Interim / Quarterly Report • Jul 26, 2019
Interim / Quarterly Report
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First Semester 2019
| MESSAGE FROM CEO Luís Palha da Silva |
Highlights | ||
|---|---|---|---|
| "The beginning of the first semester of 2019 was marked, for Pharol, with the reaching of an agreement |
PHAROL | ||
| with Oi to compensate damages suffered by decisions made in the Judicial Recovery process of our subsidiary. |
(Euro million) | 1H2019 | 1H2018 |
| A page that, once turned, allows both parties a clearer concentration of efforts and resources on the strategic, |
EBITDA | (2.0) | (2.4) |
| financial and operational challenges that the difficult Brazilian economic environment and a very competitive |
Net Income |
24.8 | (2.8) |
| sectoral framework require. |
(Euro million) | 30Jun19 | 31Dec18 |
| With a reinforced balance sheet and soon freed from the |
Assets | 210 | 161.7 |
| restraints of the judicial reorganization process, Oi can now prepare for a new investment phase that enhances |
Liabilities | 14.7 | 15.4 |
| its strategic ability to compete, with increased efficiency and a decisive presence in the most profitable segments of the sector. of telecommunications. |
Equity | 195.3 | 146.2 |
| In turn, Pharol will benefit from a significant reduction of part of its costs over the coming semesters, linked to the heavy legal litigation that resulted from the dispute with Oi." |
Contactos | ||
| Luís Sousa de Macedo Investor Relations Tel: +351 212 697 698 - E-mail: [email protected] |
Fax: +351 212 697 949 |
CONSOLIDATED REPORT FIRST SEMESTER 2019
| 01. | FINANCIAL REVIEW | 3 |
|---|---|---|
| 02. | BUSINESS PERFORMANCE | 7 |
| 03. | MAIN RISKS AND UNCERTAINTIES | 14 |
| 04. | QUALIFIED HOLDINGS | 16 |
| 05. | OUTLOOK | 19 |
| 06. | STATEMENT FROM THE BOARD OF DIRECTORS | 20 |
| CONSOLIDATED FINANCIAL STATEMENTS | 23 |
"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 June 30, 2019, PHAROL had as its main assets (1) 326,259,859 common shares and 1,800,000 preferred shares of Oi, S.A. ("Oi"), representing 5.5% of total share capital of Oi (excluding treasury shares), and (2) debt securities of Rio Forte Investments S.A. ("Rio Forte") with a nominal value of Euro 897 million. PHAROL also holds a Call Option on 17,076,554 common shares and 34,153,108 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 and, since December 31 2019 presents a null fair value.
On December 30, 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 27.48% 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, which is 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 shareholder's 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. PHAROL has considered it had significant influence over Oi and classifies it as an associate company. As a result, from July 30, 2015, the investment in Oi was accounted according to the equity method, based on PHAROL's economic stake in Oi's results (27.18%).
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, 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 entire share capital (27.18% excluding treasury shares).
On 15 September 2017, to concentrate all its operations in Luxembourg, PHAROL transferred the ownership of all the shares that BRATEL BV had in Oi SA to its subsidiary BRATEL S.à.r.l., 100% owned by BRATEL B.V.
In December 2017, and after the decision by the Court of the 7th Business Court of Rio de Janeiro, which it handles the Judicial Recovery of Oi and which decided to withdraw the rights of the members of the Board of Directors of Oi in the approval of the Judicial Recovery Plan, and subsequent events, it was understood that PHAROL lost the significant influence it had until then on its associate Oi. Consequently, on 31 December
2017, PHAROL began to measure its investment in Oi at market value and was classified as "Financial Assets".
Oi, in the disclosure of its consolidated results for 2017, announced that it had restated its Consolidated Equity on January 1, 2016 and December 31, 2016, amounting to BRL 18 billion and BRL 19 billion, respectively. Following this restatement, PHAROL's investment in Oi, being recorded under the equity method, was restated and valued at zero in the periods of 1 January 2016 and 31 December 2016.
On June 30, 2018, PHAROL held 183,483,304 ordinary shares. On July 20, 2018, after the homologation of Capital Increase through debt convert of Oi, PHAROL hold less than 8%.
| Capital Increase through debt convert of Oi, PHAROL hold less than 8%. | ||
|---|---|---|
| On January 9, 2019, as part of the Capital Increase by the Entry of New Resources, Oi's share capital increased from 2,340,060,505 shares to a total of 5,954,205,001 shares representative of Oi's share capital, thereby diluting PHAROL's stake in Oi to less than 4%. |
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| On April 2, 2019, with the approval of an agreement signed between PHAROL and Oi SA on January 8, 2019, in which Oi undertook to reimburse PHAROL through Oi shares and financial resources for the acquisition of Oi's shares, PHAROL now holds a 5.51% stake in Oi. |
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| Consolidated net income for the first half of 2019 represents a gain of 24.8 million Euros and essentially reflects (1) the compensation for damages under the Agreement between Oi and Bratel Sarl of 36.8 million Euros, (2) a loss of Euro 10.1 million due to the reduction in the expected value of Rio Forte, and (3) operating costs of Euro 2 million. |
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| CONSOLIDATED INCOME STATEMENT | ||
| CONSOLIDATED INCOME STATEMENT | ||
| 1H19 | Euro million 1H18 |
|
| Wages and salaries | 0.8 | 0.8 |
| Supplies, external services and other expenses | 1.2 | 1.4 |
| Indirec t taxes |
0.1 | 0.1 |
| Loss before financial results and taxes | (2.0) | (2.4) |
| Depreciations | 0.0 | 0.0 |
| Earnings before interest and taxes | (2.1) | (2.4) |
| Net other gains | (12.6) | 12.5 |
| Loss before financial results and taxes | 10.6 | (14.9) |
| Net interest income | (0.0) | (0.0) |
| Net losses on financial assets and other investments | (26.7) | 0.1 |
| Net other financial losses (gains) | (0.1) | 0.3 |
| Loss before taxes Income taxes |
37.3 12.6 |
(15.3) (12.5) |
Consolidated operating costs amounted to Euro 2.0 million in the first half of 2019 compared to Euro 2.4 million in the first half of 2018. This overall cost reduction was more pronounced in legal and advisory services. In 2019, other net gains include reversal of a provision made in 2018 amounting to Euro 12.5 million, detailed in the notes attached to this report.
Gains on financial assets and other net investments in the first half of 2019 amounted to Euro 26.7 million and reflect (1) compensation for damages under the Oi and Bratel Sarl Agreement amounting to Euro 36.8
| 30 jun 19 31 dec 18 ASSETS Cash and cash equivalents 22.5 38.1 Accounts receivable 2.2 1.9 Non-current assets held for distribution to holders 0.0 0.0 Investments in joint ventures and associates 0.0 0.0 Tangible assets 0.1 0.1 Taxes receivable 0.1 0.1 Financials assets 120.6 46.9 |
Total assets LIABILITIES Short-term debt |
210.0 0.1 |
161.7 0.1 |
|---|---|---|---|
| Other assets | 64.6 | 74.7 | |
| CONSOLIDATED STATEMENT OF FINANCIAL POSITION | |||
| The net profit attributable to PHAROL shareholders in the first half of 2019 was a profit of 24.8 million euros and a loss of 2.8 million euros in the same period of 2018. |
|||
| Following the signature of the already mentioned Agreement with Oi, in the first half of 2019, the gains from tax authority reimbursements of 12.5 million euros recorded in the first half of 2018 were reversed. |
million. , and (2) a loss of Euro 10.1 million due to the reduction in the expected value of Rio Forte. In the first half of 2018 this caption includes a loss of 128 thousand Euros resulting from the depreciation of the Call Option. |
The financial assets correspond to the effective participation of PHAROL in Oi at June 30, 2019 and December 31, 2018, with a value of 120.6 million Euros and 46.9 million Euros, respectively. This increase of Euro 73.8 million is mainly explained by (1) damages compensation agreement with Oi with the offsetting of new shares given to Pharol in the amount of Euro 36.8 million, (2) capital increase in Oi made by Pharol in the equivalent amount of Euro 12 million and (3) net valuation of the share as well as of the Real against the Euro in the amount of Euro 24.9 million.
The "Other assets" at June 30, 2019 and December 31, 2018, in the amount of Euro 64.6 million and Euro 74.7 million respectively, correspond essentially to the fair value of the assets of the estimated value of the equity instruments issued by Rio Forte, with a nominal value of 897 million Euros.
Equity amounted to Euro 195.3 million as at 30 June 2019, compared with Euro 146.2 million as at 31 December 2018, an increase of Euro 49.1 million, reflecting (1) the result positive net income generated in the first half of 2019 in the amount of Euro 24.8 million, and (2) the appreciation of the interest in Oi in the amount of Euro 24.3 million.
Oi presented to the market on July 16, 2019 its new strategic plan, pursuing future strategic options, focusing on improving operating and financial performance through a sustainable business model, with the objective of maximizing the Company's value, in the context of the judicial reorganization process, having defined the following 4 pillars:
In accordance with the best corporate governance practices, Oi stresses that the aforementioned plan contemplates projections and estimates (guidance) of the following indicators, based on reasonable assumptions, which are subject to various factors, many of which are not nor will be under the control of the Company:
| Indicator | $2019 - 2024$ |
|---|---|
| Net Service Revenues | CAGR 1 > 2% |
| Indicator | 2019 |
| Routine EBITDA [R\$ billion] | Between 4.5 - 5.0 |
| Indicator | $2019 - 2021$ |
| Routine EBITDA | CAGR 1 15% - 20% |
Below we list all the events that occurred between January 1 and July 25, 2019, that can be read in full at PHAROL's website (www.pharol.pt).
The main changes in qualifying holdings of PHAROL were as follows:
03/Jan/2019 | Blackhill Holding Limited, LLC. held a qualifying holding of 43,311,406 shares, representing 4.83% of PHAROL's share capital and voting rights.
03/Jan/2019 | High Seas Investments, LLC decreased its share of 7.24% to 2.41% of PHAROL's share capital and voting rights.
04/Jan/2019 | Grupo Visabeira SGPS, S.A. reported that it sold a total of 1,000,000 shares, representing 0.1115% of the share capital and voting rights of PHAROL.
As a result of the sales, Grupo Visabeira SGPS, S.A. became the holder of 15,067,041 shares, representing 1.6806% of the share capital and voting rights of PHAROL.
Furthermore, pursuant to the provisions of article 20 of the Portuguese Securities Code, in view of the existing holdings, Fernando Campos Nunes (NIF: 175,776,083) is deemed to be responsible for the total of 15,067,041 shares representing the share capital of PHAROL SGPS, SA, corresponding to 1.6806% of the share capital and voting rights.
10/Jan/2019 | Blackhill Holding Limited, LLC reported that are attributable to Nelson Tanure 43,311,406 shares representing 4.83% of the capital and voting rights of PHAROL acquired by Blackhill Holding Limited LLC, of which he is a beneficial owner, and further informed that Nelson Tanure holds a personal title of 10,000 shares representing 0.00111%. In total, 43,321,406 shares are attributable to Nelson Tanure, corresponding to 4.83% of PHAROL's share capital and voting rights.
12/Mar/2019 | Adar Capital Partners Ltd. decreased its stake from 10.285% to 4.8% of PHAROL's share capital and voting rights.
12/Mar/2019 | High Bridge Unipessoal, Lda. Increased its stake from 6.17% to 9.99% of PHAROL's share capital and voting rights.
12/Mar/2019 | Blackhill Holding Limited, LLC. increased its share from 4.83% to 6.31% of PHAROL's share capital and voting rights.
25/Mar/2019 | Blackhill Holding Limited, LLC. increased its stake from 6.31% to 7.06% of PHAROL's share capital and voting rights.
17/Apr/2019 | Blackhill Holding Limited, LLC. decreases its stake from 7.06% to 4.85% of PHAROL's share capital and voting rights.
14/May/2019 | High Seas Investments, LLC decreased its stake from 2.41% to 1.39% of PHAROL's share capital and voting rights.
20/May/2019 | Blackhill Holding Limited, LLC. decreases its share from 4.85% to 1.92% of PHAROL's share capital and voting rights.
Below we list the main corporate events of PHAROL and Oi:
09/Jan/2019 | PHAROL informed that Oi and its shareholder Pharol/Bratel have reached an agreement for the termination and extinction of any and all judicial and extrajudicial litigation in Brazil, Portugal and all the various countries where there are ongoing discussions involving companies of the two groups.
The agreement is in line with the most modern practices of alternative dispute resolution, which the 7th Corporate Court of Rio de Janeiro has already declared effective.
Oi´s and Pharol´s Boards of Directors have unanimously approved the agreement. Oi´s management and Pharol are in good faith aligned as to Oi's best interests, so that the Company may focus entirely on its operational turnaround and eliminate the distractions and costs relating to litigation.
The terms of the agreement, which have been stipulated in detail in a specific legal instrument, will only be considered valid and effective after approval by the restructuring court. The terms and conditions of this legal instrument are summarized below:
The extinction of all litigation between Oi and Pharol.
a) EUR 25 million payment to Pharol.
b) Delivery of 33.8 million shares of Oi held in treasury to Pharol.
c) confirmation of obligations, assumed by Oi, with respect to the assumption of costs with judicial guarantees related to legal proceedings of Pharol in Portugal;
d) future deposits in an escrow account of amounts to cover losses relating to tax proceedings whose chance of loss is assessed as probable, according to obligation.
a) use of a minimum of EUR 25 million in the subscription of the Capital Increase – New Resources provided for the Company in its Judicial Reorganization Plan;
b) attendance and favorable vote in any of Oi's General Shareholders Meetings concerning the approval or ratification of any act or measure contemplated in the Judicial Reorganization Plan;
c) maintenance of alignment with Oi and support in all instances for the implementation of the approved and ratified Judicial Reorganization Plan; and
d) authorization of Oi's use of any amount returned to Pharol by the Portuguese Tax Authority beginning on March 24, 2015, with guarantee costs and tax-related contingencies, for the purposes of item II.c.d, above.
Oi will also have the right to nominate a member to Pharol's Board of Directors for this mandate, and failure to implement this right is a condition for termination of the agreement.
11/Jan/2019 | PHAROL informed that at the Extraordinary General Meeting of Shareholders held today, the Shareholders resolved to suspend the meeting until 8 February 2019.
28/Jan/2019 | Oi informed that on January 25, 2019, 1,604,268,162 new common shares, corresponding to the balance of new common shares not subscribed by the shareholders during the exercise period of the preemptive right and the period for subscription of excess shares in the Capital Increase – New Resources.
28/Jan/2019 | PHAROL informed that has subscribed 127,548,955 new shares in the context of the capital increase of Oi, which the final figures were disclosed today. Using it own funds, PHAROL subscribed 41,827,181 new shares. In addition to the 166,710,904 shares previously held, if the agreement is approved and these operations take effect, PHAROL will held 328,059,859 shares, representing 5.51% of Oi's share capital.
08/Feb/2019 | PHAROL informed that the following resolutions were adopted by the Shareholders at the Annual Meetings of Shareholders held today:
Chairman: Diogo Campos Barradas de Lacerda Machado
Secretary: Maria de Lourdes Vasconcelos Pimentel da Cunha Trigoso
Chairman: Luís Maria Viana Palha da Silva
Jorge Telmo Maria Freire Cardoso Nelson Sequeiros Rodriguez Tanure Bryan Schapira Maria do Rosário Amado Pinto Correia Pedro Zañartu Gubert Morais Leitão Jorge Augusto Santiago das Neves Avelino Cândido Rodrigues Maria Leonor Martins Ribeiro Modesto Isabel Maria Ferreira Possantes Rodrigues Cascão Aristóteles Luiz Menezes Vasconcellos Drummond Fiscal Council Chairman: José Maria Rego Ribeiro da Cunha Members: Isabel Maria Beja Gonçalves Novo João Manuel Pisco de Castro Alternate Member:
Paulo Ribeiro da Silva
Chairman:
António Sarmento Gomes Mota
Francisco José Queiroz de Barros Lacerda
Pedro Miguel Ribeiro de Almeida Fontes Falcão
09/Feb/2019 | Oi informed that it approved the repurchase aims to guarantee that the Company will undertake its commitment assumed by the Company to transfer the shares of its issuance held in escrow to Bratel S.À.R.L. ("Bratel"), wholly-owned subsidiary of Pharol SGPS, S.A., pursuant to the agreement executed between them, as disclosed in the Material Fact dated as of January 8, 2019.
29/Mar/2019 | PHAROL informed that at the Annual General Shareholders' Meeting held the following resolutions were adopted by the Shareholders:
the management report, balance sheet and individual accounts for the financial year 2018;
the management report, balance sheet and consolidated accounts for the financial year 2018;
The proposed appropriation of results;
A vote of appreciation and confidence to the Board of Directors, the Supervisory Board and the Statutory Auditor and each of its members for the manner in which they conducted the management of the Company in 2018;
The acquisition and disposal of treasury shares by the Company, subject to a decision of the Board of Directors taking into account the market situation, for the period of eighteen months from the resolution, and the consideration, in the acquisitions, shall be within Up and down 25% on the lowest and average shares respectively of the shares to be acquired on Euronext Lisbon during the 3 regulated market sessions immediately prior to the date of acquisition or the constitution of the right to acquire or allocate shares, or correspond to the acquisition price resulting from contracted financial instruments and, on disposals, not less than 25% lower than the average Euronext Lisbon quotation of the shares to be disposed of during the 3 regulated market sessions immediately prior to the disposition, also setting the other conditions. applicable to such operations;
The statement of the Remuneration Committee regarding the remuneration policy of the members of the Company's management and supervisory bodies.
3/Apr/2019 | PHAROL has informed, in addition to its Notice issued on January 9, 2019, that the Approval of the Instrument of Agreement entered into on January 8, 2019 between Bratel S.à.r.l. ("Bratel") and Pharol (indirect shareholder of Oi) and Oi (collectively "Parties") became effective as a period of 15 (fifteen) business days from the publication of the judgment that granted it.
Accordingly, as determined in that Agreement, the date for the fulfillment of the second part of the obligations under both Parties shall begin on this date, including (a) the request to terminate all disputes involving the Parties indicated in the Agreement instrument ( (Litigation)) and (b) the delivery to Bratel of 33.8 million Oi shares held in its Treasury, of which 32 million common shares and 1.8 million preferred shares.
In addition, a number of obligations and rights of the Parties described in the Communiqué issued by Pharol and the Material Fact disclosed by Oi, both dated January 9, 2019, which could be resolved if not agreed, become definitively effective. had been approved by the Judicial Reorganization Court.
17/Apr/2019 | PHAROL reported that following the ratification of the agreement by the Judicial Reorganization Court and the subsequent transfer of 33.8 million shares held in Oi's Treasury, PHAROL became the holder of 326,259,859 common shares and 1,800,000 preferred shares, totaling 328,059,859 shares, representing 5.51% of Oi's share capital.
Below we list the other material events of PHAROL and Oi:
01/Feb/2019 | PHAROL reported that it was subpoenaed by the curator of Espírito Santo International, SA, a Luxembourg-based company whose bankruptcy was declared in October 2014 ("ESI"), as a precautionary measure to interrupt any limitation period, with a view to possible annulment. Notes payments made by ESI during January 2014. PHAROL has reaffirmed that it does not owe any title to ESI and will therefore challenge the lawsuit and exercise all available and appropriate rights to protect PHAROL's stakeholders, in an action that the Company considers without basis.
Below we list other material events about Oi:
15/Jan/2019 | Oi called AGM for April 30, 2019.
29/Jan/2019 | Oi reported that the date of the convened AGM changed to April 26, 2019.
28/Feb/2019 | Oi informed that it became aware, on February 27, 2019, of the final decision rendered by the Arbitral Tribunal constituted in connection with the arbitration initiated by PT Ventures, SGPS SA, an indirect subsidiary of Companha against the other shareholders of Unitel ("Other Shareholders of Unitel") , based on the shareholders agreement between PT Ventures and Unitel's Other Shareholders ("Shareholders Agreement").
27/Mar/2019 | Hi Announces Fourth Quarter 2018 Results
27/Mar/2019 | Oi announced the Call Notice - Ordinary and Extraordinary General Meeting
29/Apr/2019 | Oi announced to the market the filing of the Annual Report (Form 20-F) with the SEC.
14/May/2019 | Oi Releases First Quarter 2019 Results.
21/May/2019 | Oi has informed its shareholders and the market that its indirect subsidiary PT Ventures SGPS SA has sold and on that date transferred all the shares held by it in the Cape Verde telecommunications company Cabo Verde Telecom, SA ("CVT"), representing 40% of CVT's capital stock, for a total amount of US \$ 26.3 million, pursuant to the provisions of clauses 3.1.3 and 5.1 of the Judicial Reorganization Plan of Oi and its subsidiaries in judicial reorganization.
24/May/2019 | Oi informed the market about the RJ Judgment on the filing embargoes filed by Capricorn Capital and Goldentree Distressed Fund.
11/Jul/2019 |Oi provided the market with a clarification on a press release about a new capital increase for new resources.
16/Jul/2019 | Oi announces to the market a new Strategic Plan for the Company contemplating the projections and estimates (guidance) plan of Routine Net Revenue and EBITDA.
The events and circumstances described below could result in a significant or material adverse effect on the financial condition of PHAROL and a corresponding decline or increase in the market price of the ordinary shares of PHAROL.
| Relevant Risks | ||
|---|---|---|
| Oi's Performance | The main risk to which PHAROL is subject in Brazil still stems from the execution of Oi's Judicial Reorganization, as it is still possible until March 2020 to make a third capital increase with cash inflow, which could bring about further destruction of value, if subscription rights are quoted below their theoretical value. |
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| Economic Risks |
With the Judicial Recovery measures already in their final phase of implementation and consequently PHAROL had suffered a dilution in its participation, PHAROL will again be subject in Brazil to the operational performance of the company Oi. |
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| Information Security |
PHAROL is exposed on a daily basis to security risks, including the availability, integrity and confidentiality of the information. |
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| Exchange Rates | Foreign currency exchange rate risks relate mainly to PHAROL's investment in Oi (Brazil). Any exchange rate fluctuations of the Real against the Euro affect the valorization of Oi shares held by PHAROL, and therefore impact PHAROL's results and financial position. |
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| Interest Rate | Interest rate risks basically relate to financial expenses and the floating interest rate debt and cash applications. PHAROL is indirectly exposed to this risk specially in Brazil. It is important to point out that, at June 30, 2019 PHAROL has no debt. |
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| Treasury | PHAROL is mainly subject to credit risks in its treasury applications. | |
| Financial | Applications | In order to dilute these risks, in July 2014 the Board of Directors defined a policy for treasury applications. |
| Risks | Default by Rio Forte as to the reimbursement of the instruments that PHAROL holds following the execution of the Exchange |
The Rio Forte Instruments currently held by PHAROL, are not guaranteed by assets. Therefore, even though there may exist amounts available for reimbursement to Rio Forte's creditors the right to reimbursement of PHAROL will be shared pro rata with the other unsecured creditors of Rio Forte and only after the repayment of all debts to any secured creditors, and after confirmation of the validity of the credits. PHAROL evaluates this instrument every year, with the supervision of the Fiscal Council and External Audit. |
| The value of the Call Option on Oi's shares will depend primarily on the market price for Oi's ordinary and preferred shares, the price of |
| Exercise of the call option on Oi's shares |
which will depend, in its turn, on Oi's performance, including its operations, financial position, business outlook and its development of judicial recovery. The Board of Directors of PHAROL closely monitors Oi's business on regular basis and is further engaged in periodically following up the Call Option for purposes of financial statement recording, as well as the price of Oi's shares. |
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|---|---|---|
| Court proceedings | The Board of Directors subcontracts the risk analysis as to court proceedings to external lawyers and consultants, to know, for each claim, their assessment as to PHAROL's liability (probable, possible and remote occurrence), the status of the proceedings, the amounts involved, provisioned and paid, and what steps should be taken to defend PHAROL's interests |
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| Tax contingencies | In accordance with the agreements with Oi, Oi is responsible for the payment of all contingencies until May 5, 2014 and PHAROL remains and severally liable for these contingencies. |
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| Legal Risks | Disputes or investigations triggered under the Rio Forte Instruments or the Business Combination |
PHAROL may incur in liability under disputes and other future proceedings and incur in legal costs in such disputes or other proceedings. Any liability incurred may adversely affect PHAROL's financial position. |
As at June 30, 2019, qualified holdings represented over 34.35% of PHAROL share capital, as follows:
| DATE OF INFORMATION |
ENTITIES | NO. OF SHARES |
% OF CAPITAL |
% OF VOTING RIGHTS |
|---|---|---|---|---|
| 12/03/2019 | Adar Macro Fund LTD | 43,032,601 | 4.8% | 4.8% |
| Adar Capital Partners Ltd. | 43,032,601 | 4.8% | 4.8% | |
| Adar Macro Fund Ltd. | 43,032,601 | 4.8% | 4.8% | |
| Total attributable | 43,032,601 | 4.8% | 4.8% | |
| 31/05/2012 | Telemar Norte Leste S.A. | 89,651,205 | 10.00% | 10.00% |
| Telemar's sole shareholder is OI S.A | ||||
| Total attributable | 89,651,205 | 10,00% | 10,00% | |
| 02/04/2018 | Novo Banco S.A. | 85,665,125 | 9.56% | 9.56% |
| Directly | 85,665,125 | |||
| Shares held by companies in a controlling or group relationship with Novo Banco, S.A. |
916 | |||
| Shares held by directors and members of the Corporate Bodies |
595 |
| 12/03/2019 | High Bridge Unipessoal, Lda. | 89,551,746 | 9.99% | 9.99% |
|---|---|---|---|---|
| Full chain of controlled undertakings through which the voting rights and/or the financial instruments are effectively held starting with the ultimate controlling natural person or legal entity is formed Atlantis |
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| Global Investments, LLC. | ||||
| Total attributable | 89,551,746 | 9.99% | 9.99% |
Total attributable 85,666,636 9.56% 9.56%
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 the board members and supervisory bodies in PHAROL's share capital, which the company was informed about with reference to June 30, 2019 or the previous date, as indicated:
Isabel Maria Ferreira Possantes Rodrigues Cascão does not hold any securities of PHAROL or other companies that are in a controlling or group relationship. She was appointed for the Board of Directors of PHAROL on February 8, 2019.
The fiscal council members, identified below, do not own any shares of PHAROL.
The managing-director Luís Maria Viana Palha da Silva is also member of the Board of Directors.
The Statutory Auditor does not own any shares of PHAROL.
Having seen its shareholding in Oi successively reduced from 39,7% to 5,51%, Pharol signed with its subsidiary in January 2019 an agreement providing for the withdrawal by both parties of all disputes. that they kept with each other. In addition to a financial compensation that compensates, albeit partially, the damages suffered by the solutions adopted by Oi in its Judicial Reorganization process, this agreement allows, beyond the entry into a new phase of PHAROL's participation in Oi's life, based on the contribution For the improvement of operating efficiency and investments in the Brazilian market, the significant reduction in legal litigation costs incurred so far.
In parallel, and as a result, Pharol, which had been focusing attention and resources on its limited portfolio of assets, now finds more room for possibly longer-lasting intervention by assessing participation in more diversified investments and creating value for its Shareholders and use of tax credits held by the company.
Also regarding the credit on Rio Forte and the lawsuits, there have been no developments that could give this asset greater value or liquidity. The length of court proceedings (including those filed against former Directors and the External Auditor) and the uncertainty surrounding its progress - both in identifying all claims and in valuing assets in the bankrupt estate - make it necessary prudent cost structure management in order to keep Pharol financially prepared for longer schedules.
PHAROL's operating costs, which amounted to Euro 2.0 M in the first half of 2019, fell by 14% over the previous year and optimizing organizational efficiency will continue to be one of the company's top priorities.
PHAROL's share, which at 31 December 2018 was quoted at 0.1632 euros, reached 0.151 euros at the end of 30 June, thus devaluing 7.5% in the first half. However, the liquidity of the security translated, in the same period, into an average daily sale of 3 million shares.
For the purposes of article 246 of the Portuguese Securities Code, the members of the Board of Directors of PHAROL SGPS, S.A., identified hereunder, hereby declare, in their capacity and within their functions as described therein, that, as far as they are aware, and based on information that they have had access to, through the Board of Directors and/or Executive Committee, as applicable, while in office:
Lisbon, July 26, 2019
Luís Maria Viana Palha da Silva, Chairman of the Board of Directors and Managing Director
Aristóteles Luiz Menezes Vasconcellos Drummond, Board Member
Bryan Schapira, Board Member
Jorge Augusto Santiago das Neves, Board Member
Jorge Telmo Maria Freire Cardoso, Board Member
Maria do Rosário Amado Pinto Correia, Board Member
Nelson Sequeiros Rodriguez Tanure, Board Member
Maria Leonor Martins Ribeiro Modesto, Board Member
Pedro Zañartu Gubert Morais Leitão, Board Member
Avelino Cândido Rodrigues, Board Member
Isabel Maria Ferreira Possantes Rodrigues Cascão, Board Member
CONSOLIDATED FINANCIAL STATEMENTS
| CONSOLIDATED FINANCIAL STATEMENTS | |||
|---|---|---|---|
| CONSOLIDATED FINANCIAL STATEMENTS | |||
| PHAROL, SGPS S.A. | |||
| CONSOLIDATED INCOME STATEMENT PERIODS ENDED JUNE 30, 2019 AND 2018 |
|||
| Euro | |||
| Notes | 1H19 | 1H18 | |
| COSTS, LOSSES AND (INCOME) | |||
| Wages and salaries Supplies, external services and other expenses |
5 6 |
750,163 1,162,677 |
787,833 1,433,463 |
| Indirect taxes | 7 | 109,469 | 134,645 |
| Depreciation Net other losses (gains) |
32,222 (12,631,850) |
34,251 12,534,295 |
|
| (10,577,318) | 14,924,487 | ||
| Income (loss) before financial results and taxes | 10,577,318 | (14,924,487) | |
| FINANCIAL LOSSES AND (GAINS) | |||
| Net interest income | 8 | (6,183) | (12,545) |
| Net foreign currency exchange losses Net losses on financial assets and other investments |
(119,217) (26,667,168) |
240,574 127,619 |
|
| Net other financial expenses | 26,016 | 11,372 | |
| (26,766,552) | 367,021 | ||
| Income (loss) before taxes | 37,343,870 | (15,291,508) | |
| Income taxes | 9 | 12,559,711 | (12,528,602) |
| NET INCOME | 24,784,159 | (2,762,906) | |
| Attributable to equity holders of the parent | 24,784,159 | (2,762,906) | |
| Earnings per share Basic and Diluted |
10 | 0.03 | (0.00) |
| PHAROL, SGPS S.A. | |||
|---|---|---|---|
| CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME PERIODS ENDED JUNE 30, 2019 AND 2018 |
|||
| Euro | |||
| Notes | 1H19 | 1H18 | |
| Net Income recognised in the income statement | 24,784,159 | (2,762,906) | |
| Income (expenses) recognised directly in shareholders' equity | |||
| Items that may be reclassified subsequently to the income statement Foreign currency translation adjustments |
619 | 104,333 | |
| Items that will not be reclassified to the income statement Gains (losses) on financial assets at fair value |
24,269,839 | (24,555,585) | |
| Total earnings recognised directly in shareholders' equity | 24,270,458 | (24,451,252) | |
| Total comprehensive income | 49,054,617 | (27,214,158) | |
| Attributable to shareholders of PHAROL SGPS | 49,054,617 | (27,214,158) | |
| The accompanying notes form an integral part of these financial statements. | |||
| PHAROL, SGPS S.A. | |||
|---|---|---|---|
| CONSOLIDATED STATEMENT OF FINANCIAL POSITION PERIODS ENDED JUNE 30 2019 AND DECEMBER 31 2018 |
|||
| Euro | |||
| Notes | 30 jun 19 | 31 dec 18 | |
| ASSETS | |||
| Current Assets | |||
| Cash and cash equivalents | 15 | 22,518,536 | 38,090,992 |
| Accounts receivable Taxes receivable |
2,155,229 55,873 |
1,852,245 54,705 |
|
| Prepaid expenses | 61,078 | 14,554 | |
| Total current assets | 24,790,715 | 40,012,495 | |
| Non-Current Assets | |||
| Tangible assets | 113,845 | 141,950 | |
| Financials assets | 11 | 120,635,190 | 46,892,131 |
| Other non-current assets | 12 | 64,493,253 | 74,637,747 |
| Total non-current assets | 185,242,288 | 121,671,829 | |
| Total assets | 210,033,003 | 161,684,324 | |
| LIABILITIES | |||
| Current Liabilities | |||
| Accounts payable | 13 | 15,593 | 124,757 |
| Accrued expenses | 14 | 1,036,607 | 1,679,280 |
| Taxes payable | 186,548 | 174,835 | |
| Provisions | 17 | - | 12,500,000 |
| Other current liabilities | 17 | 13,399,508 | 856,988 |
| Total current liabilities | 14,638,255 | 15,335,860 | |
| Non-Current Liabilities | 91,622 | 99,955 | |
| 91,622 | 99,955 | ||
| Medium and long-term debt | 14,729,877 | 15,435,815 | |
| Total non-current liabilities | |||
| Total liabilities | |||
| SHAREHOLDERS' EQUITY | |||
| Share capital | 26,895,375 | 26,895,375 | |
| Treasury shares | (179,675,995) | (179,675,995) | |
| Legal reserve | 6,773,139 | 6,773,139 | |
| Reserve for treasury shares | 186,646,315 | 186,646,315 | |
| Other reserves and accumulated earnings | 154,664,292 | 105,609,675 | |
| Total equity | 195,303,126 | 146,248,509 | |
| Total liabilities and shareholders' equity | 210,033,003 | 161,684,324 | |
| The accompanying notes form an integral part of these financial statements. | |||
| PHAROL, SGPS S.A. | |||||||
|---|---|---|---|---|---|---|---|
| CONSOLIDATED STATEMENT OF CHANGES IN EQUITY | |||||||
| PERIODS ENDED JUNE 30, 2019 AND 2018 | |||||||
| Euro | |||||||
| Other reserves | |||||||
| Share capital |
Treasury shares |
Legal reserve |
Reserve for treasury shares |
and accumulated |
Equity excluding non controlling interests |
Total equity |
|
| 26,895,375 | (179,675,995) | 6,773,139 | 186,646,315 | 221,111,507 (24,451,252) |
261,750,341 (24,451,252) |
261,750,341 (24,451,252) |
|
| Balance as at December 31, 2017 | |||||||
| Income (expenses) recognized directly in equity Income recognized in the income statement |
(2,762,905) | (2,762,905) | (2,762,905) | ||||
| Balance as at June 30, 2018 | 26,895,375 | (179,675,995) | 6,773,139 | 186,646,315 | 193,897,350 | 234,536,184 | 234,536,184 |
| Other reserves | Euro | ||||||
| Share | Treasury | Legal | Reserve for | and | Equity excluding non | Total | |
| capital | shares | reserve | treasury shares | accumulated | controlling interests | equity | |
| Balance as at December 31, 2018 | 26,895,375 | (179,675,995) | 6,773,139 | 186,646,315 | 105,609,675 | 146,248,509 | 146,248,509 |
| Income (expenses) recognized directly in equity | - | - | - | - | 24,270,458 | 24,270,458 | 24,270,458 |
| Income recognized in the income statement Balance as at June 30, 2019 |
- 26,895,375 |
- (179,675,995) |
- 6,773,139 |
- 186,646,315 |
24,784,159 154,664,292 |
24,784,159 195,303,126 |
24,784,159 195,303,126 |
| Other reserves | ||||||
|---|---|---|---|---|---|---|
| Treasury | Legal | Reserve for | and | Equity excluding non | Total | |
| capital | shares | reserve | treasury shares | accumulated | controlling interests | equity |
| PHAROL, SGPS S.A. | |||
|---|---|---|---|
| CONSOLIDATED STATEMENT OF CASH FLOWS | |||
| PERIODS ENDED JUNE 30 2019 AND 2018 | |||
| Euro | |||
| Notes | 1H19 | 1H18 | |
| OPERATING ACTIVITIES | |||
| Payments to suppliers | 15.a | (1,773,036) | (1,425,362) |
| Payments to employees | (804,317) | (853,044) | |
| Payments relating to income taxes Other cash receipts, net |
(52,992) (357,015) |
(36,168) 7,207,434 |
|
| Cash flows from operating activities (1) | (2,987,360) | 4,892,860 | |
| INVESTING ACTIVITIES | |||
| Cash receipts resulting from: Financial investments |
- | 157,031 | |
| Interest and related income | 625 | 4,318 | |
| 625 | 161,349 | ||
| Payments resulting from: | |||
| Financial investments | (12,591,430) | (34,971) | |
| Tangible and intangible assets | (4,879) (12,596,309) |
- (34,971) |
|
| Cash flows from investing activities (2) | (12,595,684) | 126,378 | |
| FINANCING ACTIVITIES | |||
| Payments resulting from: | (8,072) | ||
| Loans repaid | (8,333) | ||
| Interest and related expenses | (1,781) (10,114) |
(4,848) (12,920) |
|
| Cash flows from financing activities (3) | (10,114) | (12,920) | |
| Cash and cash equivalents at the beginning of the period | 38,090,992 | 25,152,142 | |
| Change in cash and cash equivalents (4)=(1)+(2)+(3) Effect of exchange differences |
(15,593,159) 20,702 |
5,006,318 (13,651) |
|
| Cash and cash equivalents at the end of the period | 15.b | 22,518,536 30,144,808 | |
| The accompanying notes form an integral part of these financial statements. | |||
(Amounts stated in Euros, except where otherwise mentioned)
As of June 30, 2019, PHAROL indirectly holds through 100% owned subsidiaries, 326,259,859 common shares and 1,800,000 preferred shares of Oi, representing 5.51% of Oi's total share capital (excluding treasury shares).
Based on the agreements concluded on March 30, 2015 between PHAROL and Oi, PHAROL currently holds Rio Forte debt instruments with a nominal value of Euro 897 million and a Call Option on Oi shares. On March 30, 2019, as part of the options matured, PHAROL now holds the call option on 17,076,554 common shares and 34,153,108 preferred shares of Oi.
The interim consolidated financial statements were prepared according to the International Accounting Standard (IAS) 34 Interim Financial Reporting. Therefore, the financial statements do not include all information required by the International Financial Reporting Standards ("IFRS") as adopted by the European Union and so should be read in conjunction with the consolidated financial statements of December 31, 2018. Additionally, the interim management report discloses further explanations regarding major variations in income and expenses, and as such these interim consolidated financial statements should be read with the management report. The disclosed interim financial statements were not subject to external audit or review.
The presented financial statements follow the same accounting policies applied in the most recent annual financial statements. As mentioned in these most recent annual financial statements, as a result of the loss of significant influence it had on its associate Oi, on December 31, 2017, Pharol started to record this investment at market value and classified it as "Financial Assets". As of January 1, 2018, following the introduction of IFRS 9 - Financial Instruments, PHAROL chose to measure this investment at fair value through other comprehensive income for investments in equity instruments, as explained in Note 11.
| 4. | Exchange rates used to translate foreign currency financial statements | |
|---|---|---|
| At June 30, 2019 and December 31, 2018, assets and liabilities denominated in foreign currencies were | ||
| translated to Euros using the following exchange rates to the Euro: | ||
| Currency | 30 jun 19 | 31 dec 18 |
| Real | 4.3511 | 4.4440 |
| USD | 1.1380 | 1.1450 |
| At June 30, 2019 and 2018, the statements of financial position, income statements and cash flows of | ||
| subsidiaries and associated denominated in foreign currencies were translated to euros using the following | ||
| exchange rates to the Euro: | ||
| Currency | 1H19 | 1H18 |
| Real USD |
4.3455 1.1293 |
4.1415 1.2104 |
| Currency | 1H19 | 1H18 |
|---|---|---|
| Real | 4.3455 | 4.1415 |
| USD | 1.1293 | 1.2104 |
| At June 30, 2019 and 2018, the statements of financial position, income statements and cash flows of | ||
|---|---|---|
| subsidiaries and associated denominated in foreign currencies were translated to euros using the following | ||
| exchange rates to the Euro: | ||
| Wages and salaries 5. |
||
| The composition of this caption in the first semester of 2019 and 2018 is as follows: | ||
| Euro | ||
| 1H19 | 1H18 | |
| Fixed and variable remuneration Social security |
604,086 133,496 |
604,748 158,882 |
| Other | 12,582 | 24,203 |
| The composition of this caption in the first semester of 2019 and 2018 is as follows: | ||
|---|---|---|
| Euro | ||
| 787,833 | ||
| Supplies, external services and other expenses 6. |
750,163 | |
| The composition of this caption in the first semester of 2019 and 2018 is as follows: | Euro | |
| 1H19 | 1H18 | |
| Specialized work (i) | 864,415 | 916,807 |
| Insurance | 54,065 | 137,844 |
| Travel | 54,666 | 109,662 |
| Other | 189,531 1,162,677 |
269,150 1,433,463 |
| Indirect taxes Euro 1H19 1H18 108,331 131,322 1,139 3,323 109,469 134,645 |
||
|---|---|---|
| 7. | ||
| VAT Other |
||
| The composition of this caption in the first semester of 2019 and 2018 is as follows: | ||
| The composition of this caption in the first semester of 2019 and 2018 is as follows: | ||
|---|---|---|
| Euro | ||
| 109,469 | 134,645 | |
| Net interest income 8. The composition of this caption in the first semester of 2019 and 2018 is as follows: |
||
| 1H19 | Euro 1H18 |
|
| Net interest earned |
In June 2019, companies located in mainland Portugal are subject to Corporate Income Tax at a base rate of 21.0%, plus (1) up to a maximum of 1.5% of taxable income through a municipal tax, and (2) a state surcharge levied at the rates of 3.0% on taxable income between Euro 1.5 million and Euro 7.5 million, 5.0% on taxable income between Euro 7.5 million and Euro 35 million and 9.0% on taxable income in excess of Euro 35.0 million, resulting in a maximum aggregate tax rate of approximately 31.5% for taxable income higher than Euro 35 million. When calculating taxable income to which the above tax rate is applied, nontax-deductible amounts are added to or subtracted from accounting records. 1H19 1H18 Income tax - current 12,559,711 (12,528,602)
The composition of the corporate income tax for the first semester of 2019 and 2018 is as follows:
| Euro | |
|---|---|
| Income tax | |
| 12,559,711 (12,528,602) |
| In the first half of 2019, following the signature of the already mentioned Agreement with Oi, this caption | |||
|---|---|---|---|
| essentially reflects the reversal of the funds received from the Tax Authority related to corporate income tax | |||
| from previous years that had been recorded in the first half of 2018, in the amount of 12,542,510 euros. | |||
| 10. Earnings per share | |||
| Earnings per share in the first semester of 2019 and 2018 were as follows: | |||
| Euro | |||
| 1H19 | 1H18 | ||
| Net loss attributable to equity holders of | 24,784,159 | (2,762,906) | |
| Pharol Weighted average common shares |
(1) | ||
| outstanding in the period | (2) | 865,647,500 | 865,647,500 |
| Earnings per share from continuing | |||
| operations Basic and diluted |
(1)/(2) | 0.03 | (0.00) |
This caption corresponds to the investment in Oi, which since December 2017 has been measured at fair value. Until that date, Oi was classified as associate and measured by the equity method.
On September 8, 2014, as explained above, PHAROL entered into an Exchange Agreement with Oi, for the Exchange of a portion of Oi shares held directly by PHAROL for the Rio Forte Investment and the Call Option over the shares. The Exchange was completed on March 30, 2015, after obtaining all necessary approvals. Because of the Exchange, the portion of the investment in Oi delivered in connection with the Exchange was classified as a non-current asset held for sale and measured at fair value based on the price of Oi shares until the Exchange Agreement date. The remaining interest of 22.8%, including the interests of 15.9% and 3.0% held directly by PHAROL and Bratel Brasil, respectively, and the interest of 3.9% owned indirectly through the controlling holding companies of Oi, remained classified as an investment in joint ventures, measured according to the equity method of accounting. After the Exchange Agreement, on March 30, 2015, the interest was 27.5%.
As referred to above, leading up to the New Ownership Structure of Oi, the Shareholder Agreements through which Oi was jointly controlled were terminated on July 30, 2015. The simplification of the structure occurred on September 1, 2015, and led to the incorporation by Oi of several assets at fair value that were not previously booked by the holding companies.
As a result of the transaction, PHAROL's effective share in Oi reduced from 27.5% to 27.4%. Furthermore, during 2015, changes to Oi's bylaws were approved, which included a 15% limitation on the voting rights of any individual shareholder.
On October 8, 2015, Oi's Board of Directors homologated the voluntary conversion of Oi's preferred shares into common shares ("Voluntary Conversion of PSs"), approved the effective conversion of the preferred shares, object to the conversion manifestations in BM&FBovespa and in the Bank of Brazil, and accepted the conversion solicitations presented by the holders of American Depository Shares ("ADSs") representative of preferred shares ("Preferred ADSs"). The ADSs representative of the new common shares, resulting from the Offer to Exchange, related with the Voluntary Conversion of PSs, were issued on October 13, 2015. Following this operation, PHAROL's effective stake in Oi decreased from 27.4% to 27.2%.
In accordance with IAS 28 – Investments in Associates and Joint Ventures, there is a presumption that significant influence exists when voting rights are higher than 20%. For voting rights less than 20%, there should be clear indications through which significant influence may be exercised. The limitation to 15% of PHAROL's voting rights, considering the remaining available voting rights, represented as at December 31, 2016, an effective voting right of 18.83%. By analogy, IFRS 10 – Consolidated financial statements consider that control may occur when there is a concentration of significant voting rights, with the remainder of voting rights largely dispersed ("de facto control"). In Oi's shareholder structure, over 30% of ordinary shares are dispersed in free float, and two other shareholders besides PHAROL have voting rights of between 5% and 9% each. 30 jun 19 31 dec 18
| 2016, an effective voting right of 18.83%. By analogy, IFRS 10 – Consolidated financial statements consider | |||
|---|---|---|---|
| that control may occur when there is a concentration of significant voting rights, with the remainder of voting | |||
| rights largely dispersed ("de facto control"). In Oi's shareholder structure, over 30% of ordinary shares are | |||
| dispersed in free float, and two other shareholders besides PHAROL have voting rights of between 5% and | |||
| 9% each. | |||
| However, in December 2017, and after the decision by the 7th Business Court of the District of the Capital | |||
| of the State of Rio de Janeiro, before which it handles the Judicial Recovery ("Judgment"), which decided to | |||
| withdraw the rights of the members of the Council Board of Directors of Oi in the approval of Oi's Judicial | |||
| Recovery Plan in which Oi is located, and subsequent events, it was understood that PHAROL lost the | |||
| significant influence it had until then on its associate Oi SA. Therefore as of December 31, 2017, PHAROL started to record its investment in Oi at market value, and it was classified as "Financial Assets". |
|||
| Therefore, on June 30, 2019 and December 31, 2018, the accounting for Oi Investment, is as follows: | 30 jun 19 | 31 dec 18 | |
| Stock Price Oi (ON) | R\$ | 1.60 | 1.25 |
| Shares Outstanding Market Cap. |
Million R\$ Million |
5,952 9,523 |
2,422 3,028 |
| Number of shares owned by PHAROL % Participation |
Million % |
328.1 5.51% |
166.7 6.88% |
| Market value R\$ | R\$ Million | 524.9 | 208.4 |
The composition of this caption comprises an estimated future recovery of Euro 64.5 million related to the debt securities issued by Rio Forte on June 30, 2019.
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 (currently IFRS9), 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 € 48.8 million.
In addition, in December 2017, the amount of credit claims considered in the last report of the Judicial Administrators was higher than previously considered, the debt recovery valuation was again revised downwards, registering in 8, 32% recovery, equivalent to a reduction of Euro 11.1 million to the amount of Euro 74.6 million. On December 31, 2018, the debt recovery value remains at 8.32%.
On 30 June 2019 and 5 years after the filing of the Rio Forte credit claim, a new report by the Judicial Administrators was published on 30 April 2019, which essentially points to: 1) postponement of the results of the conclusion of the analysis. debt declarations; and 2) downward revision of Rio Forte's asset value in Latin America; Accordingly, and based on these new factors, the recovery in debt recovery was once again revised downwards to 7.19% of nominal value recovery, equivalent to a reduction of 10.1 million euros. Euro to the amount of Euro 64.5 million.
Furthermore, as part of the credit to Rio Forte, PHAROL in December 2017 was informed of a statement from the curators of Espírito Santo International, SA, ("ESI") stating that this bankrupt company will sue PHAROL, requesting the reimbursement of EUR 750 million without specifying the reasons for that request.
| Following this announcement, as early as January 2019, PHAROL was summoned by ESI's trustee as a precautionary measure to discontinue any limitation period in view of any cancellation of ESI Notes payments made during January 2014 |
||
|---|---|---|
| Upon examination of the abovementioned subpoena, PHAROL considers it highly unlikely that any PHAROL conviction on the subpoena could be based on the alleged facts. Accordingly, PHAROL did not record any provision in its financial statements. |
||
| 13. Accounts Payable | ||
| On June 30, 2019 and December 31, 2018, the composition of this caption is as follows: | ||
| Euro | ||
| 30 jun 19 | 31 dec 18 | |
| Current accounts payable | ||
| Current suppliers | 1,894 | 141,666 |
| Others | 13,699 15,593 |
(16,910) 124,757 |
| Euro | ||
|---|---|---|
| Current accounts payable | ||
| 15,593 | 124,757 | |
| 14. Accrued Expenses | ||
| On June 30, 2019 and December 31, 2018, the composition of this caption is as follows: | ||
| 30 jun 19 | Euro 31 dec 18 |
|
| Supplies and external services | 716,107 | 1,243,556 |
| Vacation pay and bonuses Others |
261,468 59,032 |
345,959 89,765 |
During the first semester of 2019 and 2018, payments to suppliers mainly reflect payments, related to third party suppliers and consultants.
On June 30, 2019 and 2018, the composition of this caption is as follows:
| 30 jun 19 | Euro 30 jun 18 |
|
|---|---|---|
| Cash | 2,059 | 4,400 |
| Demand deposits Time deposits |
1,016,476 21,500,000 |
15,019,409 15,121,000 |
| 22,518,536 | 30,144,809 | |
| 16. Guarantees and financial commitments | ||
| As at June 30, 2019 and December 31, 2018, this caption has the following composition: | ||
| Euro | ||
| 30 jun 19 | 31 dec 18 | |
| Bank and other guarantees presented to the tax authorities | 84,617,476 | 84,617,476 |
| Euro | ||
|---|---|---|
| Bank and other guarantees presented to the tax authorities | 84,617,476 | 84,617,476 |
| 84,617,476 | 84,617,476 |
(i) The bank and other guarantees presented to the tax authorities essentially include Euro 85 million on June 30, 2019 and 2018, respectively, related to the tax assessments received by PHAROL. The company presented legal challenges to these assessments and, in accordance with the 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 requested tax. The Portuguese Law, while always allowing for the appeal over taxes liquidated by the tax authorities, only suspends enforcement proceedings upon payment of the tax, or the provision of a guarantee. Providing a guarantee, thereby, avoids the payment of tax before the appeal decision or attachment of assets in enforcement proceedings. The change in the value of the guarantees provided in 2018 occurred due to cancellation due to the expiration of part of the guarantees.
These guarantees were presented by PHAROL as the dominant company of the consolidated fiscal in the years in question, although as of June 30, 2019 the contingencies associated with these guarantees are not the responsibility of the Company, but were transferred to Oi, but remained the same. PHAROL jointly and severally. Notwithstanding the forfeiture and consequent cancellation of part of the Guarantees, tax proceedings remain ongoing and Oi remains liable for them and may amount to up to 381 million euros. Also within the scope of the agreements entered into, Oi is also required to replace the bank guarantees provided by PHAROL to the Tax Authority with guarantees provided by Oi. In cases where this substitution is not possible, Oi has undertaken to provide equivalent guarantees. in favor of PHAROL. Additionally, and as already mentioned above, under the Agreement signed between PHAROL and Oi, in case of sale of Oi's stake in Unitel, Oi will deposit the amounts received from the sale in PHAROL's guarantee account, in order to face any condemnation in assessed tax contingencies. as probable - as provided for in the obligation.
As such, on June 30, 2019, a Pledge Agreement on the shares of Telemar Norte Leste with a maximum amount up to the limit of the potential liabilities currently, is in place.
| 17. Provisions | ||
|---|---|---|
| On June 30, 2019 and December 31, 2018, the composition of this caption is as follows: | ||
| Euro | ||
| 30 jun 19 | 31 dec 18 | |
| Provisions | ||
| Others | - - |
12,500,000 12,500,000 |
In June 2019, following the agreement signed with Oi that clarified the destination of these tax refunds from previous years, the existing provision was reversed and the Tax Authority refunds were recognized under the caption "Other current liabilities".
During the first semester 2019 and 2018 there were no costs or revenues related to associated companies.
During the periods years ended June 30, 2019 and 2018, the fixed remuneration of the Board members, which was established by the Remuneration Committee, amounted to Euro 0.27 million and 0.26 million, respectively.
The Company believes that it is relevant to disclose outstanding balances and transactions with its main shareholders, namely 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 part of the respective economic groups. The tables below present the balances as at June 30, 2019 and December 31, 2018, and the transactions occurred in June 30, 2019 and 2018 between PHAROL and the entities that are identified as shareholders with qualified holding and respective economic groups:
| Euro | ||
|---|---|---|
| 30 jun 19 | 31 dec 18 | |
| Shareholder | ||
| Novo Banco | 6,625,485 6,625,485 |
1,094,507 1,094,507 |
| Cash and bank deposits |
||
| Euro |
| Euro | ||||
|---|---|---|---|---|
| Cash and bank | ||||
| deposits | ||||
| Shareholder | ||||
| 6,625,485 | 1,094,507 | |||
| Euro | ||||
| 1H19 | 1H18 | |||
| Net interest | Costs and | Net interest | ||
| Costs and losses | income | losses | income | |
| Shareholder | ||||
| Novo Banco | 211 | 1,625 | 360 | 6,188 |
| 211 | 1,625 | 360 | 6,188 | |
| 20. Subsequent events | ||||
| Oi's stock price evolution between June30 and July 25, 2019 can be found below: | ||||
| 30 jun 19 | 25 jul 19 | |||
| Oi ON share price (Reais) | 1.6 | 1.45 | ||
| Oi PN share price (Reais) | 1.65 | 1.68 | ||
| Exchange rate Real/Euro | 4.3511 | 4.1771 | ||
| Oi ON share price (Euro) | 0.37 | 0.35 |
| 1H19 | 1H18 | |||
|---|---|---|---|---|
| Net interest | Costs and | Net interest | ||
| Costs and losses | income | losses | income | |
| Shareholder | ||||
| 211 | 1,625 | 360 | 6,188 | |
| 20. Subsequent events Oi's stock price evolution between June30 and July 25, 2019 can be found below: |
||||
| 30 jun 19 | 25 jul 19 | |||
| Oi ON share price (Reais) | 1.6 | 1.45 | ||
| Oi PN share price (Reais) | 1.65 | 1.68 | ||
| Exchange rate Real/Euro | 4.3511 | 4.1771 | ||
| Oi ON share price (Euro) | 0.37 | 0.35 |
STATEMENT OF THE AUDIT COMMITTEE
(Sub-paragraph c), paragraph 1 of Article 246 of the Portuguese Securities Code)
Under the terms and for the purposes of the sub-paragraph c), paragraph 1 of article 246 of the Portuguese Securities Code, the members of the Supervisory Board of PHAROL, SGPS S.A. ("PHAROL") states that:
To the best of their knowledge the information provided for in paragraph a) of paragraph 1 of article 246 of the Portuguese Securities Code was drawn up in accordance with the applicable accounting standards, giving a true and fair view of the assets and liabilities, financial position and the results of PHAROL and the undertakings included in the consolidation perimeter, and that the interim management report includes a fair review of important events that occurred in the period to which it relates and the impact on the respective financial statements, and a description of the main risks and uncertainties for the next six months.
Lisbon, July 26, 2019
President: José Maria Rego Ribeiro da Cunha
Members: Isabel Maria Beja Gonçalves Novo
João Manuel Pisco de Castro
Investor Relations Luís Sousa de Macedo Investor Relations Director PHAROL, SGPS S.A. Rua Joshua Benoliel, 1, 2c Edifício Amoreiras Square 1250-133 Lisboa, Portugal Tel: +351 21 269 7698 Fax: +351 21 269 7949 E-mail: [email protected]
Shareholders, investors, analysts and other interested parties should send their requests for information and clarifications (annual, half year, and quarter reports, press releases, etc.).
Depositary bank Deutsche Bank Trust Company Americas ADR Division Floor 27 60 Wall Street New York 10005-2836 Fax: +1(732)544-6346
Holders of ADRs may also request additional information directly from PHAROL's depositary bank for ADRs in New York.
Website
All publications and communications, as well as information regarding the businesses performed by the Company, are available on PHAROL's Internet page, at the following address: www.pharol.pt
Registered Office Rua Joshua Benoliel, 1, 2c Edifício Amoreiras Square 1250-133 Lisboa, Portugal Tel: +351 21 269 7690 Registered with the Commercial Registry Office of Lisbon Under No. 503 215 058
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