of beneficiaries on January 1, 2000. Contributions to thePBS-A are contingent on the determination of an accumulated deficit. As at December 31, In December 2019, the National Pension Plan Authority (PREVIC) approved the allocation of a special reserve of thePBS-A Benefit Plan, with the reversal of amounts to sponsors and improvement of benefits, in the form of temporary income, to the beneficiaries. The total amount of the Company’s share of thePBS-A’s surplus corresponds to R$669,054 (R$140,274 in the Company), to be received in 36 monthly installments, adjusted by the Plan’s profitability,
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