Annual Report • Apr 28, 2017
Annual Report
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PHAROL, SGPS S.A.
ANNUAL REPORT 2016
| 01 MANAGEMENT REPORT | 3 |
|---|---|
| 02 STANDALONE FINANCIAL STATEMENTS | 7 |
| 03 QUALIFIED HOLDINGS | 36 |
| 04 INFORMATION TO BE PRESENTED UNDER THE TERMS OF THE ARTICLE 447 | |
| OF THE CODE FOR COMMERCIAL SOCIETIES | 39 |
"PHAROL", "Group PHAROL", "Group" and "Company" is a reference to the companies that are part of PHAROL SGPS, S.A. or to one of them, depending on the context.
As at December 31, 2016, PHAROL had as its main assets (1) 183,662,204 common shares of Oi, S.A. ("Oi"), representing 27.2% of the total share capital of Oi (excluding treasury shares), (2) debt securities of Rio Forte Investments S.A. ("Rio Forte") with a nominal value of Euro 897 million, and (3) the Call Option on 42,691,385 common shares and 85,382,770 preferred shares of Oi with an exercise price of R\$20.104 per common share and R\$18.529 per preferred share, adjusted by the Brazilian rate CDI plus 1.5% per annum, and with a 6-year maturity. The Call Option has partial expiration dates throughout the period so the option volume is reduced by 10% at the end of the first year and by 18% per year thereafter. On March 30, 2016, as part of the option has reached its maturity, PHAROL's call option is from that date onwards on 42,691,385 common shares and 85,382,770 preferred shares of Oi.
As of December 31, 2014, after the capital increase of Oi, concluded on May 5, 2014 (the "Oi Capital Increase"), PHAROL held a 39.7% direct and indirect stake in Oi. This included a portion classified as a non-current asset held for sale, following the Exchange agreement ("Exchange") entered into on September 8, 2014 and completed on March 8, 2015, and the remaining stake of 22.8% classified as investment in joint ventures and associates and therefore accounted for using the equity method.
On March 30, 2015, the Exchange was completed, whereby PHAROL (1) transferred to Portugal Telecom International Finance, B.V. ("PT Finance"), a subsidiary of Oi, an aggregate amount of 47,434,872 common shares and 94,869,744 preferred shares of Oi, and (2) received from PT Finance debt securities of Rio Forte with a nominal value of Euro 897 million and a call option on the transferred shares ("Call Option"). After the completion of the Exchange, PHAROL held an effective stake of 27.5% in Oi corresponding to the 22.8% stake referred above plus 4.7% due to the decrease in the number of outstanding shares of Oi.
The relevant agreements for the implementation of the New Structure of Oi were signed on July 22, 2015. On September 1, 2015, a General Meeting of Shareholders of Oi was held where the New Structure was approved.
As of September 30, 2015, after the implementation of the New Structure, but prior to the voluntary conversion of preferred shares to ordinary shares of Oi, PHAROL held, directly or indirectly through wholly owned subsidiaries, 84,167,978 common shares and 108,016,749 preferred shares of Oi.
As of October 8, 2015, following the voluntary conversion of preferred shares into common shares of Oi, PHAROL now holds, directly and indirectly through wholly owned subsidiaries, 183,662,204
common shares of Oi, representing 27.2% of total share capital of Oi (excluding treasury shares), that represents the present situation. PHAROL's voting rights in Oi are limited to 15% of the total common shares of Oi.
With the implementation of the New Structure on July 30, 2015, the shareholders' agreements, through which joint control of Oi was exercised, were terminated. Up to that date, PHAROL accounted for its stake in Oi as an Investment in Joint Ventures. Currently, PHAROL considers it has significant influence over Oi and classifies it as an associate company. As a result, from July 30, 2015 the investment in Oi continues to be accounted for according to the equity method, based on PHAROL's economic stake in Oi's results (27.18% as at December 31, 2016).
On April 29 and May 19, 2016, PHAROL, due to a corporate reorganization, transferred direct ownership of 128,213,478 common shares issued by Oi S.A., to its 100% owned subsidiary BRATEL B.V.. Due to the Corporate Reorganization, BRATEL B.V. now directly holds (and PHAROL indirectly holds) 183,662,204 common shares of Oi S.A., which represent 22.24% of Oi S.A.'s entire share capital (27.18% excluding treasury shares).
In 2016, the net loss amounting to Euro 75.1 million, mainly reflects (1) the loss of Euro 48.7 resulting from the impairment charge in respect of the debt instruments issued by Rio Forte (2) a Euro 4.9 million loss relating to the decrease of the Call Option (3) the Euro 7 million consolidated operational costs, and (4) a Euro 13.2 million net loss regarding the impairment charge in respect of investments in Oi and from the appropriation of its portion in Oi's results, including their adjustments.
Apart from managing its investments, the Company did not directly conduct any other business activity.
There are no outstanding amounts overdue to the Portuguese State and the Portuguese Social Security System.
The Company did not enter into any material businesses or transactions with the members of its Board of Directors and the Fiscal Council, except for those mentioned in Note 21 to the Consolidated Financial Statements as at December 31, 2016.
The main events of the year ended December 31, 2016 and recent developments are described in the Consolidated Annual Report of PHAROL.
Considering that in the year ended December 31, 2016 a negative net result of Euros 75,077,177 was obtained, the Board of Directors of PHAROL proposes that they be transferred to the Company's Retained Earnings.
Lisbon, April 27, 2017
Luís Maria Viana Palha da Silva, Chairman of the Board of Directors and Managing Director
André Cardoso de Meneses Navarro, Board Member
José Manuel Melo da Silva, Board Member
João do Passo Vicente Ribeiro, Board Member
João Manuel Pisco de Castro, Board Member
Jorge Telmo Maria Freire Cardoso, Board Member
José Mauro Mettrau Carneiro da Cunha, Board Member
Maria do Rosário Pinto-Correia, Board Member
Pedro Zañartu Gubert Morais Leitão, Board Member
Rafael Luís Mora Funes, Member of the Executive Committee and Board Member, resigned on March 7, 2017
| Euro | |||
|---|---|---|---|
| Notes | 2016 | 2015 | |
| ASSETS | |||
| Non-Current Assets | |||
| Tangible assets | 214,245 | 351,546 | |
| Intangible assets | 13,429 | 21,911 | |
| Financial investments - equity method of accounting | 6 | 141,244,557 | 103,855,812 |
| Other financial assets | 7 | 87,324,070 | 141,045,340 |
| Total non-current assets | 228,796,300 | 245,274,610 | |
| Current Assets | |||
| State and other public entities | 10 | 19,357 | 3,729 |
| Other accounts receivable | 391,943 | 671,326 | |
| Cash and bank deposits | 4 | 28,291,217 | 63,175,283 |
| Total current assets | 28,702,518 | 63,850,338 | |
| Total assets | 257,498,818 | 309,124,948 | |
| SHAREHOLDERS' EQUITY | |||
| Share capital | 11 | 26,895,375 | 26,895,375 |
| Treasury shares | 11 | (179,675,995) | (178,071,827) |
| Legal reserve | 11 | 6,773,139 | 6,773,139 |
| Other reserves | 11 | 264,281,624 | 290,251,390 |
| Adjustments to financial assets | 11 | (1,506,547,853) | (1,558,435,034) |
| Retained earnings | 11 | 1,711,919,540 | 2,405,811,843 |
| Net income | (75,077,177) | (693,892,303) | |
| Total equity | 248,568,653 | 299,332,585 | |
| LIABILITIES | |||
| Non-Current Liabilities | |||
| Loans obtained | 103,487 | 121,281 | |
| Total non-current liabilities | 103,487 | 121,281 | |
| Current Liabilities | |||
| Provisions | 12 | 75,858 | 75,858 |
| Loans obtained | 8,430 | 15,851 | |
| Suppliers | 13 | 2,323,182 | 1,852,839 |
| Investment suppliers | 7,670 | 7,669 | |
| Accrued expenses | 14 | 5,404,487 | 6,474,334 |
| State and other public entities | 10 | 150,502 | 387,980 |
| Other accounts payable | 8 | 856,549 | 856,549 |
| Total current liabilities | 8,826,678 | 9,671,081 | |
| Total liabilities | 8,930,164 | 9,792,362 | |
| Total liabilities and shareholders' equity | 257,498,818 | 309,124,947 |
| PHAROL, SGPS, S.A. | |||
|---|---|---|---|
| INCOME STATEMENT | |||
| FOR THE PERIODS ENDED 31 DECEMBER 2016 AND 31 DECEMBER 2015 | |||
| Euro | |||
| Notes | 2016 | 2015 | |
| Equity in earnings/(losses) of affiliated companies | 15 | (15,496,828) | (601,548,946) |
| Supplies and external services | 16 | (2,396,863) | (8,202,115) |
| Wages and salaries | 17 | (1,661,158) | (3,117,990) |
| Indirect taxes | (561,031) | (3,223,615) | |
| Increases/(reductions) in fair value | 18 | (54,439,685) | (62,952,391) |
| Other income and gains | 739,708 | 707,483 | |
| Other expenses and losses | 19 | (1,189,764) | (16,720,100) |
| INCOME BEFORE DEPRECIATION AND AMORTISATION, FINANCING EXPENSES AND TAXES | (75,005,622) | (695,057,674) | |
| Depreciation and amortisation ((expenses)/reversals) | (83,638) | (103,507) | |
| OPERATING INCOME (BEFORE FINANCING EXPENSES AND TAXES) | (75,089,260) | (695,161,180) | |
| FINANCIAL LOSSES AND (GAINS) Interest and related income |
63,990 | 1,496,090 | |
| Interest and related expenses | (17,233) | (165,435) | |
| INCOME BEFORE TAXES | (75,042,503) | (693,830,526) | |
| Income taxes | 9 | (34,674) | (61,777) |
| Net income (loss) from continuing operations | (75,077,177) | (693,892,303) | |
| Earnings per share | |||
| Basic | 20 | (0.09) | (0.79) |
| Diluted | 20 | (0.09) | (0.79) |
| Euro | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Share | Treasury | Legal | Other | Adjustments to | Retained | Net | Total shareholders' |
||
| capital | shares | reserve | reserves | financial assets | earnings | income | equity | ||
| Balance as at 31 December 2014 | A | 26,895,375 (178,071,826) | 6,773,139 290,251,390 | (1,399,158,917) | 2,580,894,821 | (175,082,979) | 1,152,501,003 | ||
| Changes in the period: | |||||||||
| Foreign currency translation adjustments | - | - | - | - | (53,852,297) | - | - | (53,852,297) | |
| Other changes recognized in shareholders' equity | - | - | - | - | (105,423,819) | - | - | (105,423,819) | |
| B | - | - | - | - | (159,276,116) | - | - | (159,276,116) | |
| Net income | C | - | - | - | - | - | - | (693,892,303) | (693,892,303) |
| Comprehensive income | B+C | - | - | - | - | - | - | - | (853,168,418) |
| Operations with shareholders: | - | - | - | - | - | - | - | ||
| Application of the previous year's earnings | - | - | - | - | - | (175,082,979) | 175,082,979 | - | |
| D | (175,082,979) | 175,082,979 | - | ||||||
| Balance as at 31 December 2015 | E=A+B+C+D | 26,895,375 (178,071,826) | 6,773,139 290,251,390 | (1,558,435,034) | 2,405,811,843 | (693,892,303) | 299,332,586 | ||
| Changes in the period: | |||||||||
| Foreign currency translation adjustments | - | - | - | - | 103,110,793 | - | - | 103,110,793 | |
| Other changes recognized in shareholders' equity | - | (1,604,169) | - | (25,969,766) | (51,223,613) | - | - | (78,797,548) | |
| F | - | (1,604,169) | - (25,969,766) | 51,887,180 | - | - | 24,313,245 | ||
| Net income | G | - | - | - | - | - | - | (75,077,177) | (75,077,177) |
| Comprehensive income | F+G | - | - | - | - | - | - | - | (50,763,932) |
| Operations with shareholders: | - | - | - | - | - | - | - | ||
| Application of the previous year's earnings | - | - | - | - | - | (693,892,303) | 693,892,303 | - | |
| H | (693,892,303) | 693,892,303 | - | ||||||
| Balance as at 31 December 2016 | I=E+F+G+H | 26,895,375 (179,675,995) | 6,773,139 264,281,624 | (1,506,547,853) | 1,711,919,540 | (75,077,177) | 248,568,653 |
| PHAROL, SGPS, S.A. | |||
|---|---|---|---|
| STATEMENT OF CASH FLOWS | |||
| FOR THE PERIODS ENDED 31 DECEMBER 2016 AND 31 DECEMBER 2015 | |||
| Euro | |||
| Notes | 2016 | 2015 | |
| OPERATING ACTIVITIES | |||
| Payments to suppliers | (4,197,091) | (37,853,288) | |
| Payments to employees | (1,935,571) | (3,377,006) | |
| Payments relating to income taxes | (23,869) | 748,373 | |
| Other cash receipts, net | (181,450) | (143,429) | |
| Cash flows from operating activities related to continuing operations (1) | (6,337,981) | (40,625,350) | |
| INVESTING ACTIVITIES | |||
| Cash receipts resulting from: | |||
| Tangible and intangible assets | 5,300 | 89,975 | |
| Interest and related income | 64,145 | 278,482 | |
| 69,445 | 368,457 | ||
| Payments resulting from: | |||
| Financial investments | 4.a. | (1,000,000) | - |
| Tangible and intangible assets | (979) | (349,683) | |
| Cash flows from investing activities related to continuing operations (2) | (1,000,979) (931,534) |
(349,683) 18,774 |
|
| FINANCING ACTIVITIES | |||
| Payments resulting from: | |||
| Loans repaid | (27,048) | (202,541) | |
| Interest and related expenses | (13,828) | (1,831,008) | |
| Acquisition of Own Shares | 4.b. | (1,603,908) | - |
| Dividends | 4.c . | (25,969,766) | - |
| (27,614,550) | (2,033,549) | ||
| Cash flows from financing activities related to continuing operations (3) | (27,614,550) | (2,033,549) | |
| Cash and cash equivalents at the beginning of the period | 63,175,283 | 105,815,419 | |
| Change in cash and cash equivalents (4)=(1)+(2)+(3) | (34,884,065) | (42,640,125) | |
| Effect of exchange differences | 0 | (11) | |
| Cash and cash equivalents at the end of the period | 4.d. | 28,291,217 | 63,175,283 |
(Amounts in Euro, otherwise it will be referred)
PHAROL, SGPS, S.A. ("PHAROL", "PHAROL SGPS" or "Company") was founded on June 23, 1994 pursuant to Decree -Law No. 122/94, through the merger of the following companies: Telecom Portugal, S.A., Telefones de Lisboa e Porto (TLP), S.A. ("TLP") and Teledifusora de Portugal, S.A. ("TDP"), with reference to January 1, 1994. As a result of the privatization process, between June 1, 1995 and December 4, 2000, PHAROL's share capital is mainly owned by private shareholders. On December 12, 2000, Portugal Telecom, S.A. changed its name to Portugal Telecom, SGPS, S.A. ("PT SGPS") and its operation to a capital management company. On May 29, 2015, the company changes its name to PHAROL, SGPS S.A.
On May 5, 2014, Oi underwent a capital increase amounting to 13,960 million reais, composed of: (1) 5,710 million reais (Euro 1,750 million based on the exchange rate as of February 21, 2014) corresponding to 1,045,803,934 ordinary shares and 1,720,252,731 preferred shares subscribed by PHAROL, through a contribution in kind of the PT Assets, defined as the PHAROL's 100% stake in PT Portugal, which as of that date included all operational businesses of the PHAROL Group, with the exception of the subsidiaries Bratel BV, Bratel Brasil, PTB2 and PHAROL, and of the investment in Oi, Contax and their controlling shareholders; and 8,250 million reais in cash subscribed by investors other than PHAROL. The valuation of PT Assets of 5,710 million reais was determined on the basis of the valuation of PT Portugal by Banco Santander (Brasil), SA on the date of the share capital increase. As a result of PHAROL' contribution for the capital increase of Oi, PHAROL increased its effective interest in Oi from 23.2%, previously held through Bratel Brasil, to an economic interest of 39.7%, held through a total direct interest of 35.8% (32.8% in PHAROL and 3.0% in Bratel Brasil) and an indirect interest of 3.9% held by Bratel Brasil through the controlling shareholders of Oi.
On March 28, 2011, PHAROL completed the initial acquisition of investments in Telemar Norte Leste, S.A. ("Telemar"), which belongs to the Oi Group, and Contax, for the amount of 8,437 million reais, and entered into several agreements with the controlling shareholders of these companies. As a result of this transaction, PHAROL acquired an effective stake of 25.3% in TmarPart (parent company of the Oi Group on that date) and 14.1% in Contax. Within the scope of this acquisition, PHAROL, AG Telecom Participações ("AG") and LF Tel, SA ("LF"), two of the main shareholders of TmarPart, the controlling shareholder of Oi, entered into a shareholders' agreement with unanimous voting procedures for their representatives in the Board of Directors of TmarPart regarding the strategic, financial and operating decisions relating to the activity of the Oi Group. Therefore, in accordance with the provisions of NCRF 13 Interests in Joint Ventures and Investments in Associates ("NCRF 13"), the Company concluded that it contractually shares the control of TmarPart, therefore the Oi investment was classified as a joint venture and thus accounted for in accordance with the equity method.
On May 5, 2014, directly and indirectly, PHAROL held investments in debt securities issued by Rio Forte Investments, S.A. ("Rio Forte", a holding company of the Espírito Santo Group with registered address in Luxembourg essentially for their non-financial services) amounting to Euro 897 million, which formed part of the PT Assets and were contributed in the capital increase of Oi. The composition of the outstanding amount as of May 5, 2014 was as follows:
On July 15 and 17, 2014 the maturity of these instruments occurred, but the issuer did not settle its obligations.
Rio Forte requested the adoption of the controlled management regime in accordance with the Luxembourg legislation, although it was their understanding that they did not have the financial capacity to meet their financial commitments, a situation which was thought to be the most protective of their creditors' interests, and that was rejected by the Luxembourg court. As a result of that rejection, Rio Forte was declared insolvent by the Luxemburg Court on December 8, 2014, and went into liquidation on the same date.
On July 28, 2014, following the default by Rio Forte, PHAROL and Oi agreed on the main terms for the exchange of debt securities of Rio Forte held on that date by PT Finance and PT Portugal, amounting to Euro 897 million for 47,434,872 common shares and 94,869,744 preferred shares of Oi (after the reverse stock split done by Oi in December 2014) held on that date by PHAROL. On September 8, 2014, this agreement was approved in the General Shareholders' Meeting of PHAROL and following such approval the parties involved concluded the respective final contracts, the terms of which established that:
On December 31, 2014, as stated above, execution of the exchanges and the purchase option were pending approval by the CVM. On March 4, 2015, the CVM approved the above contracts, conditional upon their approval at Oi's General Shareholders' Meeting, which occurred on March 26, 2015. The exchange was executed on March 30, 2015. On March 24, 2015, PHAROL came to an agreement with Oi, PT Portugal, PT Finance and TmarPart for the Private Instrument of Assignment of Rights and Obligations and Other Fees ("Assignment Agreement"), by means of which PT Portugal transferred the Rio Forte Instruments to PT Finance, and conceded to PT Finance all pertaining rights and obligations in the terms of the Exchange Agreement ("Assignment").
On March 30, 2015, the Exchange was concluded, by means of which PHAROL (1) deposited Oi's shares object of the Exchange with the Depositary; and (2) instructed the Depositary to register the transfer of 47,434,872 ADSs ON and 94,896,744 ADSs PN to PT Finance, representing Oi's shares object of the Exchange. Therefore, on March 30, 2015, PHAROL transferred the ADSs Object of the Exchange to PT Finance, and PT Finance transferred to PHAROL the Rio Forte Instruments in the total main amount of Euro 897million.
Additionally, on March 30, 2015, the Call Option was effective.
A change ("Amendment") was signed to the Share Purchase Option Contract and Other Agreements, entered into on September 8, 2014, such as mentioned above, which will enable PHAROL to liquidate its Oi share purchase option through sale on the market, giving Oi the right of first refusal in the acquisition of the Option if PHAROL should decide to sell it to third parties without previous consent by Oi. The Amendment is subject to approval of Oi's general shareholders' meeting and, if applicable, to the CVM's approval. Oi committed to convene a general meeting to discuss the Amendment, and the reference shareholders of Oi committed to vote in approval of the Amendment.
On March 31, 2015, the Board of Directors of PHAROL concluded negotiations with the other shareholders pertaining to Oi to the extent of signing a new agreement between the parties in relation to the company structure and the administration of Oi. In view of the impossibility of implementing migration from CorpCo to the segment called Novo Mercado of the BM&FBovespa by March 31, 2015, the deadline stipulated in the agreements signed on September 8, 2014, it became essential to sign a new agreement, which allowed Oi to anticipate the principal benefits announced to shareholders at the time that Oi's capital increase was realized on May 5, 2014, without, however, failing to make every effort to migrate to the Novo Mercado. Thus, the parties agreed to a new company structure model and administration of Oi ("New Structure"), that in addition to the benefits and objectives disclosed before, are characterized by the following:
order to give all of the shareholders the possibility of exercising the voting right and to maximize the possibility of existence of a single class of shares; (ii) implementation of the principle of one share, one vote. However, to preserve the equilibrium between shareholders and the distribution of desired control at the time of the Capital Increase of Oi, inclusion of a 15% limit on the voting right in Oi's Corporate Bylaws, applicable to all of its shareholders was agreed upon; this limitation will cease to exist through verification of certain events, namely in the case of capital increase, operation of company reorganization or public offering of shares, in any case that results in the dilution of the current shareholder base (or acquisition of a stake, where applicable) greater than 50%; (iii) leveraging increase in liquidity, eliminating subjection to lock-up agreements of any shareholder; (iv) the election of a new Board of Directors at Oi with significant participation of independents, where the previously existing parity in CorpCo between the PHAROL representatives and those of the Brazilian shareholders will be maintained; (v) extinction of TmarPart by incorporation into Oi, which will determine the end of the TmarPart and other controlling companies' shareholders' agreements, thus ensuring-the distribution of Oi's shareholder control; (vi) possibility of using financial synergies through incorporation of Oi's controlling companies, directly and indirectly.
On July 22, the relevant documents for the implementation of the Oi's New Structure were signed and on September 1, 2015, Oi's General Assembly approved its implementation.
On September 30, 2015, after the implementation of the New Structure and prior to the voluntary conversion of preferred shares into common shares of Oi, PHAROL held, directly and through 100% subsidiaries held 84,167,978 company shares and 108,016,749 preferred shares of Oi.
On October 8, 2015, following the approval of voluntary conversion of preferred shares into common shares of Oi, the PHAROL held, directly and indirectly through 100% subsidiaries owned, 183,662,204 common shares of Oi, representing 27.2% of the total share capital of Oi (excluding treasury shares). PHAROL's right to vote in Oi is limited to 15% of the total common shares.
The shareholders' agreements through which joint control of Oi was exercised, ended on July 30, 2015 with the implementation of the New Structure. Until then PHAROL proceeded to recognize its participation in Oi as an investment in joint ventures. PHAROL considers that it currently has significant influence over Oi, which is considered an associate. Thus, from July 30, 2015 participation in Oi continued to be measured according to the equity method, less any impairment, reflecting the stake in Oi's financial statements (27.18% as at December 31, 2016).
On April 29 and May 19, 2016, PHAROL, due to a corporate reorganization, transferred direct ownership of 128,213,478 common shares issued by Oi S.A., to its 100% owned subsidiary BRATEL B.V.. Due to the Corporate Reorganization, BRATEL B.V. now directly holds (and PHAROL indirectly holds) 183,662,204 common shares of Oi S.A., which represent 22.24% of Oi S.A.'s entire share capital (27.18% excluding treasury shares).
As at December 31, 2016, PHAROL had as its main assets (1) 183,662,204 common shares of Oi, S.A. ("Oi"), representing 27.2% of the total share capital of Oi (excluding treasury shares), (2) debt securities of Rio Forte Investments S.A. ("Rio Forte") with a nominal value of Euro 897 million, and (3) the Call Option on 42,691,385 common shares and 85,382,770 preferred shares of Oi with an exercise price of R\$20.104 per common share and R\$18.529 per preferred share, adjusted by the Brazilian rate CDI plus 1.5% per annum, and with a 6 year maturity. The Call Option has partial expiration dates throughout the period so the option volume is reduced by 10% at the end of the first year and by 18% per year thereafter. On March 30, 2016, as part of the option has reached its maturity, PHAROL's call option is from that date onwards on 42,691,385 common shares and 85,382,770 preferred shares of Oi.
These financial statements are in respect of the Company individually and were prepared according to the generally accepted accounting principles in Portugal (Note 2). Financial investments are recorded according to the equity method, deducted of any eventual impairment losses, as referred to in Note 3.4. These individual financial statements consider the effect of the consolidation of the equity and results, of the company's subsidiaries as at December 31, 2016 and 2015, in PHAROL's equity and net profit for the fiscal years ended on those dates, based on the respective financial statements, but not the effect of full consolidation of assets, liabilities, expenses and income.
In accordance with current legislation, the Company prepared consolidated financial statements in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union ("EU"), published separately. These consolidated financial statements include the financial statements of the companies in which PHAROL holds management control.
The financial statements for the year ended December 31, 2016 were approved by the Board of Directors and authorized for issue on April 27, 2017 and are still subject to approval by the General Meeting of Shareholders under the commercial legislation in Portugal.
These financial statements were prepared based on Decree-law nº. 158/2009, dated 13 July, and in accordance with the Conceptual Framework, Accounting and Financial Reporting Standards ("NCRF") and Interpretative Standards, as approved by Notices nº 15652/2009, 15653/2009 and 15655/2009 of the General- Secretarat of the Ministry of Finance, dated August 27, which make up the New Portuguese accounting system, named "Sistema de Normalização Contabilística" ("SNC").
The Company adopted NCRF for the first time in 2010 and applied for this purpose the "NCRF 3 Adoption For The First Time of NCRF" ("NCRF 3"), with the transition date being January 1, 2009 for the purposes of the presentation of these financial statements. As permitted by Decree-Law nº. 158/2009, the Company also applies the International Financial Reporting Standards ("IAS/IFRS") and related interpretations ("SIC/IFRIC") issued by the International Accounting Standards Board ("IASB"), in order to fill in the gaps or omissions in SNC regarding specific situations of certain transactions.
SNC was amended on July 29, 2015, with the publication of the Notice No. 8256/2015, applicable to periods beginning on January 1, 2016, which based on available information will not have significant impacts effects on the Company's financial statements.
The consolidated financial statements of PHAROL are prepared, since January 1, 2005, in accordance with IFRS as adopted by the European Union, which are applicable to listed companies in the European Union.
On December 31, 2016, there is no difference between equity and net income reported in these standalone financial statements and the equity attributable to the Company shareholders and net income reported in the consolidated financial statements.
These standalone financial statements were prepared on a going concern basis of accounting. The main accounting policies used in the preparation of these standalone financial statements are described below and were applied consistently.
Tangible fixed assets are recorded at acquisition cost, which includes the amount paid to acquire the asset and any expenses directly attributable to bringing the assets to the location and condition necessary for their operation.
Tangible fixed assets are depreciated on a straight-line basis from the month they are available for use. The depreciation rates reflect the useful life of each class of assets, as follows:
| Asset class | Years of useful life |
|---|---|
| Transportation equipment | 4 |
| Admnistrative equipment | 3 - 8 |
| Other tangible fixed assets | 4 - 8 |
The gains and losses resulting from any write-off or disposal are determined by the difference between the amount received and the carrying value of the asset, and are recognized in the income statement when the write-off or disposal occurs.
Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. The remaining lease contracts are considered operating leases. The classification of leases depends on the substance of the transaction and not on the form of the contract.
Assets acquired under finance leases and the corresponding liabilities are accounted for at the beginning of the contract as the lower amount between the fair value of the assets and the present value of minimum lease payments. Rents include the reimbursement of the liability and interest expense, with interest being recognized in the income statement based on a periodic interest rate over the remaining liability.
Under operating leases, rents are recognized on a straight-line basis during the period of the lease.
Subsidiaries are those entities over which the Company has the power to govern the financial and operating policies of the entity, generally represented by the majority of the voting rights. Associate companies are entities over which the Company has a significant influence but not control, generally represented by stakes between 20% and 50% of voting rights. Joint venture is an economic activity with the engagement of two or more partners subject to joint control based on a contractual agreement.
Financial investments in subsidiaries, associate companies and joint ventures are recorded under the equity method of accounting. Under this method, financial investments are initially recorded at acquisition cost and subsequently adjusted for the changes, after the acquisition date, in the Company's share in the net assets of those entities, deducted for eventual impairment losses. PHAROL's earnings include its share in the earnings of its subsidiaries and associate companies.
Financial investments in foreign entities are translated to Euros using the exchange rates prevailing at the balance sheet date, while the Company's share in the earnings of those entities is computed based on the average exchange rates for the reported period. The effect of translation differences is recognized in shareholders' equity under the caption "Adjustments to financial assets", and is transferred to net income upon the disposal of a foreign entity or the transmission of the investment in another way. The exchange rates used in the translation of the main foreign entities (held directly or indirectly by PHAROL) are as follows:
| Final | ||
|---|---|---|
| Currency | 2016 | 2015 |
| Real | 3.4305 | 4.3117 |
| USD | 1.0541 | 1.0887 |
| Average | ||
| Currency | 2016 | 2015 |
| Real | 3.8561 | 3.7004 |
| USD | 1.1069 | 1.1095 |
Financial investments are evaluated whenever there is evidence that they may be impaired and the related impairment losses are recorded in the income statement.
Gains obtained in transactions with subsidiaries, associates companies and joint ventures are eliminated in proportion to the Company's share in those entities, against the financial investment.
Capital gains resulting from the disposal of subsidiaries and associated companies within the Group are deferred or reversed until the date these investments are disposed of to a third party. Whenever these gains are deferred, their recognition in earnings is made under the caption "Gains/(losses) of affiliated companies", in the proportion that goodwill or assets and liabilities identified in the allocation of the purchase price recorded by the acquirer is recognized in earnings.
Additional capital contributions and loans granted to subsidiaries, associates companies and joint ventures are recorded at nominal value, reduced by adjustments for estimated losses, if applicable.
The Company records its revenue and expenses as they are generated or incurred, regardless of when they are received or paid, respectively.
With regard to the recognition of expenses with taxes on the purchase of external services (eg non-deductible value added tax), the amounts are classified as indirect taxes.
Income tax expense corresponds to the sum of current and deferred taxes. Deferred taxes are recognized in earnings except when they relate to items recorded directly in shareholders' equity, in which case they are also recorded in shareholders' equity.
The current income tax is computed based on the estimated taxable income for corporate income tax purposes, based on the statutory tax rate in Portugal, which is increased by a municipal tax and/or by an additional state surcharge depending on the taxable profit of the year (Note 9).
The income tax expense recorded in the financial statements was determined in accordance with "NCRF 25 Income Taxes". In determining income tax expense for the year, besides the current tax based on profit before-tax adjusted in accordance with the tax legislation, it is also considered the effects of temporary differences between income before tax and taxable income originated in the year or in preceding years.
Deferred taxes correspond to the temporary differences between assets and liabilities for accounting purposes and the related amounts for taxable purposes. Deferred tax assets and liabilities are computed and evaluated annually, using the tax rates which are expected to be in force at the date of reversal of these temporary differences.
Deferred tax assets are recorded only when there is a reasonable expectation of sufficient future tax profits which allow for their use. As at the balance sheet date the Company conducts a reassessment of the temporary differences originating deferred tax assets, in order to record deferred tax assets not recognized previously and/or to reduce the amount of deferred tax assets that are recognized, based on the current estimate of its recoverable amount.
Accounts receivable are initially recognized at fair value, and subsequently measured at amortized cost, based on the effective interest rate method, reduced by impairment losses.
Impairment losses for doubtful accounts receivable are computed based on the evaluation of the estimated risks resulting from the non-collection of receivables and are recorded in the income statement.
The Company recognizes provisions when there is a present obligation as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Where any of the above mentioned criteria is not accomplished, the Company discloses the event as a contingent liability, unless the cash outflow is remote.
Provisions are recognized for an amount corresponding to the present value of the best estimate, at the reporting date, of the resources needed to settle the obligation. That estimate is determined considering the risks and uncertainties associated with the obligation. Provisions are reviewed at the end of each year and adjusted for in order to reflect the best estimate as of that date.
Loans obtained are initially recognized at fair value, net of transaction costs incurred, and subsequently presented at amortized cost, based on the effective interest method.
Own shares are accounted for at their acquisition value as a reduction of shareholders' equity in the caption "Own shares", and the gains or losses inherent to their disposal are recorded in "Retained earnings"
Realizable assets and liabilities due over a period greater than one year from the balance sheet date are classified under non-current assets and non-current liabilities, respectively, at present value.
Transactions denominated in foreign currencies (different from the Company´s domestic currency) are translated to Euros at the exchange rates prevailing at the time the transactions are made. Assets and liabilities in foreign currency for which there is no agreement for fixing an exchange rate are translated to Euros using the exchange rates prevailing at the balance sheet date. Favourable or unfavourable exchange rate differences arising from the differences between exchange rates in force at the date of the respective transactions and those applying on the date of collection or payment or at the balance sheet date are recorded as gains and losses in the income statement.
Assets and liabilities as at December 31, 2016 and 2015 were translated into Euros using the following exchange rates to the Euro reported by the Portuguese Central Bank:
| Currency | 2016 | 2015 |
|---|---|---|
| Real | 3.4305 | 4.3117 |
| USD | 1.0541 | 1.0887 |
Financial assets and liabilities are recognized in the balance sheet when the Company becomes part of the corresponding contractual terms, and are classified in the following categories: (a) at cost or amortized cost; and (b) at fair value, with the respective changes being recorded in the income statement.
Assets and liabilities are classified at cost or amortized cost if they: (a) have a defined maturity; (b) have a fixed or determined income; and (c) do not represent or include a derivative financial instrument.
Assets and liabilities classified in this category are measured at amortized cost reduced by accumulated impairment losses (for financial assets) and correspond primarily to the following asset and liability captions included in the Company's balance sheet:
Amortized cost is determined through the effective interest method. The effective interest rate is the one that discounts the estimated future payments and receipts, during the term of the financial instrument, to the carrying value of the financial asset or liability.
All remaining financial assets and liabilities not included in the category "cost or amortized cost" are recognized at fair value. These financial assets and liabilities correspond primarily to interest and exchange rate derivative financial instruments.
The changes in the fair value of these derivatives are recognized through shareholders' equity or profit and loss, depending on whether those derivatives meet or not the criteria for hedge accounting, respectively. These changes in fair value are recorded under the caption "Increases/(reductions) in fair value" (Note 22).
Financial assets accounted for at "cost or amortized cost" are subject to impairment tests the end of each year. Such assets are impaired when there is clear evidence that, as a result of one or more events occurred after their initial recognition, their future estimated cash flows will be affected.
For assets measured at amortized cost, the impairment loss corresponds to the difference between the carrying amount of the asset and the present value of the revised future estimated cash flows discounted using the initial effective interest rate. For financial assets measured at cost, the impairment loss corresponds to the difference between the carrying amount of the asset and the best estimate of the asset's fair value.
Subsequently, if there is a reduction in the impairment loss as a result of an event occurred after the initial recognition of the loss, the impairment should be reversed through earnings. The reversal is recognized up to the limit of the amount that would be recorded (at amortized cost) if the loss had not been initially recognized.
The Company derecognizes financial assets when its contractual rights to obtain the asset's cash flows expire, or when it transfers to another entity all the significant risks and rewards associated with the ownership of those assets. The Company derecognizes financial liabilities only when the corresponding obligation is settled, cancelled or expires.
When preparing the financial statements in accordance with the NCRF, the Company's Board of Directors uses estimates and assumptions that affect the application of accounting policies and reported amounts. Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are considered probable under the circumstances on which the estimates are based, or as a result of new information or more experience. The most significant accounting estimates reflected in the financial statements are as follows:
Estimates used are based on the best information available during the preparation of financial statements, although future events, neither controlled nor foreseeable by the Company, could occur and have an impact on those estimates. In accordance with "NCRF 4 Accounting Policies, Changes in Estimates and Errors" ("NCRF 4"), changes to these estimates that occur after the date of the financial statements are recognized in net income, using a prospective methodology.
Events occurred after the balance sheet date that provide additional information about conditions existing at the balance sheet date are reflected in the financial statements. Events occurred after the balance sheet date that provide information about conditions that occur after the balance sheet date are not reflected in the financial statements, but are disclosed in the notes to the financial statements, if material.
The caption "Cash and cash equivalents" of the statement of cash flows includes cash on hand and bank deposits readily convertible to cash.
The Company is exposed to a liquidity risk if its sources of funding, including cash balances, operating cash inflows, divestments, credit lines and cash flows obtained from financing operations, do not match its financing needs, such as operating and financing outflows, investments, shareholder remuneration and debt repayments. The Company understands that it has the ability to fulfill its obligations.
The cash flow statement was prepared in accordance with "NCRF 2 Statement of Cash Flows", with the following aspects worth mentioning.
In 2016, this caption relates to the capital increase made in Bratel BV.
In 2016 this amount refers to the acquisition by PHAROL between February 1 and April 11, 2016 of the acquisition of 10,225,000 treasury shares through Euronext Lisbon.
In 2016, this heading includes the amounts spent on the payment of dividends in the amount of Euro 0.03 per share.
As at December 31, 2016 and 2015, this caption is made up as follows:
| Euro | ||
|---|---|---|
| 2016 | 2015 | |
| Cash | 4,192 | 719 |
| Bank deposits immediately available | 28,287,025 | 63,174,564 |
| 28,291,217 | 63,175,283 |
The Company did not adopt any new or revised standard or interpretation during the year ended December 31, 2016, and did not voluntarily change other accounting policies or accounting estimates.
During the year ended December 31, 2016, the Company did not adjust its financial statements for any material errors from previous years.
During 2016 and 2015, the movements occurred in this caption were as follows:
| Euro | ||||
|---|---|---|---|---|
| 2016 | ||||
| Investments in subsidiary companies |
Additional paid in capital contributions in subsidiary companies |
Investments in associated companies |
Total | |
| Gross amount | ||||
| Opening balance | 100,158,944 | - | 229,303,760 | 329,462,704 |
| Increases | - | 1,000,000 | - | 1,000,000 |
| Transfer of shares to associates | 161,856,602 | - | (161,856,602) | - |
| Equity method | 239,136,567 | - | (67,447,158) | 171,689,409 |
| Closing balance | 501,152,113 | 1,000,000 | - | 502,152,113 |
| Impairment losses | ||||
| Opening balance | (67,671,197) | - | (157,935,694) | (225,606,892) |
| Increases | (360,907,556) | - | - | (360,907,556) |
| Reductions | 196,824,956 | - | 28,781,936 | 225,606,892 |
| Transfer of shares to associates | (129,153,759) | - | 129,153,759 | - |
| Closing balance | (360,907,556) | - | - | (360,907,556) |
| Carrying amount | 140,244,557 | 1,000,000 | - | 141,244,557 |
| 2015 | ||||||
|---|---|---|---|---|---|---|
| Additional paid in capital |
||||||
| Investments in subsidiary |
contributions in subsidiary |
Investments in associated |
Investments in | |||
| companies | companies | companies | Goodwill | joint ventures | Total | |
| Gross amount | ||||||
| Opening balance | 240,392,818 | - | - | - | 483,282,006 | 723,674,824 |
| Transfer of shares to associates | - | - | 474,178,819 | - | (474,178,819) | - |
| Equity method | (140,233,874) | - | (244,875,059) | - | (9,103,187) | (394,212,120) |
| Closing balance | 100,158,944 | - | 229,303,760 | - | - | 329,462,704 |
| Impairment losses | ||||||
| Increases | (67,671,197) | - | (157,935,694) | - | - | (225,606,892) |
| Reductions | - | - | - | - | - | - |
| Closing balance | (67,671,197) | - | (157,935,694) | - | - | (225,606,892) |
| Carrying amount | 32,487,747 | - | 71,368,066 | - | - | 103,855,812 |
In the fiscal year of 2015, the increased financial holdings in associated companies relates to the transfer of the participation of the investment in Oi from Joint Ventures to associated companies.
In 2015, the reduction in joint ventures relates to the transfer of the participation in Oi to associate companies related to joint ventures.
Euro
In 2016 PHAROL's interest in Oi was directly transferred to its subsidiary Bratel BV.
In the fiscal years 2016 and 2015, the movements in equity holdings in subsidiaries, associated companies and joint ventures resulting from the use of the equity method was recorded as follows:
| Euro | ||
|---|---|---|
| 2016 | 2015 | |
| Gains in affiliated companies (Note 15) | 119,802,229 | (234,936,005) |
| Adjustments to financial assets (Note 11) | 51,887,180 | (159,276,116) |
| 171,689,409 (394,212,120) |
The composition of this caption mainly comprises (1) an estimated future recovery of Euro 85.7 and Euro 134.6 million related to the debt securities issued by Rio Forte on December 31, 2016 and December 31, 2015, and (2) Euro 1.6 and 6.4 million related to the value of the Call Option on December 31, 2016 and December 31, 2015, respectively.
Regarding the debt securities issued by Rio Forte, after having been made aware of the Report of the Judicial Administrators in the Rio Forte insolvency case (Rapport nº 4 des Curateurs), dated August 31, 2016, available at www.espiritosantoinsolvencies.lu, PHAROL began procedures to assess the financial, accounting and legal implications of the information contained in section 2.1.6., which is transcribed in a free translation as follows:
The information currently available to the Judicial Administrators does not allow an estimate of either the total recovery or the recovery to be made by the company currently in bankruptcy proceedings.
It cannot be excluded that judicial seizing and the eventual rights of third parties involved will prolong or even definitively prevent the bankrupt estate from recovering and distributing certain assets. In fact, it is not excluded that the judicial authorities have the objective of confiscating the assets now seized."
The Board of Directors of PHAROL, after taking appropriate measures and supported by the analysis of its advisers, concluded, based on the of principle of prudence, that the expected recoverability of the insolvent estate and, consequently, PHAROL's expected recoverability of its debt instruments of Rio Forte, have reduced. PHAROL's investment in the Rio Forte securities was initially valued at fair value upon initial recognition on March 30, 2015 and subsequently measured at amortized cost less any impairment losses. Based on the principles of IAS 39, taking into account available information, Management used its judgment in the definition of assumptions that culminated in a valuation of the amount due from Rio Forte at 85.7 million euros at December 31, 2016. This reflects an appraisal of some 9.5% of the nominal value, against approximately 15% of the nominal value at December 31, 2015, which resulted in the accounting for an impairment of € 48.7 million.
On December 31, 2016 and 2015, the detail of the financial investments in subsidiaries and joint ventures is as follows (Notes 6 and 15):
| Euro | ||||||
|---|---|---|---|---|---|---|
| Financial | 2016 Share on net |
Financial | 2015 Share on net |
|||
| Company name: | % held | Investments | income | % held | Investments | income |
| SUBSIDIARIES: | ||||||
| Bratel BV | 100.00% | 141,244,557 | 193,359,116 | 100.00% | 32,487,747 | (72,248,439) |
| 141,244,557 | 193,359,116 | 32,487,747 | (72,248,439) | |||
| ASSOCIATED COMPANIES: | ||||||
| Oi | - | - | (73,556,887) | 18.98% | 71,368,066 | (252,576,366) |
| - | (73,556,887) | 71,368,066 | (252,576,366) | |||
| JOINTLY CONTROLLED ENTITIES | ||||||
| Oi | - | - | - | 0.00% | - | 89,888,801 |
| - | - | - | 89,888,801 | |||
| - | 119,802,229 | 103,855,812 | (234,936,005) |
Tables below show the transactions that occurred during the 2016 and 2015 exercises between PHAROL Group and the associated companies and joint ventures:
| Euro | ||
|---|---|---|
| Costs and | ||
| losses | ||
| Company | 2016 | 2015 |
| Joint ventures | - | 681,470 |
| - | 681,470 |
For the fiscal years ended December 31, 2016 and 2015, fixed remuneration of Board members, which were established by the Remuneration Committee, amounted to Euro 0.88 million and Euro 1.6 million respectively.
At December 31, 2016 and 2015 no share-based program or termination benefit program were in place.
For the year ended December 31, 2016, the fees paid to the Statutory Auditor of PHAROL amounted to 0.27 million euros, corresponding to audit fees of PHAROL.
For additional information related to the remuneration of members of the Board of Directors and key employees, we refer readers to the Corporate Governance Report included in the Annual Report.
In 2016, the companies located in mainland Portugal were subject to Corporate Income Tax at a base rate of 21%, with an additional (1) Municipal Surtax of up to 1.5% levied on taxable income, and (2) a State Surtax of 3.0% levied on taxable profit between Euro 1.5 million and Euro 7.5 million, of 5.0% levied on taxable profit between Euro 7.5 million and Euro 35 million and of 7% levied on taxable profit in excess of Euro 25 million, resulting in a maximum aggregate tax rate of approximately 29.5%, for taxable profit in excess of Euro 7.5 million. In the calculating of taxable income, to which is applied above mentioned tax rate, income and expenses not deductible for tax purposes are added to or deducted from the accounting results.
According to the applicable legislation, the tax statements are subject to revision and correction by the fiscal authorities during a period of four years (five for Social Security) except if there have been fiscal losses, or if fiscal benefits have been granted, or if audits, claims or impeachments are being performed, in which case, depending on the circumstances, those periods may be extended or suspended. The Company's Board of Directors, supported by the information given by their fiscal consultants, understands that possible fiscal contingencies should not have a significant impact on the financial statements of December 31, 2016, considering the provisions and the existing expectations at this time, regarding the resolution of the fiscal contingencies described in Note 12.
On December 31, 2016 and 2015, the debtor and creditor balances in respect of State and Other Public Entities are as follows:
| Euro | ||||
|---|---|---|---|---|
| 2016 | 2015 | |||
| Receivable | Payable | Receivable | Payable | |
| Current taxes | ||||
| Operations in Portugal | ||||
| Value-added tax | - | 13,305 | - | 297,832 |
| Income taxes | 19,357 | - | 1,371 | - |
| Personnel income tax witholdings | - | 69,151 | - | 39,664 |
| Social Security Contributions | - | 68,045 | - | 50,484 |
| Other | - | - | 2,358 | - |
| 19,357 | 150,502 | 3,729 | 387,980 |
As at December 31, 2016, the Company's share capital was fully paid and amounted to Euro 26,895,375, and was represented by 896,512,000 ordinary shares and 500 Class A shares, with a nominal value of 3 cents of Euro each.
At the PHAROL Annual General Meeting held on July 26, 2011, an amendment was approved to the Company's articles of association to remove the special rights allocated to the 500 Category A shares (designated by "golden share"). As a consequence of this approval, these shares have no special rights.
As of December 31, 2016 and 2015, the detail of this caption is as follows:
| Euro | ||
|---|---|---|
| 2016 | 2015 | |
| Shares held by PHAROL | 179,675,995 | 178,071,827 |
| 179,675,995 | 178,071,827 |
PHAROL, between February 1 and April 11, 2016, acquired 10,225,000 treasury shares, in the amount of Euro 1,603,908. After these purchase transactions, PHAROL held 30,865,000 treasury shares, corresponding to 3.44% of the share capital PHAROL.
Portuguese law provides that at least 5% of each annual profits must be appropriated to a legal reserve until this reserve equals the minimum requirement of 20% of share capital. This reserve is not available for distribution to shareholders but may be capitalized or used to absorb losses, once all other reserves and retained earnings have been exhausted.
As at December 31, 2016, the legal reserve was already fully incorporated in accordance with Portuguese law, and amounted to Euro 6,773,139.00.
The composition and the movements effected in this item during the years of 2016 and 2015 are as follows:
| Euro | ||||
|---|---|---|---|---|
| Reserves | ||||
| for treasury | ||||
| Free | shares | |||
| reserves | cancelled | Own shares | Total | |
| Balance as at 31 December 2014 | 105,209,244 | 6,970,320 | 178,071,826 | 290,251,390 |
| Balance as at 1 January 2016 | 105,209,244 | 6,970,320 | 178,071,826 | 290,251,390 |
| Transfer to reserves for use in own shares | (1,604,169) | - | 1,604,169 | - |
| Transfer to retained earnings | (25,969,766) | - | - | (25,969,766) |
| Balance as at 31 December 2016 | 77,635,309 | 6,970,320 | 179,675,995 | 264,281,624 |
During the fiscal years of 2016 and 2015 the movements under this item were as follows:
| Euro | |||
|---|---|---|---|
| Currency translation |
Other changes in shareholders' |
||
| adjustments | equity | Total | |
| Balance as at 31 December 2014 | (936,768,593) | (462,390,324) (1,399,158,917) | |
| Equity method (Note 6) | (53,852,297) | (105,423,819) | (159,276,116) |
| Balance as at 31 December 2015 | (990,620,890) | (567,814,143) (1,558,435,034) | |
| Equity method (Note 6) | 103,110,793 | (51,223,613) | 51,887,180 |
| Balance as at 31 December 2016 | (887,510,097) | (619,037,756) (1,506,547,853) |
In 2016, PHAROL paid as dividends the sum of Euros 25,969,766.
At the PHAROL Annual General Meeting held on May 24, 2015, the Board of Directors' proposal to distribute a dividend per share of 0.03 cents was approved, which was paid on June 9, 2016, in the total amount of 25,969,766 euros in respect of 865,658,867 shares, which includes Euros 2,689,536 (Note 6) paid to Telemar Norte Leste relating to the portion of the 89,651,205 PHAROL shares held by this entity.
Considering that in the year ended December 31, 2016 a negative net result of 75,077,177 Euros was obtained, the Board of Directors of PHAROL proposes that they be transferred to the Company's Retained Earnings.
No movement in provisions occurred during the 2016 financial year. During the year 2015, movements in provisions were as follows:
| Euro | ||||
|---|---|---|---|---|
| 2015 | ||||
| Other | ||||
| Taxes | Litigation | Provisions | Total | |
| Opening balance | 2,358 | 73,500 | 27,110,319 | 27,186,177 |
| Increases | - | - | - | - |
| Reductions | - | - | (27,110,319) | (27,110,319) |
| Utilizations | - | - | - | - |
| Other | - | - | - | - |
| Closing balance | 2,358 | 73,500 | - | 75,858 |
The movements in fiscal provisions are a result of the assessment made by management regarding the possibility of the materialization of fiscal contingencies and payments made in relation to contingencies which took place in previous years.
In 2015, following the completion of the Exchange, PHAROL derecognised the provision in the amount of 27,110,319 euros recorded in 2014.
Provisions for taxes relate to several tax contingencies regarding Corporate Income Tax, Value Added Tax and Social Security Tax, among other taxes and fees. Provisions for litigation relate to legal actions against the Company, which were estimated based on the opinion of its attorneys.
The detail of this caption as at December 31, 2016 and 2015 is as follows:
| Euro | ||
|---|---|---|
| 2016 | 2015 | |
| Current suppliers | 2,323,182 | 1,852,839 |
| 2,323,182 | 1,852,839 |
The detail of this caption as at December, 31 2016 and 2015 is as follows:
| Euro | ||
|---|---|---|
| 2016 | 2015 | |
| Supplies and external services | 5,036,950 | 6,084,565 |
| Vacation pay and bonuses | 367,537 | 389,769 |
| 5,404,487 | 6,474,334 |
The detail of this caption as at December 31, 2016 and 2015 is as follows:
| Euro | ||
|---|---|---|
| 2016 | 2015 | |
| Gains and losses in affiliated companies - equity method | 119,802,229 | (234,936,005) |
| Reversal of the 2014 provision regarding the exchange | - | (141,006,050) |
| Impairment of investment in subsidiaries and associates | (135,299,058) | (225,606,892) |
| (15,496,828) (601,548,946) |
The detail of this caption as at December 31, 2016 and 2015 is as follows:
| euros | ||
|---|---|---|
| 2016 | 2015 | |
| Specialized work | 1,719,764 | 7,042,147 |
| Insurance | 323,982 | 375,823 |
| Travel | 141,506 | 331,051 |
| Other | 211,611 | 453,095 |
| 2,396,863 | 8,202,115 |
The detail of this caption as at December 31, 2016 and 2015 is as follows:
| euros | ||
|---|---|---|
| 2016 | 2015 | |
| Fixed and variable remuneration | 1,264,877 | 2,309,664 |
| Social security | 326,770 | 468,371 |
| Other | 69,512 | 339,955 |
| 1,661,158 | 3,117,990 |
This caption reflects the change in fair value of derivative financial instruments entered into by the Company and has the following composition in the years ended December 31, 2016 and 2015:
| euros | ||
|---|---|---|
| 2016 | 2015 | |
| Losses on non-current assets held for sale (Note 7) | (48,798,021) | - |
| Call option over Oi Shares (Note 7) | (5,641,664) | (62,925,391) |
| (54,439,685) | (62,925,391) |
Other expenses and losses, in the amounts of 1,189,764 euros and 16,720,100 euros in 2016 and 2015, respectively, essentially include in 2016 an amount of USD \$ 1,250,000 paid to the SEC under the agreement between PHAROL and SEC, and in 2015 essentially includes unfavorable exchange rate differences relating to the call option.
The net result per share for the years 2016 and 2015 was calculated in the followingmanner:
| Euro | ||
|---|---|---|
| 2016 | 2015 | |
| Loss from continuing operations | (75,077,177) | (693,892,303) |
| Financial costs related to exchangeable bonds (net of tax) (i) | - | - |
| Net loss considered in the computation of the diluted earnings | ||
| per share | (75,077,177) | (693,892,303) |
| Weighted average common shares outstanding in the period (ii) | 870,760,000 | 875,872,500 |
| Basic | (0.09) | (0.79) |
| Diluted | (0.09) | (0.79) |
As of December 31, 2016 and 2015, the Company had presented the following guarantees and comfort letters to third parties:
| Euro | ||
|---|---|---|
| 2016 | 2015 | |
| Bank and other guarantees presented tax authorities and other public | 376,715,726 | 384,314,678 |
| Bank guarantees presented by Portugal Telecom to European Commiss | - | 12,843,050 |
| 376,715,726 | 397,157,728 |
(i) The bank and other guarantees presented to the fiscal authorities essentially include Euro 377 million related to the tax assessments received by PHAROL. The Company presented legal challenges to these assessments and, in accordance with Portuguese law, provided collateral in order to avoid the initiation of enforcement proceedings, which, in the absence of guarantee or payment of the contested tax, would continue until the request of a pledge of sufficient assets to cover the request tax. Portuguese law, while always allowing for the appeal of taxes liquidited by the tax authorities, only suspends enforcement proceedings upon payment of the tax or the provision of a guarantee. Providing a guarantee of security thereby avoids the payment of tax before the appeal decision or attachment of assets in enforcement proceedings. These guarantees were presented by PHAROL as a controlling company of the consolidated tax in the years in question, even though as at December 31, 2016 and 2015, the contingencies associated to these guarantees are not the Company's responsibility, having been transferred to Oi, while PHAROL remains jointly and severally liable.
Under the agreements entered into with Oi, Oi has to substitute the bank guarantees provided by PHAROL to the Tax Authority and to the European Commission for guarantees provided by Oi. Where this substitution is not possible due to demands of the counterparty, Oi has undertaken to provide equivalent guarantees in favor of PHAROL. As such, as of December 31, 2016, a Pledge Agreement for shares of Telemar Norte Leste is in force with a maximum amount up to the limit of the potential liabilities currently in existence.
The Company believes that the disclosure of the outstanding debts and transactions performed with its main shareholders, notably those with a qualified holding of more than 2% in PHAROL's share capital and with all the entities reported by these shareholders as being their related parties. The tables below present the balances as at December 31, 2016, and December 31, 2015, and the transactions that took place in the fiscal years ending December 31, 2016 and 2015, between the PHAROL Group and these entities identified as shareholders with qualified holdings respective economic groups:
| Euro | ||||
|---|---|---|---|---|
| 2016 | 2015 | |||
| Cash and cash | Accounts | Cash and cash | Accounts | |
| Shareholder | equivalents | payable | equivalents | payable |
| Banco Comercial Português, S.A. | 9,173,984 | - | 18,884,555 | - |
| Novo Banco, S.A. | 9,422,106 | - | 20,755,397 | - |
| 18,596,090 | - | 39,639,952 | - | |
| Euro | ||||
| 2016 | 2015 | |||
| Costs and | Net interest | Costs and | Net interest | |
| Shareholder | losses | income | losses | income |
| Banco Comercial Português, S.A. (i) | 3,678 | 20,149 | - | - |
| Novo Banco, S.A. | 405 | 27,343 | 1,152,712 | 25,293 |
8,168 47,492 1,152,712 25,293
Oi's stock price evolution between December 31, 2016, and March 31, 2017, can be found below:
| 31 dec 2016 | 31 mar 2017 | |
|---|---|---|
| Oi ON Share Price (real) | 2.630 | 4.140 |
| Oi PN Share Price (real) | 2.250 | 3.920 |
| Exchange Rate real/euro | 3.431 | 3.380 |
| Oi ON Share Price (euros) | 0.767 | 1.225 |
| Oi PN Share Price (euro) | 0.656 | 1.160 |
As at December 31, 2016, qualified holdings represented over 44% of PHAROL share capital, as follows:
| DATE OF INFORMATION |
ENTITIES | NO. OF SHARES | % OF CAPITAL | % OF VOTING RIGHTS |
|---|---|---|---|---|
| 05/31/2012 | Telemar Norte Leste S.A. | 89,651,205 | 10.00% | 10.00% |
| 07/05/2016 | Novo Banco S.A.(a) | 85,665,125 | 9.56% | 9.56% |
| 08/14/2015 | Banco Comercial Português, S.A. | 55,304,969 | 6.17% | 6.17% |
| 12/05/2016 | High Seas Investments LLC | 46,657,016 | 5.20% | 5.20% |
| 11/22/2016 | Hestia Investments DAC | 43,476,423 | 4.85% | 4.85% |
| 07/26/2016 | Norges Bank | 37,183,570 | 4.15% | 4.15% |
| 01/02/2014 | Grupo Visabeira | 23,642,885 | 2.64% | 2.64% |
| 06/02/2016 | Renaissance Technologies LLC | 18,003,736 | 2.01% | 0.00% |
| TOTAL | 399,584,929 | 44.57% | 42.56% |
(a) This holding refers only to the shares holding by Novo Banco and does not include shares held by societies in a controlling relationship or group, leaders and members of the Governing Bodies of Novo Banco.
Under the terms of article 9, number 1 c), of Regulation number 5/2008 of CMVM, the following information is presented with respect to the qualified holdings held by third parties in PHAROL's share capital, which the company was informed about with reference to December 31, 2016 or the previous date, as indicated:
| ENTITIES | No. OF SHARES |
|---|---|
| Shares held by societies in a controlling relationship or group with Novo Banco, S.A. |
15,916 |
| Shares held by Novo Banco, S.A. | 85,665,125 |
| Shared held by Management Bodies | 22,000 |
| Total | 85,703,041 |
| ENTITIES | No. OF SHARES |
|---|---|
| Visabeira Group | 11,523,213 |
| Visabeira Estudos e Investimentos, S.A., (company held at 100% by Visabeira Participações Financeiras, SGPS, S.A., which in turn was held at 100% by the Visabeira Group) |
12,119,672 |
| Total | 23,642,885 |
PHAROL was also informed that a participation corresponding to 78.2642% of the Visabeira Group's share capital and corresponding voting rights are directly held by the NCFGEST, SGPS, S.A. society, which is 100% held by Engineer Fernando Campo Nunes, by which the qualified holdings of the Visabeira Group are equally attributable to these entities.
• On June 2, 2016, PHAROL announced that Renaissance Tecnologies LLC held a qualified holding of 18.003.736 shares, corresponding to 2.01% of the share capital without voting rights, through derivative financial instruments with cash settlement, held by the funds GF Trading LLC and RIDGE Master Trading LP, that are managed by the Renaissance Tecnologies LLC.
After December 31, 2016, the following changes have occurred:
• On January 10, 2017, PHAROL informed that Renaissance Technologies LLC now held an economic position of 2.13% of the share capital of PHAROL, without voting rights, through derivative financial instruments with cash settlement, held by the funds GF Trading LLC and RIDGE Master Trading LP, that are managed by the entity above. This occurred as a result of an change in equity swaps contracted by those funds, which establishes the right to acquire 19,068,633 shares of PHAROL.
• On January 16, 2017, PHAROL informed that Discovery Capital Management, LLC, held now 2.02% of the share capital of PHAROL. This situation occurred after the acquisition of 18,148,055 ordinary shares, representatives of 2.02% of share capital of PHAROL, on January 11, 2017.
1. Number of shares and obligations issued by PHAROL and societies, that with it, are in a controlling or group relationship, and which are principals or members of administrative and inspecting organs of PHAROL, on December 31, 2016:
Luís Maria Viana Palha da Silva owns 200,000 PHAROL shares. He was appointed for the Board of Directors of PHAROL on May 29, 2015 and he is also a member of the Board of Directors of Oi.
André Cardoso de Meneses Navarro owns 397 PHAROL shares. He was co-opted non-executive Director of PHAROL on September 2, 2015. He is also a member of the Board of Directors of Oi.
João do Passo Vicente Ribeiro is not an owner of any marketable securities of PHAROL nor of other companies which are in a controlling or group relationship with it. He was appointed for the Board of Directors of PHAROL on May 29, 2015. On December 31, 2016, he was an alternate member of the Oi Board of Directors. After the resignation of Rafael Mora, he became an effective member of the Board of Directors of Oi.
João Manuel Pisco de Castro is not an owner of any marketable securities of PHAROL nor of other companies which are in a controlling or group relationship with it. He was appointed for the Board of Directors of PHAROL on March 17, 2015. He is also Vice-President of Grupo Visabeira, SGPS, SA. and member of the Board of Directors of Oi.
Jorge Freire Cardoso is not an owner of any marketable securities of PHAROL nor of other companies which are in a controlling or group relationship with it. He was appointed for the Board of Directors of PHAROL on November 5, 2015. He is also a member of the Board of Directors of Novo Banco, SA. He was an alternate member of the Board of Directors of Oi, until February 17, 2016, on which date he resigned his appointment.
José Manuel Melo da Silva is not an owner of any marketable securities of PHAROL nor of other companies which are in a controlling or group relationship with it. He was co-opted non-executive Director of PHAROL on July 25, 2016. He is also an alternate member of the Board of Directors of Oi, since September 14, 2016.
José Mauro Mettrau Carneiro da Cunha is not an owner of any marketable securities of PHAROL nor of other companies which are in a controlling or group relationship with it. He was appointed for the Board of Directors of PHAROL on 29 May, 2015 and he is also a member of the Board of Directors of Oi.
Maria do Rosário Pinto-Correia owns 40 shares of PHAROL. She was co-opted non-executive Director of PHAROL on September 2, 2015. She is an alternate member of the Board of Directors of Oi since February 16, 2016.
Pedro Zañartu Gubert Morais Leitão is not an owner of any marketable securities of PHAROL nor of other companies which are in a controlling or group relationship with it. He was appointed for the Board of Directors of PHAROL on May 29, 2015. He was an alternate member of the Oi Board of Directors until July 4, 2016, when he was appointed as a member of the Board of Directors of Oi.
Rafael Luís Mora Funes is not an owner of any marketable securities of PHAROL nor of other companies which are in a controlling or group relationship with it. On December 31, 2016, he was a member of the Board of Directors of PHAROL since June, 22, 2007 and he was also a member of the Board of Directors of Oi. On March 7, 2017, he resigned both.
The fiscal council does not own any shares of PHAROL.
On December, 31, 2016, the Executive Committee members, identified below, were also member of the Board of Directors.
Until March, 7, 2017, the Executive Committee members, was comprised by the members above. After the resignation of Rafael Mora, the Board Directors decided that the executive management become through a Managing Director, whom is Luís Maria Viana Palha da Silva.
The Statutory Auditor does not own any shares of PHAROL.
Under the terms of and for effects of the provisions in article 248-B of the Code for Marketable Securities and article 14, no. 7 of the CMVM Regulation no. 5/2008, the following information is presented about the PHAROL share transactions and financial instruments related to it, performed during the year 2016, by directors of PHAROL and persons directly related to them:
On June 27, 2016, PHAROL informed that it was notified of the following transaction on the regulated market representing PHAROL shares, carried out on June 24, 2016, by the Chairman of the Board of Directors, Mr. Luís Maria Viana Palha da Silva:
| DATE | QUANTITY | BUY/SELL | INSIDE | PRICE EUR |
|---|---|---|---|---|
| 24-06-2016 | 100,000 | Buy | Inside | 0.085 |
Luís Maria Viana Palha da Silva is a member of PHAROL's Board of Directors, and therefore he is a Director of PHAROL pursuant to paragraph 3 of article 248-B of the Portuguese Securities Code, thus having the obligation to notify the transaction above.
According to the information received by PHAROL, after these transaction Mr. Luís Maria Viana Palha da Silva held a total of 200,000 PHAROL shares, corresponding to 0.022% of PHAROL's share capital and corresponding voting rights.
On July 5, 2016, Novo Banco S.A. held a qualifying holding of 9.56% of the capital and voting rights of PHAROL.
The reduction occurred following the sale by NOVO BANCO, on June 30, 2016, with financial settlement on July 5, 2016, of 26,895,375 common shares, representing approximately 3.0% of the share capital and voting rights Of PHAROL, in an out-of-stock transaction, for a price of EUR 0.17 per share.
As a result of this sale, NOVO BANCO now holds a social contribution corresponding to a total of 85,665,125 common shares, representing approximately 9.56% of PHAROL's share capital and voting rights.
REPORT AND OPINION OF THE FISCAL COUNCIL
Financial Year of 2016 (Standalone accounts)
To the Shareholders of PHAROL, SGPS S.A.
As required by Article 420.1 g) of the Portuguese Companies Code, it falls to us, as the members of the Fiscal Council of "PHAROL, SGPS, S.A." (referred to below as PHAROL) to issue our annual report on our audit activities and to issue our opinion on the management report, standalone financial statements and proposal for the appropriation of the net result presented by the Board of Directors for the year ended December 31, 2016.
As the supervisory body, it is incumbent on us to mention that:
It also took note of the findings of internal and external audits of the standalone financial statements for the financial year of 2016, which comprise the income statement, the balance sheet, the statement of changes in equity the statement of cash flows and respective notes.
The Statutory Auditor and External Auditor accompanied the preparation of the standalone financial statements of PHAROL, having indicated to the Fiscal Council its conclusions and its agreement with the documents prepared by the Board of Directors.
Through the Additional report addressed to the Fiscal Council, the Statutory Auditor and External Auditor communicated the relevant aspects of the work performed and respective conclusions.
It assessed the Statutory and Auditors' Certification and Audit Report on the standalone financial information, issued with reservations and with emphasis of matter paragraphs, by the statutory auditor and external auditor, which it endorsed.
It is the understanding of the Statutory Auditor and External Auditor that the following are Key Audit Matters:
In these areas, the relevant audit procedures and testing was developed considering the circumstances.
The Fiscal Council hereby declares that, as far as it is aware, the information required in Article 245.1 a) of the Securities Code, for the standalone accounts for the year ended on December 31, 2016:
On the basis of the report set out above, our audit activities and the conclusions of the Statutory and Auditors' Certification and Audit Report on the standalone financial information, and taking into consideration the information received from the Board of Directors, from PHAROL's services and from the Statutory Auditor and External Auditor, it is our opinion that the General Meeting of PHAROL should approve:
Lastly, the members of the Fiscal Council wish to acknowledge and express their appreciation for the assistance provided by the Board of Directors, the senior managers and other staff of PHAROL.
Lisbon, April 27, 2017
THE FISCAL COUNCIL
___________________________________ José Maria Ribeiro da Cunha — Chairman
___________________________________ Isabel Maria Beja Gonçalves Novo — Member
___________________________________ Pedro Miguel Ribeiro de Almeida Fontes Falcão - Member
STATUTORY AUDITORS' CERTIFICATION AND AUDIT REPORT
| Key audit matters | Synthesis of audit response |
|---|---|
| Measurement of Oi, SA investment | |
| The equity investment in Oi, SA (held indirectly in 27,18%) is classified as an associate and measured by the equity method, adjusted by the impairment loss needed to reduce the respective carrying amount to the higher of its fair value and its value in use. Oi, SA is a large entity with high public and media profile, being highly relevant to Pharol financial statements. Oi, SA is under a judicial reorganization process since June 2016. The respective financial statements were audited by other auditors. Related disclosures: Note 3 and note 13 of the notes to the consolidated financial statements as |
The audit response involved, in synthesis, the performance of the following procedures: |
| Verification of the maintenance of significant influence in Oi, SA in face of the respective judicial reorganization process; |
|
| Consultation of the working papers of the independent auditor of Oi, SA and realization of several meetings with that auditor in order to obtain clarifications about the most relevant issues; |
|
| Procurement and analysis of the independent auditors' report on the individual and consolidated financial statements of Oi, SA; |
|
| Analysis and validation of the calculations inherent to the equity method; |
|
| at December 31, 2016. | Evaluation of the recoverable amount of the investment in Oi, SA and of the eventual need for an impairment loss; |
| Evaluation of the reasonableness of the financial statements' disclosures. |
|
| Measurement of the investment in debt securities issued by Rio Forte Investments, SA | |
| At March 30, 2015 the debt securities issued by Rio Forte Investments, SA (Rio Forte) were returned to Pharol, following the performance of the exchange contract signed on September 8, 2014 between Oi Group and Pharol. |
The audit response involved, in synthesis, the performance of the following procedures: Analysis of the information present in the reports and releases issued by the Rio Forte insolvency curators: |
| Rio Forte is under an insolvency process taking place in Luxembourg, with high public and media profile. This investment is relevant within the scope of Pharol financial statements and the respective measurement involves significant judgements. |
Analysis of the judgements made by the management in determining the recoverable amount of the debt securities at December 31, 2016; Circularization of the lawyers that handle the insolvency process; |
| Related disclosures: Note 3 and note 7 of the notes to the financial statements as at December 31, 2016. |
Circularization of the banks where the debt securities are deposited. |
| Measurement of the call option over Oi shares | |
| Following the previously mentioned performance of the exchange contract, Pharol was left with the right to repurchase shares of Oi, SA for a |
The audit response involved, in synthesis, the performance of the following procedures: Analysis and follow-up of the call option respective |
| period of 6 years, at certain strike prices. The measurement of this asset is complex and requires the use of specialists, since it is a |
contractual terms; Involvement of specialists to perform an independent appraisal of the call option; |
| Key audit matters | Synthesis of audit response |
|---|---|
| derivative financial instrument. | Analysis of the independent appraisal and |
| Related disclosures: Note 7 of the notes to the | comparison of the results with the carrying amount |
| financial statements as at December 31, 2016. | determined by Pharol. |
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