Quarterly Report • Aug 30, 2016
Quarterly Report
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1 E-mail: [email protected]
PHAROL, SA.
First Semester 2016
CONSOLIDATED REPORT
FIRST SEMESTER 2016
| 01. | FINANCIAL REVIEW | 3 |
|---|---|---|
| 02. | BUSINESS PERFORMANCE | 9 |
| 03. | MAIN RISKS AND UNCERTAINTIES | 39 |
| 04. | QUALIFIED HOLDINGS | 41 |
| 05. | OUTLOOK | 46 |
| 06. | STATEMENT FROM THE BOARD OF DIRECTORS | 47 |
| CONSOLIDATED FINANCIAL STATEMENTS | 50 |
"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, 2016, PHAROL had as its main assets (1) 183,662,204 common shares of Oi, S.A. ("Oi"), representing 27.2% of 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 June 30, 2016, as part of the option has reach its maturity, PHAROL's call option is from that date onwards 42,691,385 common shares and 85,382,770 preferred shares of Oi.
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). 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. 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 (27.2% as at June 30, 2016).
In the first semester of 2016, the consolidated net loss amounting to Euro 8.3 million, mainly reflects (1) the Euro 5.7 decrease in the value of the call option, (2) the Euro 3.3 million consolidated operational costs, and (3) a Euro 0.7 million gain in respect of the Real.
| CONSOLIDATED INCOME STATEMENT | ||||
|---|---|---|---|---|
| Euro million | ||||
| 1H16 | 1H15 | 2Q16 | 2Q15 | |
| Wages and salaries | 1.2 | 1.9 | 0.6 | 0.9 |
| Supplies, external services and other expenses | 1.8 | 6.0 | 1.1 | 3.5 |
| Provisions and adjustments | - | - | - | - |
| Indirect taxes | 0.3 | 1.1 | 0.1 | 0.6 |
| Other operational expenses | 0.1 | 0.2 | 0.1 | 0.2 |
| Loss before financial results and taxes | (3.3) | (9.2) | (1.9) | (5.3) |
| Depreciations | 0.0 | 0.0 | 0.0 | 0.0 |
| Earnings before interest and taxes | (3.4) | (9.3) | (1.9) | (5.3) |
| Net other gains | 0.1 | 0.3 | 0.1 | 0.3 |
| Loss before financial results and taxes | (3.4) | (9.6) | (1.9) | (5.6) |
| Net interest income | (0.1) | (0.3) | (0.1) | (0.1) |
| Losses (gains) in losses of joint ventures and associates | (0.1) | (13.3) | (64.2) | (51.9) |
| Net losses on financial assets and other investments | 5.7 | 11.5 | 5.1 | 11.5 |
| Net other financial losses (gains) | (0.7) | 7.0 | (0.3) | 6.5 |
| Loss before taxes | (8.3) | (14.5) | 57.6 | 28.5 |
| Income taxes | 0.0 | 0.0 | 0.0 | - |
| Net loss | (8.3) | (14.5) | 57.6 | 28.5 |
| Attributable to non-controlling interests | - | - | - | - |
| Attributable to equity holders of PHAROL, SGPS S.A. | (8.3) | (14.5) | 57.6 | 28.5 |
Consolidated operating costs amounted to Euro 3.3 million in the first semester of 2016 compared to Euro 9 million in the first semester of 2015. This decrease is explained by (1) lower third parties expenses mainly related to financial and legal services (2) lower wages and salaries expenses and (3) lower indirect taxes.
Gains in joint ventures and associates amounted to Euro 0.1 million in the first semester of 2016, which compares to Euro 13.3 million in the first semester of 2015, corresponding to the losses in the effective share of PHAROL in the results of Oi in the amount of Euro 142.2 million fully compensated by the reversion of a proportion of the impairment amounting to Euros 142.3 million, to reflect the Oi market value as at that date. This amount corresponds to PHAROL's effective share in the results of Oi until June 30, 2016. The gains recorded in 2015, amounting to Euro 13.3 million, reflect PHAROL's effective share in Oi's net income and the net losses of the controlling holding companies of Oi.
Losses on financial assets and other investments in 2016 totaled Euro 5.7 million, reflecting the decrease in value of the Call Option.
Net losses attributable to equity holders of PHAROL amounted to Euro 8.3 million in the first semester of 2016 compared to a Euro 14.2 million loss in the first semester of 2015. The net loss in 2016 reflects the effective stake of PHAROL in the negative Oi net income, decrease in value of the Call Option and operating costs.
| Euro million | ||
|---|---|---|
| 30 Jun 2016 | 31 Dec 2015 | |
| ASSETS | ||
| C ash and cash equivalents | 35.7 | 64.9 |
| Accounts receivable | 0.3 | 0.5 |
| Investments in joint ventures and associates | 99.8 | 102.2 |
| Tangible assets | 0.3 | 0.4 |
| Other assets | 136.1 | 141.0 |
| Total assets | 272.2 | 309.1 |
| LIABILITIES | ||
| Short-term debt | 0.1 | 0.1 |
| Accounts payable | 1.7 | 1.7 |
| Accrued expenses | 8.0 | 6.5 |
| Taxes payable | 0.3 | 0.4 |
| Provisions | 0.1 | 0.1 |
| Other liabilities | 0.9 | 0.9 |
| Total liabilities | 11.1 | 9.8 |
| Total equity | 261.1 | 299.3 |
| Total liabilities and shareholders' equity | 272.2 | 309.1 |
The cash position net of gross debt, accounts payable, accrued expenses, and taxes payable was Euro 26.6 million at June 30, 2016 and Euro 56 million at December 31, 2015.
Investments in joint ventures and associates correspond to PHAROL's effective stake in Oi of 27.2% on June 30, 2016 and at December 31, 2015. On June 30, 2016 and December 31, 2015, PHAROL's investment in joint ventures and associates in Oi corresponded to a total investment of Euro 100 million and Euro 102 million, respectively, a Euro 2 million reduction mainly explained by (1) the effective participation of PHAROL in the negative net income of Oi in the first semester of 2016, representing Euro 142,2 million, (2) the reversal of a proportion of the impairment amounting to Euro 142.3 million, (3) strengthening of the Brazilian Real in the first semester of 2016, with a positive impact of Euro 2.5 million in investments.
Other assets at June 30, 2016, amounting to Euro 136.1 million, mainly include the fair value of assets received on March 30, 2015 in connection with the Exchange: (1) Euro 134.6 million related to the estimated fair value of debt instruments issued by Rio Forte, the nominal value of which amounts to Euro 897 million, and (2) Euro 1.4 million related to the fair value of the Call Option.
Shareholders' equity amounted to Euro 261 million on June 30, 2016 compared to Euro 299 million on December 31, 2015, a decrease of Euro 38.2 million, mainly reflecting (1) the dividend payment to the shareholders amounting to Euro 25.9 million; (2) the loss of Euro 8.3 million recorded in the first semester of 2016, (3) the negative Euro 2.4 million impact in the Oi investment and booked inequity (4) the acquisition of own shares amounting to Euro 1.6 million.
Oi S.A. - Under Judicial Reorganization ("Oi S.A." or "Oi" or "Company") continues with its strategic plan focused on digitalization, convergence, data, cost control and improved user experience, and it has recorded operational advances in its business segments, especially the Residential segment.
Since its launch, the new portfolio of offers (Oi Total, Oi Livre, Oi Mais, Oi Mais Controle and Oi Mais Empresas) has substantially improved the Company's main KPIs, confirming the success of the strategy in offering convergent and high-end plans, in order to build customer loyalty and increase the profitability of the base while providing an improved user experience and higher-quality services.
In the Residential segment, ARPU continued to grow (+4.5% y.o.y.), reaching R\$ 82.1. All residential services (wireline, broadband and pay TV) recorded an increase of ARPU and gross adds, and lower churn. As a result, Residential revenues totaled R\$ 2,411 million, reversing its downward trend and presenting a sequential growth of 0.7% in the quarter.
The residential wireline segment recorded the lowest level of net disconnections since 2013, with 79,000 disconnections. In the broadband segment, the average speed of the customer base exceeded 6 Mbps for the first time and the average speed of gross adds reached 8.0 Mbps, with 57.6% of the sales with speeds equal to or greater than 10 Mbps in 2Q16 (+5.6 p.p. y.o.y.). Oi TV's penetration in households with Oi fixed lines came to 12.3% and the high-end offers accounted for over one quarter of the total pay TV base. It is worth noting that Oi TV's ARPU increased 19.0% y.o.y.
In the Personal Mobility segment, service revenues, which exclude handsets, totaled R\$ 1,878 million (- 3.7% y.o.y.), mainly due to the cuts on interconnection tariffs and the decline in prepaid revenues, which were affected by the Brazilian macroeconomic environment. These effects were partially offset by the good performance of the postpaid segment and data revenues, which supported the improving trend in service
revenues. In addition, the recharger base (prepaid customers who make recharges) reversed its trend and began to grow in July, indicating better outlook for the next quarters.
Data revenues in the Personal Mobility segment grew 20.3% y.o.y., fueled by the launch of new plans (Oi Livre and Oi Mais), which offer more extensive data allowances, the increase in 3G/4G handset penetration in customer base, and investments in upgrading and expanding the capacity of the network.
The B2B segment is facing challenges in the macro environment, but the quality of its revenues continues to improve, based on digitalization and IT and data services. The Corporate segment maintained its focus on profitability by offering data, IT and other non-traditional services, in order to reduce dependence on voice services. Non-voice revenues already represent 67% of total Corporate revenues.
In the B2B segment, small and medium enterprises (SMEs), albeit more strongly affected by the adverse macroeconomic environment, presented an improvement in the main KPIs due to the new strategy implemented at the end of 2015, comprising the simplification of the portfolio focused on digitalization (Oi Mais Empresas), more efficient alternative channels and the acquisition of high-end customers.
Net revenues from the Brazilian operations totaled R\$ 6,323 million in 2Q16, 3.5% lower than in the same period last year, chiefly due to: (i) the macroeconomic deterioration, affecting especially the prepaid and B2B segments; (ii) the cut in the interconnection (MTR) and fixed-to-mobile (VC) regulated tariffs; and (iii) lower customer base. These effects were partially offset by the increase in revenues from broadband (+5.4%) and pay TV (+21.3%) in the Residential segment and the upturn in data revenues (+20.3%) in the Personal Mobility segment.
Routine Opex in the Brazilian operations increased 2.9% y.o.y., well below the level of inflation in the period (+8.9%), totaling R\$ 4,878 million in 2Q16, thanks to the cost control. Routine EBITDA in the Brazilian operations stood at R\$ 1,444 million, 20.5% down year-over-year.
Capex in Brazil totaled R\$ 1,215 million in 2Q16, presenting an annual increase of 16.7% y.o.y. Investments in modernizing and expanding the capacity of the network and IT allow the delivery of offers better suited to consumers' current needs, promoting greater possibilities of use and continuous improvement in user quality and experience.
Net debt closed 2Q16 at R\$ 41,386 million, mainly impacted by the payment of the last installment of the 3G license and severance costs, in addition to investments in working capital and the payment of judicial deposits.
Oi recorded a consolidated net loss of R\$ 656 million in 2Q16.
| in R\$ million* | ||||
|---|---|---|---|---|
| 1H16 | 1H15 | 2Q16 | 2Q15 | |
| Oi S.A. Pro-forma | ||||
| Total Net Revenues | 13,279 | 13,824 | 6,524 | 6,784 |
| EBITDA | 3,201 | 3,910 | 1,435 | 1,899 |
| EBITDA Margin (%) | 24.1% | 28.3% | 22.0% | 28.0% |
| Routine EBITDA | 3,296 | 3,958 | 1,520 | 1,947 |
| Routine EBITDA Margin (%) | 24.8% | 28.6% | 23.3% | 28.7% |
| Consolidated Net Earnings (Loss) | (2,300) | 224 | (656) | 671 |
| Net Debt | 41,386 | 34,644 | 41,386 | 34,644 |
| Available Cash | 5,106 | 16,636 | 5,106 | 16,636 |
| CAPEX | 2,505 | 2,093 | 1,253 | 1,069 |
| *Or otherwise stated |
| in R\$ million* | ||||
|---|---|---|---|---|
| 1H16 | 1H15 | 2Q16 | 2Q15 | |
| BRAZIL | ||||
| Revenue Generating Unit ('000) | 69,198 | 72,975 | 69,198 | 72,975 |
| Residential | 16,153 | 16,791 | 16,153 | 16,791 |
| Personal Mobility | 45,319 | 47,756 | 45,319 | 47,756 |
| C orporate / PMEs | 7,078 | 7,778 | 7,078 | 7,778 |
| Public Telephones | 648 | 651 | 648 | 651 |
| Total Net Revenues | 12,861 | 13,396 | 6,323 | 6,555 |
| Net Services Revenues (1) | 12,736 | 13,125 | 6,256 | 6,487 |
| Residential | 4,805 | 4,951 | 2,411 | 2,460 |
| Personal Mobility | 3,852 | 4,009 | 1,878 | 1,950 |
| Clients (2) | 3,524 | 3,557 | 1,740 | 1,757 |
| C orporate / SMEs | 3,973 | 4,022 | 1,908 | 2,001 |
| Net Clients Revenues (2) | 12,167 | 12,334 | 6,008 | 6,131 |
| Routine EBITDA | 3,130 | 3,745 | 1,444 | 1,816 |
| Routine EBITDA Margin (%) | 24.3% | 28.0% | 22.8% | 27.7% |
| CAPEX | 2,419 | 2,025 | 1,215 | 1,041 |
| Routine EBITDA - CAPEX | 711 | 1,719 | 229 | 775 |
(1) Excludes handset revenues.
(2) Excludes handset and network usage revenues.
On January 7, 2016, in accordance with the resolution taken by the Board of Directors held on May 27, 2015, the Company filed the judicial liability claim before the Lisbon's District Court, against Deloitte & Associados, SROC, S.A. and other entities of the Deloitte Network for breach of its contractual duties, namely as PHAROL's External Auditor, which are legal cause for the losses suffered with the investment in debt instruments issued by entities of Espírito Santo Group.
PHAROL claims an indemnity corresponding to the difference between Euro 897,000,000 and any amount that PHAROL eventually recovers in the context of the insolvency proceeding of Rio Forte, as well as other damages that may be evidenced during proceedings, plus interest counted from the date of service until effective and full payment.
On January 25, 2016, the Company filed a judicial liability claim before the Lisbon's District Court against its former directors Zeinal Bava, Henrique Granadeiro and Luís Pacheco de Melo, for breach of their respective legal and contractual duties, namely the duty to submit to the Board of Directors for approval any investments in debt instruments issued by entities of Espírito Santo Group, as well as the duty to implement an internal control system suitable for these forms of investment. Breach of the abovementioned duties caused several damages to PHAROL, such as Euro 54,900,000, as over time the amounts invested could not be used in the activities of PHAROL and other losses in amounts yet to be determined in execution of sentence.
The Board of Directors thereby complied with the resolution of PHAROL's General Meeting of Shareholders of July 31, 2015, within the six months' deadline.
On January 22, 2016, Oi informed its shareholders and the Market in general of the change in the ratio of the number of common shares of Oi represented by the Depositary Receipts ("Common DRs") issued under its Level II Sponsored Depositary Receipts Program. Until that time, each Common DR represented one (1) common share issued by the Company. After the change in the ratio, each Common DR represented five (5) common shares.
Oi also informed that the other terms and conditions of its Common DR program will remain unchanged. Therefore, the Common DRs issued following the ratio change will be of the same type and will grant their holders the same rights as the Common DRs held prior to the ratio change.
On February 25, 2016, and in furtherance with the Material Facts disclosed on October 26 and 30, 2015, Oi informed its shareholders and the market in general that LetterOne Technology (UK)LLP ("L1 Technology") had issued a press release stating that it has been informed by TIM that TIM does not wish to enter into further discussions about a business combination with Oi in Brazil. L1 Technology's press release stated that, without TIM's participation, L1 Technology cannot proceed with the proposed transaction as previously envisaged.
Oi informed that it will evaluate the impact of this announcement on the possibility of consolidation of the Brazilian market. Oi informed that it will continue to undertake its efforts towards operational improvements and business transformation focusing on austerity, infrastructure optimization, revisions of procedures and commercial actions.
On February 25, 2016, Oi informed its shareholders and the market in general that it had retained PJT Partners as financial advisor to assist Oi in evaluating financial and strategic alternatives to optimize its liquidity and debt profile.
Oi informed that it's operational and commercial focus remains unchanged. Its customers remain its top priority. Oi is committed to continuing to make investments with the goal of permanently improving its quality of service, which it believes will allow it to continue to bring technological advances to its customers throughout Brazil. Oi continues to undertake efforts towards operational improvements and business transformation focusing on austerity, infrastructure optimization, revisions of procedures and commercial actions.
On March 24, 2016, Oi informed its shareholders and the market in general, that at a meeting held on March 23, 2016, the Board of Directors approved an amendment to the Company's Material Act or Fact Disclosure Policy, in order to include the possibility conferred by CVM Instruction No. 547/14, which allows the disclosure of material facts or acts at a newswire website on the world wide web that provides the entire disclosed information in a free-access section.
In this regard, Oi announced that it will hold its publications via the Portal NEO1 (http://www.portalneo1.net). Additionally, Oi notes that its material facts or acts, as well as other corporate information, will also continue to be disclosed through the CVM website (http://www.cvm.gov.br/), and Oi's Investor Relations website (http://www.oi.com.br/ir). Finally, Oi noted that it would update its Registration Form at the CVM website, in order to reflect the changes.
On March 24, 2016, Oi informed its shareholders and the market in general, that it had decided to not disclose projections regarding future performance ("guidance") for 2016, to allow flexibility for Oi in light of the current macroeconomic instability, following the volatility in the past months, especially regarding benchmarks/assumptions that sustained the disclosed projections, such as, for example, the inflation rate and the national product growth rate.
Pursuant to the terms and for the purposes of article 11, paragraph 2, item b) and of article 13 of the Regulation 5/2008 of the Portuguese Securities Code, and in accordance with the resolution of the General Shareholder's Meeting held on November 4, 2015, PHAROL has acquired 10,225,000 treasury shares for a total amount of Euro 1,603,908 (Euro 1,416,308 until March 31, 2015 and 187,600 thereafter). These transactions occurred between February 1 and April 11, 2016, in the Euronext Lisbon.
Following these transactions, PHAROL SGPS S.A. holds 30,865,000 own shares, corresponding to 3.4428% of the Company's share capital.
On March 28, 2016, PHAROL approved the termination of registration of its ordinary shares registered at SEC as foreign private issuer. On April 25, 2016, PHAROL filed a Form 15F with the U.S. Securities and Exchange Commission to voluntarily terminate the registration of its ordinary shares and its reporting obligations under the Exchange Act. On July 26, 2016, PHAROL finished the obligation of reporting filling in the SEC, including its obligations to file annual reports on Form 20-F and reports on Form 6-K.
On April 29, 2016, PHAROL, SGPS S.A. and Bratel B.V., informed, due to the corporate reorganization, the 57,145,521 common shares issued by Oi S.A., representing 6.92% of Oi S.A.'s capital stock, and held by PHAROL SGPS S.A. have been passed on to BRATEL B.V. with PHAROL reducing its direct shareholding in Oi S.A. to 71,067,957 common shares, representing 8.61% of Oi S.A.'s entire share capital (including treasury shares).
Bratel, due to the Corporate Reorganization, now holds 112,594,247 common shares of Oi S.A., which represent 13.63% of Oi S.A.'s entire share capital (including treasury shares).
On May 19, 2016, PHAROL, SGPS S.A. and Bratel B.V., informed, due to the corporate reorganization, that 71,067,957 common shares issued by Oi S.A., representing 8.61% of Oi S.A.'s capital stock, and held by PHAROL SGPS S.A. have been passed on to BRATEL B.V. with PHAROL no longer holding a direct shareholding position in Oi.
Bratel, due to the Corporate Reorganization, now holds 183,662,204 common shares of Oi S.A., which represent 22.24% of Oi S.A.'s entire share capital. Therefore, as PHAROL holds 100% of Bratel, PHAROL now indirectly holds 183,662,204 common shares of Oi S.A., representing 22.24% of the Oi S.A.'s entire share capital. Finally, Bratel holds Oi S.A. shares for investment purposes, without any intent to change Oi S.A.'s control.
On May 12, 2016, Oi disclosed the 2016 first quarter results.
On May 16, Oi announced that its Board of Directors approved the start of negotiations by Oi's management in relation to the financial indebtedness of Oi and of its affiliated companies. Oi and its advisors have scheduled meetings that week in New York to begin formal discussions with Moelis & Company, who acts as advisor for a diverse Ad Hoc Committee of holders of bonds issued by Oi and its subsidiaries, Portugal Telecom International Finance B.V. and Oi Brasil Holdings Coöpertief U.A. Oi requests holders of these bonds that are not currently members of the Ad Hoc Committee to contact Moelis & Company and to join the Ad Hoc Committee.
On May 24, 2016, following its Annual General Meeting of Shareholders, PHAROL informed its shareholders and the market in general that the following resolutions were adopted by the Shareholders
Approval of the management reports, balance sheets and accounts, individual and consolidated, for the 2015 financial year.
Approval of the proposal for application of results and an extraordinary dividends distribution as follows:
General appraisal of the Company's management and supervisory bodies, as well as a special praise to the Board of Directors, Fiscal Council and Statutory Auditor, and of each of their members, for the outstanding way in which the Company was led throughout the 2015 financial year.
Non approval of the amendment of the statutory provisions that provide for the limitation of the number of votes that may be held or exercised by each shareholder;
Approval of the statement of the Compensation Committee on the remuneration policy of the members of the Company's management and supervisory bodies.
At the General Meeting, Shareholders holding 42.51% of the share capital were present or represented.
On 24 May, 2016, PHAROL, SGPS S.A. announced that the following amounts per share would be paid on June 9, 2016, as set out below:
On 2 June, 2016, PHAROL informed that an economic position of 2% of the share capital of PHAROL is attributable to Renaissance Technologies LLC, 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 equity swaps contracted by those funds, reported on 1 June, which establishes the right to acquire 18,003,736 shares of PHAROL.
On 10 June, 2016, Oi informed that Bayard De Paoli Gontijo delivered his resignation as Chief Executive Officer of the Company. The Board of Directors, on this date, elected, as Bayard De Paoli Gontijo's replacement, Marco Norci Schroeder as Chief Executive Officer of Oi, who will also continue in the role of Financial Administrative Officer, which he currently exercises.
On 15 June, 2016, Oi informed that it had received a letter from Bridge informing that through the investment fund under its management, it has become the holder of 31,704,328 common shares and 17,190,300 preferred shares of Oi S.A. ("Company"), equivalent to 4.75% of the Company's voting capital and 10.90% of the Company's preferred shares, totaling 5.92% of the Company's share capital. BRIDGE clarifies that its Fund's acquisition does not aim to achieve a particular percentage of equity. BRDIGE informs that it does not intend to alter the control structure of the Company, whose capital stock is
dispersed in the market, but rather it aims to influence the Company's administrative structure. It states that is does not possess other securities and derivative financial instruments referred to in the acquired shares and it has not entered into any other contracts or agreements that regulate the exercise of voting rights or the purchase and sale of the Company's securities.
On 16 June, 2016, Oi informed that it had entered, via its whollyowned subsidiaries, PT Participações, SGPS, S.A ("PT Participações") and Africatel GmbH & Co. KG ("Africatel KG"), and 75%-owned subsidiary Africatel Holdings B.V. ("Africatel BV"), into a series of agreements with Samba Luxco S.à r. l. ("Samba" or "Helios"), an affiliate of Helios Investors LP and owner of the remaining 25% of Africatel BV, with the primary purpose of settling the arbitral proceedings commenced against Africatel KG in November 2014.
Pursuant to the Settlement and Share Exchange Agreement ("SSEA") executed that day, Samba will, upon completion: (i) withdraw the pending arbitral proceedings and release Oi's subsidiaries from all past and present claims relating to alleged breaches of the Africatel BV shareholders' agreement dated 13 August 2007 (as amended from time to time in accordance with its terms) (the "Africatel SHA") asserted in the arbitration, (ii) waive certain approval rights it has under the Africatel SHA, and (iii) transfer to Oi's subsidiary, Africatel BV, 11,000 shares with a nominal value of € 1 each in the share capital of Africatel BV, reducing Samba's stake in Africatel BV from 25% to 14%.
In exchange, Africatel BV will transfer to Samba its approximately 34% stake in the Namibian telecoms operator, Mobile Telecommunications Limited.
Completion is subject to necessary regulatory and antitrust approvals being obtained.
To give effect to the SSEA, the parties have also executed related amendments to the shareholders' agreement of Africatel BV dated 13 August 2007 and further amendment to this agreement will be executed upon completion.
On 16 June, 2016, Oi informed that it had received a letter from Ontario Teacher's Pension Plan Board ("OTPP"), informing that it has sold, in a series of transactions carried out on the dates of June 13 and 14, a total number of 7,034,767 common shares of Oi.
By virtue of this transactions, OTPP's participation in common shares of Oi has fallen below the 5% threshold established by CVM. OTPP had 39,366,866 common shares, which represented 5.86% of common shares, and currently has 32,332,099 common shares, which represents 4.84% of the common shares of Oi.
OTPP also inform that its equity interest in the company is held for investment purposes, with no intentions to change the control or influence the management structure. As of this date, OTPP does not hold any preferred shares issued by the company.
On 17 June, 2016, Oi informed that it has been involved in negotiations with members of an ad hoc group (the "Ad Hoc Group") made up of holders of, or managers of entities holding beneficial interests in, (i) the 9.750% Notes due 2016 issued by Oi S.A., (ii) the 5.125% Notes due 2017 issued by Oi S.A. and guaranteed by Telemar Norte Leste S.A. ("Telemar"), (iii) the 9.500% Notes due 2019 issued by Oi S.A. and guaranteed by Telemar, (iv) the 5.500% Notes Due 2020 issued by Oi S.A. and guaranteed by Telemar, (v) the 5.625% Notes due 2021 issued by Oi Brasil Holdings Coöperatief U.A. ("Oi Netherlands") and guaranteed by Oi S.A., (vi) the 5.750% Notes due 2022 issued by Oi Netherlands and guaranteed by Oi S.A., (vii) the 6.250% Notes due 2016 issued by Portugal Telecom International Finance B.V. ("PTIF") and guaranteed by Oi S.A., (viii) the 4.375% Notes due 2017 issued by PTIF and guaranteed by Oi S.A., (ix) the 5.875% Notes due 2018 issued by PTIF and guaranteed by Oi S.A., (x) the 5.000% Notes due 2019 issued by PTIF and guaranteed by Oi S.A., (xi) the 4.625% Notes due 2020 issued by PTIF and guaranteed by Oi S.A., (xii) the 4.500% Notes due 2025 issued by PTIF and guaranteed by Oi S.A., and (xiii) the 5.242% Notes due 2017 issued by PTIF and guaranteed by Oi S.A. (collectively, the "Notes," and such holders of the Notes, together with the managers of entities holding beneficial interests in the Notes, the "Noteholders").
Prior to the date hereof, the Company executed a confidentiality agreement (the "Confidentiality Agreement") with certain Ad Hoc Group members (the "Steering Committee") to facilitate discussions concerning the Company's capital structure and potential alternatives for a proposed restructuring of the Company. Pursuant to the Confidentiality Agreement, the Company agreed to disclose publicly, after the expiration of a period set forth in the Confidentiality Agreement, certain information regarding the discussions and/or negotiations that have taken place between the Company and the Steering Committee concerning a restructuring of the Company, as well as all material nonpublic information concerning the Company that the Company has provided to the Steering Committee (the "Confidential Information"). The information included in this press release and certain documents posted on the Company's website referenced herein are being furnished to satisfy the Company's public disclosure obligations under the Confidentiality Agreement. The Confidentiality Agreement has terminated in accordance with its terms, except as otherwise provided therein.
The information contained in the Documents, the Receivables Statement, the Company Term Sheet and the Noteholder Term Sheet is for discussion purposes only and shall not constitute a commitment to vote for or consummate any transaction described therein. Furthermore, the contents of the Documents, the Receivables Statement, the Company Term Sheet and the Noteholder Term Sheet shall not be construed as guidance by the Company in relation to its future results, and the Company waives any responsibility to update such contents or information at any time. The Company has published the Documents, the Company Term Sheet and the Noteholder Term Sheet, and will publish translations of such materials in Portuguese as soon as possible, on its website, available at http://ir.oi.com.br (English) and http://oi.com.br/ri (Portuguese).
On 20 June, 2016, Oi informed that in conjunction with its wholly-owned direct and indirect subsidiaries, Oi Móvel S.A., Telemar Norte Leste S.A., Copart 4 Participações S.A, Copart 5 Participações S.A., Portugal Telecom International Finance BV and Oi Brasil Holdings Coöperatief U.A. (the "Oi Companies"), it had filed a request for judicial reorganization of the Oi Companies with the Court of the State of Rio de Janeiro.
As previously announced, the Oi Companies, together with their financial and legal advisors, are conducting efforts and studies to optimize their liquidity and indebtedness profile. The Company, together with its legal and financial advisors, also negotiated with its creditors and with Moelis & Company, a financial advisor to a group of bond holders, seeking mutual agreement as to the consensual restructuring of the Oi Companies' indebtedness and to strengthen their capital structure.
However, considering the challenges of the Oi Companies' economic and financial situation in connection with the maturity schedule of their financial debts, the threats to the assets of the Oi Companies represented by imminent attachments or freezings in judicial lawsuits and the urgent need to adopt measures that protect the Oi Companies, the Company decided that filing for judicial reorganization would be the most appropriate course of action at this time to (i) preserve the continuity of its offering of quality services to its customers, within the rules and commitments undertaken with the Brazilian National Telecommunications Agency - ANATEL, (ii) preserve the value of the Oi Companies, (iii) maintain the continuity of operations and corporate activities in an organized manner that protects the interests of the Oi Companies and their subsidiaries, their customers, shareholders and other stakeholders, and (iv) protect the Oi Companies' cash and cash equivalents.
The request for judicial reorganization was filed due to challenges confronted by the Company's management in finding a viable alternative with its creditors that enables the Company to achieve the abovementioned purposes, and to adequately protect the Oi Companies against creditors while preserving the continuity of the Oi Companies' operations. The total claims of persons not controlled by Oi listed in documents filed with the request for judicial reorganization total, on this date, approximately R\$65.4 billion. The Management of the Oi Companies intends to take all necessary measures and take the necessary actions in all appropriate jurisdictions to guarantee the effectiveness of this request for judicial reorganization.
On June 21, 2016, as requested by CMVM, PHAROL, SGPS S.A. ( "PHAROL") announced to its shareholders and the market in general that its subsidiary Oi, S.A. ("Oi"), in conjunction with its wholly-owned direct and indirect subsidiaries, Oi Móvel S.A., Telemar Norte Leste S.A., Copart 4 Participações S.A., Copart 5 Participações S.A., Portugal Telecom International Finance BV, and Oi Brasil Holdings Coöperatief U.A. ("the Oi Companies"), filed a request, as of June 20, 2016, for judicial reorganization of the Oi Companies with the Court of the State of Rio de Janeiro, pursuant to Art. 51 of Law No. 11,101/05 and Art. 122, of the Brazilian Corporations Law, pursuant to an urgent measure unanimously approved by the Company's Board of Directors - which has six directors of PHAROL - and unanimously approved by the other authorized governing bodies of the Oi Companies at meetings held on the same date.
As previously announced, the Oi Companies, together with their financial and legal advisors, are conducting efforts and studies to optimize their liquidity and indebtedness profile and lead negotiations with its creditors and with Moelis & Company, a financial advisor to a group of bond holders, seeking mutual agreement as to the consensual restructuring of the Oi Companies' indebtedness and to strengthen their capital structure.
The request for judicial reorganization would be submitted to a Company's General Shareholders' Meeting resolution, on July 22, 2016.
PHAROL also informed that, according to the disclosed Material Fact of Oi, there are no expected alterations to the management or staff structure of the Oi Companies during the judicial reorganization process, and if the request is accepted, all labor obligations and benefits are maintained.
On June 21, 2016, Oi informed that Fitch had announced its review of the credit rating attributed to Oi, downgrading the long-term global and domestic scale credit rating from C to D.
On June 21, 2016, Oi informed that Moody's had announced its review of the credit rating attributed to Oi, downgrading the long-term global scale credit rating from Caa1 to C.
On June 21, 2016, Oi informed that Standard & Poor's had announced its review of the credit rating attributed to Oi, downgrading the long-term global scale credit rating from CCC- to D and the long-term domestic scale credit rating from brCCC- to D.
On June 22, 2016, Oi in line with the Material Fact dated June 20, 2016, informed that, on this date, the 7th Corporate Court of the State of Rio de Janeiro granted, in the judicial recovery proceeding requested by Oi and certain subsidiaries (the "Oi Companies"), a request for injunctive relief to determine the following:
a) The suspension of all lawsuits and execution actions against the Oi Companies, for a period of 180 days, in order to avoid the imposition of judicial constraints during the period between the filing of the request for judicial recovery and the granting of its processing;
b) An exemption from the requirement to present clearance certificates under any circumstance related to the Oi Companies, including for the exercise of their activities (including any debt clearance certificate regarding revenues managed by ANATEL and clearance certificate of distribution of bankruptcy and judicial claims).
On June 22, 2016, Oi informed that on this date, the United States Bankruptcy Court for the Southern District of New York entered an order granting the provisional relief (the "Provisional Relief Order") requested by Oi, Telemar Norte Leste S.A., Oi Brasil Holdings Coöperatief U.A. and Oi Móvel S.A. (together, the "Debtors") in accordance with chapter 15 quests of US Bankruptcy code were decided on June 21, 2016.
Under the Provisional Relief Order, an injunction under 11 U.S.C. § 362 has been entered on a preliminary basis, which prevents creditors from initiating actions against the Debtors or their property located within the territorial jurisdiction of the United States and parties from terminating their existing U.S. contracts with the Debtors. This preliminary injunctive relief will remain in place until the Debtors obtain full recognition of their chapter 15 petitions from the U.S. Court. Upon recognition, a stay under 11 U.S.C. § 362 protecting the Debtors and their U.S. property will be imposed automatically by operation of law.
The hearing to consider the Debtors' petitions is scheduled for July 21, 2016. A copy of the Provisional Relief Order can be obtained at https://ecf.nysb.uscourts.gov.
On June 23, 2016, Oi informed that , on this date, the High Court of Justice of England and Wales granted orders recognizing, in respect of the Company, Telemar Norte Leste S.A. and Oi Móvel S.A. (together, the "Debtors"), the commencement of judicial recovery proceedings (pursuant to Law No. 11,101/05 and the Brazilian Corporations Law) as a foreign main proceeding in accordance with the UNCITRAL Model Law on Cross-Border Insolvency (as set out in Schedule 1 to the Cross-Border Insolvency Regulations 2006 (S.I. 2006 No 1030)) (the "Recognition Orders").
The Recognition Orders provide that the commencement or continuation of proceedings (including any enforcement actions) in England and Wales relating to the Debtors' assets, rights, obligations or liabilities are stayed from 23 June 2016.
On June 23, 2016, Oi informed that it has received a letter from HSBC Global Asset Management announcing that the sum of the portfolio share administered by HSBC, corresponds to 0.00% of shares of listed company capital.
On June 24, 2016, Oi has received a letter from BlackRock, Inc. ("BlackRock") announcing that, on behalf of certain of its clients and in its capacity as investment manager, that it sold preferred shares of Oi S.A. ("Company"), such that, on June 22, 2016, its aggregate equity interest totaled 5,189,650 preferred shares and 184,173 American Depositary Receipts ("ADRs") representing preferred shares, for a total of 5,373,823 preferred shares, representing approximately 3.40% of the Company's total preferred shares.
The equity interest in the Company is held strictly for investment purposes, with no intention to change the control or influence the management structure of the Company; and BlackRock has not executed any contracts or agreements that govern the exercise of the right to vote or the purchase and sale of the Company's securities.
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 June 27, 2016, Oi informed that on this date, Syzygy Capital Management Ltd filed an insolvency
proceeding in The Netherlands Court against Oi Brasil Holdings Cooperatief U.A. ("Oi Brasil Holdings"), one of Oi's financial vehicles in The Netherlands, based on the default by Oi Brasil Holdings of bonds that it had issued in the aggregate principal amount of U.S.\$800,000. This aggressive action by a minority holder was not unexpected, and Oi is fully prepared to take all available measures, including in The Netherlands, to protect against such actions and does not expect any impacts to the judicial reorganization process in Brazil.
In accordance with the Notice to the Market dated June 22, 2016, Oi and certain subsidiaries of Oi ("Oi Companies"), including Oi Brasil Holdings, obtained from the Brazilian Court overseeing Oi's judicial reorganization a preliminary decision granting broad protection against creditor actions in connection with the judicial reorganization request. Moreover, courts in the U.K. and the U.S. have also granted recognition and provisional relief protecting certain Oi Companies from creditor action in those jurisdictions.
Notwithstanding this recent action taken in The Netherlands, Oi looks forward to continuing to engage in constructive reorganization discussions with a majority of creditors in connection with the Oi Companies' judicial reorganization proceedings in Brazil. Oi intends to undertake all appropriate efforts in order to secure the protection of the interests of the Oi Companies and all of their stakeholders.
On June 28, 2016, Oi informed that it received a letter from Morgan Stanley announcing that at, as of June 17, 2016, Morgan Stanley (in the aggregate, through its subsidiaries, Morgan Stanley Capital Services LLC, Morgan Stanley & Co. International plc, Morgan Stanley Uruguay Ltda., Morgan Stanley &Co. LLC, Morgan Stanley Smith Barney LLC, Caieiras Fundo de Investimento Multimercado and Formula XVI Fundo De Investimento Multimercado Credito Privado - Investimento No exterior) reached 50,503,269 common shares issued by the Oi SA (the "Company"), equivalent to 7.6% of the Company´s outstanding common shares.
It has also reached a short position of 24,493,777 common shares, equivalent to 3.7% of the outstanding common shares of the Company.
In addition, Morgan Stanley reached long economic exposure through cash-settled derivative instruments referencing 3,201,100 or 0.5% of the outstanding common shares of the Company; and short economic exposure through cash-settled derivative instruments referencing 26,464,200 or 4.0% of the outstanding common shares of the Company. Finally, Morgan Stanley held a position of 1,684,436 borrowed common shares, and a position of 211,460 loaned common shares issued by the Company. Morgan Stanley does not intend to change the control or management of the Company.
On June 30, 2016, Oi informed that on June 29, 2016, the Judgment of the 7th Corporate Court of the Judicial District of the State Capital of Rio de Janeiro granted the processing of the request for the judicial reorganization of the Company and its direct and indirect wholly-owned subsidiaries, Oi Móvel S.A., Telemar Norte Leste S.A., Copart 4 Participações S.A, Copart 5 Participações S.A., Portugal Telecom International Finance B.V. and Oi Brasil Holdings Coöperatief U.A. (the "Oi Companies"), determining, among other measures, in particular:
a) To request that ANATEL present, within five days, up to 5 names of legal entities with competence and expertise on the subject to be evaluated for appointment as trustee;
b) The ratification of the decision to grant an emergency measure to exempt the Oi Companies from the requirement to present clearance certificates for the exercise of their activities;
c) The ratification of the decision to grant an emergency measure in regards to the suspension of all lawsuit and execution actions for 180 business days;
d) the suspension of the effectiveness of clauses inserted in contracts signed by the Oi Companies that cause the termination of such agreements due to the request for judicial reorganization;
e) permission for the Oi Companies to participate in all forms of bidding processes;
f) that the Oi Companies add "in judicial reorganization" after their respective business names, pursuant to Law No. 11,101 / 05;
g) the suspension of publicity surrounding protests and enrollment in the credit protection agencies, with respect to the Oi Companies, for a period of 180 business days;
h) the presentation by the Oi Companies of monthly statements of accounts throughout the judicial reorganization process, under penalty of dismissal of its officers;
i) that all Presidencies and General Internal Affairs of Justice of Brazil (Superior, State and Federal Courts), and Internal Affairs of the Regional Courts and Superior Labor Court are officiated, and inform of the suspension of lawsuits, in accordance with the terms described in the decision, and requesting notice from the lower courts, in the sense that: i) the eligibility of loans subject to judicial reorganization shall be formalized in accordance with Law No. 11,101 / 05, not through an Official Letter, but rather by formal request of the creditor itself, as instructed in the appropriate debt clearance certificate, and ii) the ongoing
Consolidated Report │ First Semester 2016 23
lawsuits, as plaintiffs or defendants, that demand a gross amount, as provided in Art.6, paragraph 1 of Law No. 11,101 / 05, shall continue the judgment in which they are being processed until execution; and the jurisdictional provisions reflecting asset constriction or in connection with a decision to block or pledge gross amounts that involve any kind of asset loss of the applicants or that interferes with the ownership of goods related to their business activity shall also be suspended, with the court processing the judicial reorganization being response for analyzing the specific case; and
j) the creditors may at any time request the convening of a General Shareholders' Meeting to establish a creditors committee or replace its members, subject to the provisions of Law No. 11,101 / 05.
The Court also ruled that the Oi Companies shall present their recovery plan within 60 business days of publication of the decision, which shall comply with the requirements of Law No. 11,101/05.
On July 5, 2016, PHAROL informed that Hestia Investments DAC, now holds 4.70% of the share capital of PHAROL.
On June 30, Hestia Investments DAC acquired 26,895,375 ordinary shares, representing approximately 3.0% of the share capital of PHAROL. As a result, Hestia Investments DAC now holds 42,112,574 ordinary shares, representing 4.7% of the share capital of PHAROL and of the voting rights of PHAROL.
On July 5, 2016, PHAROL informed that NOVO BANCO S.A. ("NOVO BANCO"), now holds 9.56% of the share capital of PHAROL.
On June 30, 2016 NOVO BANCO sold 26,895,375 ordinary shares representing approximately 3.0% of the share capital and voting rights of PHAROL, SGPS S.A. in an over-the-counter transaction and at an unit price of EUR 0.17 with financial settlement on 5 July 2016.
As a result of the above-mentioned sale, NOVO BANCO now holds 85,665,125 ordinary shares, representing approximately 9.56% of the share capital and voting rights of PHAROL.
On July 7, 2016, Oi informed that, on this date, the shareholder Societé Mondiale Fundo de Investimento em Ações, represented by its manager Bridge Administradora de Recursos Ltda., shareholder of 6.64% of the Company's capital stock, requested that the Board of Directors convene an Extraordinary General Meeting of the Company within a period of eight days, based on art. 123, sole paragraph, subparagraph c of the Brazilian Corporations Law, to discuss the following matters:
(i) Discuss and assess the Company's current economic-financial position, as well as the challenges to be faced henceforth, contemplating any suggestions from shareholders, to be considered by the Company's management in the process of economic-financial uplift currently underway.
(ii) Decide on the dismissal, in individual polls, of the Board Members listed below:
a) Rafael Luis Mora Funes (member) and João do Passo Vicente Ribeiro (alternate);
b) João Manuel Pisco de Castro (member) and Pedro Guimarães e Melo de Oliveira Guterres (alternate);
c) Luís Maria Viana Palha da Silva (member) and Maria do Rosário Amado Pinto Correia (alternate);
d) André Cardoso de Menezes Navarro (member) and Nuno Rocha dos Santos de Almeida e Vasconcellos (alternate);
e) Pedro Zañartu Gubert Morais Leitão (member without alternate);
(iii) Decide on the dismissal of Board Member Marcos Grodetzky (member without alternate);
(iv) Decide on the election of members and alternate members of the Board of Directors, to replace those removed, and also for the vacant Board of Directors positions, as well as the vacant positions of Directors Sergio Franklin Quintella and Joaquim Dias de Castro, who recently submitted their resignations to the Board, to fulfill their respective remaining terms, in accordance with the provisions of art. 69 of the Company's Bylaws. The Board of Directors is evaluating the Request to convene the Meeting and will express its opinion on the matter within the period specified in the Brazilian Corporations Law.
Regarding to the material fact disclosure by Oi - Request For Call Of General Meeting Of Shareholders, PHAROL informed that has been acting in accordance with the interests of Oi and is of the opinion that the board of directors of the Company has been implementing the necessary actions to protect the assets of Oi and to overcome the economic and financial crisis that the Company is facing. The recent judicial recovery request by Oi is part of this strategy: the search for an organized process of restructuring its debt and the legal protection of all stakeholders of the Company.
PHAROL is persuaded that all members of the board of directors of Oi are compliant and will comply with their fiduciary duties and will act in the best interests of the Company, will resort to the governance measures set out in Oi's by-laws and the voting rights of shareholders, as legally established, in order to proceed with the existing strategy and plans, with the sole purpose of enabling its financial recovery.
In addition, PHAROL expects that the members of the board of directors of Oi remain alert to the possible appearance of investors – on the side of equity or on the side of the creditors – focused on the opportunistic return of their investments and who may act in order to obtain an advantageous negotiating position at the expense of the interests of companies going through financial difficulties. As a consequence, any measures that create unsteadiness, in breach of Oi's by-laws and interests may cause major material damage to Oi and to its image and should therefore be avoided by all shareholders.
On July 8, 2016, regarding the CVM requested clarifications concerning the news published on the same date on the website "Portal G1" with the title: " TCU orders Anatel to suspend the agreement with Oi (TCU determina à Anatel suspensão de acordo com a Oi), Oi informed that it was not officially notified of the Order referred to in the news, which was delivered in a proceeding classified as restricted to the Audit Court ("TCU"), of which is not a party. Thus, it is not possible for Oi to comment on the content of such Order.
Nonetheless, Oi believes that the information reported in the news does not change the situation previously disclosed to the market by this Company. According to the news report, "The suspension of the agreement is valid until the court makes the final decision on the subject." In the Notice to the Market dated May 20, 2016, whereby Oi disclosed the "Approval of Term of Adjustment of Conduct by ANATEL," it was recorded that the approval of the Term of Adjustment of Conduct by ANATEL ("TAC") was subject to approval by the TCU for its enforcement.
Thus, according to the news, it is not clear that the Order makes any changes to the suspension of the TAC pending approval of the TCU, previously disclosed to the market in general.
The purpose of the judicial reorganization process is to ensure for the Company economic viability that allows it to fulfill its obligations, including those undertaken under the TAC. This initiative will provide benefits to society through investments in telecommunications services tailored to the current demands of users, establishing a virtuous cycle to promote quality improvements in services and the economic and social development of the country.
On July 11, 2016, PHAROL informed that the members of the Board of Shareholders General Meeting of PHAROL have presented the resignation to their positions to the Chairman of the Supervisory Board.
The Chairman of the Shareholders General Meeting, Mr. João Vieira de Almeida, sent his resignation for professional reasons and, following this decision, the Secretary of the Shareholders General Meeting also resigned.
On July 11, 2016, Oi informed that it has received a letter from PointState Capital LPannouncing that it has become the indirect holder of the total amount of 34,500,000 (thirty-four million, five hundred thousand) common shares issued by Oi S.A. ("Company"), equivalent to 5.16% of the Company's outstanding shares, by means of the ownership of 6,900,000 American Depositary Receipts ("ADR") underlined by those shares issued by the Company.
PointState informs that it does not currently intend to change the control of the Company, and it does not currently intend to exert any influence to the management of the Company.
PointState declares, at last, that, in addition to the acquired ADRs mentioned hereby, it does not own any other securities issued by the Company and it has not executed any agreement that governs the exercise of the voting rights nor the purchase and sale of securities issued by the Company.
On July 12, 2016, Oi informed that it has received a letter from MARATHON ASSET MANAGEMENT L.P., announcing that it has acquired 14,500,000 preferred shares of Oi S.A. ("Company"), bringing its total holdings in the Company to 9.2% of the preferred capital stock of the Company.
Marathon further informs that (i) it does not intend to change or affect the control of the Company, or to change its management team; (ii) does not hold any other securities or derivatives referenced to the shares of the Company; and (iii) has no agreement relating to the exercise of voting rights, the purchase or the sale of shares.
On July 15, 2016, Oi informed that on July 14, 2016, the shareholder Société Mondiale Fundo de Investimento em Ações, that on July 7, 2016 required a call for an Extraordinary General Shareholders' Meeting of the Company, based on art. 123, sole paragraph, subparagraph c of the Brazilian Corporations Law and, as disclosed in a Material Fact on that same date, sent to the Company's Board of Directors correspondence with the following content: "SOCIÉTÉ MONDIALE FUNDO DE INVESTIMENTO EM AÇÕES, registered under corporate taxpayers' registry (CNPJ/MF) No. 20.588.268/0001-01, represented by its manager Bridge Administradora de Recursos Ltda., registered under corporate taxpayers' registry No. 11.010.779/0001-42 ("Shareholder"), informs that it extends the deadline to July 22, 2016 call notice for the Extraordinary General Shareholders' Meeting, as required on July 7, 2016. The Shareholder, however, reserves the right to convene said Meeting directly as allowed by law (Brazilian Corporations Law, art. 123, sole paragraph, subparagraph "c")."
On July 15, 2016, Oi, pursuant to Article 12 of CVM Instruction 358/02, informs that it received correspondence from SOCIÉTÉ MONDIALE INVESTMENT FUND SHARES, with the information that follows below transcribed:
"01. SOCIÉTÉ MONDIALE FUNDO DE INVESTIMENTO EM AÇÕES, registered under corporate taxpayers' registry No. 20.588.268/0001-01 (the "Shareholder"), represented by its manager BRIDGE ADMINISTRADORA DE RECURSOS LTDA., registered under corporate taxpayers' registry No. 11.010.779/001-42, in response to the clarification request dated July 12, 2016 (the "Clarification Request"), hereby, informs the following:
The Clarification Request demanded (i) confirmation of the common and preferred shareholdings of shares issued by Oi S.A. ("Oi" or the "Company") held to-date by the Shareholder and (ii) clarification regarding the lack of notice to the Company regarding the change in shareholdings held by the Shareholder within the period between the notice dated June 14, 2016 and the notice of July 7, 2016.
Firstly, the Shareholder clarifies that, to-date, it holds 46,820,800 common shares and 7,934,624 preferred shares issued by Oi, representing 7.01% of the Company's common shares and 5.03% of the Company's preferred shares, respectively, representing an aggregate total of 6.63% of the Company's capital stock.
On June 14 and July 7, 2016, the Shareholder notified the Company of the acquisition of a relevant shareholding, pursuant to the governing law, and informed that there was no significant change in the shareholdings of the Shareholder between the aforementioned notices.
Furthermore, the Shareholder clarifies that the events that occurred after the notice to the market dated June 14, 2016 do not represent, together or in isolation, relevant variations to justify a need for the communication established in Article 12, paragraph 1 of CVM Instruction No. 358.
However, if the Company believes there is a need to disclose information on all milestones of share interest, represented by percentages and absolute numbers, the Shareholder will begin to observe the Company's interpretation of the legal rule.
Finally, the Shareholder takes this opportunity to clarify that the request to convene the Extraordinary General Meeting, submitted on July 7, 2016, was on an individual basis. The choice for the appointed names to integrate the Company's Board of Directors was made by the Shareholder, without the interference or participation of other Company investors.
The Shareholder does not have or represent the common interest of any other shareholder or group of the Company's shareholders, nor has it signed any type of shareholders' agreement, including voting rights agreement, which discusses shareholdings of Oi's capital stock or the decisions to be resolved at the Company's upcoming General Meetings.
For the reasons set forth above, the Shareholder hopes to have clarified the points raised by you and is available for any other necessary clarifications."
On July 21, 2016, Oi, further to the Notice to the Market dated June 22, 2016, informs its that the hearing to consider the chapter 15 petitions of the Company, Telemar Norte Leste S.A. - In Judicial Reorganization, Oi Brasil Holdings Coöperatief U.A. - In Judicial Reorganization and Oi Móvel S.A. - In Judicial Reorganization (the "Debtors") was held on this date before United States Bankruptcy Court for the Southern District of New York (the "U.S. Bankruptcy Court"). The Debtors sought recognition of their jointly administered judicial reorganization (recuperação judicial) proceeding presently ongoing in the 7th Corporate Court of the Judicial District of the State of Rio de Janeiro (the "RJ Proceeding") as a "foreign main proceeding," as that term is defined in 11 U.S.C. § 1502(4), with respect to each of the Debtors.
No objections to recognition were made, and the U.S. Bankruptcy Court concluded the hearing by issuing an oral ruling granting recognition of the RJ Proceeding as a foreign main proceeding with respect to each of the Debtors. As a consequence of recognition, a stay under 11 U.S.C. § 362 is imposed automatically by operation of law, extending the provisional stay obtained on June 22, 2016 and barring actions in the United States against the Debtors and their U.S. assets, including actions to terminate or otherwise interfere with the Debtors' U.S. telecom operating contracts.
On July 22, 2016, Oi in furtherance of the Material Facts dated June 20 and June 30, 2016, informs its shareholders and the market that the Company's shareholders, in an Extraordinary General Shareholders' Meeting held on this date, ratified the request for judicial reorganization of the Company, submitted together with its wholly-owned direct and indirect subsidiaries Oi Móvel S.A. - In Judicial Reorganization, Telemar Norte Leste S.A.- In Judicial Reorganization, Copart 4 Participações S.A.- In Judicial Reorganization, Copart 5 Participações S.A.- In Judicial Reorganization, Portugal Telecom International Finance BV - In Judicial Reorganization and Oi Brasil Holdings Coöperatief U.A.- In Judicial Reorganization (together with the Company, the "Oi Companies") as an urgent measure, as approved by the Company's Board of Directors and the relevant corporate bodies of the other Oi Companies on June 20, 2016.
The shareholders also authorized the Company's management to make arrangements and perform all acts necessary in relation to the judicial reorganization of the Oi Companies, as well as ratified all actions taken to date.
On July 22, 2016, Oi communicated that the Company's Board of Directors met on this date to assess the requirement for a call of an extraordinary general shareholders' meeting requested by Société Mondiale Fundo de Investimento em Ações.
In light mainly of the Judgment of the 7th Corporate Court of the District of the Capital of the State of Rio de Janeiro (where the Company's judicial reorganization is pending) which granted the request made by the Brazilian National Telecommunications Agency - ANATEL to determine that prior approval from ANATEL is required for, among others, the possible transfer of Oi's corporate control, including the replacement of the Company's Board of Directors, the Board of Directors of Oi believes that, before it resolves upon the possible call of an extraordinary general shareholders' meeting, the 7th Corporate Court of the District of the Capital of the State of Rio de Janeiro should be heard on the timeliness and propriety of the requested call, in order to fully comply with the abovementioned Judgment.
On July 25, 2016, Oi informed that, on July 22, 2016, the 7th Corporate Court of the Judicial District of Rio de Janeiro, which is processing the Company's judicial reorganization, nominated PricewaterhouseCoopers Assessoria Empresarial Ltda. and the law firm Arnoldo Wald to exercise the function of the judicial administrator of the Company, Telemar Norte Leste S.A. - In Judicial Reorganization, Oi Móvel S.A. - In Judicial Reorganization, Copart 4 Participações S.A. - In Judicial Reorganization, Copart 5 Participações S.A. - In Judicial Reorganization, Portugal Telecom International Finance BV - In Judicial Reorganization and Oi Brasil Holdings Coöperatief UA - In Judicial Reorganization. A copy of the decision by which the Judge made the nomination is available to shareholders of the Company at its headquarters, on its website (www.oi.com.br/ri), on the Brazilian Securities Commission's IPE System Empresas.Net (www.cvm.gov.br), as well as on the website of the BM&FBovespa (www.bmfbovespa.com.br). A copy of the translated decision will also be sent, as soon as possible, to the U.S. Securities and Exchange Commission on a Form 6-K.
On July 25, 2016, PHAROL announced that Francisco Ravara Cary has resigned, on this date, from the respective office as non-executive member of PHAROL's Board of Directors.
The Board of Directors has approved to appoint by co-optation, as member of the Board of Directors, to complete the current term of office (2015-2017), José Manuel Melo da Silva, to replace Francisco Ravara Cary. Such co-optation will be submitted to ratification at the next General Meeting of Shareholders of PHAROL.
On July 27, 2016, Oi informed that it received a letter from Société Mondiale Fundo de Investimento em Ações, announcing that, on the closing of July 26, 2016, its interest in preferred shares of Oi S.A. ("Company") was reduced to 3.45% of the total number of preferred shares issued by the Company. As a result, on this date, it informs that it holds 46,770,800 common shares representing 7.00% of the voting capital, 5,434,624 preferred shares representing 3.45% of the total number of issued preferred shares, totaling 6.32% of the Company's share capital.
SOCIETE informs that it does not intend to alter the control structure of the Company, whose capital stock is dispersed in the market, but rather it aims to influence the Company's administrative structure. It states that is does not possess other securities and derivative financial instruments referred to in the acquired shares and it has not entered into any other contracts or agreements that regulate the exercise of voting rights or the purchase and sale of the Company's securities.
On July 28, 2016, Oi informed that it gained access to Official Letter No. 324/2016/SEI/CPOE/SCP-ANATEL ("Official Letter") of the National Telecommunications Agency (Agência Nacional de Telecomunicações - ANATEL), titled "Corporate Changes - need to observe applicable regulations," with the fowling text:
"1. We make reference to the correspondence filed with Anatel's Electronic Information System (Sistema Eletrônico de Informações – SEI) No. 0679542, for the proceeding referenced above, in which Société Mondiale Fundo de Investimento em Ações, represented by its manager Bridge Administradora de Recursos Ltda., in its capacity as shareholder of Oi S.A., requested that this National Telecomunications Agency provide additional clarifications on its position expressed in Official Letter No. 320/2016/SEI/CPOE/SCP-ANATEL, dated July 18, 2016, SEI No. 0663608.
First, we reiterate the need for compliance with the provisions of the Rules of Assessment and Transfer of Control in Telecommunications Service Providers, approved by Resolution No. 101, dated February 4, 1999, especially with respect to the submission of the request for prior consent for an analysis of a transfer of corporate control.
In this context, it must be clarified, once again, that the aforementioned rule, and even the current regulatory framework, does not establish any prohibition with respect to the call for, occurrence of, and participation in the elective process for selecting members of the decision-making bodies of telecommunications service providers. As such, the exercise of political rights by any new controlling shareholders of Oi S.A. and its subsidiaries or affiliated providers, especially voting rights and veto power over the decisions of the Board of Directors, Management or similar organs, shall be conditioned on the agency's acknowledgement through the relevant procedure for prior consent.
In other words, the corporate acts necessary to the elective process at issue, governed by the Brazilian Corporations Law, can be performed up until the new members take office without the need for prior acknowledgement by this Agency. However, after taking office, the new members of the Boards of Directors, Management or similar bodies, elected by the potential new controlling shareholders of the Oi Group, shall excuse themselves from their duties pending the effective acknowledgement of the Agency pursuant to the Rules approved by Resolution No. 101 of 1999."
On August 1, 2016, Oi communicated that, on July 29, 2016 at 6.57 p.m., shareholder Société Mondiale Fundo de Investimento em Ações, represented by its manager Bridge Administradora de Recursos Ltda., holder of 6.32% of the Company's capital stock, sent an e-mail requesting, on the basis of line "c" of the sole paragraph of Art. 123 of the Brazilian Corporation Law, that the Board of Directors call an Extraordinary General Shareholders' Meeting of the Company, within 8 days, to decide on the following matters:
(i) Annulment of the Extraordinary General Meeting of March 26, 2015. Decide on the annulment of Oi's extraordinary general shareholders' meeting that took place on March 26, 2015, in which the terms and conditions of the Exchange Agreement and the Call Option Agreement, both concluded between the Company, Portugal Telecom SGPS S.A. (currently Pharol SGPS S.A. - "Pharol") and others (the "Agreements"), were approved;
(ii) Liability lawsuit for illicit acts conducted against the Company. Decide on the filing of a lawsuit and demand for arbitration against Pharol, the principal shareholders of Pharol that may have participated in injurious acts towards Oi, and its wholly-owned subsidiary, Bratel B.V. ("Bratel"), for the reparation of all the damage caused to the Company due to the illicit acts perpetrated by Pharol during the payment of the shares subscribed under the Public Offering closed on May 6, 2014 ("Public Offering"), notably due to the transfer of overvalued and/or unsubstantiated assets in this payment of capital, as well as, if necessary, request the cancellation of the Agreements;
(iii) Liability lawsuit against the appraiser of the assets contributed to capital. Decide upon the filing of a lawsuit and possible correlated measures against Banco Santander (Brasil) S.A. ("Santander") for having contributed, significantly and decisively, through action or inaction, to the damage suffered by Oi during the subscription by Pharol of the shares issued during the Public Offering, by preparing an incorrect appraisal report on the economic reality of the assets contributed to the capital of the Company;
(iv) Lawsuit against the current and former management of Oi. To decide upon the filing of a lawsuit, with a basis in Art. 159 of the Brazilian Corporation Law and other applicable legal devices, whether judicial or arbitral, against, at least, without prejudice to other current or former members of the management that may be identified in the future: (a) Zeinal Abedin Mahomed Bava; (b) Shakhaf Wine; (c) Henrique Manuel Fusco Granadeiro; (d) Nuno Rocha dos Santos de Almeida e Vasconcellos; (e) Rafael Luis Mora Funes; (f) Luis Maria Viana Palha da Silva; (g) João Manuel Pisco de Castro; (h) Pedro Zañartu Gubert Moraes Leitão; (i) Francisco Ravara Cary; (j) Jorge Telmo Maria Freire Cardoso, due to the contribution, by commission or omission of each one to the consummation of damages caused to Oi, due to the subscription by Pharol of shares issued in the Public Offering with unsubstantiated assets, adopting all the means necessary for the success of this lawsuit, including the possible claims for the annulment of general shareholders' meetings.
(v) To decide upon the authorization for the management of Oi to adopt measures necessary for the implementation of what is to be decided in relation to items "i" through "iv," above, including the hiring of an independent top-tier auditor and other service providers to quantify accurately the damage suffered by the Company, and to identify any other stakeholders (management, former management and service providers in general) responsible for the commission of fraud against the Company.
On August 3, 2016, Oi communicated that the Company's Board of Directors met on this date to assess the new request for a call of an extraordinary general shareholders' meeting sent by Société Mondiale Fundo de Investimento em Ações, as disclosed in the Material Fact dated August 1, 2016. In assessing this request, the Board of Directors considered the following:
(i) there are doubts of legal nature regarding the authority of the general shareholders' meeting to decide upon certain matters in the request; and
(ii) with respect to any action for liability against its management, since it would imply a potential change of the Board of Directors, such matter would produce the same effects as those contained in the request to call a shareholders' meeting previously submitted by the same shareholder, which request is the subject of a consultation with the 7th Corporate Court of the District of the Capital of the State of Rio de Janeiro, where the Company's judicial reorganization is pending.
Consolidated Report │ First Semester 2016 34
Regarding the possible lawsuit against its management, the Company's Board of Directors reiterates its view that, before it resolves upon the possible call of an extraordinary general shareholders' meeting, the 7th Corporate Court of the District of the Capital of the State of Rio de Janeiro should be heard on the timeliness and propriety of the requested call, in order to fully comply with the Court's decision mentioned in the Notice to the Market disclosed by the Company on July 22, 2016. With respect to the other items proposed in the request for the call of the meeting, in order to be able to assess the legality of such matters and resolve on the call in due course, the Board of Directors authorized the management to request a legal opinion of a legal professional with notable expertise in the matter.
On August 8, 2016, Oi informed that it received a letter from Morgan Stanley, announcing as June 29, 2016, that Morgan Stanley (in the aggregate, through its subsidiaries, Morgan Stanley Capital Services LLC, Morgan Stanley & Co. International plc, Morgan Stanley Uruguay Ltda., Morgan Stanley & Co. LLC, Morgan Stanley Smith Barney LLC, Caieiras Fundo de Investimento Multimercado and Formula XVI Fundo De Investimento Multimercado Credito Privado – Investimento no exterior) reached 7,893,554 preferred shares issued by OI S.A. (the "Company"), equivalent to 5.0% of the Company´s outstanding preferred shares. Such position already includes 121,900 loaned preferred shares and 2,903,019 borrowed preferred shares issued by the Company.
It has also reached a short position of 4,736,533 preferred shares, equivalent to 3.0% of the outstanding preferred shares of the Company.
Finally, Morgan Stanley reached long economic exposure through cash-settled derivative instruments referencing 3,200,000 or 2.0% of the outstanding preferred shares of the Company; and short economic exposure through cash-settled derivative instruments referencing 5,922,300 or 3.8% of the outstanding preferred shares of the Company. Morgan Stanley does not intend to change the control or management of the Company.
On August 9, 2016, Oi informed its shareholders and the market in general that, on this date, the Court of Amsterdam granted the request of Oi Brasil Holdings Coöperatief U.A. - Under Judicial Reorganization ("Oi Brasil Holdings"), one of the Company's financial vehicles in the Netherlands, for a suspension of payments
Consolidated Report │ First Semester 2016 35
proceeding, initiated in order to ensure compatibility in that jurisdiction with the Oi Companies' judicial reorganization proceeding in Brazil. Among other matters addressed, a judicial administrator was nominated to oversee Oi Brasil Holdings' suspension of payments in the Netherlands.
On August 10, 2016, PHAROL regarding the notices published on Tuesday (09.08.2016) by a shareholder of Oi, PHAROL, SGPS SA ("PHAROL") states that:
On August 10, 2016, Oi informed in light of the questions received by the Company with respect to the publications of call notices for Extraordinary General Shareholders' Meetings of the Company, to be held on September 8, 2016 ("Meetings"), put forth by shareholder Société Mondiale Fundo de Investimento em Ações, pursuant to Art. 123, sole paragraph, line "c" of Law No. 6,404/76, that the possibility of calling a general meeting to resolve upon matters that result in the possible replacement of board members is subject to prior judicial authorization, in accordance with the findings of the Judgment of the 7th Corporate Court of the Judicial District of the State of Rio de Janeiro dated July 14, July 26, July 28 and August 3, 2016, as stated in the Notices to the Market dated July 22 and August 3, 2016.
On August 10, Oi informed that the material on the extraordinary general meetings and the information contained therein were supplied by the shareholder Société Mondiale Investment Fund Shares, through its Bridge management Administradora de Recursos Ltda., and that, pursuant to CVM Instruction 481/09, such shareholder is liable to the CVM for the information provided by the Company. The Company points out that it is not responsible for the accuracy, completeness or consistency of such information, nor corroborates the terms of the Assembly convened.
On August 11, 2016, PHAROL informed that Hestia Investments DAC, holds 5,01% of the share capital of PHAROL and of the voting rights of PHAROL since August 11, corresponding to 44,884,411 ordinary shares.
On August 11, 2016, Oi disclosed the 2016 second quarter results.
On August 12, 2016, Oi informed that the Company's Board of Directors, in a meeting held on that date
date, unanimously nominated Messrs. Marcos Duarte Santos and Ricardo Reisen de Pinho to fill the vacancies of members of the Board of Directors for the remainder of their respective terms until the 2018 Ordinary General Shareholders' Meeting. Both are considered to be Independent Members under the terms of Novo Mercado Listing Regulation adopted by the Company's Bylaws.
Mr. Marcos Duarte holds a bachelor's degree in production engineering from the Universidade Federal do Rio de Janeiro and has vast experience in the financial and capital markets, having worked at Banco Icatu, Bankers Trust Company, CSFB - Garantia e Polo Gestão. He also held positions on the fiscal councils of various companies in the telecommunications sector, including Tim Nordeste, Tim Sul and Oi, where, since 2010, he has held a position on the Board of Directors of Casa and Vídeo.
Mr. Ricardo Reisen holds a bachelor's degree in mechanical engineering and a master's degree in finance from Pontifícia Universidade Católica do Rio de Janeiro. He has 30 years of experience in financial services and corporate governance, making relevant contributions to leading companies in various segments, including Banco Garantia, Banco Itaú and Cerbero Ltd. He is a Certified Advisor by the Brazilian Institute of Corporate Governance (Instituto Brasileiro de Governança Corporativa - IBGC) and a current member of the Advisory Board of Editora do Brasil and of the Boards of Directors of Light S/A, Brasil Insurance and Brado Logística, the latter in which he also serves as a member of the Finance, Compensation, Auditing and Compliance Committee.
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 in the market price of the ordinary shares of PHAROL or the PHAROL ADSs, as the case may be.
| Relevant Risks | ||
|---|---|---|
| The main risk to which PHAROL is subject to derives from Oi's operational and financial performance, notably Oi's ability to generate profits and cash flow and pay dividends. |
||
| Economic Risks |
Oi's Performance | Oi's performance is also dependent on the performance of the Brazilian economy and, at this time in particular, the evolution of the judicial recovery process that the Company has adopted. Despite the fact that this process can bring financial and operational stability to the Company, it depends on numerous wills not fully controlled by Oi. In the event of failure in negotiations with creditors, Oi may face serious difficulties in the normal development of their activities. |
| 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 translation of the results attributable to PHAROL, and therefore impact PHAROL's results and financial position. |
|
| The Company does not have a hedging policy regarding the value of these investments. |
||
| Interest Rate | Interest rate risks basically relate to financial expenses and the floating interest rate debt and cash applications. PHAROL is exposed to this risk specially in Brazil. It is important to point out that, at June 30, 2015, PHAROL has no debt. |
|
| Regarding debt, Oi is consolidated by the equity method in PHAROL's Financial Statements. Market interest rates also affect the discount rates used for impairment testing to the various assets of the entity. |
||
| Financial Risks |
Treasury Applications |
PHAROL is mainly subject to credit risks in its treasury applications. In order to dilute these risks, in July 2014 the Board of Directors defined a policy for treasury applications. |
| 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, following the consummation of the Exchange on March 30 2015, 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. |
|
| Exercise of the call option on Oi's shares |
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 which will depend, in its turn, on Oi's performance, including its operations, financial position and business outlook. 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. |
| Court proceedings | The Board of Directors subcontracts the risk analysis as to court proceedings to external lawyers and consultants, so as 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. |
|
|---|---|---|
| Tax contingencies | PHAROL may incur future liabilities under its tax obligations with the Tax Authorities. In the context of the agreement with Oi, where Oi assumes responsibility for the direct payment of all contingencies until May 5, 2014, PHAROL remains directly and severally liable for these contingencies. |
|
| 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 and the capacity to fully implement the Business Combination. On January 13, 2015, PHAROL received a subpoena ("Subpoena") from SEC in relation to a private inquiry demanding that PHAROL deliver documents and other information on several topics, including the Rio Forte Instruments and treasury applications in entities pertaining to the Espírito Santo Group, the Business Combination between PHAROL and Oi, communications made by PHAROL, internal controls and the investigation conducted by international auditors in relation to the procedures adopted and the actions undertaken by PHAROL in respect of the Rio Forte Instruments and other investments in entities pertaining to GES. On June 1, 2015, PHAROL received another subpoena asking for more information related to these matters. PHAROL is cooperating with SEC in respect of the investigation and the Subpoenas. |
| SEC's comments on Form 20-F for 2013 |
In 2013, the PHAROL presented its financial statements to various entities and institutions. Form 20-F for 2013 is still subject to revision by SEC, which has requested additional information for its analysis. SEC's comments include topics related to the Rio Forte Instruments, the communication of information on related party transactions, communications on the concentration of credit risks, the accounting treatment of the investment in Unitel as of December 31, 2013 and other aspects. SEC's comments may lead to the amendment of Portugal Telecom's consolidated accounts for 2013 and previous years and other disclosures in Form 20-F or even financial penalties. PHAROL cannot predict when SEC's revision and comments will end. As to the 2013 Form 20-F, the Board of Directors appointed a law firm for purposes of legal advice and follow up of the progress of the procedure. General Secretariat have made efforts to respond to SEC's requests as fully and swiftly as possible. Additionally, a new timeline has been established with the new PHAROL External Auditor for compliance with the reporting periods established both by CMVM and by SEC. |
As at June 30, 2016, qualified holdings represented over 36% of PHAROL share capital, as follows:
| DATE OF INFORMATION |
ENTITIES | NO. OF SHARES | % OF CAPITAL | % OF VOTING RIGHTS |
|---|---|---|---|---|
| 31/may/12 | Telemar Norte Leste | 89,651,205 | 10.00% | 10.00% |
| 05/jul/16 | Novo Banco | 85,703,041 | 9.56% | 9.56% |
| 14/ago/15 | Banco Comercial Português | 55,304,969 | 6.17% | 6.17% |
| 30/jun/16 | Hestia Investments DAC (a) | 42,112,574 | 4.70% | 4.70% |
| 26/jul/16 | Norges Bank (b) | 28,983,570 | 3.23% | 3.23% |
| 02/jan/14 | Grupo Visabeira | 23,642,885 | 2.64% | 2.64% |
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 June 30, 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.
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, 2016 or the previous date, as indicated:
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 and CFO of Novo Banco, SA. He was also a 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.
The fiscal council does not own any shares of PHAROL.
The Statutory Auditor does not own any shares of PHAROL.
PHAROL's management intend to exclusively focus on the management of the Company's current portfolio, not foreseeing diversification in its activities nor relevant investments.
PHAROL holds as its main asset, its investment in Oi, being its most relevant shareholder with 183,662,204 common shares and a stake of 27.18% of its equity, and also holds a Call Option over 42,691,385 common shares and 85,382,770 preferred shares of Oi.
Having monitored Oi's management, Oi has followed the guidelines in it Strategic Plan, and that are based on a significant cost reduction programme and investment optimization program, focused on its investments and opportunities for growth and return, the exploring and identification of opportunities for consolidation in the Brazilian market and the strengthening of its balance sheet.
PHAROL additionally has a credit over Rio Forte and will continue to carefully monitor the ongoing liquidation process in Luxembourg, with a view to maximizing the settlement of the Rio Forte Instruments. Among the possible scenarios, there is the possibility to trigger legal proceedings against Rio Forte, the relevant related parties and others.
PHAROL will monitor the value of its Call Option on Oi shares and analyze the alternatives that enable the maximization of value which includes the possibility of monetizing the aforementioned instruments.
PHAROL's Financial Statements are characterized today by the absence of financial debt but with some risks and lawsuits, that may potentially lead to further liabilities, and that are identified throughout this report. These are mainly contingencies that have been transferred to Oi, but in which PHAROL is severally liable, and have occupied a significant part of the Company's leadership team efforts.
The optimization and distribution to shareholders of any cash surplus has been a concern of management and the Board of Directors has made significant steps in this direction by approving the dividend payment of Euro 0.03 per share, paid on June 9,2016.
During the first semester of 2016, PHAROL's operating expenses were Euro 3.3 million representing a significant decrease - 64% on a comparable basis - and should maintain the same trend in 2016 and in the coming years.
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, August 30, 2016
Luís Maria Viana Palha da Silva, President of the Executive Committee and Chairman of the Board of Directors
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
Ricardo Malavazi Martins, Board Member
(*) Francisco Ravara Cary resigned on July 25, 2016 and was appointed José Manuel Melo da Silva as new member of the Board of Directors of PHAROL
CONSOLIDATED FINANCIAL STATEMENTS
| PHAROL, SGPS S.A. | |||||
|---|---|---|---|---|---|
| CONSOLIDATED INCOME STATEMENT | |||||
| PERIODS ENDED JUNE 30 2016 AND 2015 | |||||
| Notes | 1H16 | 1H15 | 2Q16 | Euro 2Q15 |
|
| COSTS, LOSSES AND (INCOME) | |||||
| Wages and salaries | 5 | 1,159,885 | 1,907,156 | 568,991 | 901,247 |
| Supplies, external services and other expenses | 6 | 1,841,383 | 6,035,767 | 1,087,985 | 3,538,877 |
| Indirect taxes | 7 | 263,686 | 1,076,070 | 143,835 | 607,014 |
| Depreciation | 41,937 | 47,047 | 12,406 | 23,393 | |
| Net other losses (gains) | 54,831 | 230,002 | 65,811 | 230,002 | |
| 3,361,722 | 9,347,341 | 1,879,028 | 5,351,832 | ||
| Income (loss) before financial results and taxes | (3,361,722) | (9,347,341) | (1,879,028) | (5,351,832) | |
| FINANCIAL LOSSES AND (GAINS) | |||||
| Net interest income | 8 | (114,910) | (313,886) | (52,801) | (113,618) |
| Net foreign currency exchange losses | 12 | (684,188) | 5,935,604 | (365,439) | 5,961,862 |
| Net losses on financial assets and other investments | 12 | 5,737,470 | 11,477,002 | 5,086,927 | 11,477,002 |
| Equity in losses of joint ventures and associates | 11 | (88,819) | (13,280,356) | (64,234,013) | (51,935,026) |
| Net other financial expenses | 29,496 | 1,065,281 | 46,297 | 496,361 | |
| 4,879,048 | 4,883,645 (59,519,030) (34,113,419) | ||||
| Income (loss) before taxes | (8,240,771) (14,230,986) | 57,640,003 | 28,761,587 | ||
| Income taxes | 15,233 | 18,259 | 15,233 | 18,213 | |
| Net income (loss) for the period | (8,256,004) (14,249,245) | 57,624,770 | 28,743,374 | ||
| Attributable to non-controlling interests | - | - | - | - | |
| Attributable to equity holders of the parent | (8,256,004) (14,249,245) | 57,624,770 | 28,743,374 | ||
| Earnings per share | |||||
| Basic | 10 | (0.01) | (0.02) | 0.07 | 0.03 |
| Diluted | 10 | - | (0.02) | - | 0.03 |
| PHAROL, SGPS S.A. | ||||
|---|---|---|---|---|
| CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME PERIODS ENDED JUNE 31 2016 AND 2015 |
||||
| Euro | ||||
| 1H16 | 1H15 | 2Q16 | 2Q15 | |
| Net Income recognised in the income statement | (8,256,004) | (14,249,245) | 57,624,770 | 28,743,374 |
| Income (expenses) recognised directly in shareholders' equity | ||||
| Items that may be reclassified subsequently to the income statement | ||||
| Foreign currency translation adjustments (i) | (25,330,716) | 3,965,523 | (17,822,064) | 28,624,842 |
| Gains (expenses) recorded in shareholders' equity related to joint ventures (ii) | 22,974,462 | (142,884,664) | 6,671,872 | (143,097,927) |
| Items that will not be reclassified to the income statement | ||||
| Other expenses recognised directly in shareholders' equity, net | 894,056 | - | (517,734) | |
| Total earnings recognised directly in shareholders' equity | (2,356,253) | (138,025,085) | (11,150,192) | (114,990,819) |
| Total comprehensive income | (10,612,257) | (152,274,330) | 46,474,578 | (86,247,445) |
| Attributable to non-controlling interests | - | - | - | - |
| Attributable to shareholders of PHAROL SGPS | (10,612,257) | (152,274,330) | 46,474,578 | (86,247,445) |
The accompanying notes form an integral part of these financial statements.
(i) Losses recorded in the first quarter of 2016 and 2015 mainly relate to the impact of the depreciation of the Real against the Euro on the investments in Brazil as well as on Oi's investments outside Brazil.
(ii) This caption relates to the effective share of PHAROL in the fair value variations of Oi's financial instruments.
| Euro | |||
|---|---|---|---|
| Notes | 30 Jun 2016 | 31 Dec 2015 | |
| ASSETS | |||
| Current Assets | |||
| C ash and cash equivalents | 16.d | 35,700,322 | 64,879,371 |
| Accounts receivable | 297,509 | 542,036 | |
| Taxes receivable | 58,461 | 24,437 | |
| Prepaid expenses | 150,265 | - | |
| Total current assets | 36,206,557 | 65,445,845 | |
| Non-Current Assets | |||
| Taxes receivable | - | - | |
| Investments in joint ventures and associates | 11 | 99,766,365 | 102,230,974 |
| Tangible assets | 298,100 | 421,578 | |
| Other non-current assets | 12 | 135,956,597 | 141,045,340 |
| Total non-current assets | 236,021,061 | 243,697,892 | |
| Total assets | 272,227,618 | 309,143,737 | |
| LIABILITIES | |||
| Current Liabilities | |||
| Short-term debt | 14,565 | 15,851 | |
| Accounts payable | 13 | 1,748,973 | 1,729,138 |
| Accrued expenses | 14 | 7,951,095 | 6,539,596 |
| Taxes payable | 310,349 | 424,215 | |
| Provisions | 15 | 75,858 | 75,858 |
| Other current liabilities | 867,147 | 905,214 | |
| Total current liabilities | 10,967,986 | 9,689,871 | |
| Non-Current Liabilities | |||
| Medium and long-term debt | 112,979 | 121,281 | |
| Total non-current liabilities | 112,979 | 121,281 | |
| Total liabilities | 11,080,966 | 9,811,152 | |
| SHAREHOLDERS' EQUITY | |||
| Share capital | 26,895,375 | 26,895,375 | |
| Treasury shares | (179,675,734) | (178,071,827) | |
| Legal reserve | 6,773,139 | 6,773,139 | |
| Reserve for treasury shares | 186,646,054 | 185,042,147 | |
| Other reserves and accumulated earnings | 220,507,819 | 258,693,752 | |
| Total equity | 261,146,653 | 299,332,586 | |
| Total liabilities and shareholders' equity | 272,227,618 | 309,143,737 |
CONSOLIDATED STATEMENT OF CHANGES IN EQUITYPERIODS ENDED JUNE 31 2016 AND 2015
| Eur o |
||||||||
|---|---|---|---|---|---|---|---|---|
| Oth er res erv es |
lud Equ ity ing exc |
|||||||
| Sha re |
Tre asu ry |
Leg al |
Res e f erv or |
and ula ted ac cum |
ntr oll ing non -co |
No ont rol ling n-c |
To tal |
|
| ita l cap |
sha res |
res erv e |
sha tre asu ry res |
rni ea ngs |
int sts ere |
int sts ere |
uit eq y |
|
| Bal t D mb 31, 20 14 anc e a s a ece er |
,89 26 5,3 75 |
(17 8,0 827 ) 71, |
6,7 73, 139 |
185 ,04 2,1 47 |
862 1,1 11, ,16 9 |
1,1 52, 501 ,00 3 |
- | 1,1 52, 501 ,00 3 |
| e (e s) r zed dir ly i Inc gni ect qui ty om xpe nse eco n e |
- | - | - | - | (13 ) 8,0 25, 085 |
(13 ) 8,0 25, 085 |
- | (13 ) 8,0 25, 085 |
| Inc nize d in the inc tate nt om e re cog om e s me |
- | - | - | - | (14 ,24 9,2 45) |
(14 ,24 9,2 45) |
- | (14 ,24 9,2 45) |
| Bal t Ju 30, 20 15 anc e a s a ne |
26 ,89 5,3 75 |
(17 ) 8,0 71, 827 |
6,7 73, 139 |
185 ,04 2,1 47 |
959 ,58 7,8 38 |
1,0 00 ,22 6,6 72 |
- | 1,0 00 ,22 6,6 72 |
| Eur o |
||||||||
|---|---|---|---|---|---|---|---|---|
| Oth er res erv es |
Equ ity lud ing exc |
|||||||
| Sha re |
Tre asu ry |
al Leg |
e f Res erv or |
and ula ted ac cum |
oll ing ntr non -co |
rol ling No ont n-c |
tal To |
|
| ita l cap |
sha res |
res erv e |
tre sha asu ry res |
rni ea ngs |
int sts ere |
int sts ere |
uit eq y |
|
| Bal t D mb 31, 20 15 anc e a s a ece er |
26 ,89 5,3 75 |
(17 ) 8,0 71, 827 |
6,7 73, 139 |
185 ,04 2,1 47 |
258 ,69 3,7 51 |
299 ,33 2,5 86 |
- | 299 ,33 2,5 86 |
| Acq uisi tion of har ow n s es |
- | (1,6 03, 908 ) |
- | 1,6 03, 908 |
(1,6 03, 908 ) |
(1, 603 ,90 8) |
- | (1,6 03, 908 ) |
| Diiv ide nds |
- | - | - | - | (25 ,96 9,7 66) |
(25 ,96 9,7 66) |
- | (25 ,96 9,7 66) |
| Inc e (e s) r gni zed dir ly i qui ect ty om xpe nse eco n e |
- | - | - | - | (2,3 56, 253 ) |
(2, 356 ,25 3) |
- | (2,3 56, 253 ) |
| Inc nize d in the inc tate nt om e re cog om e s me |
- | - | - | - | (8,2 56, 004 ) |
(8, 256 ,00 4) |
- | (8,2 56, 004 ) |
| Bal t Ju 30, 20 16 anc e a s a ne |
26 ,89 5,3 75 |
(17 ) 9,6 75, 734 |
6,7 73, 139 |
186 ,64 6,0 54 |
220 ,50 7,8 19 |
261 ,14 6,6 53 |
- | 261 ,14 6,6 53 |
| Euro | |||
|---|---|---|---|
| Notes | 1H16 | 1H15 | |
| OPERATING ACTIVITIES | |||
| Payments to suppliers | 16.a | (2,535,458) | (21,985,492) |
| Payments to employees | (1,108,007) | (2,355,853) | |
| Payments relating to income taxes | (18,633) | 488,222 | |
| Other cash receipts, net | 16.b | 1,737,212 | 566,579 |
| Cash flows from operating activities (1) | (1,924,887) | (23,286,544) | |
| INVESTING ACTIVITIES | |||
| Cash receipts resulting from: | |||
| Tangible and intangible assets | 5,300 | 45,000 | |
| Interest and related income | 123,157 | 270,209 | |
| 128,457 | 315,209 | ||
| Payments resulting from: | |||
| Tangible and intangible assets | (979) | (157,074) | |
| (979) | (157,074) | ||
| Cash flows from investing activities (2) | 127,478 | 158,135 | |
| FINANCING ACTIVITIES | |||
| Payments resulting from: | |||
| Loans repaid | (9,587) | (47,604) | |
| Interest and related expenses | (11,452) | (1,015,654) | |
| Dividendos | 16.c | (25,969,766) | - |
| Purchase of own shares | 16.d | (1,603,908) | - |
| Cash flows from financing activities (3) | (27,594,714) | (1,063,257) | |
| Cash and cash equivalents at the beginning of the period | 64,879,371 | 109,511,599 | |
| Change in cash and cash equivalents (4)=(1)+(2)+(3) | (29,392,123) | (24,191,668) | |
| Effect of exchange differences | 213,074 | (205,518) | |
| Cash and cash equivalents at the end of the period | 16.e | 35,700,322 | 85,114,413 |
(Amounts stated in Euros, except where otherwise mentioned)
As at June 30, 2016 PHAROL 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). PHAROL's voting rights in Oi are limited to 15% of the total common shares of Oi. Currently, PHAROL considers it has significant influence over Oi and classifies Oi as an associate company. As a result, from July 30, 2015 (the date of the end of shareholder agreements) the investment in Oi continues to be accounted for according to the equity method, based on PHAROL's economic stake in Oi's results.
Based on the agreements concluded on March, 30 2015 between PHAROL and Oi, PHAROL currently holds Rio Forte debt securities with a nominal value of Euro 897 million and a Call Option for shares of Oi. On March,31 2016, as a part of the options has reached maturity, PHAROL holds a call option on 42,691,385 common shares of Oi and 85,382,770 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, 2015. 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.
At June 30, 2016 and December 31, 2015, assets and liabilities denominated in foreign currencies were translated to Euros using the following exchange rates to the Euro:
| Euro | ||
|---|---|---|
| Currency | 30 Jun 2016 | 31 Dec 2015 |
| Real | 3.5898 | 4.3117 |
| USD | 1.1102 | 1.0887 |
At June 30, 2016 and 2015, the statements of financial position, income statements and cash flows of subsidiaries and joint ventures denominated in foreign currencies were translated to euros using the following exchange rates to the Euro:
| Euro | |
|---|---|
| 1H16 | 1H15 |
| 4.1295 | 3.3101 |
| 1.1159 | 1.1158 |
The composition of this caption in the first semester of 2016 and 2015 is as follows:
| Euro | ||||
|---|---|---|---|---|
| 1H16 | 1H15 | 2Q16 | 2Q15 | |
| Fixed and variable remuneration | 905,994 | 1,592,991 | 435,633 | 724,982 |
| Social security | 221,214 | 292,651 | 109,151 | 162,217 |
| Other | 32,677 | 21,514 | 24,207 | 14,048 |
| 1,159,885 | 1,907,156 | 568,991 | 901,247 |
The composition of this caption in the first semester of 2016 and 2015 is as follows:
| Euro | ||||
|---|---|---|---|---|
| 1H16 | 1H15 | 2Q16 | 2Q15 | |
| Specialized work (i) | 1,312,136 | 4,857,607 | 834,772 | 2,877,610 |
| Insurance | 164,714 | 225,639 | 70,740 | 73,786 |
| Travel | 83,495 | 245,501 | 26,821 | 143,091 |
| Other | 281,038 | 707,021 | 155,651 | 444,391 |
| 1,841,383 | 6,035,767 | 1,087,985 | 3,538,877 |
(i) This caption reflects primarily non-recurring financial and legal services.
The composition of this caption in the first semester of 2016 and 2015 is as follows:
| Euro | ||||
|---|---|---|---|---|
| 1H16 | 1H15 | 2Q16 | 2Q15 | |
| VAT | 259,474 | 1,072,486 | 142,664 | 603,430 |
| Other | 4,213 | 3,584 | 1,171 | 3,584 |
| 263,686 | 1,076,070 | 143,835 | 607,014 |
The composition of this caption in the first semester of 2016 and 2015 is as follows:
| Euro | ||||
|---|---|---|---|---|
| 1H16 | 1H15 | 2Q16 | 2Q15 | |
| Interest income Related to cash and cash equivalents (i) Other |
(114,910) - |
(311,754) (2,132) |
(52,801) - |
(144,512) 30,894 |
| (114,910) | (313,886) | (52,801) | (113,618) |
(i) Interest income obtained in these quarters essentially relates to cash amounts applied in term deposits by PHAROL SGPS and PHAROL Brasil.
In 2015, companies located in mainland Portugal are subject to Corporate Income Tax at a base rate of 21.0% (23.0% in 2014), 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 7.0% on taxable income in excess of Euro 35.0 million, resulting in a maximum aggregate tax rate of approximately 29.5% for taxable income higher than Euro 35 million. When calculating taxable income to which the above tax rate is applied, non-tax-deductible amounts are added to or subtracted from accounting records.
The composition of the corporate income tax for the first semester and second quarter of 2016 and 2015 is as follows:
| Euro | ||||
|---|---|---|---|---|
| 1H16 | 1H15 | 2Q16 | 2Q15 | |
| Income tax | ||||
| Income tax - current | 15,233 | 18,259 | 15,233 | 18,213 |
| Deferred taxes | - | - | - | - |
| 15,233 | 18,259 | 15,233 | 18,213 |
Earnings per share in the first semester and second quarter of 2016 and 2015 were as follows:
| Euro | |||||
|---|---|---|---|---|---|
| 1H16 | 1H15 | 2Q16 | 2Q15 | ||
| Net loss attributable to equity holders of Pharol |
(1) | (8,256,004) | (14,249,245) | 57,624,770 | 28,743,374 |
| Weighted average common shares outstanding in the period (i) |
(2) | 870,760,000 | 875,872,500 866,347,500 | 875,872,500 | |
| Earnings per share from continuing | |||||
| operations | |||||
| Basic | (1)/(2) | (0.01) | (0.02) | 0.07 | 0.03 |
(i) In the first semester of 2016, weighted average shares outstanding were calculated considering the 896,512,500 issued shares and taking into account the amount of 20,640,000 owned shares on January 1, 2016 and adjusted for acquisitions in the period, culminating in a total of 30,865,000 owned shares.
In the second quarter of 2016, weighted average shares outstanding were calculated considering the 896,512,500 issued shares and taking into account the amount of 29,465,00 owned shares on April 1, 2016 and adjusted for acquisitions in the period culminating in a total of 30,865,00.
In the first semester and second quarter of 2015, weighted average shares outstanding were calculated considering the 896,512,500 issued shares and taking into account the amount of 20,640,000 owned shares.
This line item corresponds to investments in joint ventures and associates, including investments in Oi and its controlling holding companies.
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. As a result 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. 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, as at December 31, 2014 and measured according to the equity method of accounting.
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%. As at September 30, 2015, the Oi common shares owned by PHAROL (that carry voting rights) represented 36.5% of shares in circulation (excluding Oi treasury shares). 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 in 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 was 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, in light of the remaining available voting rights, represented as at June 30, 2016, an effective voting right of 18.83%. By analogy, IFRS 10 – Consolidated financial statements considers 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 24% of ordinary shares are dispersed in free float, and four other shareholders besides PHAROL have voting rights of between 5% and 7% each. Note also that although on June 30, 2016 Oi is in judicial recuperation, the majority of inherent statutory rights to shares held by PHAROL are not substantially affected by this situation.
As such, by analogy to the consideration of control in IFRS consolidated financial statements, PHAROL considers that it has significant influence over Oi, and as such, Oi is considered to be an associate. This investment is measured in accordance with the equity method, based on the economic share of Oi's earnings (27.2% as at June 30, 2016), reduced by any adjustments for impairment losses.
Accordingly, PHAROL resorted to an independent value, in order to determine Oi's value in use, in accordance with the market's best practices. It was determined that the market value corresponded to Oi's share price as at December 31, 2015. Thus, PHAROL's financial investment in Oi, on that date, was measured on the basis of its stock exchange valuation, amounting to Euro 102.2 million. An impairment loss of Euro 225.6 million was recognized, with reference to December 31, 2015.
As at June 30, 2016, given the maintenance of the main assumptions of the valuation, after application of the equity method and appropriation of the results of Oi, the investment in Oi was measured at its stock market value, amounting to Euro 99.8 million.
As described above, and in accordance with IAS 28, PHAROL's investment in Oi as at June 30, 2016 is measured in accordance with the equity method, reduced by any accumulated impairment losses.
The detail of these investments in joint ventures and associates was as follows:
| Euro million | ||
|---|---|---|
| 30 Jun 2016 | 31 Dec 2015 | |
| Investment in each associate entity | ||
| Oi - Equity method (i) | 183 | 328 |
| Oi - Impairment (i) | (83) | (226) |
| 100 | 102 |
(i) Following the simplification of the Oi shareholder structure, and the end of the Shareholder Agreements, this caption reflects the investment in Oi owned by PHAROL – 27.2% owned by Bratel, a wholly owned subsidiary of PHAROL. As previously commented, an impairment analysis was carried out at December 31, 2015 by an independent valuer, analysis which resulted in the measurement of the financial investment at its market value, corresponding to 183.7 million shares, R\$2.40 per share (Euro 0.56 per share), amounting to Euro 102.2 million. This valuation corresponds to the first fair value level of IFRS 13 – Fair value measurement. On June 30, 2016 and after the application of the equity method investment, Oi was also measured at market value corresponding to 183,700,000 shares measured at R \$ 1.9 per share (0.54 euros per share), representing approximately Euros 99.8 million.
The detail of the assets and liabilities of Oi, for purposes of application of the equity method, is as follows:
| Euro millions | ||
|---|---|---|
| 30 Jun | ||
| 2016 31 Dec 2015 | ||
| Current Assets | 6,985 | 8,829 |
| C ash and cash equivalents | 1,352 | 3,455 |
| Accounts receivable | 2,442 | 1,943 |
| Financial investments | 59 | 418 |
| Derivative financial instruments | 87 | 141 |
| Current assets held for sale | 1,622 | 1,783 |
| Judicial deposits | 335 | 292 |
| Other current assets | 1,088 | 797 |
| Non-Current Assets | 12,281 | 11,814 |
| Judicial Deposits | 3,870 | 3,043 |
| Derivative financial instruments | - | 1,573 |
| Deferred taxes | 2,171 | 2,060 |
| Other non-current assets | 6,239 | 5,138 |
| Total assets | 19,266 | 20,642 |
| Current Liabilities | 15,950 | 5,931 |
| Short-term debt | 12,984 | 2,739 |
| Accounts payable | 1,424 | 1,161 |
| Derivative financial instruments | 54 | 461 |
| Licenses and concessions payable | 17 | 212 |
| Provisions | 260 | 237 |
| Liabilities related to assets held for sale | 145 | 173 |
| Other liabilities | 1,066 | 949 |
| Non-current Liabilities | 2,413 | 13,228 |
| Debt | - | 11,144 |
| Derivative financial instruments | - | 121 |
| Licenses and concessions payable | 2 | 2 |
| Provisions | 1,051 | 792 |
| Other liabilities | 1,360 | 1,170 |
| Total liabilities | 18,363 | 19,159 |
| Net Assets | 902 | 1,483 |
| Share to non-controlling interests of Oi | 229 | 276 |
| Net assets attributable to controlling interest of Oi | 673 | 1,207 |
| Effective share of PHAROL in Oi | 27.2% | 27.2% |
| Total Investment from Pharol in Oi | 183 | 328 |
Gains/(losses) in joint ventures and associates were accounted for through the equity method of accounting - their composition for the periods ended June 30, 2016 and 2015 is as follows:
| Euro million | ||||
|---|---|---|---|---|
| 1H16 | 1H15 | 2Q16 | 2Q15 | |
| Joint ventures | ||||
| Direct share in the earnings of each entity (i) | ||||
| Oi | - | 20 | - | 43 |
| Telemar Participações | - | 1 | - | - |
| EDSP75 Participações | - | 8 | - | 3 |
| PASA Participações | - | 8 | - | 3 |
| Sayed RJ Participações | - | 4 | - | 1 |
| Venus RJ Participações | - | 4 | - | 1 |
| Other | - | - | - | - |
| Gain resulting from the increase in the interest held in Oi | - | 109 | - | - |
| Reversal of provision (v) | - | (141) | - | - |
| - | 13 | - | 52 | |
| Joint ventures | ||||
| Effective share in the earnings of each entity | ||||
| Oi (ii) | - | 24 | - | 52 |
| Oi Holding companies (iii) | - | 22 | - | (0) |
| Gain resulting from the increase in the interest held in Oi | - | 109 | - | - |
| Reversal of provision (v) | (141) | |||
| - | 13 | - | 52 | |
| Associates | ||||
| Effective share in the earnings of each entity | ||||
| Oi (ix) | (142) | - | (37) | - |
| Impairment Reversal/(Loss) (vi) | 142 | - | 83 | - |
| - | - | 47 | - | |
| Earnings of joint ventures and associates | - | 13 | 47 | 52 |
(i) These captions, as explained above, reflect PHAROL's direct share in the earnings of each joint venture, including, in the case of Oi's controlling holding companies, their share of Oi's net income and also the net income generated by these same entities, excluding the equity method of accounting of Oi.
(ii) This caption reflects PHAROL's direct share in the earnings of Oi. The breakdown of Oi's earnings and losses used in the equity method accounting are outlined below.
(iii) This caption reflects PHAROL's effective share in the earnings and losses of Oi's controlling holding companies excluding these entities' share in the earnings of Oi, calculated through the equity method of accounting.
(iv) This caption corresponds to the gains recorded directly and indirectly, through the controlling holdings of Oi, by PHAROL totaling Euro 131 million, relating to the increase in the stake held in Oi as a result of the reduction in the number of Oi's outstanding shares following the completion of the Exchange.
(v) This cost of Euro 141 million corresponds to the estimated impact recorded on December 31, 2014 relative to the increase in the stake held in Oi, following the completion of the Exchange, which was deducted from the provision for the Exchange. This amount, net of the effective gain of Euro 131 million recorded in 2015, as mentioned above, resulted in a total net loss of Euro 10 million recorded in 1Q15, mainly associated with the reduction in Oi's shareholders equity between 4Q14 and 1Q15.
(vi) During the Financial Statements on December 31, 2016, an impairment analysis was carried out by an independent valuer, analysis which resulted in the measurement of the financial investment at its market value, as at June 30, 2016.
(vii) This caption reflects PHAROL's effective share in the earnings and losses of Oi, during the first semester of 2016. The detail of the earnings and losses of Oi that were used for purposes of equity method of accounting are presented below.
The detail of the earnings and losses of Oi that were used for the application of the equity method of accounting, which were adjusted for the purchase price allocation, as well as other adjustments, to conform to PHAROL's accounting policies, are as follows:
| Euro millions | ||||
|---|---|---|---|---|
| 1H16 | 1H15 | 2Q16 | 2Q15 | |
| Services rendered and sales (i) (ii) | 3,216 | 4,176 | 1,646 | 1,992 |
| Operating expenses excluding amortization (i) | 2,441 | 2,995 | 1,284 | 1,435 |
| Interconnection (iii) | 140 | 289 | 56 | 132 |
| Personnel (iv) | 346 | 374 | 188 | 183 |
| Third-party services (v) | 769 | 958 | 409 | 476 |
| Grid maintenance service (vi) | 243 | 290 | 130 | 147 |
| Rentals and insurance (vii) | 525 | 516 | 270 | 241 |
| Other operating income (expenses), net (viii) | 417 | 567 | 230 | 255 |
| Operating income excluding amortization | 775 | 1,181 | 362 | 557 |
| Depreciation and amortisation | 656 | 753 | 337 | 375 |
| Income from operations | 119 | 428 | 25 | 183 |
| Finantial expenses | 310 | 749 | (157) | 355 |
| Income before taxes | (191) | (321) | 182 | (172) |
| Income taxes | 366 | (61) | 347 | (42) |
| Net income from continuing operations | (557) | (259) | (165) | (130) |
| Net income from discontinued operations (ix) | 0 | 326 | 0 | 336 |
| Net income | (557) | 68 | (165) | 207 |
| Share to non-controlling interests | (34) | 2 | (41) | 16 |
| Net income attributable to controlling interests | (523) | 66 | (124) | 191 |
PHAROL recorded its share in the earnings of Oi under the equity method of accounting based on its effective stake during the first semester of 2016 corresponding to 27.18% and in the first semester of 2015, corresponding to 22.8% until March 30, 2015 and 27.5% until June 30, 2015.
The composition of this caption mainly comprises (1) Euro 134.6 million related to the debt securities issued by Rio Forte on June 30, 2016 and December 31, 2015, and (2) Euro 1.4 and 6.4 million related to the value of the Call Option on June 30, 2016 and December 31, 2015, respectively.
On June 30, 2016 and December 31, 2015 the composition of this caption is as follows:
| Euro | ||
|---|---|---|
| 30 Jun 2016 | 31 Dec 2015 | |
| Current accounts payable | ||
| Current suppliers | 166,383 | 1,367,580 |
| Others | 1,582,589 | 361,558 |
| 1,748,973 | 1,729,138 |
On June 30, 2016 and December 31, 2015, the composition of this caption is as follows:
| Euro | ||
|---|---|---|
| 30 Jun 2016 | 31 Dec 2015 | |
| Supplies and external services (i) | 7,488,750 | 6,118,641 |
| Vacation pay and bonuses | 451,437 | 394,271 |
| Others | 10,907 | 26,684 |
| 7,951,095 | 6,539,596 |
On June 30, 2016 and December 31, 2015, the composition of this caption is as follows:
| Euro | ||
|---|---|---|
| 30 Jun 2016 | 31 Dec 2015 | |
| Provisions for risks and costs | ||
| Litigation | 73,500 | 73,500 |
| Taxes | 2,358 | 2,358 |
| 75,858 | 75,858 |
During the semester of 2016 and 2015, payments to suppliers mainly reflect payments, related to third party suppliers and consultants.
In the first quarter of 2016 this item includes a tax refund received from the Portuguese Government regarding the municipal tax, tax benefits and international taxation under the tax prior consolidation regime in which the PHAROL was the dominant society.
In the first semester of 2016, this item includes the amounts spent on the dividend payment of Euro 0.03 per share.
In the first semester of 2016, this item includes the amounts spent on the acquisition of own shares by PHAROL.
On June 30, 2016 and 2015, the composition of this caption is as follows:
| Euro | ||
|---|---|---|
| 30 Jun 2016 | 30 jun 2015 | |
| Cash | 842 | 5,108 |
| Demand deposits | 16,105,910 | 1,732,017 |
| Time deposits | 19,593,570 | 81,000,000 |
| Other bank deposits | - | 2,377,288 |
| 35,700,322 | 85,114,413 |
As at June 30, 2016 and December 31, 2015, this caption has the following composition:
| Euro | ||
|---|---|---|
| 30 Jun 2016 | 31 Dec 2015 | |
| Provisions for risks and costs | 384,314,678 | 384,314,678 |
| Litigation | - | 12,843,050 |
| 384,314,678 | 397,157,728 |
(i) The bank and other guarantees presented to the tax authorities essentially include Euro 378 million 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 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 the controlling company of the consolidated tax in the years in question, even though, as at June 30, 2016, the contingencies associated to these guarantees are not the Company's responsibility, having been contractually transferred to Oi.
During the first semester 2016 there were no costs or revenues related to associated companies and joint ventures. In the first semester of 2015, the costs related to associated companies and joint ventures amounted to Euro 681.470.
During the periods years ended June 30, 2016 and 2015, the fixed remuneration of the Board members, which was established by the Remuneration Committee, amounted to Euro 0.38 million and 1.4 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, 2016 and December 31, 2015, and the transactions occurred in June 30, 2016 and March 31, 2015 between PHAROL and the entities that are identified as shareholders with qualified holding and respective economic groups:
| Euro | ||||
|---|---|---|---|---|
| 30 jun 2016 | 31 dec 2015 | |||
| Cash and | ||||
| Cash and cash | Accounts | cash | Accounts | |
| Shareholder | equivalents | payable | equivalents | payable |
| Banco Comercial Português, S.A. (i) | 11,699,765 | - | 10,294,863 | - |
| Novo Banco, S.A. | 11,743,078 | - | 20,755,397 | - |
| 23,442,844 | - | 31,050,260 | - | |
| Euro | ||||
| 30 jun 2016 | 30 jun 2015 | |||
| Costs and | Net interest | Costs and | Net interest | |
| Shareholder | losses | income | losses | income |
| Banco Comercial Português, S.A. (i) | 5,973 | 16,178 | - | - |
| Novo Banco, S.A. | 1,083 | 28,194 | 570,311 | - |
| 7,055 | 44,372 | 570,311 | - |
i) Transactions are only presented since the date of the start of the qualified holding.
Oi's stock price evolution between June30 and August 26, 2016 can be found below:
| 30.Jun.16 | 26.Aug.16 | |
|---|---|---|
| Oi ON share price (Reais) | 1.95 | 3.59 |
| Oi PN share price (Reais) | 1.32 | 2.37 |
| Exchange rate Real/Euro | 3.59 | 3.64 |
| Oi ON share price (Euros) | 0.54 | 0.99 |
| Oi PN share price (Euros) | 0.37 | 0.65 |
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.
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
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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