Interim / Quarterly Report • Nov 28, 2014
Interim / Quarterly Report
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First Nine Months 2014
| 01 | Financial review | 3 |
|---|---|---|
| 02 | Business performance | 8 |
| Consolidated financial statements | 19 |
On 5 May 2014, Portugal Telecom subscribed a share capital increase of Oi through the contribution in kind of the PT Assets, defined as its 100% interest in PT Portugal, which as of that date included all operational businesses of Portugal Telecom Group except for the subsidiaries Bratel BV, Bratel Brasil, S.A., PTB2, S.A. and Marnaz, S.A. and the investments in Oi, Contax and its controlling shareholders. As a result of the contribution to the Oi share capital increase on 5 May 2014:
| Euro million | ||||
|---|---|---|---|---|
| 3Q13 | 9M13 | |||
| 3Q14 | Restated | 9M14 | Restated | |
| Wages and salaries | 1.5 | 2.9 | 8.1 | 8.9 |
| Supplies and external services | 16.9 | 0.6 | 21.3 | 2.4 |
| Provisions and adjustments | 0.2 | 0.0 | 0.3 | (0.8) |
| Indirect taxes | 3.9 | 0.3 | 5.6 | 1.1 |
| Other operating expenses | 0.0 | 0.0 | 0.0 | 0.0 |
| EBITDA | (22.5) | (3.8) | (35.3) | (11.7) |
| Depreciation | 0.0 | 0.1 | 0.1 | 0.2 |
| EBIT | (22.6) | (3.9) | (35.4) | (11.9) |
| Other gains, net | 0.0 | 0.0 | (0.9) | (126.0) |
| Income (loss) before financial results and taxes | (22.6) | (3.9) | (34.5) | 114.1 |
| Net interest income | (0.4) | (4.4) | (10.8) | (12.5) |
| Losses in joint ventures | - | 8.9 | 38.0 | 68.4 |
| Net losses on financial assets and other investments | 266.3 | 1.2 | 337.7 | 1.2 |
| Net other financial losses | 0.7 | 11.2 | 19.6 | 22.6 |
| Income (loss) before taxes | (289.2) | (20.8) | (418.9) | 34.4 |
| Income taxes | (5.6) | 9.8 | (10.1) | 14.2 |
| Net income (loss) from continuing operations | (283.6) | (30.6) | (408.8) | 20.3 |
| Net income from discontinued operations | - | 68.8 | 484.1 | 328.3 |
| Net income (loss) | (283.6) | 38.3 | 75.2 | 348.5 |
| Non-controlling interests | - | 17.2 | 13.6 | 43.5 |
| Net income (loss) attributable to controlling interests | (283.6) | 21.0 | 61.7 | 305.0 |
Consolidated operating costs amounted to Euro 35 million in 9M14 and Euro 12 million in 9M13, reflecting higher third party expenses related to business combination between Portugal Telecom and Oi and also higher indirect taxes related to those expenses.
Net other gains of Euro 126 million in 9M13 includes mainly a gain of Euro 134 million resulting from the settlement of contractual obligations related to the acquisition of the investment in Oi in 2011, for an amount of Euro 16 million that was lower than the liability initially recognised.
Net interest income amounting to Euro 11 million in 9M14 and Euro 12 million in 9M13 relate mainly to term deposits held by Portugal Telecom and Bratel Brasil, as Portugal Telecom's debt prior to the Oi share capital increase was transferred to Oi as part of PT Assets.
Losses in joint ventures correspond to Portugal Telecom's share in the losses of joint ventures up to 5 May 2014, based on the equity method of accounting, since as from that date the investment in Oi is measured at fair value based on the share price of Oi's shares with the related changes in fair value being included under the caption "Net losses on financial assets and other investments". PT's share in the losses of joint ventures decreased to Euro 38 million in 9M14 as compared to Euro 68 million in 9M13, reflecting mainly a capital gain recorded by Oi in the first quarter of 2014 relating to the disposal of mobile telecommunication towers, amounting to R\$ 1,247 million (equivalent to approximately Euro 60 million corresponding to PT's share, net of taxes), and lower interest expenses from Oi's controlling shareholders, which in 2014 relate to only four months as compared to nine months in 2013.
These effects were partially offset by higher interest costs, higher net other financial expenses and lower revenues at Oi.
Net losses on financial assets and other investments in 9M14 correspond to the loss resulting from the reduction in the fair value of the investment in Oi between 5 May and 30 September 2014, since as from 5 May 2014 this investment is classified as held for distribution to owners and accordingly measured at fair value based on the quote price of Oi's shares.
Net other financial losses reflect mainly certain bank commissions and other financial services, including certain financial costs incurred in 2Q14 in connection with the business combination between Portugal Telecom and Oi, namely financial taxes paid for the transfer of funds to Brazil.
Income taxes amounted to a gain of Euro 10 million in 9M14, corresponding basically to the tax effect on operating costs and other financial expenses net of interest income. The change compared to the same period of last year reflects mainly higher operating and net other financial costs.
Net income from discontinued operations in 9M14 includes primarily a gain recorded in connection with Oi's share capital increase, totaling Euro 701 million, partially offset by the write-off of deferred tax assets relating to tax losses of Euro 208 million that was recorded on the same date due to the discontinuing of Portuguese businesses that supported the recognition of those deferred tax assets. Adjusting for these effects, discontinued operations reported a net loss of Euro 9 million in 9M14, as compared to a net income of Euro 328 million in 9M13 that reflects primarily the gain recorded in connection with the disposal of the equity investment in CTM in 2Q13 (Euro 310 million), partially offset by certain provisions and adjustments recorded in the same period to adjust the carrying value of certain assets to their corresponding recoverable amounts.
Net income attributable to non-controlling interests amounted to Euro 14 million in 9M14 and Euro 43 million in 9M13, reflecting mainly lower income from African businesses in 2014 up to 5 May, when these businesses were contributed to Oi's share capital increase.
Net income decreased to Euro 62 million in 9M14 as compared to Euro 305 million in 9M13, reflecting primarily: (1) the loss of Euro 338 million due to the reduction in the fair value of the investment in Oi as from 5 May 2014; (2) the gain of Euro 310 million recorded in connection with the disposal of the equity investment in CTM in 2Q13, and (3) the net other gains recorded in 9M13 (Euro 126 million). These effects were partially offset by the gain recorded in connection with Oi's share capital increase, as described above, and by lower losses in joint ventures recorded through the equity method of accounting.
| Euro million | ||
|---|---|---|
| 30 Sep 2014 | 31 Dec 2013 | |
| ASSETS | ||
| Cash and cash equivalents | 105.6 | 1,659.0 |
| Short-term investments | - | 914.1 |
| Accounts receivable | 0.0 | 1,170.7 |
| Non-current assets held for distribution to owners | 1,910.8 | - |
| Investments in joint ventures | - | 2,408.2 |
| Investments in associated companies | - | 511.3 |
| Goodwill | - | 380.6 |
| Intangible assets | - | 717.7 |
| Tangible assets | 0.2 | 3,438.5 |
| Deferred taxes | 1.4 | 564.9 |
| Other assets | 6.4 | 255.4 |
| Total assets | 2,024.5 | 12,020.4 |
| LIABILITIES | ||
| Gross debt | 0.1 | 7,371.1 |
| Accounts payable | 5.9 | 587.7 |
| Accrued expenses | 35.2 | 534.7 |
| Post retirement benefits | - | 960.9 |
| Deferred taxes | 1.7 | 243.8 |
| Provisions | 27.0 | 91.1 |
| Other liabilities | 1.4 | 364.3 |
| Total liabilities | 71.4 | 10,153.6 |
| Equity excluding non-controlling interests | 1,953.1 | 1,641.3 |
| Non-controlling interests | - | 225.5 |
| Total equity | 1,953.1 | 1,866.8 |
| Total liabilities and shareholders' equity | 2,024.5 | 12,020.4 |
The decrease in total assets and total liabilities reflects the assets and liabilities of the businesses that were contributed to Oi's share capital on 5 May 2014, explaining the reduction across the majority of captions of the consolidated statement of financial position.
Non-current assets held for distribution to owners as at 30 September 2014 correspond to the fair value of the investment in Oi based on quote prices of Oi's shares as of that date. The investment in Oi is classified in accordance with the provisons of IFRS 5 and accordingly measured at fair value based on the quote prices of Oi's shares, since this fair value is lower than the previous carrying amount.
Shareholders' equity excluding non-controlling interests amounted to Euro 1,953 million as at 30 September 2014, compared to Euro 1,641 million as at 31 December 2013, an increase of Euro 312 million reflecting (1) the net income generated in the period (Euro 62 million), (2) positive foreign currency translation adjustments of Euro 160 million, related mainly to the impact of the appreciation of the Brazilian Real against the Euro, and (3) the reversal of treasury shares related to the 10% interest in Portugal Telecom held by Oi (Euro 159 million), following the
remeasuring of this investment from the equity accounting to fair value. These effects were partially offset by dividends attributed to PT's shareholders on 30 April 2014 (Euro 86 million) and paid on 30 May 2014.
Following the memorandum of understanding disclosed to the market on 2 October 2013 (the "Memorandum of Understanding"), Portugal Telecom, Oi and the main shareholders of both companies announced their intention to implement a combination of the businesses of Portugal Telecom and Oi (the "Business Combination") into a single listed company governed by the laws of Brazil, which has now been determined to be Telemar Participações, S.A. ("TmarPart" ou "CorpCo").
The Business Combination transaction, as initially considered, involved three principal steps:
CorpCo equal to the amount of shares of that company held by Portugal Telecom immediately prior to the Merger. The shares of CorpCo, the entity resulting from the abovementioned transactions, would be listed on the Novo Mercado segment of the BM&FBOVESPA, on the NYSE Euronext Lisbon regulated market ("Euronext Lisbon"), and on the New York Stock Exchange ("NYSE").
The transaction resulted thus from an agreement, and it was left to the management of both companies (which included certain members exercising management positions at both companies as a result of the cross-shareholdings between the companies) to implement such transactions, subject to approval by the shareholders at general meetings. With respect to PT, the first and third steps of the Business Combination were to be subject to the approval of PT's shareholders at general meetings.
In the context of the Business Combination, the Oi Capital Increase has already taken place, whereby, as expected, part of the new shares issued by Oi were subscribed by Portugal Telecom through a contribution in kind corresponding to all of the shares of PT Portugal, SGPS, SA ("PT Portugal"), a company that held all the operational assets corresponding to the businesses of the companies of the Portugal Telecom group ("Portugal Telecom Group") (with the exception of the interests held, directly or indirectly, in Oi, Contax Participações, SA, and Bratel BV) and the respective liabilities on the date of their contribution ("PT Assets"). The PT Assets were contributed based on the value set forth in a proposal of the Board of Directors of Oi to the general meeting of Oi's shareholders, based on a valuation report issued by an independent and specialized institution - Banco Santander (Brasil) SA, engaged by Oi for that purpose – in accordance with applicable Brazilian legislation, the valuation report of which was approved at the Oi general shareholders' meeting held on 27 March 2014. For more information regarding the valuation methods and criteria used by Banco Santander (Brasil) SA for the issuance of the valuation report, see the copy attached as Annex 1 to the proposal of the PT Board of Directors to the general shareholders' meeting held last 27 March, and available at www.cmvm.pt.
As indicated above, given its importance, PT's subscription to the Oi Capital Increase was subject to and approved by the shareholders of PT at a general shareholders' meeting.
Upon completion of the Oi Capital Increase, Oi became a company with significant presence in the principal segments of the telecommunications markets in Portugal and Brazil, while at the same time holding the interests previously held by PT in Africa.
On 27 March 2104, the general meeting of Oi's shareholders approved the aforementioned valuation report and the contribution of the PT Assets to Oi, which assets were valued at R\$5,709.9 million - corresponding to Euro 1,750 million, using the conversion rate from Reais to Euros on 20 February 2014 (that is, R\$3.2628 per Euro), as set forth in the previous agreements - the amount for which the general shareholders' meeting of Portugal Telecom, also held on 27 March 2014, approved the contribution of the PT Assets in the context of the Oi Capital Increase.
The Oi Capital Increase was completed on 5 May 2014, where Portugal Telecom subscribed for 1,045,803,934 common shares and 1,720,252,731 preferred shares of Oi in exchange for the contribution of all of the shares of PT Portugal, owner of the PT Assets. As a result, Portugal Telecom currently owns, as its sole material asset, a direct and indirect interest of 39.7% of Oi's share capital, including 39.0% of the voting share capital (excluding indirect interests through TmarPart, AG Telecom and LF Tel in Oi).
The PT Assets contributed by PT in the context of the Oi Capital Increase included a creditor position with respect to Rio Forte Investments, SA ("Rioforte") - a company within Grupo Espírito Santo ("GES") - corresponding to certain short-term investments subscribed for or acquired by two companies which at the time were wholly-owned subsidiaries of Portugal Telecom – namely PT Portugal and Portugal Telecom International Finance, BV ("PTIF") – in the aggregate amount of Euro 897 million, detailed below as Rioforte Instruments .
On 15 July 2014, the Rioforte Instruments held by the above mentioned subsidiaries in the amount of Euro 847 million matured. On 17 July 2014 the additional portion of Euro 50 million of the Rioforte Instruments also matured.
Rioforte failed to repay the amounts due under the Rioforte Investments on their respective maturity dates, and on 22 July and 24 July 2014, the additional grace periods during which the payment of the Rioforte Instruments due on 15 July and 17 July 2014, respectively, could have been made, also lapsed without the amounts due having been paid.
Under the agreements relating to the Business Combination as currently in effect below, if the second step of the Business Combination, which includes the Merger of Shares and the Corporate Reorganization, is not completed by 31 March 2015, the parties will no longer be bound to exercise their respective voting rights in the applicable companies in favor of approving all the steps for Corporate Reorganization and the Merger of Shares expected to occur during this second step of the Business Combination.
In this case, the shareholders' agreements relating to TmarPart (the "TmarPart Shareholder Agreements") entered into or amended on 25 January 2011, on 19 February 2014 and on 8 September 2014, will remain in force, with the quorum requirements provided for in the agreements to be adjusted in consideration of the percentage interests held by AG Telecom, LF Tel, BNDES Participações SA - BNDESPAR ("BNDESPAR"), Caixa de Previdência dos Funcionários do Banco do Brasil ("PREVI"), Fundação Atlântico de Seguridade Social ("FATL"), Fundação Petrobras de Seguridade Social - PETROS ("PETROS"), Fundação dos Economiários Federais - FUNCEF ("FUNCEF") and Bratel brasil S.A. ("Bratel Brasil") on 31 March 2015, in order to ensure that the voting rights of such shareholders are equal to those on 19 February 2014, and provided they have not reduced their respective shareholder interests before 31 March 2015 through the sale of shares to third parties that are not original signatories of the Global Shareholders' Agreement (as defined below) or their related parties.
The TmarPart Shareholder Agreements included (a) a general shareholders' agreement, entered into by all TmarPart shareholders - AG Telecom, LF Tel, FATL, Bratel Brasil, BNDESPAR, PREVI, PETROS, and FUNCEF - as parties, and by TmarPart and Portugal Telecom, as intervening parties ("Global Shareholders' Agreement") and (b) a separate shareholders' agreement entered into only among AG Telecom, LF Tel, and FATL as parties, and TmarPart as intervening party ("Control Group Shareholders' Agreement").
The TmarPart Shareholder Agreements provide for the following relevant rights and obligations:
any of its subsidiaries, whichever occurs last, subject to the agreement of the parties to the Global Shareholders' Agreement. The Global Shareholders' Agreement may be extended for successive periods of ten years with the consent of all the parties.
(ii) The following provisions apply to the election of members of the board of directors and the executive officers, and the voting of their shares, in TmarPart and every TmarPart subsidiary that has net operating revenues equal to or in excess of R\$ 100 million, which will be referred to as the "controlled subsidiaries":
meetings. Such parties will not be entitled to exercise their voting rights, including for the interests held directly in Oi and in the other controlled subsidiaries, against matters already approved at a pre-meeting held pursuant to the Global Shareholders' Agreement.
c. If one of the parties to the Control Group Shareholders' Agreement sells all or part of its common shares of TmarPart to any other party or a third party, the purchaser(s) and the seller, as applicable, will be considered one voting block for the purposes of exercising voting rights under the Control Group Shareholders' Agreement (even if the purchaser(s) is/are already a party to the agreement), and such voting block will hold pre-meetings to the pre-meetings of the parties to the Control Group Shareholders' Agreement.
In addition to the TmarPart Shareholders' Agreements, if the second step of the Business Combination between Portugal Telecom and Oi, which includes the Merger of Shares and the Corporate Reorganization, is not completed by 31 March 2015, the shareholder agreements entered into among Bratel Brasil, AGSA and Jereissati Telecom, which include the following shareholder agreements entered into by such parties on 25 January 2011 and amended on 19 February 2014 and 8 September 2014, will remain in force: (i) the shareholders' agreement entered into between Jereissati Telecom and Bratel Brasil in relation to EDSP75 Participações ("EDSP"), with EDSP, LF Tel, AGSA, Pasa Participações ("PASA"), Andrade Gutierrez Telecomunicações Ltda. (which later merged with and into AGSA), AG Telecom, Portugal Telecom, Sayed RJ Participações S.A. ("Sayed"), Venus RJ Participações S.A. ("Venus") and PTB2 S.A. ("PTB2") as intervening parties (the "EDSP Shareholders' Agreement"), and (ii) the shareholders' agreement entered into between AGSA and Bratel Brasil in relation to PASA, with PASA, AG Telecom, Jereissati Telecom, ESDP, LF Tel, Portugal Telecom, Sayed, Venus and PTB2 as intervening parties (the "PASA Shareholders' Agreement"). The initial terms of these shareholder agreements also expire on 25 April 2048 but can be extended for successive ten-year periods with the consent of all the parties thereto.
These EDSP and PASA shareholder agreements are intended to coordinate PASA and EDSP's corporate governance and to simplify the decision-making process among Jereissati Telecom, AGSA and Portugal Telecom as shareholders of TmarPart. Under these shareholders' agreements, among other things:
Approval of, and amendments to, the annual budget and annual investment plans of PASA, EDSP, AG Telecom, and LF Tel, which are subject to a qualified majority of 83% of the votes;
The entering by PASA, EDSP, AG Telecom, or LF Tel, into any loans or financing agreements in excess of R\$50 million, or the entering of any agreement imposing a pecuniary obligation on PASA, EDSP, AG Telecom, or LF Tel in excess of R\$50 million, or the granting of any guarantees by PASA, EDSP, AG Telecom, or LF Tel on behalf of third parties obligations in excess of R\$50 million, which are subject to a qualified majority of 90% of votes; and
Any amendments to the Global Shareholders' Agreement or the issuance of preferred shares by PASA, AG Telecom, or LF Tel, the approval of any decision subject to a qualified majority under the scope Global Shareholders' Agreement (defined as a "material decision" according to the PASA Shareholders' Agreement and the EDSP Shareholders' Agreement), among other issues, which are subject to a unanimous vote of the shareholders.
• A general restriction on the sale of shares issued by PASA and EDSP by AGSA or Jereissati Telecom, as applicable, to competitors of Portugal Telecom.
If the Business Combination is not completed by 31 March 2015, any of the shareholders party to the PASA Shareholders' Agreement or the EDSP Shareholders' Agreement may send a notification of non-occurrence of the reorganization and require the adoption of the necessary measures in order for Bratel Brasil, PTB2, AGSA and Jereissati Telecom to receive shares of capital stock of Oi held by AG Telecom and LF Tel, in proportion to their respective direct and indirect capital interests in those entities.
The implementation of the second step of the Business Combination, which includes the Corporate Reorganization and the Merger of Shares, requires a further pre-meeting of the shareholders of CorpCo to approve the valuation reports required for the implementation of such transactions, among other matters.
On 28 July 2014, PT SGPS and Oi S.A. announced that they had reached an agreement on the final terms of the key contracts following the Memorandum of Understanding ("MOU") announced on 16 July 2014. The main terms of these contracts established that:
PT SGPS would be exchange ("Exchange") with Oi the treasury applications in Rio Forte Investments SA ("Rioforte debt"), amounting to Euro 897 million, for 474,348,720 Oi ON shares plus 948,697,440 Oi PN shares (the "Oi Call Shares");
PT SGPS would be granted a non-transferrable American-type call ("Call") to repurchase the Oi Call Shares (strike prices of R\$2.0104 ON and R\$1.8529 PN), which would be adjusted by the Brazilian CDI rate plus 1.5% per year;
The Call on the Oi Call Shares would become effective on the date of the Exchange, will have a 6-year maturity, and the Oi Call Shares that PT SGPS has the right to call would be reduced by 10% at the end of the first year and by 18% per year thereafter;
Any proceeds received as a result of a monetization of the Call through the issuance of derivatives or back to back instruments must be used to exercise the Call;
PT SGPS could only acquire Oi or CorpCo shares through the exercise of the Call;
The Call would be cancelled if (i) PT SGPS's bylaws would be voluntarily amended to remove the 10% voting limitation, (ii) PT SGPS act as a competitor to Oi, or (iii) PT SGPS breach certain obligations under the definitive documentation, and
The contracts would be executed as soon as all corporate approvals had been obtained and the Exchange should be subject to the approval of Comissão de Valores Mobiliários in Brazil and should be executed before or on 31 March 2015.
The terms of the agreements also included an agreed alternative to the incorporation of PT SGPS into CorpCo as previously announced, aimed at achieving the following objectives:
Allow for the merger of Oi and CorpCo and migration to the Novo Mercado to be implemented as soon as possible, with the listing of CorpCo on BM&F Bovespa, Euronext Lisboa and NYSE;
Subject to approval by the Board of Directors and at a General Shareholders Meeting, to be specifically convened for such purpose, PT SGPS shareholders will receive all shares of CorpCo held by PT SGPS, corresponding to the ownership interest in CorpCo of 25.6%, adjusted for the treasury shares resulting from the execution of the Exchange and prior to any exercise of the Call, and
PT SGPS to remain listed with the Rioforte Instruments and the Call as its only material assets.
The terms of the agreements, as described above, were approved on 8 September 2014 at the General Shareholders Meeting of PT SGPS, and the definitive agreements were concluded on the same day. However, the Exchange is still subject to the approval of Comissão de Valores Mobiliários in Brazil. Such approval should be granted until 31 March 2015.
• On 9 November 2014, Terra Peregrin - Participações SGPS, S.A. published a preliminary announcement for the launch of a public takeover bid for the acquisition of the total ordinary and category A shares, representative of the whole share capital and voting rights of Portugal Telecom (including the shares corresponding to the share capital of Portugal Telecom which are underlying to the ADRs). The offeror's voting rights are entirely attributable to Mrs. Isabel dos Santos and/or one or more companies (with registered offices in Portugal or abroad) in a control or group relationship with the offeror and/or with Mrs. Isabel dos Santos.
The offer is general and voluntary and the consideration offered, to be paid in cash, is of €1.35 per share, which represents a premium of circa 11% in relation to the last closing price of the shares of Portugal Telecom on 7 November 2014 (€1.217). The effectiveness of the offer is subject to the acquisition of, at least, 50.01% of the voting rights corresponding to the share capital of Portugal Telecom.
According to the preliminary announcement, the launch of the offer is subject to:
In addition, the preliminary announcement mentions several assumptions on which the offer is based.
On 10 November, Oi published an announcement in which it stated that the conditions for the launch of the offer whose adoption would imply the change of the terms of the Business Combination, recently renegotiated by Portugal Telecom and Oi – notably, the conditions mentioned in paragraphs 6, 7, 8 and 9 above – were unacceptable. Oi also mentioned that it would not proceed to any change of the
corporate acts, definitive agreements and other instruments executed in order to meet any of the conditions for the launch of the offer.
Further to Oi's announcement, on 17 November 2014, Terra Peregrin - Participações SGPS, S.A. issued an announcement in which it stated its willingness to waive certain conditions previously established for the launch of the offer over Portugal Telecom's shares:
On the same date, the CMVM issued an announcement on the change of the conditions by the offeror and stated that (i) the offeror had announced its willingness to waive or amend certain conditions included in the preliminary announcement for the launch of the offer, and that any definitive decision should be formalised through an alteration of the conditions established in said preliminary announcement and be included in the request for registration to be presented to the CMVM until 1 December 2014; and (ii) since the consideration mentioned in the preliminary announcement does not comply with the weighted average price in the six-month period prior to the preliminary announcement, the CMVM would evaluate, at the time of the registration of the offer, the justification and equity of the consideration proposed, to be duly explained by the offeror in its request for the registration of the offer, and then decide whether the offer should be deemed as derogating the duty to launch the subsequent takeover bid as a result of the acquisition of more than 50% of the voting rights of Portugal Telecom.
Under article 181 of the Portuguese Securities Code, the Board of Directors will issue a statement within 8 days counting from the reception of the draft of the prospectus and of the offer announcement that shall be delivered by the offeror until 1 December 2014.
• In November 2014, Africatel GmbH and Portugal Telecom were informed that Samba Luxco S.à.r.L. ("Samba"), holder of a 25% interest in Africatel Holdings B.V., had initiated an arbitration proceeding against Africatel GmbH (a former subsidiary of Portugal Telecom now owned by Oi S.A.) and Portugal Telecom in the Court of Arbitration of the International Chamber of Commerce relating to its purported put right to sell a interest in Africatel Holdings B.V., which Samba believes was triggered by the transfer of the shares of Africatel GmbH to Oi S.A. in the share capital increase of Oi in May 2014, among other claims. Both Africatel GmbH and Portugal Telecom intend to vigorously defend this proceeding.
Under the Subscription Agreement entered into by Portugal Telecom and Oi S.A. in connection with the Oi S.A. share capital increase, Oi S.A. agreed to succeed to Portugal Telecom in any right or obligation contracted by it, as long as the agreements generating that right or obligation have been indicated in the documents for the global offering that formed part of the Oi share capital increase. The prospectus for the Oi S.A. share capital increase disclosed, among other things, that Samba had asserted that the business combination between Portugal Telecom and Oi S.A. triggered certain rights under the Africatel shareholders' agreement, including a put right in respect of Samba's interest in Africatel Holdings B.V.
• On 8 October 2014, some shareholders of the Company brought a civil lawsuit before the District Court of Lisbon (Tribunal Judicial da Comarca de Lisboa) seeking a declaration of invalidity and/or the nullification of a shareholders resolution that was approved at the General Meeting of Shareholders held on 8 September 2014, on the grounds of alleged impediment to vote of certain shareholders of the Company, violation of the purpose or object of the Company and abusive vote. The Company was summoned in order to present its statement defense on 13 October 2014 and submitted it on 12 November 2014.
In addition, on 19 September 2014, a shareholder holding 500 shares of the Company has initiated an injunction proceedings before the District Court of Lisbon (Tribunal Judicial da Comarca de Lisboa) in order to suspend the shareholders resolution that was approved at the General Meeting of Shareholders held on 8 September 2014. Although the claimant lacks legal standing for the required purpose – to the extent that such proceedings could only be initiated by shareholders who, alone or jointly, hold shares corresponding to at least 0.5% of the share capital -, the Court ordered the Company to be summoned in order to present its statement of opposition, which occurred last 5 November 2014. The Company submitted its statement of opposition on 17 November 2014 and now waits for a Court decision on the granting of the protective order.
• On 18 November 2014, at Oi's Extraordinary General Meeting, shareholders approved a reverse stock split of all the ordinary and preferred shares issued by Oi at a ratio of 10: 1, such that each lot of ten shares of each class was grouped into a single share of the same class, with a related amendment to Article 5 of Oi's bylaws.
As a result of the reverse stock split, the current 2,861,553,190 ordinary shares and 5,723,166,910 preferred shares now represent 286,155,319 ordinary shares and 572,316,691 preferred shares, respectively, with the resulting amendment of Article 5 of Oi's bylaws. Similarly, at the Extraordinary General Meeting held on 18 November 2014, Oi's shareholders also approved the amendment of the first paragraph of Article 5 of Oi's bylaws to reflect the changes in share capital and number of shares of Oi approved by the Board, such that the share capital is represented by 858,472,010 shares, comprised of 286,155,319 ordinary shares and 572,316,691 preferred shares, without par value.
The reverse stock split proposal was aimed at reducing the volatility of Oi's shares resulting from the reduced share price in the market, in order to protect Oi and its shareholders from percentage fluctuations resulting from small changes in the share price and, at the same time, to prevent shareholders, especially foreign investment funds, from being precluded from investing in Oi shares because of its share price. In addition, the reverse stock split was aimed at meeting the requirements of NYSE Listing Rules, which require, among other things, that the average closing price of the shares of listed companies remain equal to or greater than USD1 per share during any consecutive period of 30 trading days.
NINE AND THREE MONTH PERIODS ENDED 30 SEPTEMBER 2014 AND 2013
| Notes | 9M14 | 9M13 Restated | 3Q14 | 3Q13 Restated | |
|---|---|---|---|---|---|
| CONTINUING OPERATIONS | |||||
| COSTS, LOSSES AND (INCOME) | |||||
| Wages and salaries | 5 | 8,058,183 | 8,935,163 | 1,534,927 | 2,939,738 |
| Commercial costs | 29,763 | 24,324 | 25,000 | 5,864 | |
| Supplies, external services and other expenses | 6 | 21,328,488 | 2,447,248 | 16,926,051 | 637,718 |
| Indirect taxes | 7 | 5,620,927 | 1,075,181 | 3,858,481 | 253,688 |
| Provisions and adjustments | 276,792 | (797,542) | 203,292 | 1,050 | |
| Depreciation and amortisation | 85,733 | 179,828 | 21,234 | 53,602 | |
| Losses (gains) on disposal of fixed assets, net | 31,690 | (18,281) | - | - | |
| Net other losses (gains) | 8 | (922,169) | (125,993,199) | 68 | 5,822 |
| 34,509,407 | (114,147,278) | 22,569,053 | 3,897,482 | ||
| Income (loss) before financial results and taxes | (34,509,407) | 114,147,278 | (22,569,053) | (3,897,482) | |
| FINANCIAL LOSSES AND (GAINS) | |||||
| Net interest income | 9 | (10,842,355) | (12,499,249) | (384,394) | (4,391,467) |
| Net foreign currency exchange losses (gains) | 87,050 | 241,073 | (224,351) | 4,290,429 | |
| Net losses on financial assets and other investments | 16 | 337,677,151 | 1,199,426 | 266,299,279 | 1,152,021 |
| Equity in losses of joint ventures | 17 | 38,027,775 | 68,400,567 | - | 8,900,064 |
| Net other financial expenses | 10 | 19,483,539 | 22,402,707 | 932,782 | 6,907,464 |
| 384,433,160 | 79,744,524 | 266,623,316 | 16,858,511 | ||
| Income (loss) before taxes | (418,942,567) | 34,402,754 | (289,192,369) | (20,755,993) | |
| Income taxes | 11 | (10,107,250) | 14,150,951 | (5,634,976) | 9,816,156 |
| Net income (loss) from continuing operations | (408,835,317) | 20,251,804 | (283,557,393) | (30,572,148) | |
| DISCONTINUED OPERATIONS | |||||
| Net income from discontinued operations | 12 | 484,071,230 | 328,274,093 | - | 68,846,054 |
| NET INCOME | 75,235,913 | 348,525,897 | (283,557,393) | 38,273,906 | |
| Attributable to non-controlling interests | 13,554,384 | 43,480,984 | - | 17,230,538 | |
| Attributable to equity holders of the parent | 13 | 61,681,529 | 305,044,913 | (283,557,393) | 21,043,368 |
| Earnings per share from continuing operations | |||||
| Basic | 13 | (0.49) | (0.03) | (0.32) | (0.06) |
| Diluted | 13 | (0.49) | (0.03) | (0.32) | (0.06) |
| Earnings per share | |||||
| Basic | 13 | 0.07 | 0.36 | (0.32) | 0.02 |
| Diluted | 13 | 0.07 | 0.35 | (0.32) | 0.02 |
The accompanying notes form an integral part of these financial statements.
Euro
Euro Notes 9M14 9M13 Restated 3Q14 3Q13 Restated Net income recognised in the income statement 75,235,913 348,525,897 (283,557,393) 38,273,906 Income (expenses) recognised directly in shareholders' equity Items that may be reclassified subsequently to the income statement Foreign currency translation adjustments Translation of foreign investments (i) 158,750,163 (402,188,450) (54,239,816) (185,153,726) Transfers to income statement (3,784,493) (3,129,234) - - Hedge accounting of financial instruments Change in fair value - 2,488,621 - 1,510,618 Tax effect - (622,155) - (377,654) Share in other comprehensive income (loss) of joint ventures 7,183,894 (3,323,254) - 988,002 Items that will not be reclassified to the income statement Post retirement benefits Net actuarial gains (losses) 19 28,349,892 (13,539,460) - 11,319,867 Tax effect (6,520,475) 3,384,865 - (2,818,652) Other gains (expenses) recognised directly in shareholders' equity, net (9,015,825) (24,577,839) (275,553) (10,112,611) Total earnings and reserves recognised directly in shareholders' equity 174,963,156 (441,506,906) (54,515,369) (184,644,156) Total comprehensive income 250,199,069 (92,981,009) (338,072,762) (146,370,250) Attributable to non-controlling interests 12,336,053 22,751,296 - 8,511,521 Attributable to equity holders of the parent 237,863,016 (115,732,305) (338,072,762) (154,881,771)
(i) Gains recorded in 2014 and losses recorded in 2013 relate mainly to the impact of, respectively, the appreciation and depreciation of the Brazilian Real against the Euro on the investments in Brazil.
The accompanying notes form an integral part of these financial statements.
30 SEPTEMBER 2014 AND 31 DECEMBER 2013
| Notes | 30 Sep 2014 | 31 Dec 2013 | |
|---|---|---|---|
| ASSETS | |||
| Current Assets | |||
| Cash and cash equivalents | 22.f | 105,591,478 | 1,658,950,514 |
| Short-term investments | 15 | - | 914,128,757 |
| Accounts receivable - trade | - | 762,936,473 | |
| Accounts receivable - other | 22,565 | 406,451,496 | |
| Inventories | - | 85,872,948 | |
| Taxes receivable | 6,373,738 | 70,932,459 | |
| Prepaid expenses | 63,599 | 65,244,104 | |
| Other current assets | - | 3,985,415 | |
| Non-current assets held for sale | - | 4,653,741 | |
| Non-current assets held for distribution to owners | 16 | 1,910,836,660 | - |
| Total current assets | 2,022,888,040 | 3,973,155,907 | |
| Non-Current Assets | |||
| Accounts receivable - trade | - | 204,316 | |
| Accounts receivable - other | - | 1,080,306 | |
| Taxes receivable | 3,440 | 24,739 | |
| Investments in joint ventures | 17 | - | 2,408,246,860 |
| Investments in associated companies | - | 511,316,161 | |
| Other investments | 6,235 | 22,243,652 | |
| Goodwill | 18 | - | 380,616,265 |
| Intangible assets | 18 | - | 717,703,676 |
| Tangible assets | 18 | 167,788 | 3,438,479,384 |
| Post retirement benefits | 19 | - | 1,834,000 |
| Deferred taxes | 11 | 1,429,622 | 564,894,918 |
| Other non-current assets | - | 594,998 | |
| Total non-current assets | 1,607,085 | 8,047,239,275 | |
| Total assets | 2,024,495,125 | 12,020,395,182 | |
| LIABILITIES | |||
| Current Liabilities | |||
| Short-term debt | 20 | 58,530 | 1,491,976,460 |
| Accounts payable | 5,931,530 | 568,270,540 | |
| Accrued expenses | 35,182,974 | 534,656,119 | |
| Deferred income | - | 246,784,244 | |
| Taxes payable | 453,988 | 80,107,942 | |
| Provisions | 21 | 27,049,691 | 88,789,844 |
| Other current liabilities | 856,550 | 13,980,981 | |
| Total current liabilities | 69,533,263 | 3,024,566,130 | |
| Non-Current Liabilities | |||
| Medium and long-term debt | 20 | 60,014 | 5,879,161,433 |
| Accounts payable | - | 19,470,144 | |
| Taxes payable | 39,864 | - | |
| Provisions | 21 | - | 2,271,075 |
| Post retirement benefits | 19 | - | 960,880,069 |
| Deferred taxes | 11 | 1,740,804 | 243,824,693 |
| Other non-current liabilities | - | 23,406,523 | |
| Total non-current liabilities | 1,840,682 | 7,129,013,937 | |
| Total liabilities | 71,373,945 | 10,153,580,067 | |
| SHAREHOLDERS' EQUITY | |||
| Share capital | 26,895,375 | 26,895,375 | |
| Treasury shares | (178,071,827) | (337,520,916) | |
| Legal reserve | 6,773,139 | 6,773,139 | |
| Reserve for treasury shares | 185,042,147 | 6,970,320 | |
| Other reserves and accumulated earnings | 1,912,482,346 | 1,938,201,459 | |
| Equity excluding non-controlling interests | 1,953,121,180 | 1,641,319,377 | |
| Non-controlling interests | - | 225,495,738 | |
| Total equity | 1,953,121,180 | 1,866,815,115 | |
| Total liabilities and shareholders' equity | 2,024,495,125 | 12,020,395,182 |
The accompanying notes form an integral part of these financial statements.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY NINE MONTH PERIODS ENDED 30 SEPTEMBER 2013 AND 2014
| Euro | ||||||||
|---|---|---|---|---|---|---|---|---|
| Other reserves | Equity | |||||||
| and | excluding non | Non | ||||||
| Share | Treasury | Legal | Reserve for | accumulated | controlling | controlling | Total | |
| capital | shares | reserve | treasury shares | earnings | interests | interests | equity | |
| Balance as at 31 December 2012 | 26,895,375 (337,520,916) | 6,773,139 | 6,970,320 2,601,464,676 2,304,582,594 | 232,674,346 2,537,256,940 | ||||
| Dividends (Note 14) | - | - | - | - | (277,884,293) | (277,884,293) | (21,856,960) | (299,741,253) |
| Acquisitions, disposals and share capital increases/decreases | - | - | - | - | - | - | (792,784) | (792,784) |
| Corporate reestructuring at Contax | - | - | - | - | 13,260,000 | 13,260,000 | - | 13,260,000 |
| Income (expenses) recognized directly in equity | - | - | - | - | (420,777,218) | (420,777,218) | (20,729,688) | (441,506,906) |
| Income recognized in the income statement (restated) | - | - | - | - | 305,044,913 | 305,044,913 | 43,480,984 | 348,525,897 |
| Balance as at 30 September 2013 | 26,895,375 (337,520,916) | 6,773,139 | 6,970,320 2,221,108,078 1,924,225,996 | 232,775,898 2,157,001,894 | ||||
| Other reserves | Equity | |||||||
|---|---|---|---|---|---|---|---|---|
| and | excluding non | Non | ||||||
| Share | Treasury | Legal | Reserve for | accumulated | controlling | controlling | Total | |
| capital | shares | reserve | treasury shares | earnings | interests | interests | equity | |
| Balance as at 31 December 2013 | 26,895,375 (337,520,916) | 6,773,139 | 6,970,320 1,938,201,459 1,641,319,377 | 225,495,738 1,866,815,115 | ||||
| Dividends (Note 14) | - | - | - | - | (85,510,302) | (85,510,302) | (101,991) | (85,612,293) |
| Acquisitions, disposals and share capital increases/decreases (Note 1) | - | - | - | - | - | - | (237,729,800) | (237,729,800) |
| Treasury shares relating to the Company's share in Oi's 10% interest | ||||||||
| in Portugal Telecom (Note 1) | - | 159,449,089 | - | - | - | 159,449,089 | - | 159,449,089 |
| Physical exercise of equity swaps over own shares (Note 20) | - | 178,071,827 | (178,071,827) | - | - | - | ||
| Income (expenses) recognized directly in equity | - | - | - | - | 176,181,487 | 176,181,487 | (1,218,331) | 174,963,156 |
| Income recognized in the income statement | - | - | - | - | 61,681,529 | 61,681,529 | 13,554,384 | 75,235,913 |
| Balance as at 30 September 2014 | 26,895,375 (178,071,827) | 6,773,139 | 185,042,147 1,912,482,346 1,953,121,180 | - 1,953,121,180 |
The accompanying notes form an integral part of these financial statements.
Euro
NINE MONTH PERIODS ENDED 30 SEPTEMBER 2014 AND 2013
| Euro | |||
|---|---|---|---|
| Notes | 9M14 | 9M13 Restated | |
| OPERATING ACTIVITIES | |||
| Payments to suppliers | (10,091,047) | (3,320,191) | |
| Payments to employees | (15,561,199) | (6,488,541) | |
| Payments relating to income taxes | (13,363,846) | (4,300,163) | |
| Other cash receips (payments), net | 1,724,758 | (277,217) | |
| Cash flows from operating activities from continuing operations (1) | (37,291,334) | (14,386,112) | |
| INVESTING ACTIVITIES | |||
| Cash receipts resulting from: | |||
| Short-term financial applications | 22.a | 215,085,554 | 941,724 |
| Financial investments | - | 85,965 | |
| Tangible and intangible assets | 967,959 | 13,651 | |
| Interest and related income | 14,568,229 | 14,435,510 | |
| Dividends | 22.b | - | 55,711,833 |
| 230,621,742 | 71,188,683 | ||
| Payments resulting from: | |||
| Short-term financial applications | 22.a | (27,070,616) | (46,935,051) |
| Financial investments | 22.c | (1,554,545,455) | - |
| Tangible and intangible assets | (54,702) | - | |
| Other investing activities | 8 | - | (16,000,000) |
| (1,581,670,773) | (62,935,051) | ||
| Cash flows from investing activities related to continuing operations (2) | (1,351,049,031) | 8,253,632 | |
| FINANCING ACTIVITIES | |||
| Payments resulting from: | |||
| Loans repaid | 22.d | (73,246,846) | - |
| Interest and related expenses | (2,511,097) | - | |
| Dividends | 14 | (87,587,250) | (284,658,563) |
| Cash flows from financing activities related to continuing operations (3) | (163,345,193) | (284,658,563) | |
| Cash and cash equivalents at the beginning of the period | 1,658,950,514 | 1,988,797,138 | |
| Change in cash and cash equivalents from continuing operations (4)=(1)+(2)+(3) | (1,551,685,558) | (290,791,043) | |
| Change in cash and cash equivalents from discontinued operations | 22.e | 371,576,861 | (25,618,421) |
| Effect of exchange differences | 7,747,343 | (29,380,655) | |
| Cash and cash equivalents of discontinued operations as of 5 May 2014 | 1 | (380,997,683) | - |
| Cash and cash equivalents at the end of the period | 22.f | 105,591,478 | 1,643,007,019 |
The accompanying notes form an integral part of these financial statements.
(Amounts expressed in Euros, except where otherwise stated)
On 5 May 2014, Portugal Telecom, SGPS, S.A. ("Portugal Telecom" or "Company") subscribed for 1,045,803,934 common shares and 1,720,252,731 preferred shares issued by Oi, S.A. ("Oi") through the contribution of the PT Assets defined as its 100% interest in PT Portugal, SGPS, S.A., which as of that date included all operational businesses of Portugal Telecom Group except for the subsidiaries Bratel BV, Bratel Brasil, S.A., PTB2, S.A. and Marnaz, S.A. and the investments in Oi, Contax and its controlling shareholders. As a result of the contribution to the Oi share capital increase:
Up to 5 May 2014, Portugal Telecom and its subsidiaries and joint ventures were engaged in rendering a comprehensive range of telecommunications and multimedia services in Portugal, Brazil and other countries in Africa and Asia.
On 1 October 2013, Portugal Telecom, Oi S.A., AG Telecom Participações S.A. ("AG"), LF Tel S.A. ("LF"), Bratel Brasil S.A. ("Bratel"), Pasa Participações S.A. ("Pasa"), EDSP 75 Participações S.A. ("EDSP75") (which together with Telemar Participações S.A. ("Tpart") are defined as "Oi Holding Companies"), Banco Espírito Santo ("BES") and Nivalis Holding B.V. ("Ongoing") signed a memorandum of understanding setting out the basis for a proposed merger of Portugal Telecom, Oi and the Oi Holding Companies (the "Business Combination") into a single Brazilian incorporated listed entity ("CorpCo" or "Telemar Participações").
On 19 February 2014, Portugal Telecom and Oi signed the definitive agreements relating to the combination of their businesses. These agreements govern the steps necessary to implement the Business Combination, which include the following primary transactions, some of which were already completed and others are expected to be completed in 2015:
− On 5 May 2014, Oi realised a share capital increase under which it issued a total of 2,142,279,524 ordinary shares at the price of R\$2.17 per share and of 4,284,559,049 preferred shares at the price of R\$2.00 per share and, on the same date, pursuant to article 24 of CVM Instruction No. 400, Banco BTG Pactual S.A. ("Banco Pactual"), in its role as Stabilizing Agent for the Public Offering, partially exercised its option to place an additional 120,265,046 common shares and 240,530,092 preferred shares issued by Oi; the total proceeds from this share capital increase, including the option exercised by Banco Pactual, amounted to R\$13,960 million, composed of (1) R\$5,710 million (Euro 1,750 million based on the exchange rate as of 21 February 2014) in assets contributed by Portugal Telecom, corresponding to the valuation of PT Assets (as defined below) carried out by Banco Santander (Brasil), S.A., as a result of which Portugal Telecom subscribed for 1,045,803,934 common shares and 1,720,252,731 preferred shares issued by Oi, and (2) R\$8,250 million in cash proceeds obtained from other investors, which subscribed for the remainder 1,216,740,636 ordinary shares and 2,804,836,410 preferred shares issued by Oi; the participation of Portugal Telecom in the Oi capital increase, through the contribution of assets representing all of the operating assets held directly or indirectly by the Portugal Telecom Group and the related liabilities with the exception of the shares of Oi, the shares of Contax Participações S.A. and the shares of Bratel B.V. ("PT Assets"), for the amount of Brazilian R\$5,710 million (Euro 1,750 million), was approved by a majority of 99.87% of the votes present at a General Meeting of Portugal Telecom's shareholders held on 27 March 2014.
In connection with the Oi share capital increase referred to above, Portugal Telecom Group has undertaken an internal restruturing with the purpose of concentrating all operating assets and related liabilities, except for the investments in Oi and Contax under PT Portugal ("PT Assets"), a wholly-owned subsidiary of Portugal Telecom. This was an internal reorganization of entities under common control and, as such, no gains or losses were recorded in the consolidated financial statements of Portugal Telecom. Prior to the Oi share capital increase the following main corporate transactions were realized under this internal restruturing:
As mentioned above, on 5 May 2014, following the completion of the above mentioned internal restruturing, Portugal Telecom subscribed the Oi share capital increase through the contribution in kind of its 100% interest in PT Portugal, which as of that date included only the PT Assets, since the investments in joint ventures (Oi, Telemar Participações, AG and LF) were held directly by Bratel Brasil and PTB2, both of which were wholly-owned by Bratel BV which in turn was wholly-owned by Portugal Telecom. Besides the investments in joint ventures, certain assets and liabilities of Portugal Telecom were not transferred to PT Portugal as part of PT Assets and therefore continued to be fully consolidated in Portugal Telecom's financial statements, including mainly dividends payable to its shareholders, the financing associated with the equity swap contract over treasury shares, certain tax liabilities and certain accrued expenses as well as the necessary cash balances to settle these liabilities and other expenses expected to be incurred. In addition, as Portugal Telecom no longer controls PT Assets as from 5 May 2014, the related earnings and losses prior to that date are presented as results from discontinued operations and therefore the consolidated income and cash flow statements for the nine months period ended 30 September 2013 were restated accordingly (Note 3).
Following the share capital increase mentioned above and also the option exercised by Banco Pactual, Portugal Telecom held a 39.7% effective interest of Oi's issued and outstanding share capital, including (1) a 35.8% interest held directly in Oi, S.A. through Portugal Telecom (32.8%) and Bratel Brasil (3.0%) and (2) a 3.9% interest held indirectly through the shares of Oi owned by Telemar Participações, AG and LF. In addition, PT Portugal became a wholly-owned subsidiary of Oi, S.A. also as a result of the Oi share capital increase.
Portugal Telecom recorded a gain of approximately Euro 701 million (Note 12) in connection with Oi's share capital increase, which reflects mainly (1) the difference between the fair value of the shares obtained in the Oi share capital increase and the carrying value of PT Assets (negative Euro 2,676 million), partially offset by (2) the dilution effect on Portugal Telecom's previous investment in Oi held through Bratel Brasil and the effect of the remeasurement of the previous investment in Oi to fair value, since as from 5 May 2014 this investment is classified in accordance with the provisions of IFRS 5 (Note 3). The detail of the total gain recorded in connection with Oi share capital increase is as follows:
| Euro million | |
|---|---|
| Fair value of shares obtained in the Oi share capital increase (i) | 1,854 |
| Minus: Carrying value of the net assets contributed to Oi share capital increase (ii) | (2,676) |
| Plus: Remeasurement of the previous investment in Oi to fair value and other effects (iii) | (3,829) |
| Total gain (Note 12) (iv) | 701 |
(i) This caption corresponds to the fair value of the shares obtained by Portugal Telecom in the Oi share capital increase of 5 May 2014, which, based on the price of Oi's shares (R\$2.17 per ordinary share and R\$2.00 per preferred share), amounted to R\$5,710 million, equivalent to Euro 1,854 million at the exchange rate of that date.
The table below presents the detail of the carrying value of PT Assets as of 5 May 2014, after which those assets were no longer fully consolidated in Portugal Telecom's consolidated financial statements:
| Euro million | |
|---|---|
| ASSETS | |
| Cash and cash equivalents | 381 |
| Short-term investments | 904 |
| Accounts receivable | 1,375 |
| Inventories | 93 |
| Prepaid expenses | 69 |
| Investments in associated and other companies | 438 |
| Intangible assets | 1,088 |
| Tangible assets | 3,345 |
| Post retirement benefits | 2 |
| Deferred taxes | 341 |
| Other assets | 95 |
| Total assets | 8,130 |
| LIABILITIES | |
| Gross debt | 8,051 |
| Post retirement benefits | 873 |
| Deferred taxes | 229 |
| Accounts payable | 549 |
| Accrued expenses | 484 |
| Deferred income | 207 |
| Taxes payable | 95 |
| Provisions | 54 |
| Other liabilities | 26 |
| Total liabilities | 10,569 |
| Non-controlling interests | 238 |
| PT (Net) Assets | (2,676) |
Short-term investments as at 5 May 2014 in the table above included a total amount of Euro 897 million outstanding in commercial paper issued by Rio Forte Investments, S.A. ("Rioforte", an holding company located in Luxemburg, mainly for the non-financial investments of the Espírito Santo Group), which was contributed to the Oi share capital increase as part of PT Assets. The composition of the outstanding amount is as follows:
The above mentioned commercial paper was not repaid by Rioforte on the respective maturity dates and RioForte has recently requested access to the controlled management regime under Luxemburg legislation, as it believes that it does not have the financial ability to comply with its financial commitments. This request was rejected by Luxemburg court and as a result Rioforte entered into liquidation. On 28 July 2014, following Rioforte default, Portugal Telecom and Oi reached an agreement to exchange the Euro 897 million treasury applications in Rioforte for 16.9% of Oi share capital, represented by 474,348,720 Oi ON shares plus 948,697,440 Oi PN shares. This agreement was approved by the General Shareholders Meeting of Portugal Telecom on 8 September 2014 and the Board of Directors of Oi and its execution is pending the approval of Comissão de Valores Mobiliários in Brazil. The terms of this agreement are as follows:
In addition to the assets and liabilities included in the table above that were contributed to the Oi share capital increase, and since the merger between Portugal Telecom and CorpCo is no longer foreseeable in the short-term as before, Portugal Telecom and Oi are finalizing an agreement for the transfer to Oi of certain liabilities recorded at Portugal Telecom's Statement of Financial Position, together with the related cash equivalents to settle those liabilities, which include accrued management costs and responsibilities and provisions for tax contingencies relating to former subsidiaries of Portugal Telecom, totaling approximately Euro 28 million.
The accompanying interim consolidated financial statements were approved by the Board of Directors and authorized for issue on 27 November 2014.
These interim consolidated financial statements have been presented in accordance with IAS 34 Interim Financial Reporting ("IAS 34"). These financial statements do not include all the information required by the International Financial Reporting Standards ("IFRS") as adopted by the European Union and accordingly should be read in conjunction with the consolidated financial statements for the year ended 31 December 2013. In addition, further explanations for the main changes of revenues and costs are disclosed in our interim management report, which should be read in conjunction with these interim consolidated financial statements.
As mentioned in Note 1, subsequent to 5 May 2014, Portugal Telecom no longer fully consolidates the majority of the businesses held prior to that date, which were contributed to the Oi share capital increase. The revenues, costs and cash flows of these businesses prior to that date are presented under captions of discontinued operations and as a result the Consolidated Statements of Income and Cash Flows for the nine months period ended 30 September 2013 were restated accordingly (Note 3).
As referred to in the 2013 annual report, in the fourth quarter of 2013, Portugal Telecom chose to early adopt the "package of five" standards issued by the IASB in May 2011 (IFRS 10, IFRS 11, IFRS 12 and revised versions of IAS 27 and IAS 28), although its application in the European Union was only mandatory as from 1 January 2014. The impacts of the adoption of IFRS 11 consisted of recognizing the investments in joint ventures by the equity method of accounting, including primarily Oi, Contax and its controlling shareholders, which prior to the adoption of this standard were proportionally consolidated as allowed by IAS 31, standard that has been replaced by IFRS 11.
As a result of the adoption of IFRS 11 for the first time in the fourth quarter of 2013, the Consolidated Statement of Financial Position as of 31 December 2013 presented in the Company's last annual report already reflected the impacts of the adoption of this standard, but the Consolidated Income and Cash Flow Statements for the nine months period ended 30 September 2013 presented in last year's interim report did not reflect the impacts of the adoption of IFRS 11 and therefore were restated accordingly.
In addition to the adoption of IFRS 11, the Company also restated the Consolidated Income and Cash Flow Statements for the nine and three-month periods ended 30 September 2013 by presenting the revenues, costs and cash flows from the businesses contributed to the Oi share capital increase under the captions of discontinued operations.
The impacts of the restatement (due to the adoption of IFRS 11 and the discontinued operations of PT Assets) of the Consolidated Income and Cash Flow Statements for the nine and three-month periods ended 30 September 2013 are as follows:
| Consolidated Income Statement for the nine months period ended 30 September 2013 Euro |
||||
|---|---|---|---|---|
| Prior to | Adjustments | Discontinued | Restated | |
| restatement | IFRS 11 | operations | statement | |
| Total revenues | 4,546,738,739 | (2,371,282,929) | (2,175,455,810) | - |
| Costs, losses and (income) | ||||
| Wages and salaries | 763,175,330 | (461,226,347) | (293,013,820) | 8,935,163 |
| Direct costs | 770,596,966 | (431,279,976) | (339,316,990) | - |
| Commercial costs | 388,436,103 | (168,511,296) | (219,900,483) | 24,324 |
| Supplies, external services and other expenses | 863,605,510 | (480,346,799) | (380,811,463) | 2,447,248 |
| Indirect taxes | 171,682,182 | (138,600,196) | (32,006,805) | 1,075,181 |
| Provisions and adjustments | 74,893,816 | (58,052,329) | (17,639,029) | (797,542) |
| Depreciation and amortisation | 1,001,377,059 | (458,100,814) | (543,096,417) | 179,828 |
| Post retirement benefits costs | 37,031,206 | (5,211,340) | (31,819,866) | - |
| Curtailment costs | 128,306,339 | - | (128,306,339) | - |
| Losses (gains) on disposal of fixed assets, net | (17,857,136) | 14,867,321 | 2,971,534 | (18,281) |
| Other operating expenses, net | (77,723,021) | (6,943,089) | (41,327,089) | (125,993,199) |
| Income before financial results and taxes | 443,214,385 | (177,878,064) | (151,189,043) | 114,147,278 |
| Net interest expenses | 425,611,374 | (232,025,017) | (206,085,606) | (12,499,249) |
| Equity in losses of joint ventures | - | 58,429,563 | 9,971,004 | 68,400,567 |
| Equity in earnings of associated companies, net | (411,424,078) | 7,964,625 | 403,459,453 | - |
| Net other financial losses | 89,449,403 | (35,866,997) | (29,739,200) | 23,843,206 |
| Income taxes | (5,492,073) | 20,163,624 | (520,600) | 14,150,951 |
| Net income from continuing operations | 345,069,759 | 3,456,138 | (328,274,093) | 20,251,804 |
| Net income from discontinued operations | - | - | 328,274,093 | 328,274,093 |
| Net income | 345,069,759 | 3,456,138 | - | 348,525,897 |
| Attributable to non-controlling interests | 40,024,846 | 3,456,138 | - | 43,480,984 |
| Attributable to equity holders of the parent | 305,044,913 | - | - | 305,044,913 |
| Earnings per share attributable to the equity holders of the parent | ||||
| Basic | 0.36 | - | - | 0.36 |
| Diluted | 0.35 | - | - | 0.35 |
| Consolidated Income Statement for the three months period ended 30 September 2013 | Euro | |||
|---|---|---|---|---|
| Prior to | Adjustments | Discontinued | Restated | |
| restatement | IFRS 11 | operations | statement | |
| Total revenues | 1,454,326,342 | (731,293,088) | (723,033,254) | - |
| Costs, losses and (income) | ||||
| Wages and salaries | 246,523,102 | (151,855,247) | (91,728,117) | 2,939,738 |
| Direct costs | 235,901,780 | (125,054,476) | (110,847,304) | - |
| Commercial costs | 121,561,683 | (43,604,847) | (77,950,972) | 5,864 |
| Supplies, external services and other expenses | 279,048,017 | (150,057,403) | (128,352,896) | 637,718 |
| Indirect taxes | 57,856,133 | (47,156,753) | (10,445,692) | 253,688 |
| Provisions and adjustments | 15,893,334 | (11,194,921) | (4,697,363) | 1,050 |
| Depreciation and amortisation | 315,929,230 | (138,846,668) | (177,028,960) | 53,602 |
| Post retirement benefits costs | 12,196,503 | (1,576,768) | (10,619,735) | - |
| Curtailment costs | 89,385 | - | (89,385) | - |
| Losses (gains) on disposal of fixed assets, net | (16,747,046) | 15,386,394 | 1,360,652 | - |
| Other operating expenses, net | 2,873,202 | (1,707,360) | (1,160,020) | 5,822 |
| Income before financial results and taxes | 183,201,019 | (75,625,039) | (111,473,462) | (3,897,482) |
| Net interest expenses | 132,970,259 | (67,669,181) | (69,692,545) | (4,391,467) |
| Equity in earnings of joint ventures | - | - | 8,900,064 | 8,900,064 |
| Equity in earnings of associated companies, net | (35,504,383) | 8,037,627 | 27,466,756 | - |
| Net other financial losses | 47,875,160 | (18,821,325) | (16,703,921) | 12,349,914 |
| Income taxes | (853,759) | 3,267,676 | 7,402,239 | 9,816,156 |
| Net income from continuing operations | 38,713,742 | (439,836) | (68,846,054) | (30,572,148) |
| Net income from discontinued operations | - | - | 68,846,054 | 68,846,054 |
| Net income | 38,713,742 | (439,836) | - | 38,273,906 |
| Attributable to non-controlling interests | 17,670,374 | (439,836) | - | 17,230,538 |
| Attributable to equity holders of the parent | 21,043,368 | - | - | 21,043,368 |
| Earnings per share attributable to the equity holders of the parent | ||||
| Basic | 0.02 | - | - | 0.02 |
| Diluted | 0.02 | - | - | 0.02 |
| Consolidated Statement of Cash Flows for the nine months period ended 30 September 2013 | Euro | |||
|---|---|---|---|---|
| Prior to | Adjustments | Discontinued | Restated | |
| restatement | IFRS 11 | operations | statement | |
| OPERATING ACTIVITIES | ||||
| Collections from clients | 5,490,728,886 | (2,991,626,663) | (2,499,102,223) | - |
| Payments to suppliers | (2,282,539,950) | 1,170,690,148 | 1,108,529,611 | (3,320,191) |
| Payments to employees | (800,897,905) | 470,553,641 | 323,855,723 | (6,488,541) |
| Payments relating to income taxes | (87,905,580) | 41,438,801 | 42,166,616 | (4,300,163) |
| Payments relating to post retirement benefits, net | (145,281,282) | 8,515,506 | 136,765,776 | - |
| Payments relating to indirect taxes and other | (1,081,413,344) | 855,616,742 | 225,519,385 | (277,217) |
| Cash flows from operating activities from continuing operations (1) | 1,092,690,825 | (444,811,825) | (662,265,112) | (14,386,112) |
| INVESTING ACTIVITIES | ||||
| Short-term financial applications | (86,751,435) | (201,631,121) | 242,389,229 | (45,993,327) |
| Interest and related income | 103,103,738 | (15,801,126) | (72,867,102) | 14,435,510 |
| Dividends | 26,446,747 | 1,155,042 | 28,110,044 | 55,711,833 |
| Financial investments | 322,640,668 | 3,574,082 | (326,128,785) | 85,965 |
| Tangible and intangible assets | (984,501,232) | 515,653,957 | 468,860,926 | 13,651 |
| Other investing activities | (18,382,614) | 1,930,956 | 451,658 | (16,000,000) |
| Cash flows from investing activities related to continuing operations (2) | (637,444,128) | 304,881,790 | 340,815,970 | 8,253,632 |
| FINANCING ACTIVITIES | ||||
| Loans obtained | (126,521,803) | 14,230,297,175 | (14,103,775,372) | - |
| Loans repaid | - | (14,160,514,302) | 14,160,514,302 | - |
| Interest and related expenses | (481,213,257) | 161,138,498 | 320,074,759 | - |
| Dividends | (329,438,779) | 73,182,530 | (28,402,314) | (284,658,563) |
| Subsidies | 1,344,043 | (1,344,043) | - | - |
| Other financing activities | 35,606,244 | (34,262,201) | (1,344,043) | - |
| Cash flows from financing activities related to continuing operations (3) | (900,223,552) | 268,497,657 | 347,067,332 | (284,658,563) |
| Cash and cash equivalents at the beginning of the period | 2,507,099,156 | (518,302,018) | - | 1,988,797,138 |
| Change in cash and cash equivalents from continuing operations (4)=(1)+(2)+(3) | (444,976,855) | 128,567,622 | 25,618,190 | (290,791,043) |
| Change in cash and cash equivalents from discontinued operations | - | - | (25,618,190) | (25,618,421) |
| Effect of exchange differences | (73,236,648) | 43,855,993 | - | (29,380,655) |
| Cash and cash equivalents at the end of the period | 1,988,885,653 | (345,878,403) | - | 1,643,007,019 |
In addition to the changes in accounting policies referred to above, following Oi's share capital increase on 5 May 2014, Portugal Telecom changed the recognition criteria of the investment in Oi from the equity method of accounting to held for distribution to owners in accordance with the provisions of IFRS 5 (Note 16), and accordingly measured this investment at fair value based on the price of Oi shares, since that fair value is lower than the previous carrying amount. Any future distribution would be subject to formal approval by the Board of Directors of Portugal Telecom, the shareholders of Portugal Telecom at a meeting convened for that purpose, and other conditions. Regarding the recognition of changes in fair value of this investment, as mentioned below, changes attributable to the appreciation or depreciation of the Brazilian Real against the Euro are recorded directly under the Statement of Comprehensive Income as foreign currency translation adjustments and the remaining changes are recorded in the Income Statement.
As at 30 September 2014 and 31 December 2013, assets and liabilities denominated in foreign currencies were translated to Euros using the following exchange rates to the Euro:
| Currency | 30 Sep 2014 | 31 Dec 2013 |
|---|---|---|
| Brazilian real | 3.0821 | 3.2576 |
| US dollar | 1.2583 | 1.3791 |
During the nine-month periods ended 30 September 2014 and 2013, income statements of subsidiaries, associated companies and joint ventures expressed in foreign currencies were translated to Euros using the following average exchange rates to the Euro:
| Currency | 9M14 | 9M13 |
|---|---|---|
| Brazilian real | 3.1028 | 2.7934 |
| US dollar | 1.3549 | 1.3171 |
The composition of this caption during the nine and three-month periods ended 30 September 2014 and 2013 is as follows:
| Euro | ||||
|---|---|---|---|---|
| 9M14 | 9M13 | 3Q14 | 3Q13 | |
| Fixed and variable remuneration | 6,248,638 | 8,400,537 | 1,247,238 | 2,778,060 |
| Social security | 1,714,217 | 439,567 | 270,964 | 143,030 |
| Health care benefits related to active employees | 27,665 | 24,762 | 3,493 | 224 |
| Training | 11,213 | (1,303) | (4,546) | (2,750) |
| Other | 56,450 | 71,600 | 17,778 | 21,174 |
| 8,058,183 | 8,935,163 | 1,534,927 | 2,939,738 |
The composition of this caption during the nine and three-month periods ended 30 September 2014 and 2013 is as follows:
| Euro | ||||
|---|---|---|---|---|
| 9M14 | 9M13 | 3Q14 | 3Q13 | |
| Specialized work | 20,073,321 | 1,860,551 | 16,507,270 | 652,561 |
| Support services | 15,048 | 19,245 | 4,017 | 4,664 |
| Insurance | 381,823 | 308,755 | 150,654 | 51,697 |
| Operating leases | 265,418 | 9,825 | 88,912 | - |
| Other | 592,878 | 248,872 | 175,198 | (71,204) |
| 21,328,488 | 2,447,248 | 16,926,051 | 637,718 |
Higher costs in the nine and three month periods ended 30 September 2014 reflect certain consultancy and legal fees incurred in connection with the business combination between Portugal Telecom and Oi.
The composition of this caption during the nine and three-month periods ended 30 September 2014 and 2013 is as follows:
| Euro | ||||
|---|---|---|---|---|
| 9M14 | 9M13 | 3Q14 | 3Q13 | |
| Value added tax | 2,706,442 | 950,124 | 1,002,908 | 222,206 |
| Other | 2,914,485 | 125,057 | 2,855,573 | 31,482 |
| 5,620,927 | 1,075,181 | 3,858,481 | 253,688 |
In the nine-month periods ended 30 September 2014 and 2013, net other gains amounted to Euro 1 million and Euro 126 million, respectively. In the nine months period ended 30 September 2013, this caption includes mainly a gain of Euro 134 million resulting from the settlement of contractual obligations related to the acquisition of the investment in Oi in 2011, for an amount of Euro 16 million that was lower than the liability initially recognized.
In the nine and three-month periods ended 30 September 2014 and 2013, the composition of this caption is as follows:
| Euro | ||||
|---|---|---|---|---|
| 9M14 | 9M13 | 3Q14 | 3Q13 | |
| Interest expense | ||||
| Related to loans obtained and financial instruments | 525,466 | 1,742,698 | - | 587,283 |
| Interest income | ||||
| Related to cash and cash equivalents | (10,999,139) | (12,941,905) | (384,394) | (4,330,243) |
| Other | (368,682) | (1,300,042) | - | (648,507) |
| (10,842,355) | (12,499,249) | (384,394) | (4,391,467) |
In the nine and three-month periods ended 30 September 2014 and 2013, the composition of this caption is as follows:
| Euro | ||||
|---|---|---|---|---|
| 9M14 | 9M13 | 3Q14 | 3Q13 | |
| Bank commissions and expenses | 10,447,669 | 19,479,983 | 533,778 | 6,797,589 |
| Other (i) | 9,035,870 | 2,922,724 | 399,004 | 109,875 |
| 19,483,539 | 22,402,707 | 932,782 | 6,907,464 |
(i) In the nine months period ended 30 September 2014, this caption includes financial expenses incurred in connection with the business combination with Oi, namely financial taxes (IOF) paid in Brazil due to the transfer of funds from Portugal.
In the nine and three-month periods ended 30 September 2014 and 2013, the composition of this caption is as follows:
| Euro | ||||
|---|---|---|---|---|
| 9M14 | 9M13 | 3Q14 | 3Q13 | |
| Income tax-current | (12,025,502) | 12,745,970 | (5,634,976) | 9,827,462 |
| Deferred taxes | 1,918,252 | 1,404,981 | - | (11,306) |
| (10,107,250) | 14,150,951 | (5,634,976) | 9,816,156 |
The composition of deferred tax assets and liabilities as at 30 September 2014 and 31 December 2013 is as follows:
| Euro | ||
|---|---|---|
| 30 Sep 2014 | 31 Dec 2013 | |
| Deferred tax assets | ||
| Post-retirement benefits | - | 288,222,361 |
| Tax losses carryforward | - | 208,913,360 |
| Provisions and adjustments | - | 56,620,020 |
| Other | 1,429,622 | 11,139,177 |
| 1,429,622 | 564,894,918 | |
| Deferred tax liabilities | ||
| Revaluation of fixed assets | - | 148,113,148 |
| Financial instruments | - | 13,143,452 |
| Other | 1,740,804 | 82,568,093 |
| 1,740,804 | 243,824,693 |
The reduction in total deferred tax assets reflects mainly the deferred tax assets from discontinued operations as at 5 May 2014 (Euro 341 million), which were no longer consolidated as from that date, and the write-off of deferred tax assets relating to tax losses (Euro 208 million). These deferred tax assets relating to tax losses were recorded at Portugal Telecom holding company in connection with the special regime for the taxation of groups of companies. This write-off was included under the results of discontinued operations as those tax losses became non-recoverable following the discontinuing of the businesses that supported the tax consolidation group.
The reduction in total deferred tax liabilities reflects mainly the deferred tax liabilities from discontinued operations as at 5 May 2014 (Euro 229 million), which were no longer consolidated as from that date, and the reversal of a deferred tax liability of Euro 13 million recorded at Portugal Telecom corresponding to the tax effect on the convertible option included in the exchangeable bond that was also contributed to the Oi share capital increase.
As mentioned in Note 1, on 5 May 2014 Portugal Telecom contributed the majority of its businesses to the Oi share capital increase. As a result, revenues and costs of these businesses in the period between 1 January and 5 May 2014 and in the nine and threemonth periods ended 30 September 2013 were presented under the caption "Net income from discontinued operations". In addition, this caption also includes the gain recorded in connection with the contribution of these businesses to the Oi share capital increase, as explained in Note 1. The detail of this caption is as follows:
| Euro | ||||
|---|---|---|---|---|
| 9M14 | 9M13 | 3Q14 | 3Q13 | |
| Net gain recorded in connection with the contribution of | ||||
| PT Assets to Oi's share capital increase in exchange for an | ||||
| additional interest in Oi (Note 1) | 701,378,600 | - | - | - |
| Net income before non-controlling interests of businesses | ||||
| contributed to Oi share capital increase (i) | (217,307,370) | 328,274,093 | - | 68,846,054 |
| Net income from discontinued operations | 484,071,230 | 328,274,093 | - | 68,846,054 |
(i) This caption corresponds to the net income before non-controlling interests of businesses contributed to Oi share capital increase in the period between 1 January and 5 May 2014 and in the nine and three month periods ended 30 September 2013. The detail of this caption is presented in the table below.
The composition of the net income before non-controlling interests of businesses contributed to Oi share capital increase in the periods between 1 January and 5 May 2014 and 5 May 2014 and in the nine and three-month periods ended 30 September 2013 is as follows:
| Euro | ||||
|---|---|---|---|---|
| 9M14 | 9M13 | 3Q14 | 3Q13 | |
| Operating revenues | 945,500,482 | 2,175,455,810 | - | 723,033,254 |
| Operating costs | 834,880,672 | 2,024,266,767 | - | 611,559,792 |
| Income (loss) before financial results and taxes | 110,619,810 | 151,189,043 | - | 111,473,462 |
| Financial gains (losses) (i) | (73,051,332) | 177,605,651 | - | (50,029,646) |
| Income before income taxes | 37,568,478 | 328,794,694 | - | 61,443,816 |
| Provision for income taxes (ii) | (254,875,848) | (520,600) | - | 7,402,239 |
| Net income (loss) before non-controlling interests of | ||||
| businesses contributed to Oi share capital increase | (217,307,370) | 328,274,093 | - | 68,846,054 |
(i) In the nine months period ended 30 September 2013, this caption includes a gain of Euro 310 million related to the disposal of the equity investment in CTM.
(ii) In the nine months period ended 30 September 2014, as mentioned in Note 11, this caption includes the write-off of deferred tax assets relating to tax losses, amounting to Euro 208 million.
Earnings per share for the nine and three-month periods ended 30 September 2014 and 2013 were computed as follows:
| Euro | |||||
|---|---|---|---|---|---|
| 9M14 | 9M13 | 3Q14 | 3Q13 | ||
| Income (loss) from continuing operations | (1) | (422,389,701) | (23,229,180) | (283,557,393) | (47,802,686) |
| Income from discontinued operations, net of non-controlling interests | (2) | 484,071,230 | 328,274,093 | - | 68,846,054 |
| Net income attributable to equity holders of the parent | (3) | 61,681,529 | 305,044,913 | (283,557,393) | 21,043,368 |
| Financial costs related to exchangeable bonds (net of tax) | (4) | 10,866,947 | 23,070,181 | - | 7,713,367 |
| Net income considered in the computation of the diluted earnings per share | (5) | 72,548,476 | 328,115,094 | (283,557,393) | 28,756,735 |
| Weighted average common shares outstanding in the period (i) | (6) | 866,362,658 | 855,028,595 | 875,872,500 | 855,028,595 |
| Effect of the exchangeable bonds (ii) | 38,541,705 | 84,175,084 | - | 84,175,084 | |
| (7) | 904,904,363 | 939,203,679 | 875,872,500 | 939,203,679 | |
| Earnings per share from continuing operations | |||||
| Basic | (1)/(6) | (0.49) | (0.03) | (0.32) | (0.06) |
| Diluted | [(1)+(4)]/(7) | (0.49) | (0.03) | (0.32) | (0.06) |
| Earnings per share from discontinued operations, net of non-controlling interests | |||||
| Basic | (2)/(6) | 0.56 | 0.38 | - | 0.08 |
| Diluted | (2)/(7) | 0.53 | 0.35 | - | 0.07 |
| Earnings per share attributable to equity holders of the parent | |||||
| Basic | (3)/(6) | 0.07 | 0.36 | (0.32) | 0.02 |
| Diluted | (5)/(7) | 0.07 | 0.35 | (0.32) | 0.02 |
(i) Weighted average shares outstanding were computed considering the 896,512,500 issued shares adjusted for (1) 20,640,000 treasury shares, applicable for all periods presented, and (2) Portugal Telecom's stake in its own shares that were acquired by Telemar Norte Leste in 2011 and 2012, under the strategic partnership between Portugal Telecom and Oi, which is applicable only up to 5 May 2014, since as from that date the investment in Oi is classified in accordance with the provisions of IFRS 5 and, accordingly, measured at fair value, as a result of which the Company derecognized the related treasury shares held indirectly through the investment in Oi.
(ii) Dilutive effects correspond to the impact of the exchangeable bonds issued on August 2007, applicable up to 5 May 2014 when this financing was transferred to PT Portugal under the Oi share capital increase.
On 19 April 2013, the Annual Shareholders' Meeting of Portugal Telecom approved the proposal of the Board of Directors to distribute a dividend of 32.5 cents per share, which was paid on 17 May 2013, amounting to Euro 284,658,563, in relation to 875,872,500 shares, which includes an amount of Euro 6,774,270 paid to Telemar Norte Leste in relation to a portion of the Portugal Telecom's 89,651,205 shares held by this entity corresponding to the Company's effective interest in Oi, resulting in a net impact on shareholders' equity amounting to Euro 277,884,293.
On 30 April 2014, the Annual Shareholders' Meeting of Portugal Telecom approved the proposal of the Board of Directors to distribute a dividend of 10.0 cents per share, which was paid on 30 May 2014, amounting Euro 87,587,250, in relation to 875,872,500 shares, which includes an amount of Euro 2,076,949 paid to Telemar Norte Leste in relation to a portion of the Portugal Telecom's 89,651,205 shares held by this entity corresponding to the Company's effective interest in Oi, resulting in a net impact on shareholders' equity amounting to Euro 85,510,302.
Cash amounts mentioned above correspond to the unitary dividend paid to the 896,512,500 Portugal Telecom's shares adjusted by 20,640,000 shares.
As at 31 December 2013, the composition of this caption is as follows:
| Euro | |
|---|---|
| 31 Dec 2013 | |
| Debt securities (Note 23) (i) | 750,000,000 |
| Debentures (ii) | 161,820,445 |
| Other short-term investments | 2,308,312 |
| 914,128,757 |
(i) As at 31 December 2013, this caption includes commercial paper issued by Espírito Santo International in the following amounts: (a) Euro 500 million subscribed by PT Finance on 8 November 2013 that were repaid at maturity, on 10 February 2014, by the corresponding notional amount plus accrued interest; (b) Euro 200 million subscribed by PT Portugal on 29 October 2013 that were repaid at maturity, on 29 January 2014, by the corresponding notional amount plus accrued interest, and (c) Euro 50 million subscribed by PT Finance on 20 November 2013 that were repaid at maturity, on 20 February 2014, by the corresponding notional amount plus accrued interest. These repayments were classified as cash receipts from investing activities of discontinued operations.
(ii) The debentures as at 31 December 2013, amounting to approximately Euro 162 million, were issued by Banco Santander Brasil, S.A. and Dibens Leasing, S.A. and were subscribed by Brazilian subsidiaries of Portugal Telecom Group. Up to 5 May 2014, debentures included under this caption were repaid and the related proceeds plus the proceeds from the cash capital increases realized by Bratel BV in Bratel Brasil and PTB2 were used to subscribe debentures issued by the controlling shareholders of Oi, as explained in Note 1.
On 28 March 2011, as referred to in Note 1, Portugal Telecom concluded the acquisition process of its investments in Oi and the agreements with the controlling shareholders of these companies. This investment was realized through the acquisition of a direct stake in this company and indirectly through the acquisition of stakes in the share capital of its controlling shareholders. Oi Group is the leading provider of telecommunication services in the Brazilian market, providing these services through Oi, S.A. and its subsidiaries.
As mentioned in Note 3, as from 5 May 2014, Portugal Telecom recognizes the investment in Oi in accordance with the provisions of IFRS 5. This investment is therefore measured at fair value based on the quote price of Oi shares as at 30 September 2014, which is the best reference of fair value and is lower than the previous carrying amount.
Based on Oi's stock price for purposes of the share capital increase as at 5 May 2014 (R\$ 2.17 per ordinary share and R\$ 2.00 per preferred share) and Oi's stock price as at 30 September 2014 (R\$ 1,79 per ordinary share and R\$ 1,74 per preferred share), the investment in Oi was valued at Euro 2,244 million (R\$ 6,914 million) as at 5 May 2014 and Euro 1,911 million (R\$ 5,889 million) as at 30 September 2014.
The reduction in the investment in Oi between 5 May and 30 September 2014, amounting to Euro 334 million, reflects:
The reduction in the investment in Oi between 30 June and 30 September 2014, amounting to Euro 321 million, reflects:
A loss of Euro 266 million recorded in the Consolidated Income Statement under the caption "Net losses on financial assets and other investments", corresponding to the change in the fair value of the investment in Oi due to the reduction in the price of Oi's shares, totaling R\$806 million;
A loss of Euro 54 million recorded directly in other comprehensive income, reflecting the impact of the appreciation of the Brazilian Real against the Euro during the third quarter of 2014.
As at 31 December 2013, this caption corresponds to the investments in Oi, Contax and its controlling shareholders that prior to 5 May 2014, as mentioned previously, were accounted for by the equity method of accounting, based on Portugal Telecom's 23.2% economic interest in Oi held prior to the Oi share capital increase.
As at 31 December 2013, the detail of Portugal Telecom's total investments in joint ventures was as follows:
| Euro | |
|---|---|
| 31 Dec 2013 | |
| Oi | 2,013,310,333 |
| Financial Investment (i) | 1,254,256,430 |
| Goodwill (ii) | 759,053,903 |
| Contax | 54,251,514 |
| Financial investment | 18,246,588 |
| Goodwill (ii) | 36,004,926 |
| Telemar Participações (iii) | 77,907,584 |
| LF (iv) | 120,551,271 |
| AG (iv) | 124,513,850 |
| CTX | 16,181,157 |
| Other | 1,531,151 |
| 2,408,246,860 |
(i) As at 31 December 2013, this financial investment reflects the Company's 15.4% direct interest in Oi's net assets amounting to Euro 8,162 million, the detail of which is presented below.
(ii) As at 31 December 2013, Portugal Telecom held a 12.1% direct interest in Telemar Participações. The investment in Telemar Participações reflected the 12.1% share in its net assets composed by (1) this company's investment in Oi through a 18.8% direct interest, and (2) its outstanding gross debt totaling Euro 942 million.
(iii) As at 31 December 2013, Portugal Telecom held a 35% direct interest in both AG and LF. The investments in these companies reflected the 35% share in its net assets composed by (1) their investments in Telemar Participações, through a 19.4% direct interest each, and in Oi through a 4.25% direct interest each, and (2) their outstanding gross debt, amounting to Euro 196 million for AG and Euro 199 million for LF.
Oi's net assets presented below are adjusted to reflect the effects of the purchase price allocation performed by Portugal Telecom in connection with the acquisition of this investment as well as other adjustments to conform with the Group accounting policies. The detail of Oi's net assets as at 31 December 2013 is as follows:
| Euro | |
|---|---|
| 31 Dec 2013 | |
| Cash and cash equivalents | 762,768,814 |
| Short-term investments | 163,210,160 |
| Current accounts receivable | 3,050,513,483 |
| Current taxes receivable | 713,511,917 |
| Current judicial deposits (i) | 404,055,634 |
| Goodwill | 22,692,638 |
| Tangible assets (ii) | 8,011,567,784 |
| Intangible assets (iii) | 8,284,614,390 |
| Post retirement benefits | 18,479,119 |
| Deferred taxes (iv) | 1,867,025,458 |
| Non-current judicial deposits (i) | 3,392,355,244 |
| Other | 755,899,047 |
| Total assets | 27,446,693,687 |
| Short-term debt (v) | 1,075,578,550 |
| Current accounts payable | 847,752,589 |
| Current accrued expenses | 1,014,419,828 |
| Current taxes payable | 841,981,404 |
| Current provisions (vi) | 375,591,309 |
| Medium and long-term debt (v) | 9,062,011,675 |
| Non-current taxes payable (vii) | 849,402,537 |
| Non-current provisions (vi) | 1,348,916,630 |
| Post retirement benefits | 197,557,853 |
| Deferred taxes (iv) | 1,984,575,960 |
| Other (viii) | 1,687,211,722 |
| Total liabilities | 19,285,000,057 |
| Total net assets | 8,161,693,630 |
Equity in losses of joint ventures, recognized in accordance with the equity method of accounting, amounted to Euro 38 million in the four months period ended 30 April 2014 and Euro 68 million in the nine months period ended 30 September 2013. The reduction in these losses reflects mainly (1) a capital gain recorded by Oi in the first quarter of 2014 relating to the disposal of mobile telecommunication towers, amounting to R\$ 1,247 million (equivalent to approximately Euro 60 million corresponding to Portugal Telecom's share, net of taxes), and (2) lower interest expenses from Oi's controlling shareholders, which in 2014 relate to only four months as compared to nine months in 2013. These effects were partially offset by higher interest costs, higher net other financial expenses and lower revenues at Oi.
| Euro | ||
|---|---|---|
| 30 Sep 2014 | 31 Dec 2013 | |
| Tangible assets | 167,788 | 3,438,479,384 |
| Intangible assets | - | 717,703,676 |
| Goodwill | - | 380,616,265 |
| 167,788 | 4,536,799,325 |
The decrease of Euro 4,537 million in total tangible and intangible assets, including goodwill, reflects primarily:
Depreciation and amortization costs of discontinued operations between 1 January and 5 May 2014, amounting to Euro 231 million;
The carrying value of total tangible and intangible assets (including goodwill) of discontinued operations as at 5 May 2014, amounting to Euro 4,433 million, which were transferred to Oi under its share capital increase (Note 1).
As at 31 December 2013, the projected post retirement benefits obligations, which relate to pension complements and healthcare benefits, totaled Euro 494 million and the fair value of plan assets amounted to Euro 386 million. In addition, Portugal Telecom had liabilities with salaries payable to suspended and pre-retired employees amounting to Euro 852 million, resulting in net benefits obligations of Euro 959 million as at 31 December 2013.
These obligations were transferred to Oi in connection with its share capital increase and amounted to Euro 871 million as at 5 May 2014, a reduction of Euro 88 million compared to the balance as at 31 December 2013, reflecting payments of salaries to suspended and pre-retired employees (Euro 50 million), payments of healthcare expenses (Euro 7 million) and net actuarial gains recorded in the period (Euro 28 million), partially offset by post retirement benefits costs amounting to Euro 7 million. Net actuarial gains reflected the difference between the actual and the estimated return on plan assets.
As at 30 September 2014 and 31 December 2013, this caption consists of:
| Euro | ||||
|---|---|---|---|---|
| 30 Sep 2014 | 31 Dec 2013 | |||
| Short-term | Long-term | Short-term | Long-term | |
| Exchangeable bonds | - | - | 743,011,847 | - |
| Bonds | - | - | - | 4,731,260,092 |
| Bank loans | ||||
| External loans | - | - | 103,868,391 | 949,281,957 |
| Domestic loans | - | - | 5,111,006 | 175,039,738 |
| Liability related to equity swaps on treasury shares (Note 22) | - | - | 73,210,079 | - |
| Commercial paper | - | - | 542,000,000 | - |
| Leasings | 58,530 | 60,014 | 24,729,526 | 23,579,646 |
| Other financings | - | - | 45,611 | - |
| 58,530 | 60,014 | 1,491,976,460 | 5,879,161,433 |
The reduction in this caption reflects:
As at 30 September 2014, this caption corresponds mainly to provisions for income tax contingencies. The reduction compared to 31 December 2013 reflects the provisions from discontinued operations as at 5 May 2014 (Euro 54 million) that were transferred to Oi in connection with its share capital increase.
These captions include basically cash receipts from the short-term applications matured, net of cash payments related to new short-term financial applications entered into. Net cash receipts amounted to Euro 188,014,938 in the nine months period ended 30 September 2014, compared to net cash payments of Euro 45,993,327 in the same period of last year. In the nine months period ended 30 September 2014, net cash receipts relate mainly to the settlement of outstanding applications by Bratel Brasil up to 5 May 2014, when it used the proceeds from these applications together with the proceeds from a share capital increase realised by Bratel BV to subscribe a portion of the convertible debentures issued by certain entities that directly or indirectly control AG and LF, as mentioned in Notes 1 and 22(c).
This caption corresponds to dividends received from Oi in the nine months period ended 30 September 2013.
This caption corresponds to the total amount of R\$ 4,788 million (Euro 1,555 million) paid by Bratel Brasil and PTB2 to subscribe debentures convertible into shares of certain companies that directly or indirectly control AG and LF, the proceeds of which were ultimately used by AG and LF to repay its indebtness and to subscribe convertible debentures to be issued by Telemar Participações, that also used the related proceeds to repay its own indebtness, as explained in more detail in Note 1.
In the nine months period ended 30 September 2014, payments resulting from loans obtained, amounting to Euro 73,246,846, reflect primarily the repayment of the equity swap, amounting to Euro 73,210,079 (Note 20), and payments relating to finance lease contracts.
In the nine-month periods ended 30 September 2014 and 2013, the composition of this caption is as follows:
| Euro | ||
|---|---|---|
| 9M14 | 9M13 | |
| Operating activities | 145,752,202 | 662,264,884 |
| Investing activities | (241,193,564) | (285,146,479) |
| Financing activities | 467,018,223 | (402,736,826) |
| 371,576,861 | (25,618,421) |
Cash flows from discontinuing operations in the nine months period ended 30 September 2014 correspond mainly to the cash flows up to 5 May 2014 from the businesses discontinued and contributed to the Oi share capital increase on that date, as compared to cash flows for a nine months period in 2013, which explains the lower cash flows from operating activities.
The change in cash flows from investing activities reflects the reduced number of months of those cash flows in 2014, as explained above, and the lower payments resulting from capital expenditures reflecting the decreased investments as a result of strong investments in past years, both on FTTH and 4G-LTE networks. These effects were partially offset by the proceeds received in June 2013 in connection with the sale of the equity investment in CTM (Euro 336 million), as referred to in Note 12.
The change in cash flows from financing activities reflects mainly the cash proceeds resulting from the increase in outstanding commercial paper due, as mentioned in Note 20, while in the same period of last year total gross debt remained broadly stable.
As at 30 September 2014 and 31 December 2013, the composition of this caption is as follows:
| Euro | ||
|---|---|---|
| 30 Sep 2014 | 31 Dec 2013 | |
| Cash | 2,000 | 10,526,405 |
| Demand deposits | 8,578,570 | 94,713,210 |
| Time deposits | 93,900,000 | 1,455,485,775 |
| Other bank deposits | 3,110,908 | 98,225,124 |
| 105,591,478 | 1,658,950,514 |
Portugal Telecom maintained influence over the companies identified below until Oi's share capital increase on 5 May 2014, when it contributed to Oi its 100% interest in PT Portugal, including the indirect investments in these associated companies. Therefore, since as at 30 September 2014 Portugal Telecom no longer has a direct interest in those associated companies, the tables below present the balances as at 31 December 2013 between Portugal Telecom Group and its associated companies and joint ventures, and the transactions between Portugal Telecom Group and those same entities occurred during the four months period ended 30 April 2014, prior to Oi's share capital increase, and the nine months period ended 30 September 2013:
| Accounts receivable | Accounts payable | Euro Loans granted |
||||
|---|---|---|---|---|---|---|
| Company | 30 Sep 2014 | 31 Dec 2013 | 30 Sep 2014 | 31 Dec 2013 | 30 Sep 2014 | 31 Dec 2013 |
| Joint ventures | - | 4,685,059 | - | 24,796 | - | - |
| International companies: | ||||||
| Unitel | - | 238,241,859 | - | 2,638,599 | - | - |
| Multitel | - | 6,265,431 | - | 229,884 | - | 915,058 |
| Other | - | 646,420 | - | - | - | - |
| Domestic companies: | ||||||
| Páginas Amarelas (i) | - | 173,050 | - | 1,325,856 | - | - |
| PT-ACS | - | 3,372,065 | - | 3,103,827 | - | - |
| Fundação PT | - | 341,983 | - | - | - | - |
| Sportinveste Multimédia | - | 56,864 | - | 226,993 | - | 32,282,861 |
| Siresp | - | 28,024 | - | 5,860 | - | 1,260,909 |
| Other | - | 410,491 | - | 1,129,313 | - | 2,392,443 |
| - | 254,221,246 | - | 8,685,128 | - | 36,851,271 |
| Euro | ||||||
|---|---|---|---|---|---|---|
| Costs | Revenues | Interest charged | ||||
| Company | 4M14 | 9M13 | 4M14 | 9M13 | 4M14 | 9M13 |
| Joint ventures | 1,035,361 | 162,630 | 4,178,146 | 6,773,434 | - | - |
| International companies: | ||||||
| Unitel | 2,579,292 | 4,171,454 | 4,542,112 | 9,998,466 | - | - |
| Multitel | 62,348 | 303,602 | 476,471 | 1,299,423 | - | - |
| CTM (i) | - | 74,739 | - | 88,654 | - | - |
| Other | - | 21,743 | - | - | - | - |
| Domestic companies: | ||||||
| Páginas Amarelas (i) | - | 16,278,836 | - | 2,645,241 | - | - |
| PT-ACS | 3,910,991 | 5,384,368 | - | 2,114,406 | - | - |
| Sportinveste Multimédia | 143,441 | 696,122 | 58,727 | 133,224 | 10,798 | 24,677 |
| Siresp | - | - | 6,490,862 | 11,238,215 | 16,738 | 44,110 |
| Other | 229,763 | 513,444 | 1,297,778 | 3,120,107 | 40,057 | 94,450 |
| 7,961,196 | 27,606,938 | 17,044,096 | 37,411,170 | 67,593 | 163,237 |
(i) The investments in Páginas Amarelas and CTM were disposed of in January 2014 and June 2013, respectively.
As at 30 September 2014 and 31 December 2013, the Company has not identified entities that in accordance with the provisions of IAS 24 would be classified as related parties, except for those already mentioned in Note 23.a). Nevertheless, the Company believes that it is relevant to disclose the balances outstanding and transactions occurred with its main shareholders, namely those that have a qualified interest above 2% in Portugal Telecom's share capital, and all entities reported by those shareholders as their related parties. The tables below present the balances as at 30 September 2014 and 31 December 2013 and the transactions occurred during the nine-month periods ended 30 September 2014 and 2013 between Portugal Telecom Group and those entities:
| Euro | ||||||
|---|---|---|---|---|---|---|
| 30 Sep 2014 | 31 Dec 2013 | |||||
| Cash | Accounts | Accounts | Cash | Short-term | Loans and financings | |
| Shareholder | equivalents | receivable | payable | equivalents (i) | investments (ii) | (iii) |
| GES (iv) | 71,453 | 1,428,622 | 5,755,946 | 1,402,888,437 | 750,000,000 | 14,517,265 |
| Visabeira | - | 34,768,339 | 20,322,411 | - | - | - |
| Controlinveste | - | 463,937 | 8,545,056 | - | - | - |
| Ongoing | - | 268,962 | 389,724 | - | - | - |
| 71,453 | 36,929,860 | 35,013,137 | 1,402,888,437 | 750,000,000 | 14,517,265 |
(i) Cash equivalents as at 31 December 2013 include mainly term deposits in Banco Espírito Santo and Banco Espírito Santo Investimento (Note 22.e).
(ii) Short-term investments as at 31 December 2013 correspond to debt securities issued by Espírito Santo International (Note 15).
(iii) In addition, Portugal Telecom issued commercial paper amounting to Euro 200 million as of 31 December 2013 that BES commercialized to other investors. Portugal Telecom is not informed about who those investors are.
(iv) On 3 August2014, the qualified holding in Portugal Telecom, SGPS, S.A., previously held or attributable to Banco Espírito Santo, S.A., became held or attributable to Novo Banco, S.A. ("Novo Banco").
| Euro | ||||||
|---|---|---|---|---|---|---|
| 9M14 (i) | 9M13 | |||||
| Revenues | Costs | Net interest | Revenues | Costs | Net interest | |
| Shareholder | and gains | and losses | income | and gains | and losses | income |
| GES (ii) | 4,667,477 | 13,356,591 | 13,772,609 | 11,798,605 | 11,273,257 | 30,145,238 |
| Caixa Geral de Depósitos (iii) | - | - | - | 14,764,426 | 3,121,521 | (2,518,964) |
| Visabeira | 2,245,730 | 22,608,561 | - | 7,016,958 | 56,385,665 | - |
| Controlinveste | 712,744 | 19,898,270 | - | 1,864,983 | 35,288,393 | - |
| Ongoing | 143,861 | 1,228,160 | - | 379,864 | 2,243,775 | - |
| UBS | - | - | (15,000) | 29 | - | (33,750) |
| 7,769,812 | 57,091,582 | 13,757,609 | 35,824,865 | 108,312,611 | 27,592,523 |
(i) As referred to above, this caption reflects mainly the transactions occurred up to 5 May 2014, since as from that date Portugal Telecom no longer controls the entities that were contributed to the Oi share capital increase and that were responsible for the majority of the transactions with shareholders.
(ii) On 3 August2014, the qualified holding in Portugal Telecom, SGPS, S.A., previously held or attributable to Banco Espírito Santo, S.A., became held or attributable to Novo Banco, S.A. ("Novo Banco").
| Consolidated Report | First Nine Months 2014 44 / 48
(iii) Caixa Geral de Depósitos does not have a qualified interest above 2% in Portugal Telecom since 25 October 2013.
The following amounts were paid to board members and key employees:
The offer is general and voluntary and the consideration offered, to be paid in cash, is of €1.35 per share, which represents a premium of circa 11% in relation to the last closing price of the shares of Portugal Telecom on 7 November 2014 (€1.217). The effectiveness of the offer is subject to the acquisition of, at least, 50.01% of the voting rights corresponding to the share capital of Portugal Telecom.
According to the preliminary announcement, the launch of the offer is subject to:
In addition, the preliminary announcement mentions several assumptions on which the offer is based.
On 10 November, Oi published an announcement in which it stated that the conditions for the launch of the offer whose adoption would imply the alteration of the terms of the Business Combination, recently renegotiated by Portugal Telecom and Oi – notably, the conditions mentioned in paragraphs 6, 7, 8 and 9 above – were unacceptable. Oi also mentioned that it would not proceed to any alteration of the corporate acts, definitive agreements and other instruments executed in order to meet any of the conditions for the launch of the offer.
Further to Oi's announcement, on 17 November 2014, Terra Peregrin - Participações SGPS, S.A. issued an announcement in which it stated its willingness to waive certain conditions previously established for the launch of the offer over Portugal Telecom's shares:
f. In addition, the offeror stated it was willing to waive the condition mentioned in paragraph 7 above.
g. Thirdly, the offeror stated it was willing to waive the condition mentioned in paragraph 8 above. Within this context, the offeror stated it would amend this condition so that it would consist on the alteration (even if conditional upon the success of the offer) of the instruments which grant Oi with the option to cancel or extinguish the Call Option in case the situations mentioned in (a) and (b) of paragraph 8 above occur, in such a way that the Call Option would only be granted to Portugal Telecom's shareholders who do not sell their shares in the offer, i.e., in such a way that the offeror does not benefit from the Call Option.
On the same date, the CMVM issued an announcement on the alteration of the conditions by the offeror and stated that (i) the offeror had announced its willingness to waive or amend certain conditions included in the preliminary announcement for the launch of the offer, and that any definitive decision should be formalised through an alteration of the conditions established in said preliminary announcement and be included in the request for registration to be presented to the CMVM until 1 December 2014; and (ii) since the consideration mentioned in the preliminary announcement does not comply with the weighted average price in the six-month period prior to the preliminary announcement, the CMVM would evaluate, at the time of the registration of the offer, the justification and equity of the consideration proposed, to be duly explained by the offeror in its request for the registration of the offer, and then decide whether the offer should be deemed as derogating the duty to launch the subsequent takeover bid as a result of the acquisition of more than 50% of the voting rights of Portugal Telecom.
Under article 181 of the Portuguese Securities Code, the Board of Directors will issue a statement within 8 days counting from the reception of the draft of the prospectus and of the offer announcement that shall be delivered by the offeror until 1 December 2014.
• In November 2014, Africatel GmbH and Portugal Telecom were informed that Samba Luxco S.à.r.L. ("Samba"), holder of a 25% interest in Africatel Holdings B.V., had initiated an arbitration proceeding against Africatel GmbH (a former subsidiary of Portugal Telecom now owned by Oi S.A.) and Portugal Telecom in the Court of Arbitration of the International Chamber of Commerce relating to its purported put right to sell a interest in Africatel Holdings B.V., which Samba believes was triggered by the transfer of the shares of Africatel GmbH to Oi S.A. in the share capital increase of Oi in May 2014, among other claims. Both Africatel GmbH and Portugal Telecom intend to vigorously defend this proceeding.
Under the Subscription Agreement entered into by Portugal Telecom and Oi S.A. in connection with the Oi S.A. share capital increase, Oi S.A. agreed to succeed to Portugal Telecom in any right or obligation contracted by it, as long as the agreements generating that right or obligation have been indicated in the documents for the global offering that formed part of the Oi share capital increase. The prospectus for the Oi S.A. share capital increase disclosed, among other things, that Samba had asserted that the business combination between Portugal Telecom and Oi S.A. triggered certain rights under the Africatel shareholders' agreement, including a put right in respect of Samba's interest in Africatel Holdings B.V.
• On 8 October 2014, some shareholders of the Company brought a civil lawsuit before the District Court of Lisbon (Tribunal Judicial da Comarca de Lisboa) seeking a declaration of invalidity and/or the nullification of a shareholders resolution that was approved at the General Meeting of Shareholders held on 8 September 2014, on the grounds of alleged impediment to vote of certain shareholders of the Company, violation of the purpose or object of the Company and abusive vote. The Company was summoned in order to present its statement defense on 13 October 2014 and submitted it on 12 November 2014.
In addition, on 19 September 2014, a shareholder holding 500 shares of the Company has initiated an injunction proceedings before the District Court of Lisbon (Tribunal Judicial da Comarca de Lisboa) in order to suspend the shareholders resolution that was approved at the General Meeting of Shareholders held on 8 September 2014. Although the claimant lacks legal standing for the required purpose – to the extent that such proceedings could only be initiated by shareholders who, alone or jointly, hold shares corresponding to at least 0.5% of the share capital -, the Court ordered the Company to be summoned in order to present its statement of opposition, which occurred last 5 November 2014. The Company submitted its statement of opposition on 17 November 2014 and now waits for a Court decision on the granting of the protective order.
• On 18 November 2014, at Oi's Extraordinary General Meeting, shareholders approved a reverse stock split of all the ordinary and preferred shares issued by Oi at a ratio of 10: 1, such that each lot of ten shares of each class was grouped into a single share of the same class, with a related amendment to Article 5 of Oi's bylaws.
As a result of the reverse stock split, the current 2,861,553,190 ordinary shares and 5,723,166,910 preferred shares now represent 286,155,319 ordinary shares and 572,316,691 preferred shares, respectively, with the resulting amendment of Article 5 of Oi's bylaws. Similarly, at the Extraordinary General Meeting held on 18 November 2014, Oi's shareholders also approved the amendment of the first paragraph of Article 5 of Oi's bylaws to reflect the changes in share capital and number of shares of Oi approved by the Board, such that the share capital is represented by 858,472,010 shares, comprised of 286,155,319 ordinary shares and 572,316,691 preferred shares, without par value.
The reverse stock split proposal was aimed at reducing the volatility of Oi's shares resulting from the reduced share price in the market, in order to protect Oi and its shareholders from percentage fluctuations resulting from small changes in the share price and, at the same time, to prevent shareholders, especially foreign investment funds, from being precluded from investing in Oi shares because of its share price. In addition, the reverse stock split was aimed at meeting the requirements of NYSE Listing Rules, which require, among other things, that the average closing price of the shares of listed companies remain equal to or greater than USD1 per share during any consecutive period of 30 trading days.
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