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United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(MARK ONE)
/ / REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF
THE SECURITIES EXCHANGE ACT OF 1934
OR
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2003
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______.
Commission file number: 333-114196
AXTEL, S.A. DE C.V.
(Exact name of Registrant as specified in its charter)
AXTEL
(Translation of Registrant's Name into English)
UNITED MEXICAN STATES
(Jurisdiction of incorporation or organization)
BLVD. GUSTAVO DIAZ ORDAZ 3.33 NO. L-1
COL. UNIDAD SAN PEDRO
SAN PEDRO GARZA GARCIA, N.L.
MEXICO, LP 66215
(Address of principal executive offices)
_____________________________
Securities registered or to be registered pursuant to
Section 12(b) of the Act:
Title of each class Name of each exchange on which
registered
- --------------------------------------------------------------------------------
None........................................... Not applicable
- --------------------------------------------------------------------------------
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
----------------
(Title of Class)
Securities for which there is a reporting obligation
pursuant to Section 15(d) of the Act:
None
----------------
(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report: 2,533,706,866
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
Yes: ____ No: [X]
Indicate by check mark which financial statement item the registrant has elected
to follow:
Item 17: ____ Item 18: [X]
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TABLE OF CONTENTS
GENERAL INFORMATION
PAGE
Item 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS...........4
Item 2. OFFER STATISTICS AND EXPECTED TIMETABLE.........................4
Item 3. KEY INFORMATION.................................................4
Item 4. INFORMATION ON THE COMPANY.....................................15
Item 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS...................38
Item 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.....................52
Item 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS..............58
Item 8. FINANCIAL INFORMATION..........................................62
Item 9. THE OFFER AND LISTING..........................................62
Item 10. ADDITIONAL INFORMATION.........................................63
Item 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.....64
Item 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.........64
Item 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES................64
Item 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND
USE OF PROCEEDS............................................64
Item 15. CONTROLS AND PROCEDURES........................................64
Item 16A AUDIT COMMITTEE FINANCIAL EXPERT...............................65
Item 16B CODE OF ETHICS.................................................65
Item 16C PRINCIPAL ACCOUNTANT FEES AND SERVICES.........................65
i
Item 16D EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.....65
Item 16E PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS..................................................66
Item 17. FINANCIAL STATEMENTS...........................................66
Item 18. FINANCIAL STATEMENTS...........................................66
Item 19. EXHIBITS.......................................................67
ii
In this annual report, references to "$," "$U.S." or "Dollars" are to
United States Dollars and references to "Ps." or "Pesos" are to Mexican Pesos.
This annual report contains translations of certain Peso amounts into Dollars at
specified rates solely for the convenience of the reader. These translations
should not be construed as representations that the Peso amounts actually
represent such Dollar amounts or could be converted into Dollars at the rates
indicated or at any other rate.
FORWARD LOOKING STATEMENTS
This report on Form 20-F contains certain forward-looking statements within
the meaning of Section 27A of the United States Securities Act of 1933, as
amended, (the "Securities Act") and Section 21E of the United States Securities
Exchange Act of 1934, as amended (the "Exchange Act"). These forward-looking
statements reflect our views with respect to our financial performance and
future events. All forward-looking statements contained herein are inherently
uncertain. Actual results could differ materially from those projected in the
forward-looking statements as a result of factors discussed herein. Many of
these statements may be identified by the use of forward-looking words such as
"believe," "expect," "anticipate," "should," "planned," "estimated" and
"potential," among others. Readers are cautioned not to place reliance on these
forward-looking statements. The following factors, as well as other factors
described in this report, could cause actual results to differ materially from
such forward-looking statements:
o ability to attract subscribers;
o changes and developments in technology, including our ability to
upgrade our networks to remain competitive and our ability to
anticipate and react to frequent and significant technological
changes;
o our ability to manage, implement and monitor billing and operational
support systems;
o an increase in churn, or subscriber cancellations;
o the control of us retained by certain of our stockholders;
o changes in capital availability or cost, including interest rate or
foreign currency exchange rate fluctuations;
o the effects of governmental regulation of the Mexican
telecommunications industry;
o declining rates for long distance traffic;
o fluctuations in labor costs;
o foreign currency exchange fluctuations relative to the US dollar or
the Mexican peso;
o the general political, economic and competitive conditions in markets
and countries where we have operations, including competitive pricing
pressures, inflation or deflation and changes in tax rates;
o the timing and occurrence of events which are beyond our control; and
2
o other factors described in this Form 20-F.
3 Any forward-looking statements in this Form 20-F are based on certain
assumptions and analysis made by us in light of our experience and perception of
historical trends, current conditions, expected future developments and other
factors we believe are appropriate under the current circumstances.
Forward-looking statements are not a guarantee of future performance and actual
results or developments may differ materially from expectations. You are
therefore cautioned not to place undue reliance on such forward-looking
statements. While we continually review trends and uncertainties affecting our
results of operations and financial condition, we do not intend to update any
particular forward-looking statements contained in this document.
PART I
Item 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
Item 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
Item 3. KEY INFORMATION
A. Selected Financial Data
The following table provides our selected historical consolidated financial
data. The selected historical consolidated financial data for the years ended
December 31, 2001, 2002 and 2003 have been derived from our audited consolidated
financial statements included elsewhere in this Form 20-F.
The information presented below should be read in conjunction with "Item 5.
Operating and Financial Review and Prospectus" and the consolidated financial
statements and related notes thereto included elsewhere in this Form 20-F.
YEAR ENDED DECEMBER 31,
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1999 2000 2001 2002 2003
--------- ------------ ------------ ----------- ---------
(CONSTANT PS. IN MILLIONS AS OF DECEMBER 31, 2003, EXCEPT RATIOS AND
MARGINS)
STATEMENT OF INCOME DATA:
Revenues .......................... 105.7 1,052.7 2,242.9 2,452.4 2,919.5
Cost of sales and operating
expenses........................ (448.8) (1,935.2) (2,808.7) (2,685.2) (2,807.1)
--------- ------------ ------------ ----------- ---------
Income (loss) from operations ..... (343.2) (882.4) (565.8) (232.8) 112.4
Interest expense, net ............. (62.2) (243.0) (401.8) (422.0) (198.9)
Foreign exchange gain (loss,
net)............................ (9.4) (18.9) 99.6 (618.2) (319.4)
Monetary position.................. 56.6 166.0 216.9 280.5 92.8
Other income (expense), net(l)..... -- 13.2 (30.9) (27.6) 1,714.5
Cash severance and special
items........................... -- -- (63.0) (32.4) (10.4)
--------- ------------ ------------ ----------- ---------
Income (loss) before income
taxes and employee profit ...... (358.3) (965.2) (745.0) (1,052.5) 1,390.9
Income tax and employee profit
sharing expense (benefit) ...... -- 221.2 160.3 241.7 (493.5)
--------- ------------ ------------ ----------- ---------
Net income (loss) ................. (358.3) (744.0) (584.7) (810.8) 897.4
========= ============ ============ =========== =========
OPERATING DATA:
Depreciation and amortization ..... 33.2 335.4 644.7 810.5 860.6
Investment in fixed assets
(end of period) ................ 1,144.8 3,083.6 1,582.8 565.4 460.1
Net Cash Flow:
Operating activities .............. (369.4) (620.3) (303.6) (11.5) 159.7
Investing activities............... (1,254.4) (3,177.3) (1,595.1) (566.8) (556.7)
4
YEAR ENDED DECEMBER 31,
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1999 2000 2001 2002 2003
--------- ------------ ------------ ----------- ---------
(CONSTANT PS. IN MILLIONS AS OF DECEMBER 31, 2003, EXCEPT RATIOS AND
MARGINS)
Financing activities .............. 1,646.5 3,841.5 1,886.4 771.3 1,083.0
--------- ------------ ------------ ----------- ---------
Total net cash flows .............. 22.8 43.8 (12.3) 193.0 686.0
Ratio of earnings to fixed
charges under Mexican
GAAP(2).......................... N/A N/A N/A N/A 5.7x
Ratio of earnings to fixed
charges under U.S. GAAP(2)...... N/A N/A N/A N/A 10.4x
Total access lines in service
(in thousands) (end of
period):
Business .......................... 3.2 72.5 121.0 116.4 132.4
Residential ....................... 25.2 144.3 169.1 178.7 216.7
--------- ------------ ------------ ----------- ---------
Total.............................. 28.4 216.8 290.1 295.1 349.1
AS OF DECEMBER 31, 2003
-----------------------
BALANCE SHEET DATA:
Cash & cash equivalents ....................... 1,013.0
Net working capital investment ................ 73.5
Total assets .................................. 8,129.4
Total debt .................................... 2,169.4
Total liabilities ............................. 2,747.3
Total shareholders' equity .................... 5,382.1
DATA IN ACCORDANCE WITH US GAAP(3)
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
2000 2001 2002 2003
------------- -------------- -------------- -------------
(CONSTANT PS. IN MILLIONS AS OF DECEMBER 31, 2003)
STATEMENT OF OPERATIONS DATA:
Income (loss) from operations ..... (1,004.2) (570.8) (123.7) 170.9
Net income (loss)................... (1,139.1) (610.5) (945.6) 2,739.7
Total assets........................ 6,378.2 7,317.1 7,125.3 7,702.1
Total shareholders' equity.......... 1,242.9 1,631.1 746.2 4,854.2
(1) Other income for the year ended December 31, 2003 includes a net gain of
Ps. 1,858.5 due to our repurchase of certain debt.
(2) For purposes of determining the ratio of earnings to fixed charges,
earnings are defined as our income from operations before income taxes,
plus fixed charges. Fixed charges consist of interest expense on all
indebtedness, amortization of debt issuance costs and 33% of lease
payments, which represents the amounts considered to be the interest
factor. According to Mexican GAAP, earnings in 1999, 2000, 2001 and 2002
were insufficient to cover to cover fixed charges by Ps. 280.2 million, Ps.
630.1 million, Ps. 232.0 million and Ps. 529.9 million, respectively.
According to U.S. GAAP, earnings in 1999, 2000, 2001 and 2002 were
insufficient to cover to cover fixed charges by Ps. 407.2 million, Ps.
749.7 million, Ps. 93.1 million and Ps. 420.8 million, respectively.
(3) Reconciled in connection with Note 24 of our consolidated financial
statements.
5
EXCHANGE RATES
As of March 31, 2004, the noon buying rate in the spot market for the
purchase of US dollars (in nominal pesos per US dollar) was Ps. 11.1540(1). The
following table sets forth, for the periods indicated, the period end, average,
high and low noon buying rates, in each case for the purchase of US dollars, all
expressed in nominal pesos per US dollar.
NOON BUYING RATE(1)
-------------------
PRIOR YEARS PERIOD END AVERAGE HIGH LOW
---------- ------- ---- ---
Year ended December 31, 1999........... Ps. 9.48 Ps. 9.55 Ps. 10.60 Ps. 9.24
Year ended December 31, 2000........... 9.62 9.46 10.09 9.18
Year ended December 31, 2001........... 9.16 9.34 9.97 8.95
Year ended December 31, 2002........... 10.43 9.66 10.43 9.00
Year ended December 31, 2003........... 11.24 10.79 11.41 10.11
(1) Source: Federal Reserve Bank of New York
The following table sets forth, for the periods indicated, the period end,
average, high and low noon buying rates, in each case for the purchase of US
dollars, all expressed in nominal pesos per US dollar.
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NOON BUYING RATE(1)
- ----------------------------------------------------------------- --------------
2003/2004 HIGH LOW
- ----------------------------------------------------------------- --------------
September 2003............................... 11.04 10.77
- ----------------------------------------------------------------- --------------
October 2003................................. 10.97 11.32
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November 2003................................ 11.40 10.98
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December 2003................................ 11.41 11.17
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January 2004................................. 11.10 10.81
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February 2004................................ 11.25 10.97
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(1) Source: Federal Reserve Bank of New York
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
D. Risk Factors
Since we have a limited operating history you will not be able to fully
evaluate our historical performance.
We were founded in 1994. In June 1996, we were awarded by the Mexican
government a concession to install and operate a public telecommunications
network for the offering of local and long distance telephony services in
Mexico. We commenced commercial opera-
6
tions in June 1999 by beginning operations in the city of Monterrey and entered
the city of Guadalajara by the end of that same year. We commenced operations in
Mexico City at the beginning of 2000 and expanded our services to the cities of
Puebla, Toluca and Leon a year later. Because of our limited historical
commercial operations, it may be difficult to fully evaluate our past operating
performance.
We may not have sufficient administrative, operational or financial
resources to pursue our growth strategy.
Our expected growth will place a strain on our administrative, operational
and financial resources. The development of our business and the installation
and expansion of our network, services and customer base require significant
expenditures. Since inception we have invested in the aggregate approximately
Ps. 7,400 million in our network and infrastructure. These expenditures,
together with operating expenses, will adversely impact our cash flow and
profitability. We also anticipate that continued growth will require us to
attract and retain qualified personnel who can efficiently manage such growth.
If we are unable to meet the challenges that our growth presents, our results of
operations and financial condition could be adversely affected.
We depend on certain vendors for the deployment of our network.
Our ability to achieve our strategic objectives and our overall performance
and prospects depends and will depend, in large part, upon the successful,
timely and cost-effective acquisition of equipment. From our inception until
December 2003, Nortel Networks was our main supplier of fixed wireless access
technology. On December 23, 2003, Airspan Communications Limited ("Airspan")
acquired Nortel's fixed wireless access business, assuming Nortel's rights and
obligations relating to the supply of fixed wireless access products and related
services to us. Therefore, we currently depend on Airspan for the production of
the fixed wireless access product, which represent most of our current network
access infrastructure. We are Airspan's primary customer for these products. If
Airspan ceases to produce these products, our network expansion and growth could
be slowed and our operating results could be adversely affected. We have a
contingent license from Airspan to use their fixed wireless access technology to
produce these products in the event Airspan ceases production. However, we may
be unable to obtain additional fixed wireless access products on satisfactory
terms, if at all. See Item 7. "Major Shareholders and Related Party
Transactions."
If we do not successfully maintain, upgrade and efficiently operate
accounting, billing, customer service and management information systems, we may
not be able to maintain and improve our operating efficiencies.
Sophisticated information and processing systems are vital to our
operations and growth and our ability to monitor costs, render monthly invoices
for services, process customer orders, provide customer service and achieve
operating efficiencies. We have installed the accounting, information and
processing systems that we deem necessary to provide services efficiently.
However, there can be no assurance that we will be able to successfully operate
and upgrade such systems or that they will continue to perform as expected. Any
failure
7
in our information and processing systems could impair our ability to collect
payment from customers and respond satisfactorily to customer needs.
Our operations are dependent upon our ability to protect our network
infrastructure.
Our operations are dependent upon our ability to protect our network
infrastructure against damage from fire, earthquakes, floods, power loss,
breaches of security, software defects and similar events and to construct
networks that are not vulnerable to the effects of such events. The occurrence
of a natural disaster or other unanticipated problem at our facilities or at the
sites of our switches could cause interruptions in the services we provide. The
failure of a switch would result in the interruption of service to the customers
served by that switch until necessary repairs were effected or replacement
equipment was installed. Repairing or replacing damaged equipment may be costly.
Any damage or failure that causes interruptions in our operations could have a
material adverse effect on our business, financial condition and results of
operations.
If our significant customer fails to perform under our existing agreements,
our business could be adversely impacted.
We have an agreement with Nextel de Mexico, our largest single customer,
which allows Nextel de Mexico to provide telecommunications services to its
customers through access to our network. Under this agreement, we are guaranteed
certain minimum levels of traffic. In 2003, our sales to Nextel de Mexico
accounted for approximately 18% of our net sales. In the event Nextel de Mexico
fails to comply with its obligations under our agreement, or such agreement is
not renewed upon its expiration in December 2005, our results of operations and
financial condition could be materially and adversely affected.
We depend on key personnel; if they were to leave us, we might have an
insufficient number of qualified employees.
We believe that our ability to implement our business strategy and our
future success depends on the continuous employment of our senior management
team, in particular our president and chief executive officer, Tomas Milmo
Santos. Our senior management team has extensive experience in the industry and
is vital in maintaining some of our major customer relationships which may be
difficult to replace. The loss of the technical knowledge, management and
industry expertise of these key employees could make it difficult for us to
execute our business plan effectively and could result in delays in new products
being developed, loss of customers and diversion of resources while we seek
replacements.
We depend on Telmex for interconnection and we may be forced to pay higher
interconnection fees in the future, which could have a material adverse effect
on our business and results of operations.
Telmex exerts significant influence on all aspects of the
telecommunications markets in Mexico, including interconnection agreements. We
use Telmex's network to terminate the vast majority of our customers' calls. Our
interconnection agreement with Telmex expired on December 31, 2003.
Notwithstanding such expiration, the terms and conditions of the agree-
8
ment (including the tariffs) are automatically extended until the parties
mutually agree to extend the agreement. If a new interconnection agreement is
entered into with Telmex, the terms and conditions (including rates) of such new
agreement may not permit us to offer services that are both profitable and
competitive. In addition, if the SCT (Secretaria de Comunicaciones y
Transportes), the Mexican telecommunications regulatory authority, ceased to
regulate Telmex's pricing, the resulting competitive climate could have a
material adverse effect on our business and results of operations.
A system failure could cause delays or interruptions of service, which
could cause us to lose customers.
To be successful, we will need to continue to provide our customers
reliable service over our network. Some of the risks to our network and
infrastructure include:
o physical damage to access lines;
o power surges or outages;
o software defects; and
o disruptions beyond our control.
Disruptions may cause interruptions in service or reduced capacity for
customers, either of which could cause us to lose customers and incur additional
expenses.
We operate in a highly competitive environment, which may negatively affect
our operating margins.
The telecommunications industry in Mexico is becoming more competitive.
Over the past two years, prices for local and long distance calls in Mexico
declined by approximately 13% and 20% in real terms, respectively. We expect the
Mexican telecommunications market to continue to experience rate pressure,
primarily as a result of:
o increased competition and focus by our competitors on increasing
market share;
o recent technological advances that permit substantial increases in the
transmission capacity of both new and existing fiber-optic networks,
resulting in long distance overcapacity and rate pressure; and
o the entrance of cable television operators into certain of our
markets.
As the telecommunications industry in Mexico becomes more competitive, we
will face significant competition from other operators primarily on the basis of
features, pricing and customer service. Some of these competitors include
Telmex, Avantel, Alestra, Maxcom and others, as well as established cable
television operators who may expand their services into certain of our markets,
such as long distance voice and data service. As they become licensed, resellers
of telephony services will also offer competition in many of our targeted
markets.
9
Telmex, as the former state-owned telecommunications monopoly and dominant
provider of local and other telecommunications services in Mexico, has
significantly greater financial and other resources than those available to us.
In addition, Telmex's nationwide network and concessions, as well as its
established and long-standing customer base, give it a substantial competitive
advantage over us. In addition, although not allowed by the Ley Federal de
Telecomunicaciones enacted in 1995, referred to herein as the Mexican
Telecommunications Law, and Telmex's concessions, Telmex may subsidize its long
distance services with revenues obtained from its local services and as a result
may be able to price its services at rates that are not profitable for us. We
will face significant competition from Telmex in all the areas where we
currently operate.
We depend on revenues from certain highly competitive segments.
High-volume business customers are one of the most attractive niches in the
market. This segment is being addressed by a number of carriers that offer
competitive telecommunications services solutions in order to gain these
accounts. Losing some of these customers could represent a significant loss of
income and lower operating income.
We may need additional financing.
We may require additional financing in the future to service our
indebtedness, including our 11% Senior Notes due 2013 ("2013 Senior Notes"), and
fund our operations. We cannot assure you that we will have sufficient resources
and that, if needed, any financing will be available in the future or on terms
acceptable to us. In addition, our ability to incur additional indebtedness will
be restricted by the terms of the 2013 Senior Notes or other covenants from
other financial agreements currently in place or into which we may enter in the
future.
The technology we use may be made obsolete by the technology used by our
competitors.
All companies in the global telecommunications industry must adapt to rapid
and significant changes in technology. While we have been installing since
inception what we believe to be a technologically advanced fixed wireless
system, as well as a fiber optic network, point-to-multipoint, point-to-point
and copper infrastructure, we cannot assure you that these technologies will not
be challenged by competition. We have relied heavily on the continued
performance of wireless technology. Technological changes or advances in
alternative technologies may adversely affect our competitive position, require
us to reduce our prices, require substantial new capital expenditures and/or
require write-downs of obsolete technology.
If our current churn rate increases, our business could be negatively
impacted.
The cost of acquiring a new customer is much higher than the cost of
maintaining an existing customer. Accordingly, customer deactivations, or churn,
could have a material negative impact on our operating income, even if we are
able to obtain one new customer for each lost customer. Although our average
monthly churn rate has decreased to approximately 1.6% during 2003 from
approximately 2.2% during 2002, our churn rate was still higher than that of our
main competitors. We believe that our churn rate was mainly due to customer
deactivations resulting from non-payment of bills. If we experience a further
increase in our
10
churn rate, our ability to achieve revenue growth could be materially impaired.
In addition, a decline in general economic conditions could lead to an increase
in churn, particularly among our residential customers.
A majority of our voting stock is controlled by one shareholder, the
interests of which may not always be the same as the interests of the holders;
there is a dispute among certain of our shareholders and us which could affect
our ability to make corporate decisions.
Telinor owns all of our Series A Voting Shares and, as a result, a majority
of all of our voting shares. As a result, Telinor has control over many of our
corporate decisions and will have the ability to prevent our taking any
particular corporate decision, whether or not Telinor's actions are in the best
interest of the holders.
Our other series of voting shares issued and outstanding is Series C Voting
Shares. The holders of the Series C Voting Shares are entitled to certain
rights. Certain actions cannot be approved at a meeting of shareholders without
the vote of a majority of the Series C Voting Shares and certain actions cannot
be approved at the Board of Directors level without the vote of at least one
director appointed by the holders of Series C Voting Shares. These matters
include, among others, issues associated with the fundamental nature of Axtel as
a corporation, changes in its indebtedness, changes in its charter or bylaws,
the issuance or repurchase of securities, initiation or settlement of material
litigation, transactions not in the ordinary course of business and material
capital expenditures.
As a result of a dispute among certain of our shareholders and us, if a
matter requiring the approval of the majority of the Series C Voting Shares is
approved without the affirmative vote of LAIF X sprl (a holder of some of our
Series C voting shares), or a matter requiring the approval of one or more
Series C Directors is approved without the affirmative vote of at least one
director appointed by LAIF X sprl, there may be doubt as to the validity of such
approval. LAIF X sprl has voted in favor of the issuance of the 2013 Senior
Notes and no action is required at the Board of Directors level. See Item 4.B.
"Business Overview --Legal Proceedings--Shareholdings Disputes."
We operate in a highly regulated industry.
As a provider of public services, we are subject to extensive regulation.
Although the basic regulatory framework governing telecommunications has been in
existence since 1995, it may undergo changes from time to time, which may
materially and adversely affect our business, operations, financial condition
and prospects.
If the Mexican government grants more concessions or amends existing
concessions, the value of our concessions could be severely impaired.
The Mexican government regulates the telecommunications industry. Our
concessions are not exclusive and the Mexican government has granted and may
grant additional concessions covering the same geographic regions. We cannot
assure you that additional concessions to provide services similar to those we
provide will not be granted and that the value of our concessions and
competition levels will not be adversely affected as a result.
11
Foreign ownership restrictions may limit our ability to raise equity
capital.
Mexican law provides that no more than 49% of the full voting stock of a
Mexican corporation holding a concession to provide telecommunications services
other than cellular services may be held by non-Mexicans. Non-Mexicans own 41.5%
of our full voting stock. Any future sales of equity securities to non-Mexicans
in excess of 49% of full voting stock must involve so-called "neutral"
securities with limited or no voting rights or would require a proportional
purchase of voting stock by Mexicans. This national ownership requirement may
limit our ability to raise capital from non-Mexican investors in the future.
Fraud could increase our expenses.
The fraudulent use of telecommunications networks could impose a
significant cost upon service providers, who must bear the cost of services
provided to fraudulent users. We may suffer a loss of revenue as a result of
fraudulent use and incur an additional cash cost due to our obligation to
reimburse carriers the cost of services provided to fraudulent users. Although
technology has been developed to combat this fraudulent use and we have
installed it in our network, this technology does not eliminate fraud entirely.
In addition, because we rely on other long distance carriers to terminate our
calls on their networks, some of which do not have anti-fraud technology in
their networks, we may be particularly exposed to this risk in our long distance
service.
Economic developments in Mexico affect our business.
We are a Mexican company with all of our operations in Mexico. The economic
environment within Mexico can have a significant impact on our business and
financial condition and results of operations and our ability to meet our
obligations under the 2013 Senior Notes.
Beginning in December 1994 and continuing through 1995, Mexico experienced
an economic crisis characterized by a sharp devaluation of the peso, high
inflation, foreign currency exchange rate instability, high domestic interest
rates, a strong contraction in consumer demand for many products and services,
reduced availability of credit, high unemployment and diminished international
investor confidence in Mexico. Mexico's gross domestic product, which grew at a
real annual rate of 3.5% during 1994, declined by 6.2% in real terms during
1995.
In response to these developments, beginning in February 1995, the Mexican
government implemented a variety of economic programs designed to promote
economic recovery, stabilize foreign currency exchange rates and reduce
inflation. Economic conditions in Mexico improved moderately in 1996 and 1997.
However, a combination of factors led to a slowdown in Mexico's economic growth
in 1998. Notably, the decline in the international price of oil resulted in a
reduction of federal revenues, approximately one-third of which are derived from
petroleum taxes and duties. In addition, the economic crises in Asia and Russia,
as well as the financial turmoil in Brazil, Venezuela and elsewhere, produced
greater volatility in the international financial markets, which further slowed
Mexico's economic growth. In 1998, the inflation rate in Mexico was 18.6%,
interest rates on 28-day Certificados de la Tesoreria
12
de la Federacion ("CETES") averaged 24.8% and the peso lost 22.7% of its value
(in nominal terms) relative to the US dollar.
During 1999, conditions improved with inflation in Mexico at 12.3%,
interest rates on 28-day CETES averaging 21.4% and the peso appreciating 4.2% in
value (in nominal terms) relative to the US dollar. Throughout 2000, the
improvement shown in 1999 continued. In 2000, the inflation rate was 9.0%,
interest rates on 28-day CETES averaged 15.2% and the peso devalued 1.5% in
value (in nominal terms) relative to the US dollar. The Mexican government
estimated that Mexico's real gross domestic product grew by 5.0% in 1998, 3.6%
in 1999 and 6.6% in 2000.
Beginning in January 2001, however, and increasing in the fourth quarter of
2001, amid concerns of a global economic slowdown and a recession in the United
States, Mexico began to experience an economic slowdown marked by a decline in
gross domestic product. In 2001, Mexico's gross domestic product shrank by 0.2%
in real terms while the inflation rate was 4.4%, interest rates on 28-day CETES
averaged 11.3% and the peso appreciated 4.8% in value (in nominal terms)
relative to the US dollar. During 2002, as the United States and global economic
slowdown continued, the Mexican real gross domestic product growth rate was
0.7%, the inflation rate was 5.7%, interest rates on 28-day CETES averaged 11.3%
and the peso devalued 13.9% (in nominal terms) relative to the US dollar. During
the year ended December 31, 2003, the inflation rate was 4.0%, interest rates on
28-day CETES averaged 6.2% and the peso devalued 7.7% (in nominal terms)
relative to the US dollar.
In the past, inflation has led to high interest rates and devaluation of
the peso. Inflation itself, as well as governmental efforts to reduce inflation,
has had significant negative effects on the Mexican economy in general and on
Mexican companies, including us. Inflation in Mexico decreases the real
purchasing power of the population of Mexico, and the Mexican government's
efforts to control inflation by tightening the monetary supply have historically
resulted in higher financing costs, as real interest rates have increased. Such
policies have had and could have an adverse effect on us.
The current global economic slowdown, including the slowdown in the United
States and Mexican economies, and other future economic developments in or
affecting Mexico could impair our business, results of operations, financial
condition, prospects and ability to obtain financing.
Political events in Mexico could affect Mexican economic policy and our
results of operations.
The Mexican government has exercised, and continues to exercise,
significant influence over the Mexican economy. Mexican governmental actions
concerning the economy could have a significant impact on Mexican private sector
entities in general, as well as on market conditions.
Mexican political events may also significantly affect our operations. In
the Mexican national elections held on July 2, 2000, Vicente Fox of the Partido
Accion Nacional, which we refer to as the "PAN," won the presidency. His victory
ended more than 70 years of
13
presidential rule by the Partido Revolucionario Institucional, which we refer to
as the "PRI." Neither the PRI nor the PAN succeeded in securing a majority in
either house of the Mexican Congress.
President Fox assumed office on December 1, 2000. While the transition from
the previous administration was smooth, since assuming office, President Fox has
encountered strong opposition to some of his proposed reforms from both houses
of Mexican Congress, where opposition parties such as the PRI, the Partido de la
Revolucion Democratica (PRD) and/or the Partido Verde Ecologista (PVE) have
frequently joined forces to block PAN initiatives. Further, on July 6, 2003,
Mexican Congressional elections were held. The elections resulted in a reduction
in the number of Congressional seats held by the PAN and an increase in the
number of Congressional seats held by the PRI, among others. We expect that
these events will intensify the current legislative gridlock in the Mexican
Congress, which could lead to a further slowdown in the progress of political
reforms in Mexico. This gridlock could have an adverse effect on us, including
our business, financial condition, prospects and results of operations.
Social and political instability in Mexico or other adverse social or
political developments in or affecting Mexico could adversely affect us and our
ability to obtain financing. It is possible that political uncertainty may
adversely affect financial markets.
We may lose money because of peso devaluation.
While our revenues are almost entirely denominated in pesos, the
substantial majority of our obligations, and all of our long-term debt, are
denominated in US dollars. The value of the Mexican peso has been subject to
significant fluctuations with respect to the US dollar in the past and may be
subject to significant fluctuations in the future. During the year ended
December 31, 2003, the peso was devalued by 7.7% (in nominal terms). Further
declines in the value of the peso relative to the US dollar could adversely
affect our ability to meet our US dollar-denominated obligations, including the
2013 Senior Notes. In addition, any further devaluation of the peso may
negatively affect the value of Mexican securities such as the 2013 Senior Notes.
Our financial statements do not give you the same information as financial
statements prepared under United States accounting principles.
We prepare our financial statements in accordance with Mexican GAAP. These
principles differ in significant respects from US GAAP, including the treatment
of the capitalization of pre-operating expenses, the amortization of frequency
rights, the capitalization of interest and deferred income taxes and employees'
profit sharing, and in the presentation of cash flow information. In particular,
all Mexican companies must incorporate the effects of inflation directly in
their accounting records and in published financial statements. The effects of
inflation accounting under Mexican GAAP are not eliminated in the reconciliation
of US GAAP. For this and other reasons, the presentation of Mexican financial
statements and reported earnings may differ from that of companies in other
countries. See Note 24 to the audited consolidated financial statements.
14
Item 4. INFORMATION ON THE COMPANY
A. History and Development of the Company
Axtel, S.A. de C.V. was founded in 1994. We are a variable capital
corporation (sociedades anonimas de capital variable) organized under the laws
of Mexico. In June 1996, we were awarded by the Mexican government a concession
to install and operate a public telecommunications network for the offering of
local and long distance telephony services in Mexico. In 1998 and 1999, we won
several spectrum auctions, including for 60 MHz at 10.5 GHz for
point-to-multipoint access, for 112 MHz at 15 GHz for point-to-point backhaul
access, for 100 MHz at 23 GHz for point-to-point last mile access and for 50 MHz
at 3.4 GHz for fixed wireless access, which together allow us to service the
entire territory of Mexico. In June 1999, we launched commercial operations in
the city of Monterrey. Our network currently reaches six of the largest
metropolitan areas in Mexico (Mexico City, Monterrey, Guadalajara, Puebla,
Toluca and Leon), which represent approximately 19% of the population of Mexico.
Due to our concentration of network facilities in business centers and upper
income residential areas, we estimate that our current network coverage
represents a significant portion of the total Mexican telephony and data
telecommunications revenue opportunity. For a description of our principal
capital expenditures, see Item 5. "Liquidity and Capital Resources."
Our corporate offices are located at Blvd. Gustavo Diaz Ordaz km. 3.33 No.
L-1, Col. Unidad San Pedro, San Pedro Garza Garcia, N.L., Mexico, CP 66215
(Telephone +52 (81) 8114-0000).
Our agent for service in the United States is CT Corporation System,
located at CT 111 Eighth Avenue, 13th Floor, New York, New York 10011.
B. Business Overview
OUR COMPANY
We believe we are a leading telecommunications services provider in Mexico,
offering a wide array of services, including local and long distance telephony,
data and internet to business and residential customers. We believe that we are
one of the largest and fastest growing integrated telecommunications companies
in Mexico, with 349,144 lines in service as of December 31, 2003. For the year
ended December 31, 2003, we generated revenues and operating income of Ps.
2,919.5 million (US$259.8 million) and Ps. 112.4 million (US$10.0 million),
respectively.
We hold concessions to offer local and long distance telecommunications
services nationwide. We provide services using a hybrid wireline and fixed
wireless local access network designed to optimize capital expenditures through
the deployment of network access equipment based on specific customer
requirements. Our current network last-mile access options include fixed
wireless access, point-to-point and point-to-multipoint wireless technologies,
as well as copper and metropolitan fiber rings. Since inception we have invested
in the aggregate over Ps. 7,400 million in our network, which includes 10
digital switches, 207
15
fixed wireless access sites, of which 57 are also point-to-multipoint sites, and
431 kilometers of metropolitan fiber optic rings.
Our strategy is to continue to penetrate our existing markets by offering a
comprehensive portfolio of high quality, facilities-based voice, data, internet
and value-added communications services and to cost-effectively enter into
selective new markets with high growth and revenue opportunity. Our approach is
to bundle multiple voice, data and internet services into integrated
telecommunications solutions for businesses and high-usage residential
customers. For the year ended December 31, 2003, approximately 66% of our
revenues were generated from business lines and 34% of our revenues were
generated from residential lines. We estimate that our total lines represent
approximately 10% of our total addressable market.
COMPETITIVE STRENGTHS
Leading Market Position. By being one of the first competitive providers to
approach customers with bundled local, long distance voice and data services, we
believe we are able to meet pent-up demand for an alternative service provider,
as well as establishing brand awareness and customer relationships prior to
market entry by emerging competitors. We have benefited from our
first-competitor-to-market advantage by capturing an average of approximately
10% market share of our total addressable market in the six cities where we
offer services. In Monterrey and Guadalajara, the first two markets where we
launched operations in 1999, we have achieved approximately 13% market share of
our coverage market in both of these cities.
Comprehensive Voice and Data Service Portfolio. We provide our customers an
integrated bundle of services that includes local and long distance voice
services, as well as internet, data and other value-added services. We believe
our comprehensive service portfolio enables us to build strong, long-term
relationships with customers, thereby reducing churn and increasing our return
on our investment in network infrastructure. Furthermore, our digital access,
transport and switching network enable us to capture the current revenue
opportunity in voice services, while also enabling us to provide data services
as demand for those services grows.
Flexible, Technologically Advanced, Reliable Digital Network. Our hybrid
fixed wireless and wireline local access network structure allows us to enter
new markets quickly and cost-effectively. As a result, our return on our
investment in network infrastructure is increased. By utilizing the FWA
technology model, we are able to quickly cover a substantial geographic area
with minimal initial capital expenditures. We do not incur incremental capital
expenditures for last-mile connectivity until the customer subscribes to our
service. As of December 31, 2003, our network consisted of 10 digital switches,
207 FWA sites, of which 57 are also PMP sites, and 431 kilometers of
metropolitan fiber optic rings in order to service our 349,144 access lines.
Compelling Financial Profile. We have a diversified revenue base, a
favorable average revenue per user and a strong overall financial profile.
16
o Diversified revenue base. Our wide array of service offerings and our
349,144 lines in service and over 251,000 customers provide us with a
diverse revenue base.
o Average Revenue Per User. Our business model targets business and
high-usage residential customers. We believe this model allows us to
achieve a favorable average revenue per user. For the year ended
December 31, 2003, we had an average revenue per user of Ps. 665.
o Positive free cash flow and strong capitalization. Our positive free
cash flow, strong capitalization and low leverage put us in a solid
financial position to continue to execute our business strategy.
o Efficient network build-out strategy. Fixed wireless access technology
gives us the ability to rapidly initiate large geographic coverage
areas while minimizing our upfront capital expenditures and reducing
our payback period.
Experienced Management Team and Strong Equity Partners. Our senior
management team has extensive entrepreneurial, financial, marketing and
telecommunications expertise. The diverse experience of our senior management
team has contributed significantly to our initial success and rapid growth. In
addition, we benefit from working with strong local partners and experienced
multinational investors such as The Blackstone Group, AIG-GE Capital Latin
American Infrastructure Fund, and affiliates of Metropolitan Life Insurance
Company and The Soros Group. Our local investors include Tomas Milmo Santos,
Tomas Milmo Zambrano, Alberto Santos de Hoyos and Lorenzo Zambrano Trevino.
These businessmen have extensive financial, operating and senior management
experience in large Mexican corporations.
STRATEGY
The key elements of our business strategy are:
Target Service Sectors with High Profitability Potential. We have divided
our target market into the mass market and business market. In the mass market
we focus on high-usage residential, micro and small business customers. Within
the business market we focus on medium and large businesses. We have developed
differentiated, targeted telecommunications services plans designed to capture
business and retain high-usage residential customers in each market segment. We
believe that by focusing on the business and high-usage residential customers
within a coverage area we are able to increase the return per dollar invested in
our network infrastructure. For the year ended December 31, 2003, approximately
66% of our revenues were generated from business lines and 34% from residential
lines.
Bundle Products in an Integrated Offering. We believe that the bundling of
voice, data and internet services into communications solutions for our
customers enables us to generate higher revenue per customer and more revenue
per dollar invested in access infrastructure while also generating customer
loyalty. We have focused and will continue to focus on increasing the
penetration of bundled products to our customer base. By being a
facilities-based telecommunications service provider, we believe we are well
positioned to offer our
17
customers the convenience of receiving voice, data and internet services from a
single provider.
Exploit First-Competitor-to-Market Advantage. As Telmex's primary
competitor in local fixed telephony services and the first facilities-based
telecommunications service provider to enter new markets and offer integrated
voice, data and internet services, we will continue to focus on selectively
opening new markets where we believe we can capitalize on the market's desire to
have an alternative carrier and on serving demand unmet by our competitors.
Focus on Customer Service and Retention. Since launching operations, we
have been focused on achieving customer satisfaction levels that are superior to
the incumbent and our primary competitors. We believe that our service-driven
customer care leads to superior customer satisfaction, which enhances
profitability and cash flow by increasing customer retention and expanding sales
opportunities.
Continue to Expand Technologically Advanced Network Infrastructure. Since
1999, we have successfully launched operations in six cities. We continue to
evaluate opportunities in other regions in order to enhance our coverage area.
We believe that selectively expanding our network and coverage area will enhance
our ability to acquire large business customers with multi-city operations,
which we expect to result in higher revenues and margin improvements while
minimizing capital expenditures.
OUR SERVICES
We offer local and long distance telephony services, as well as data and
internet services to business and residential customers. We also provide
value-added services such as call waiting, call forwarding, three-way-calling,
call barring and multi-line hunting (centrex). We also provide internet services
in dial-up, dedicated and on-demand fashion. We have integrated access
technologies that allow the internet access required by different types of
customers, such as dial-up connection, Internet Fixed Wireless Access (an
always-on data channel that allows for the continuous use of the voice line
while navigating on the internet), and dedicated private lines of all speeds. We
have also launched dedicated private lines for both local and domestic long
distance telephony markets. For the latter, we use both our own and leased
infrastructure.
The following chart summarizes each component of our revenue sources for
the year ended December 31, 2003:
REVENUE SOURCE % REVENUE DESCRIPTION
- -------------- --------- -----------
Local services................... 75% We generate revenue by enabling our customers to
originate and receive an unlimited number of calls
within a defined local service area. Customers are
charged an initial fee for activating the service, a
flat monthly fee for basic service, a per call fee
and a per minute usage fee, depending on the type of
call.
18
Long distance services........... 10% We generate revenues by providing long distance
services for our customers' completed calls.
Other services................... 15% We generate revenues by providing other services to
our customers such as internet, data, interconnection
and dedicated private line service, as well as
value-added services such as caller ID, call waiting,
call forwarding and voicemail.
- ----------------------------------- --------------------- -------------------------------------------------------
Total 100%
As of December 31, 2003 we offered the following products and services:
PRODUCTS AND SERVICES
Voice Data
- ----- ----
o Business and Residential Line o Local and Domestic Private Lines
o Long Distance o High Speed Private Lines
o Digital Trunks o Co-location
o Voicemail o Virtual Private Network-- MPLS
o Centrex Line
o Customer Premise Equipment - Internet
o Telephone Sets, Key Systems and PBX o Dial Up Internet
o Call Waiting, Call Forwarding, Caller ID, o Dedicated Internet
Conference Call o Web Hosting
o Directory Assistance o Internet on Demand
o Operator Services o Internet FWA
o Automatic Dialing o Co-location
o Unique Number
o Prepaid Services Bundles
o Collect Calls o Axtel in a Box
o Virtual Line o Axtel NeXt
o Toll Free Services
OUR MARKETS
We launched commercial operations in June 1999 in the city of Monterrey.
Our network currently reaches six of the largest metropolitan areas in Mexico
(Mexico City, Monterrey, Guadalajara, Puebla, Toluca and Leon), which represent
approximately 19% of the population of Mexico. As of December 31, 2003, we had
349,144 lines. Due to our concentration of network facilities in business
centers and upper income residential areas, we estimate that the cities in which
we operate represent the majority of the total Mexican telecommunications
revenue opportunity.
Our city roll-out was determined taking into consideration the following
criteria:
19
o Size of telecommunications opportunity. According to COFETEL, for the
nine months ended September 30, 2003, nearly 70% of the number of net
lines added by the 32 states in Mexico were concentrated in only 10
states: Mexico, Distrito Federal, Jalisco, Nuevo Leon, Veracruz, Baja
California, Puebla, Guanajuato, Chihuahua and Tamaulipas. The six
cities we currently serve are in these states and five of them are
state capitals.
o Regional economy. According to INEGI (Instituto Nacional de Economia,
Estadistica e Informatica), in 2001, 53.2% of the total gross domestic
product in Mexico was generated in six states in which we have a
presence.
o Operational synergies. To become more efficient in launching cities,
we decided to open clusters of cities. The cities of Toluca and Puebla
are close enough to Mexico City and Leon is close enough to
Guadalajara to allow for quick systems and operations integration and
network buildout.
Within these cities, studies were conducted using geographical, statistical
and self-generated market research data to determine where the opportunity was
concentrated. Our network has been built upon this comprehensive data allowing
for fast penetration and cost-efficiency.
Our "first-competitor-to-market" advantage has enabled us to capture an
average of approximately 10% market share of our coverage market in the six
cities in which we offer services. In Monterrey and Guadalajara, the first two
markets where we launched services, we have achieved market shares of
approximately 13% in both cities. In particular, in the business segment, we
estimate that in Monterrey and Guadalajara we have achieved approximately a 14%
and 17% market share, respectively. The table below provides our access lines
and estimated market share of our coverage market as of December 31, 2003 for
each of the cities where we offer services.
MARKET SHARE WITHIN COVERAGE MARKET
AS OF DECEMBER 31, 2003
DATE RESIDENTIAL BUSINESS TOTAL
CITY LAUNCHED LINES SHARE LINES SHARE LINES SHARE
- -------------- -------------- -------- -------- ----------- ---------- ---------- ---------
MONTERREY June 1999 71,024 12.1% 39,174 14.4% 110,198 12.9%
GUADALAJARA December 1999 41,514 11.2 28,785 16.8 70,299 13.0
MEXICO CITY March 2000 77,898 8.3 45,954 8.3 123,852 8.3
PUEBLA January 2001 13,427 4.8 8,594 9.4 22,021 6.0
TOLUCA January 2001 5,747 4.5 3,054 9.4 8,801 5.5
LEON January 2001 7,109 6.1 6,864 13.4 13,973 8.3
-------- -------- ----------- ---------- ---------- ---------
TOTAL 6 CITIES 216,719 9.0% 132,425 11.3% 349,144 9.7%
======== ======== =========== ========== ========== =========
Source: Share percentages are Company estimates
Our largest single customer is Nextel de Mexico, which provides
telecommunications services to its customers through access to our network. We
first entered into an agreement with Nextel de Mexico for the provision of our
services in April 2001, and such agreement
20
has been extended four times. Pursuant to the most recent agreement with Nextel
de Mexico, we are guaranteed certain minimum levels of traffic through December
2005. This arrangement with Nextel de Mexico accounted for approximately 18% our
net sales in the year 2003.
MARKETING AND SALES
Our marketing strategy is to position ourselves as the first and best
alternative provider of local, long distance and internet and data services in
Mexico. We undertake direct mail marketing (both special delivery and bill
inserts) as well as telemarketing in order to generate geographically targeted
brand awareness and to up-sell new services to existing customers. We also build
brand awareness through the use of outdoor advertising on bus stops and
billboards, printed media including newspapers and magazines, advertisements on
the radio and television and sponsorships of local news programs. Our brand
strategy is to convey a modern, attractive image using simple, visual
communication and portraying a human profile.
We complement this marketing campaign with focused sales efforts directed
to our target market using a variety of sales channels. Our primary sales
methods are:
o Direct Sales. Account executives seek out a particular business
customer and establish an appointment.
o Door to Door. Salespeople walk through a neighborhood soliciting
potential customers.
o Telemarketing. Salespeople call potential customers from an extensive
database developed by us. This same team receives calls from potential
customers that have been addressed by our advertising and promotional
campaigns.
o Sales Booths. Salespeople stand at strategically determined areas
where potential customers carry out their shopping activities.
o MAPs (Modulos de Atencion y Pago). Axtel-branded sales and service
offices located at strategic locations within our targeted cities.
o Indirect Channels (Sales Distributors). Selected companies are
certified to carry out sales activities in the name of Axtel. These
companies target specific niches over which they have influence.
Sales efficiency is measured by subscriber acquisition cost. Telemarketing
has proven to be a highly efficient sales channel due to the quality of our
detailed database systems, which screen potential customers based on geographic
location, network availability and expressed interest. By effectively
pre-selecting customers based on network availability, we are able to maximize
telemarketing sales efficiency and decrease the cost of acquisition. The
accuracy of our database system also results in highly efficient installations.
Customer attrition, or churn, occurs primarily from our disconnecting
customers for non-payment of bills but also when a customer chooses to switch to
a competing service or to terminate service altogether. Churn results in the
loss of future revenue from customers
21
whose service is disconnected and limits our ability to recoup costs incurred in
acquiring customers such as switching costs, commissions and costs incurred in
connection with independent third-party verification. Our average monthly churn
rate has declined to 1.6% during 2003 as compared to 2.2% during 2002 as a
result of management initiatives to improve customer retention as well as the
billing and collection process.
PRICING
In the residential market, in order to attract new subscribers, we
frequently offer flexible and attractive initial pricing. Once a customer has
chosen our services, we focus on customer satisfaction and offer the customer
benefits, rather than lower pricing, in order to maximize our retention rate.
For instance, we install and activate second lines for free and allow customers
free service trials for value-added services. In the business market, we attract
users by providing volume discounts on local calls and provide additional
services and discounts to customers who sign long-term contracts. To date, this
strategy has allowed us to capture significant market share without eroding the
value of the market through excessive price competition.
We generally seek to maintain our prices at market levels. We offer pricing
plans that are simple in order to assure customers of the integrity of the
billing process. Our pricing structure rewards consumption by increasing
discounts in relation to the amount billed. Our ability to introduce new
products such as Axtel.NeXt, a bundled product that provides voice services and
always-on internet access, allows us to position ourselves as a value-added
provider rather than as a price-cutter.
OUR NETWORK
We provide services using a hybrid local access network, designed to
optimize capital expenditures through the deployment of network access equipment
based on specific customer requirements. Our current network access options
include fixed wireless access, point-to-point and point-to-multipoint, high
quality copper and metropolitan fiber. We switch our traffic using DMS equipment
that interconnects with Telmex's equipment and that of other local and long
distance carriers in each city, as shown below.
FWA SITES PMP SITES (1) SWITCHES FIBER (KMS)
--------- ------------- -------- -----------
Mexico............................ 85 27 3 154
Monterrey......................... 50 13 2 108
Guadalajara....................... 44 9 2 89
Puebla............................ 15 3 1 63
Toluca............................ 6 2 1 7
Leon.............................. 7 3 1 9
--------- ------------- -------- -----------
Total........................ 207 57 10 431
========= ============= ======== ===========
- ----------
(1) PMP Sites are included in FWA Sites
In order to deliver superior network reliability, we have acquired advanced
network technology and initially contracted network construction on a turn-key
basis from proven in-
22
dustry participants. Since March 2002 we have built our network through the use
of our own personnel and through certain Mexican third-party contractors. Our
wireless network uses Nortel Networks' customer access equipment (currently,
Airspan's equipment), microwave radios and DMS switching equipment. Our internet
platform uses Cisco's routing platform with Compaq servers and Microsoft
software applications. Our fiber networks use Lucent Technology Allwave fiber
and Nortel Networks DNX SDH equipment. The combination of these network
components enables us to deliver network reliability, which we believe is
superior to the incumbent's legacy network.
Through our current use of Nortel's Proximity II Fixed Wireless Access
technology, we are able to provide our customers quality voice service and 64
Kbps data speeds. We consider Fixed Wireless Access technology to be ideal for
our residential and micro and small business customers. Internet Fixed Wireless
Access technology provides our customers with always-on data connections with
speeds up to 96 Kbps by using an Internet Protocol interface and dynamic
timeslot assignments, which improves the data rates experienced by customers and
also increases our network efficiency.
Basic voice and data services are delivered over all of our access
technologies. Advanced data services and internet access with data rates ranging
from 64 Kbps to 2,048 Kbps require deployment of the additional equipment to
support the customer's requirements. In general, the capabilities of the access
technologies increase directly with the cost of the solution. Our hybrid access
capability enables us to:
o provide a full range of voice, data and internet services;
o rapidly meet demand;
o penetrate specific target markets; and
o scale the infrastructure deployed to market demand and individual
customer requirements.
This network infrastructure allows us to satisfy the requirements of
diverse market segments while maintaining a low-cost position relative to our
competition.
Build-out strategy
Our network is built on a modular basis. Once a region of opportunity has
been identified and the decision to expand has been made, we build our network
in tandem with our sales efforts within the region. This approach provides
greater flexibility and minimizes the time lag between the incurrence of capital
expenditures and the generation of service revenues. This model differs
significantly from a traditional wireline network covering the same geographic
area in which the vast majority of capital expenditures are incurred prior to
obtaining customer subscriptions.
23
Last-mile connectivity
The last-mile connectivity portion of our network is comprised of a mix of
wireless technologies as well as fiber optics for customers within our
metropolitan fiber optics rings. Our access technology is determined by
cost-effectiveness analysis, customer applications and availability of service.
We use fixed wireless access to serve customers requiring between 1 and 9 lines
(POTS) in a single point of service. Point-to-multipoint is used for customers
that require between 10 and 30 lines (POTS) and/or require low-speed (below
2,048 Kbps) dedicated private line accesses. Our point-to-point and fiber optics
accesses are used for customers requiring digital trunks or dedicated private
line accesses of more than 2Mbps. Hybrid solutions are being used in order to
reach more customers by expanding service using copper, PDMX and multi-tenant
solutions.
Recently, we signed contracts with Telefonica Data de Mexico, a subsidiary
of Telefonica de Espana, pursuant to which we will have the right to use
capacity in Telefonica's long haul fiber infrastructure which is located between
the northern border of Mexico and Mexico City. Telefonica Data de Mexico will
have the right to use a pair of dark fibers in a portion of our metropolitan
fiber rings. This agreement should enable us to reduce our long distance costs
by shifting a portion of our traffic from other carriers' long distance
infrastructure to our own network.
Network backbone
As of December 31, 2003, our network backbone consisted of 431 kilometers
of metropolitan fiber optic rings in the cities where we have presence. Our
network is comprised of several technologies such as fixed wireless access,
point-to-point, point-to-multipoint, copper and fiber. Each city we currently
reach is served by a Nortel DMS-100 digital switch which collects all calls
originated and terminated in our network. We have geographically deployed 207
sites/Hubs (technology concentrators) in order to serve our target markets.
Switching
We use Nortel's DMS-100 digital switches to route traffic within each city.
These switches are capable of handling up to approximately 100,000 lines in a
modular basis. The switches are capable of providing analog lines, E1 digital
lines, digital high speed data services, centrex services and operator assisted
service. In addition, they can provide private clear-channel digital lines, data
transmission and value-added services such as four digit dialing, conference,
call back, caller ID, call waiting, hot line and hunt group among others.
Operational support systems
Since launching operations, we have implemented and integrated an
information technology architecture that is based upon SAP software for
enterprise resource planning, Kenan software for billing and an internally
created customer relationship management system. These systems enable us to
perform on-line sales and service provisioning. We have been able to manage
customer requests, generate accurate bills and produce timely financial
statements. We have also integrated Siebel's customer relationship management
software into the
24
core of our information technology architecture. These systems allow us to
respond to customer requests with speed, quality and accuracy.
We have also implemented an advanced network management system, which
allows us to detect, diagnose and solve network problems in real time. This
system is being expanded to integrate all network components in order to improve
fault management and response times.
In July 2003, we received authorization from the Mexican Federal
Telecommunication Commission (COFETEL) to install and operate an international
gateway, which allows us to establish interconnection agreements with other
countries for incoming and outgoing traffic. By sending outbound traffic we will
also have the right to receive incoming traffic. This mechanism is in accordance
with the Rules of Proportional Return. Tariffs are applied to this international
traffic in accordance with international settlement rates. See Item 4.B.
"Interconnection--International Settlement."
OUR CONCESSIONS
We believe we have purchased sufficient spectrum to fulfill the capacity
requirements of our business plan including the offering of broadband services
to our customers. On June 17, 1996, we were granted concessions to offer local
and long distance telephony services nationwide. We were also awarded a public
telecommunications network concession for no fee, which has a term of 30 years
and, subject to the satisfaction of certain conditions, is renewable for an
additional 30-year period.
In April, June and October of 1998, we were awarded several concessions to
use and exploit the following frequency bands:
o 60 MHz at 10.5 GHz, nationwide divided in 9 regions, for
point-to-multipoint access;
o 112 MHz at 15 GHz, nationwide, for point-to-point access and
transport;
o 100 MHz at 23 GHz nationwide for point-to-point access and transport;
and
o 50 MHz at 3.4 GHz, nationwide divided in 9 regions for local telephony
using fixed wireless access technology.
We paid a license fee of Ps. 569.7 million (in nominal pesos) for these
spectrum licenses. Each of the spectrum licenses has a term of 20 years and may
be renewed at our option for additional 20-year periods as long as we are in
compliance with all of our obligations thereunder and as long as an agreement is
reached on the new conditions set forth by the SCT.
The concession expressly permits us to provide the following services:
o basic local telephony;
o nationwide long distance telephony;
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o the sale or lease of network capacity for the generation, transmission
or reception of signs, signals, writings, images, voice, sounds or
other information of any nature;
o the purchase and lease of network capacity from other carriers,
including the lease of digital circuits;
o value-added services;
o operator services;
o data, video, audio and video conference services, except for cable or
other restricted television, continuous music or digital audio
services; and
o credit or debit telephone cards.
We have the required regulatory authority to provide such services to
Mexico's entire population. Some of our concessions require us to offer services
in certain geographic areas where we are not currently offering services. We
have, in the past, obtained waivers to such requirements. These waivers have
expired and we have applied for the renewal of such waivers. We have been
advised in writing by COFETEL that we are not in a situation contemplated in the
Federal Telecommunications Law which may result in revocation of any of our
licenses. We expect to maintain all of our concessions for each such geographic
area where we do not presently offer our services. However, in the event that we
were to lose our concessions for these areas where we do not presently offer our
services, our concessions for the geographic areas where we do presently offer
our services will not be adversely affected.
INTERCONNECTION
In accordance with the Federal Telecommunications Law, all holders of
concessions for the installation, operation and exploitation of public
telecommunications networks are required to provide interconnection services to
other holders of public telecommunications network concessions.
All terms of interconnection (such as point of interconnection and
interconnection fees) are negotiated between telecommunications concessionaires
under COFETEL's supervision. Should telecommunications concessionaires be unable
to agree on the terms of interconnection, including rates charged, after a
certain period of negotiation, either concessionaire may request that COFETEL
resolve any interconnection term at issue. Telecommunications concessionaires
are prohibited from adopting discriminatory practices in the application of
rates or any other terms of interconnection.
In accordance with Mexican Telecommunications Regulations, we have
established interconnection agreements as follows:
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Local interconnection
We entered into an interconnection agreement with Telmex in March of 1999.
This agreement included provisions concerning local switched interconnection,
local non-switched interconnection, signaling, co-location and local transiting,
and provided for an interconnection rate of US$0.00975 per minute. This
interconnection agreement expired on December 31, 2003. However, its terms and
conditions (including the interconnection rate) are automatically extended until
the parties mutually agree to extend the agreement or execute a new
interconnection agreement.
In addition to Axtel-Telmex local interconnection agreements, we have
established interconnection agreements with most of the local fixed carriers,
such as Telefonos del Noroeste, S.A. de C.V. ("Telnor"), Alestra, S. de R.L. de
C.V. ("Alestra"), Operadora Unefon, S.A. de C.V. ("Unefon") and Maxcom
Telecomunicaciones, S.A. de C.V. ("Maxcom"). The terms and conditions for each
agreement are similar to those established with Telmex. Although we have no
local interconnection agreement with Avantel Servicios Locales, S.A. de C.V.
("Avantel") or with Megacable Comunicaciones de Mexico, S.A. de C.V. due to
particular legal issues between those operators and COFETEL, traffic is
exchanged and interconnected between us and those local carriers through transit
agreements with Telmex.
Pursuant to those local interconnection contracts, we have established
"bill and keep" agreements. Under the "bill and keep" agreements, if the
imbalance between calls originated by a local carrier (Maxcom, Alestra, Telmex,
Unefon, Telnor, etc.) and terminated by us and calls originated by us and
terminated by such local carrier during a given month does not exceed a
predetermined percentage, then no interconnection fees are payable by the net
user of interconnection services. If the imbalances are in excess of the
predetermined percentage, which is 30% to date, then the net user must pay all
interconnection fees related to calls originated by it in that period. The bill
and keep agreements contain exceptions regarding internet traffic and long
duration calls so that these will not affect the calculation of the permitted
imbalance percentage. The prices and tariffs charged under these local
interconnection agreements are denominated in US dollars and then converted into
Mexican pesos based on monthly rates published by Banco de Mexico.
Mobile interconnection
We have reciprocal interconnection agreements with all-cellular providers,
such as Telcel, Unefon, Iusacell and Telefonica Movil (including Cedetel and
Pegaso PCS) within each of the local coverage areas in which we operate. As of
December 2003, the interconnection fee with the cellular carriers was Ps.1.90
per minute for wireline to mobile interconnection under the "calling party pays"
mode. For mobile to wireline calls, we receive US$0.00975 per minute from the
mobile carrier.
Long distance interconnection
In our local operation, we have long distance interconnection agreements in
place with major long distance carriers such as LADA (Telmex and Telnor Long
Distance operation), Grupo Iusacell, Alestra, Marcatel, and Protel. Other long
distance carriers transit traffic
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though Telmex. As of December 2003, the interconnection fee we receive from long
distance carriers was US$0.00975 per minute.
In our long distance operation, we have established agreements with local
networks such as Maxcom, Telmex and Telnor. In addition to the interconnection
rate described above, we may pay extra charges for our local interconnection
with Telmex and Telnor.
International settlement
The international settlement rates that US carriers use to settle accounts
with Mexican telecommunications companies are US$0.055 (Mexico City, Monterrey
and Guadalajara), US$0.0850 (197 equal access cities) and US$0.1175 (non equal
access cities) per minute as of December 2003.
In 1996, COFETEL implemented the "Rules of Proportional Return" system for
allocating international long distance calls for each Mexican carrier based upon
the carrier's percentage of outbound international calls. The "proportional
return" system may be eliminated or phased out in the future.
CUSTOMER SERVICE
A key element of our competitive strategy is to consistently provide
reliable, responsive customer service. In order to achieve this goal, we have
established a 24 hour/7 day a week customer service center for voice, data and
internet services which is staffed by highly trained personnel. We have
implemented a comprehensive training, testing and certification program for all
staff that directly interacts with customers.
We provide post-sales service on a nationwide basis through the following
four operations:
o Customer Service provides post-sales customer support, ranging from
general information, additions, moves and changes to billing inquires
and technical support.
o Operator Services is a 24/7 operation providing directory assistance,
wake-up calls, time of day, emergency calls and placing domestic and
international long distance calls.
o Repair Answer is our customer contact group that addresses and manages
all customer trouble reports and provides on-line technical support
and analysis.
o Local Test analyzes and tests all trouble reports that are not
resolved on-line by Repair Answer. This team is accountable for
routing "in service" and "out of service" trouble reports to Repair
Dispatch. Both Repair and Local Test work closely with our network
maintenance center in order to monitor and fix network disruptions.
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BILLING AND COLLECTION
We believe our billing and collection process is an important aspect of our
competitive advantage.
Our billing team receives and validates the call detail record from the
network and bills customers on a monthly basis, typically within 14 days from
the end of the billing period. During 2003, we have made significant
improvements in shortening the billing process through internal improving
efficiencies.
An ongoing revenue assurance process which consists of reviewing the
billing stream, payments and adjustments, as well as fraud detection and control
has become part of our regular billing operation. This process has contributed
to minimizing fraud and risk.
To facilitate the reception of payments and to make the payment process
convenient for customers, we have developed a number of payment reception
channels. Some of these channels are:
o convenience stores;
o banks;
o Axtel MAPs (Axtel's Sales Points);
o website e-billing;
o supermarkets; and
o automatic charges to credit cards, checking and debit accounts (upon
customer approval).
These channels provide easy and fast options for the customer to select the
most suitable and convenient alternative for a prompt payment.
To ensure customers pay on time, we use preventive tactics such as calls to
remind customers that have failed to pay promptly on their previous payment due
dates and call interception. Additional procedures involve suspension of long
distance and cellular outgoing calling, suspension of outbound calling and total
suspension of service.
Past due accounts are turned over to external collections agencies 90 days
after due date. Accounts are disconnected 180 days after due date. Prior to
disconnection, we conduct a negotiation of the outstanding balance with the
customer as part of our retention efforts oriented to provide alternate
solutions payment programs. Alternatives include reconnection of the service
under a pre-payment scheme with a payment schedule for the outstanding balance.
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COMPETITION
We compete primarily in the local telephony services market on the basis of
features, customer service and value. Our direct competitors are wireline and
fixed wireless local telephony operators.
We do not compete directly in the long distance market. Although we provide
long distance service, we view such service as a part of our suite of products
for our telephony customers. As a result, we currently do not offer our long
distance service separately from our local telephony service.
There may be opportunities for consolidation in the Mexican
telecommunications industry. Although it is not the focus of our strategy, we
intend to review and evaluate opportunities from time to time and, if an
appropriate opportunity arises, we may pursue it through the strategic
acquisition of assets or an acquisition of, or combination with, another
company.
Telmex. Our main local telephony competitor is Telmex, the former
state-owned telecommunications monopoly. Telmex has significantly greater
financial and other resources than we have and serves all of the cities and
segments that we serve. In addition, Telmex has an established customer base
which represents the vast majority of the wireline local telephony lines in
Mexico.
We interconnect with and use Telmex's network to service our own customers
and we are dependent upon Telmex to meet certain telecommunications needs of our
customers and to maintain our service standards. In addition, because Telmex is
the dominant provider of local telephony services, a significant number of our
customers maintain an ongoing relationship with Telmex. Telmex has a presence
throughout Mexico and its established and long-standing customer base gives it a
substantial competitive advantage. See Item 3.D. "Risk Factors--We depend on
Telmex for interconnection."
We believe we are competing effectively against Telmex by providing
fast-deployment infrastructure in underserved areas, and by providing value to
customers through high quality customer service.
Avantel. Avantel commenced operations in 1996 by providing only long
distance telephony services to residential and business customers. In 2000,
Avantel started to offer local service to some of its corporate customers. We
believe we are competing effectively against Avantel by developing and offering
to corporate customers customized telecommunications service packages, which
include attractive pricing, additional product value and applications and access
technologies to meet customer needs.
Alestra. Alestra commenced operations in 1996, providing only long distance
telephony services to residential and business customers. Like Avantel, in 2000,
Alestra also started to offer local service to some of its corporate customers.
We believe we are competing effectively against Alestra by developing and
offering to corporate customers customized telecommunications service packages,
which include attractive pricing, additional product value and applications and
access technologies to meet customer needs.
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Maxcom. Maxcom commenced operations in 1999 targeting residential and
business customers in the cities of Puebla, Mexico City and recently in
Queretaro. It has deployed a wireline network in these cities and after four
years of operations, its customer base has grown to approximately 140,000 lines.
We currently compete in Puebla and Mexico City and we believe we compete
effectively on the basis of outstanding customer service and price.
LEGAL PROCEEDINGS
We are currently party to the following material legal proceedings:
Metronet Dispute
On October 2002, Metronet, S.A. de C.V. ("Metronet") filed an action
against us in the Fourth Civil Court in Monterrey (Mexico). Metronet claims that
we wrongfully terminated a letter of intent and is seeking payment for services
and direct damages of approximately US$3.8 million, plus other expenses and
attorneys' fees. The trial court ruled against us. This lawsuit, which we are
vigorously defending, is currently in the appeal stage.
Spectrasite Dispute
In March 2002, Spectrasite Communications Mexico, S. de R.L. de C.V.
("Spectrasite Mexico") filed an action against us in the 30th Civil Court in
Mexico City. Spectrasite Mexico is seeking recovery of a deposit in the amount
of US$13.0 million that Spectrasite Mexico made with us in connection with a
proposed sale-leaseback of towers. We, in turn, countersued Spectrasite Mexico
and Spectrasite Communications Inc. for breach of contract in a related action.
If the court rules against us, the deposit will have to be reimbursed as will
Spectrasite Mexico's legal costs and expenses and any other applicable amounts
considered direct damages in accordance with applicable Mexican laws. If the
court rules in our favor, we may be able to retain the deposit and/or any other
applicable amounts considered as direct damages in accordance with applicable
Mexican laws, in addition to receiving payment of our legal costs and expenses.
This lawsuit is in the discovery stage.
Rendall Dispute
On June 27, 2003, we and Telinor jointly filed an action against Rendall &
Associates seeking a court pronouncement that neither of us owed any amounts to
Rendall & Associates. Rendall & Associates seeks payment from Telinor of
approximately US$3.0 million pursuant to an expired services agreement between
Rendall & Associates and Telinor. We believe Rendall & Associates' allegations
are without merit and that the court may find in our favor. This proceeding is
in its initial stages.
Shareholdings Disputes
In connection with an increase in our capital, approved on February 28,
2003, Telinor was entitled to subscribe for a certain number of voting shares.
The subscription agreement tendered to us by Telinor recited that Telinor had
assigned to Blackstone Capital Partners III Merchant Banking Fund L.P.,
Blackstone Offshore Capital Partners III L.P. and Blackstone Family Investment
Partnership III L.P. (collectively, "Blackstone") a portion of its subscrip-
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tion rights and that the voting shares representing that portion were to be
subscribed for by Telinor, as a commercial agent for Blackstone, and issued in
Telinor's name, for the account of Blackstone. As a result of the subscription,
Series A voting shares were issued in Telinor's name. Subsequently, the portion
of the voting shares issued in Telinor's name which Telinor had advised us it
was subscribing for the account of Blackstone were exchanged for Series C voting
shares. The record ownership of these Series C voting shares was placed in
Blackstone's name. We and Telinor believe these actions were proper because
Blackstone, as a non-Mexican investor, cannot hold our Series A voting shares.
LAIF X sprl , a holder of Series C voting shares, asserts that it would own a
majority of the Series C voting shares absent Blackstone's ownership of Series C
voting shares, and disputes the validity of what it characterizes as the
issuance of Series C voting shares to Blackstone, based on what LAIF X sprl
asserts was an impermissible conversion of Series A voting shares into Series C
voting shares. LAIF X sprl also asserts that Blackstone's holding of Series C
voting shares is invalid and that our current board of directors was not
properly constituted because the directors representing the Series C
shareholders, elected with Blackstone's vote, were not properly elected. The
subscription agreement submitted to us by LAIF X sprl states that Worldtel
Mexico Telecom Limited ("WorldTel") assigned its subscription rights to
participate in the capital call to its direct shareholders, among which LAIF IV
Ltd. was an assignee. It also states that LAIF IV Ltd. thereafter re-assigned
its rights to subscribe its pro-rata share of Axtel shares to LAIF X sprl, which
in turn subscribed and paid for some of our shares arising out of the capital
call. Prior to such subscription and payment for Axtel shares by LAIF X sprl,
Telinor had subscribed and paid in full the entire capital call, subject to
WordlTel's exercise of pre-emptive rights. As a consequence of LAIF X sprl's
subscription, we refunded to Telinor the amount paid by LAIF X sprl.
These disputes have evolved as follows:
(i) In October 2003, LAIF X sprl filed a petition before the trial court
located in Monterrey (Mexico), seeking preliminary injunctive relief
consisting of an order to suspend the effectiveness of the resolutions
adopted during the meeting of our shareholders held on October 9,
2003, with respect to the appointment of members of our board of
directors by the holders of Series C shares, pending the resolution of
the dispute through the dispute resolution process set forth in our
bylaws. The trial court dismissed this action and the State Superior
Court of Appeals (Sala Novena Civil) confirmed such dismissal. LAIF X
sprl may still request the review of this decision by a Federal Court.
(ii) In December 2003, LAIF X sprl invoked the dispute resolution process
in our bylaws and filed a demand for arbitration before the
International Centre for Dispute Resolution of the American
Arbitration Association against Axtel, Telinor and Blackstone
(referred to collectively herein as the respondents). Each of the
respondents submitted on time its answer to the demand for
arbitration. This proceeding is in its initial stages; each of the
claimants and respondents has selected one arbitrator, and the
International Centre for Dispute Resolution is in the process of
selecting the president of the arbitration tribunal. In this
arbitration proceeding, LAIF X sprl seeks, among other things, the
following relief: (a) an interim order preventing Axtel from taking,
without LAIF X sprl's
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express written consent, any action that under our bylaws is subject
to the approval of the holders of the majority of the Series C voting
shares or the approval of at least one of our Series C directors; (b)
a declaration that the alleged transfer of Series A voting shares to
Blackstone and their alleged conversion into Series C shares was not
in full compliance with our bylaws; (c) an order to nullify the Series
C shares issued to Blackstone; (d) a declaration that the election of
our board of directors on October 9, 2003 was conducted in breach of
our bylaws; (e) an order to remove our current board of directors as
appointed on October 9, 2003; and (f) damages in an unspecified
amount.
(iii) In January 2004, Telinor filed a lawsuit in Monterrey (Mexico)
against LAIF IV Ltd., LAIF X sprl and Axtel. In this lawsuit, Telinor
is challenging the validity of a re-assignment of preferential
subscription rights by LAIF IV Ltd. in favor of LAIF X sprl, and as a
consequence thereof, the subscription of shares made by LAIF X sprl.
If the court rules in favor of Telinor, the re-assignment of
preferential subscription rights by LAIF IV Ltd. in favor of LAIF X
sprl may be judicially declared invalid, LAIF X sprl's status as a
shareholder of Axtel may be revoked, and the shares subscribed by LAIF
X sprl may be judicially allocated to Telinor.
(iv) In February 2004, LAIF X sprl filed a petition against the respondents
before the United States District Court, Southern District of New
York, in order to (a) compel the respondents to arbitrate any and all
disputes with LAIF X sprl arising directly or indirectly out of our
bylaws, and (b) to obtain injunctive relief and enjoin the respondents
from commencing or pursuing any lawsuit against LAIF X sprl (its
affiliates, employees, officers, and agents) arising directly or
indirectly out of our bylaws in any jurisdiction without a prior
determination by the arbitration tribunal that such action would
indeed be outside the scope of its jurisdiction. On March 1, 2004, the
injunctive relief sought by LAIF X sprl was denied as to Axtel and
Blackstone with the consent of LAIF X sprl; and on March 8, 2004, it
was denied as to Telinor in all respects. On March 26, 2004, LAIF X
sprl appealed the District Court's order as to Telinor before the
United States Court of Appeals for the Second Circuit.
(v) In March 2004, LAIF X sprl submitted to the International Centre for
Dispute Resolution an amendment to its demand for arbitration
requesting additional relief consisting of a declaration that,
pursuant to our bylaws, LAIF X sprl is a legitimate shareholder of
Axtel. On April 7, 2004 we filed our answer and defenses to the
amendment to the demand.
GOVERNMENT REGULATIONS
General
The telecommunications industry in Mexico is subject to the Federal
Telecommunications Law (Ley Federal de Telecomunicaciones), which was enacted in
1995, and its regulations. In addition, certain rules under the General Means of
Communications Law (Ley de
33
Vias Generales de Comunicacion) and the Telecommunications Regulations
(Reglamento de Telecomunicaciones) generally remain effective and are referred
to as the Old Telecommunications Law.
Under the Federal Telecommunications Law, the Mexican telecommunications
industry is regulated for regulatory, administrative and operational matters by
COFETEL (Comision Federal de Telecomunicaciones). COFETEL was created in 1996 as
a separate entity from the SCT (Secretaria de Comunicaciones y Transportes) to
regulate and promote the efficient development of the telecommunications
industry in Mexico. COFETEL is responsible for, among other things:
o enacting regulations and technical standards for the
telecommunications industry;
o ensuring that concession holders fulfill the terms and obligations of
their concessions and permits;
o suspending operators without concessions;
o resolving interconnection controversies between competitors; and
o maintaining a registry of applicable rates.
The SCT retains the authority to grant and revoke all concessions and
permits. COFETEL makes recommendations to the SCT on major issues, such as
amending existing telecommunications legal framework, allocating spectrum
frequencies, granting, transferring, renewing or revoking concessions and
applying penalties for concession violations. The SCT has final decision making
power on these issues. Once a final decision is made, COFETEL implements the
related regulations.
Concessions and permits
To provide telephony services in Mexico through a public telecommunications
network, a service provider must first obtain a concession from the SCT.
Pursuant to the Federal Telecommunications Law, concessions for public
telecommunications networks may not exceed a term of 30 years, and concessions
for spectrum frequencies may not exceed a term of 20 years. Generally,
concessions for public telecommunications networks and spectrum frequencies may
be extended for a term equivalent to the term for which the concessions were
originally granted as long as the concessionaire is in compliance with ongoing
obligations stated therein. Concessions specify, among other things:
o the type and technical specifications of the network, system or
telecommunication services that may be provided;
o the allocated spectrum frequencies, if applicable;
o the geographical region in which the holder of the concession may
provide the telecommunication service;
o the required capital expenditure program;
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o the term during which such service may be provided;
o the payment, where applicable, required to be made to acquire the
concession, including, if applicable, the participation of the Mexican
government in the revenues of the holder of the concession; and
o any other rights and obligations affecting the concession holder.
In addition to concessions, the SCT may also grant permits for the
following:
o installing, operating or exploiting transmission-ground stations; and
o providing telecommunications services as a reseller.
There is no legally mandated maximum term for these permits unless
specifically stated in the permit. Under the Federal Telecommunications Law, a
company needs to register with COFETEL the rates for the telecommunications
services that it wishes to provide in order to be able to provide them to the
public.
The Mexican Congress enacted a law, effective January 1, 2002, that
expanded the scope of the sales and use tax to include additional services,
including services provided by telecommunications service providers such as
value-added services, at a rate of 10%. An amendment to this law, effective
January 1, 2003, confirmed that our core business (the offering of local and
long distance services) is not subject to the tax. Although we believe, based on
the advice of our tax and regulatory advisors, that certain other services that
are part of our local service offerings are also not subject to such tax, we
cannot assure you that the tax authorities may not interpret the law otherwise
or impose other taxes from time to time.
Ownership restrictions. Under the Federal Telecommunications Law and the
Mexican Foreign Investment Law (Ley Federal de Inversion Extranjera), basic
telephony concessions may be granted only to:
o Mexican individuals; and
o Mexican corporations in which non-Mexicans own 49% or less of the full
voting stock and that are not otherwise controlled by non-Mexicans.
However, in the case of concessions for cellular telecommunications
services, foreign investment participation may exceed 49% of the voting stock
with the prior approval of the Mexican Foreign Investment Bureau of the Mexican
Ministry of Economy (Secretaria de Economia).
Pursuant to the Foreign Investment Law, the Mexican Ministry of Economy may
also authorize the issuance of non-voting or limited-voting stock (also known as
"neutral shares") that are not counted for purposes of determining the foreign
investment percentage of a Mexican corporation under the Mexican Foreign
Investment Law. Any share transfers resulting in a violation of these foreign
ownership requirements are invalid under Mexican law.
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Transfer. Concessions are transferable after the first three-year period of
the concession, if the SCT approves the transfer of the concession title, the
assignee agrees to comply with the terms of the concession and such a transfer
does not violate the foreign ownership requirements of the Federal
Telecommunications Law and the Mexican Foreign Investment Law.
Termination. A concession or a permit may be terminated pursuant to the
Federal Telecommunications Law upon the following events:
o expiration of its term;
o resignation by the concession holder or the permit holder;
o revocation prior to the end of its term under certain circumstances,
such as:
o dissolution or bankruptcy of the concession holder or the
permitholder;
o failure to exercise the rights of the concession within 180 days of
its granting;
o failure to provide interconnection services with other holders of
telecommunications concessions and permits without just cause;
o loss of the concession or permit holder's Mexican nationality;
o unauthorized assignment, transfer or encumbrance of the concession or
permit;
o unauthorized interruption of service;
o taking any action that impairs the rights of other concessionaires or
permit holders;
o failure to comply with the obligations or conditions specified in the
concession or permit; and
o failure to pay the Mexican government its fee for the concession or,
where applicable, its participation in the revenues of the holder of
the concession.
The SCT may revoke a concession for violations in any of the circumstances
referred to in the first four instances above. Under the last four instances
above, the SCT would have to fine the concessionaire at least three times for
the same failure before moving to revoke a concession.
Expropriation
The Mexican government has the statutory right to permanently expropriate
any telecommunications concession and claim any related assets for reasons of
public interest. Under Mexican law, the Mexican government is obligated to
compensate the owner of such assets in the case of a statutory expropriation.
The amount of the compensation is to be determined by
36
appraisers. If the party affected by the expropriation disagrees with the
appraisal amount, such party may initiate judicial action against the
government. In such a case, the relevant judicial authority will determine the
appropriate amount of compensation to be paid. We are not aware of any instance
in which the SCT has exercised its expropriation rights in connection with a
telecommunications company.
Temporary seizure
The Mexican government, through the SCT, may also temporarily seize all
assets related to a telecommunications concession or permit in the event of a
natural disaster, war, significant public disturbance, threats to internal peace
or for economic reasons or for other reasons related to national security. If
the Mexican government temporarily seizes such assets, except in the event of
war, it must indemnify the concession holder for all losses and damages,
including lost revenues. We are not aware of any instance in which the SCT has
exercised its temporary seizure powers in connection with a fixed or mobile
telecommunications company.
Rates for telecommunications services
Before the Federal Telecommunications Law was enacted in June 1995, the
SCT's approval was required for setting the rates charged for all basic local,
long distance and certain value-added local and long distance telecommunications
services. Historically, the SCT permitted rate increases based on the cost of
service, the level of competition, the financial situation of the carrier and
certain macroeconomic factors. Carriers were not allowed to discount the rates
authorized by the SCT, although operators occasionally waived activation fees on
a promotional basis. Interconnection rates also required SCT approval. Rates for
private dedicated circuit services through microwave networks and private
networks through satellites were not regulated before the Federal
Telecommunications Law was enacted.
Under the Federal Telecommunications Law, rates for telecommunications
services (including local, cellular and long distance telephony services) are
now freely determined by the providers of such services, except that such rates
may not be set below a service provider's long-term incremental cost.
In addition, COFETEL is authorized to impose specific rate, quality and
service requirements on those companies determined by the Federal Antitrust
Commission (Comision Federal de Competencia) to have substantial market power
pursuant to the provisions of Mexico's antitrust statute. All rates for
telecommunications services (other than value-added services) must be registered
with COFETEL prior to becoming effective. The Federal Telecommunications Law
prohibits telecommunications providers from cross-subsidizing among their
services and requires that they keep separate accounting for each of their
services.
The Mexican Antitrust Commission has found that Telmex has substantial
power in the following five markets: interconnection, local services, domestic
long distance services, international long distance services and long distance
resale, as defined under Mexico's antitrust statute. Based on this finding,
COFETEL issued a resolution in September 2000 regulating Telmex as a dominant
carrier and imposing special obligations regarding, among other things, quality
of services, tariffs and information disclosure. However, Telmex has obtained
37
an injunction against any potential action by COFETEL for the purpose of
implementing such resolution. As a result of this injunction, Telmex is not
currently subject to the specific obligations covered by COFETEL's resolution.
C. Organizational Structure
Our major investors are Telinor Telefonia, S. de R.L. de C.V. ("Telinor"),
a company formed in 1994 by a group of Monterrey businessmen including Tomas
Milmo Santos, Tomas Milmo Zambrano, Lorenzo Zambrano Trevino and Alberto Santos
de Hoyos; LAIF X sprl, an affiliate of AIG-GE Capital Latin American
Infrastructure Fund L.P.; and The Blackstone Group, a New York-based investment
group. Telinor holds 58.5% of our voting stock and has a 53.0% economic interest
in us. LAIF X sprl holds 15.7% of our voting stock and has a 14.3% economic
interest in us. The Blackstone Group holds 13.9% of our voting shares and has an
11.7% economic interest in us. Some of our other direct investors include
Tapazeca sprl (an affiliate of The Soros Group), New Hampshire Insurance Company
(an affiliate of American International Group, or AIG) and Nortel Networks
Limited.
The following table sets forth our significant subsidiaries as of the date of
this annual report:
JURISDICTION OF PERCENTAGE
NAME OF COMPANY INCORPORATION OWNED
- --------------- ------------- -----
Impulsora e Inmobiliaria Regional, S.A. de C.V. Mexico 99.998%
Instalaciones y Contrataciones, S.A. de C.V. Mexico 99.998%
Servicios Axtel, S.A de C.V. Mexico 99.998%
D. Property, Plants and Equipment
All of our properties are located in Mexico. Our corporate headquarters are
located in Monterrey, Mexico. Our Monterrey office consists of 39,779 square
meters, and the lease on this property expires in 2015. We also own eight
buildings throughout the six cities where we operate. These are the facilities
in which we have installed our switches. We have over 200 towers on leased land
throughout our service areas.
Item 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion should be read in conjunction with our financial
statements and the notes thereto included elsewhere in this Form 20-F. The
following discussion includes certain forward-looking statements. For a
discussion of important factors, including the continuing development of our
business, actions of regulatory authorities and competitors and other factors
which could cause actual results to differ materially from the results referred
to in the forward-looking statements, see Item 3.D. "Risk Factors."
OVERVIEW
We provide bundled local and long distance voice services, as well as data
and internet services. Our integrated service offering enables us to maximize
the recurring revenue received from each customer, increasing the return
achieved on our investment in infrastructure,
38
sales and marketing and distribution. Long distance services, for example, have
been a significant source of revenue, but would not be cost-effective to provide
as a stand-alone service offering because of the significant downward pricing
pressure on long distance services in Mexico. In addition, we believe and have
found that customers prefer to purchase their telecommunications services from a
single provider and receive a single bill. We believe customer loyalty is
increased with the provision of additional services, resulting in a lower
customer churn rate.
KEY PERFORMANCE INDICATORS
Management evaluates the performance of the Company by tracking the
following indicators:
2001 2002 2003
-------------------------------------------------------------------------------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
-------- -------- -------- ------- ------- -------- -------- --------- ------ -------- ------ ---------
Revenues(1) ... 469.3 528.6 641.0 604.0 563.0 613.5 626.4 649.5 664.7 710.2 746.8 797.8
Cost of Revenues
and Operating
Expenses(1) (605.6) (637.5) (732.5) (833.1) (666.4) (680.7) (703.7) (634.4) (667.7) (696.4) (704.3) (738.7)
Access Lines(2) 265.3 287.8 280.1 290.1 290.7 285.7 289.0 295.1 300.2 311.1 332.7 349.1
ARPU(3) ....... 538.3 590.5 676.1 622.1 573.1 632.8 645.5 656.8 655.0 680.6 671.1 652.5
(1) Amounts in constant Ps. in millions as of December 31, 2003.
(2) Amounts in thousands at end of period.
(3) ARPU means average revenue per user. Amounts in constant Ps. as of December
31, 2003.
Revenues
We derive our revenues from:
o Local calling services. We generate revenue by enabling our customers
to originate and receive an unlimited number of calls within a defined
local service area. Customers are charged an initial fee for
activating the service, a flat monthly fee for basic service, a per
call fee and a per minute usage fee for calls completed on a cellular
line ("calling party pays calls").
o Long distance services. We generate revenues by providing long
distance services for our customers' completed calls.
o Other services. We generate revenues by providing other services to
our customers which include internet, data, interconnection and
dedicated private line service, as well as value-added services such
as caller ID, call waiting, call forwarding and voicemail.
39
The following summarizes our revenues and percentage of revenues from
operations from these sources:
REVENUES (CONSTANT PS.
IN MILLIONS AS OF % OF REVENUES
DECEMBER 31, 2003) YEAR ENDED
YEAR ENDED DECEMBER 31, DECEMBER 31,
----------------------------------------- ---------------------------------------
REVENUE SOURCE 2001 2002 2003 2001 2002 2003
-------------- ---- ---- ---- ---- ---- ----
Local calling services.. Ps. 1,657.4 Ps. 1,832.3 Ps.2,180.8 73.9% 74.7% 74.7%
Long distance services.. 299.8 289.8 296.1 13.4% 11.8% 10.1%
Other services.......... 285.7 330.3 442.7 12.7% 13.5% 15.2%
----------- ----------- ---------- ------ ------ ------
Total................... Ps. 2,242.9 Ps. 2,452.4 Ps.2,919.5 100.0% 100.0% 100.0%
Cost of Revenues and Operating Expenses
Our costs are categorized as follows:
o Cost of revenues include expenses related to the termination of our
customers' cellular and long distance calls in other carriers'
networks, as well as expenses related to billing, payment processing,
operator services and our leasing of private circuit links.
o Operating expenses include costs incurred in connection with general
and administrative matters including compensation and benefits, the
costs of leasing land related to our operations and costs associated
with sales and marketing and the maintenance of our network.
o Depreciation and amortization includes depreciation of all
communications network and equipment and amortization of preoperating
expenses and the cost of spectrum licenses.
Access Lines
Our access lines are separated into residential and business categories. We
determine the number of our total access lines by adding to the ending
balance of access lines from the previous period the gross installed access
lines during such period and then subtracting any access lines that were
disconnected during such period. By determining the number of our access
lines, we are able to estimate our share of a particular geographic market.
ARPU (Average Revenue Per User)
Average revenue per user is used as an industry-standard measurement of a
telecommunication company's ability to maximize the amount of revenue we
derive from each customer in light of the amount of capital expenditures
made to attract such customer. This measurement allows us to gauge our
return on investment as compared with both our domestic competitors in
Mexico as well as other telecommunication services providers abroad.
40
DEBT REPURCHASE
During the first quarter of 2003, we implemented a significant
restructuring of our debt and equity and entered into agreements to replace our
most significant supply contracts. From the commencement of the roll-out of our
network, Nortel Networks had been our main supplier of network equipment and our
most significant lender. As of December 31, 2002, our total indebtedness to
Nortel Networks was US$511.5 million. After extensive negotiations, we agreed
with Nortel to repurchase this debt in exchange for (i) non-voting shares of our
stock representing 9.9% of our total outstanding shares, (ii) a cash payment of
US$125.2 million and (iii) a promissory note in the face amount of US$24.2
million. These debt repurchase transactions resulted in a net gain for financial
statement purposes of US$168.9 million recorded in March 2003 and additional
shareholder's equity of US$60.0 million. Although there was no negative impact
on our cash flow in terms of accrued tax liabilities in connection with these
transactions, we did decrease our accumulated Net Operating Losses and tax loss
carryforwards due to the financial gain. In December 2003, the promissory note
in the amount of US$24.2 million in favor of Nortel was repaid in full with the
net proceeds received in connection with the issuance of the outstanding notes.
As part of the Nortel debt repurchase transaction, we renegotiated our
supply arrangements with Nortel, and entered into five agreements: three
agreements relating to the provision of fixed wireless access equipment, and two
agreements relating to the provision of non-fixed wireless access equipment.
Under such agreements, we assumed certain purchase obligations, including: (i)
the obligation to purchase not less than 25,000 RSS units (customer premise
equipment) in year 2003; 20,000 customer premise equipment kits in year 2004;
25,000 customer premise equipment kits in year 2005; 30,000 customer premise
equipment kits in year 2006; and 35,000 customer premise equipment kits in year
2007; (ii) the obligation to purchase not less than 20 radio base station units
in year 2003; 30 radio base station units in year 2004; and 20 radio base
station units in each of years 2005, 2006 and 2007; (iii) the obligation to
purchase a minimum amount of US$0.6 million during year 2003 and US$2.1 million
during each of the following four years. In addition, as part of these
agreements, we are obligated to make yearly payments of US$3.8 million for
technical services regarding our fixed wireless access platform. On December 23,
2003, Airspan Communications Limited ("Airspan") acquired Nortel's fixed
wireless access business, assuming Nortel's rights and obligations under some of
these agreements.
Bell Canada International Limited, or BCI, one of our founding
shareholders, was also a party to a certain Technical Services Agreement and a
Secondment Agreement with us. BCI has embarked upon a Canadian court ordered
plan of dissolution. In connection with our on-going capital needs and BCI's
plans to dissolve, we agreed to pay BCI US$13.2 million to terminate all the
rights and obligations of both parties under the two agreements, including our
obligation to pay fees in the future based on our financial performance, and in
full settlement of any and all claims that BCI may have against us arising out
of or related to the Secondment Agreement and the Technical Services Agreement
that we previously entered into. Such US$13.2 million amount was evidenced by a
cash payment of US$2.8 million on May 30, 2003 and three non-negotiable
promissory notes: (a) US$1.1 million paid on June 30, 2003; (b) US$1.1 million
paid on September 20, 2003; and (c) US$1.2 million payable on December 31, 2003.
In addition, we issued in favor of BCI another promissory note
41
with a future value of US$9.4 million payable in June 2006. Due to these
transactions with BCI, we recorded an extraordinary expense of US$10.7 million.
In December 2003, all these amounts owed to BCI were repaid in full with the net
proceeds received in connection with the issuance of the outstanding notes.
Finally, in connection with the foregoing transactions, on February 28,
2003 we issued a capital call to our existing shareholders for the subscription
and payment of shares representing additional capital of US$60.0 million.
Certain of our shareholders assigned their subscription rights with respect to
such shares to some of their shareholders or members. As a result, the number of
our shareholders increased from 3 to 11. However, each of our new shareholders
is an indirect shareholder of ours through their equity interest in the
respective holding companies of Telinor and Worldtel, that own our stock. As is
required under Mexican law, Mexican shareholders continue to own more than 51%
of our voting stock.
YEAR OVER YEAR COMPARISONS
YEAR ENDED DECEMBER 31, 2003 COMPARED WITH YEAR ENDED DECEMBER 31, 2002
Revenues from Operations
Revenues from operations increased to Ps. 2,919.5 million for year 2003
from Ps. 2,452.4 million for the year ended 2002, an increase of Ps. 467.1
million, or 19%. The number of access lines increased to 349,144 from 295,141,
an increase of 18%, and our average revenue per user increased to Ps. 664.6 from
Ps. 627.0. During the year 2003, the Company launched new and innovative
commercial offers, thus allowing the Company to increase the number of lines in
service, which had a favorable impact on the 2003 revenues.
Local services. Local service revenues increased to Ps. 2,180.8 million for
the year ended 2003 from Ps. 1,832.3 million for the year ended 2002, an
increase of Ps. 348.4 million, or 19%. These increases were primarily due to
higher monthly rent and cellular consumption driven by specifically targeted
offers to capture high consumption customers.
Long distance services. Long distance services revenues increased to Ps.
296.1 million for the year ended 2003 from Ps. 289.8 million for the year ended
2003, an increase of Ps. 6.3 million, or 2%. This is a consequence of a higher
number of lines in use during the year.
Other services. Revenue from other services increased to Ps. 442.7 million
in 2003 from Ps. 330.3 million in 2002, an increase of Ps. 112.4 million, or
34%. The increase was due to different factors, including but not limited to the
following: higher termination of calls in our network, increase in international
traffic through our international gateway and more subscription of our value
added services.
Cost of Revenues and Operating Expenses
Cost of Revenues. Cost of revenues from operations increased to Ps. 808.4
million for the year ended 2003 from Ps. 612.2 million for the year ended 2002,
an increase of Ps. 196.2
42
million, or 32%. This increase was due primarily to a Ps. 195.9 million increase
in our underlying costs related to calling party pays call revenues.
Operating expenses. Operating expenses decreased to Ps. 1,138.1 million for
the year ended 2003 from Ps. 1,262.4 million for the year ended 2002, a decrease
of Ps. 124.3 million, or 10%. This decrease was attributable to the improvements
made on collections policies/processes which resulted in less provision for
doubtful accounts.
Depreciation and Amortization. Depreciation and amortization from
continuing operations increased to Ps. 860.6 million for the year ended 2003
from Ps. 810.5 million for the year ended 2002, an increase of Ps. 50.1 million,
or 6%. This increase in depreciation and amortization goes in line with the
Company's growth and investments.
YEAR ENDED DECEMBER 31, 2002 COMPARED WITH YEAR ENDED DECEMBER 31, 2001
Revenues from Operations
Revenues from operations increased to Ps. 2,452.4 million for year 2002
from Ps. 2,242.9 million for the year ended 2001, an increase of Ps. 209.6
million, or 9%. The number of access lines increased to 295,141 from 290,132, an
increase of 2%, and our average revenue per user increased to Ps. 627.0 from Ps.
609.7. During the year 2001, we commenced offering our services in three new
cities, Puebla, Toluca and Leon, which contributed positively to the increase in
revenue and customer base. We derived our revenues from the following sources:
Local services. Local service revenues increased to Ps. 1,832.3 million for
the year ended 2002 from Ps. 1,657.4 million for the year ended 2001, an
increase of Ps. 174.9 million, or 11%. This increase was primarily due to the
increase in consumption levels in cellular and measured service on a per line
basis as a result of the acquisition of high consumption customers through the
development of offers specifically targeted to such customers.
Long distance services. Long distance services revenues decreased to Ps.
289.8 million for the year ended 2002 from Ps. 299.8 million for the year ended
2001, a decrease of Ps. 10.0 million, or 3%, due to a lower consumption on a per
line basis following the introduction of alternative options to complete long
distance traffic, like trunking services, voice over IP, among others.
Other services. Revenue from other services increased to Ps. 330.3 million
in 2002 from Ps. 285.7 million in 2001, an increase of Ps. 44.6 million, or 16%.
Cost of Revenues and Operating Expenses
Cost of Revenues. Cost of revenues from operations increased to Ps. 612.2
million for the year ended 2002 from Ps. 521.3 million for the year ended 2001,
an increase of Ps. 90.9 million, or 17%. This increase was due primarily to a
Ps. 127.4 million increase in our underlying costs related to calling party pays
call revenues, which was partially offset by a decrease in the cost of investing
related to a reduction in gross additions over the prior year.
43
Operating expenses. Operating expenses from operations decreased to Ps.
1,262.4 million for the year ended 2002 from Ps. 1,642.6 million for the year
ended 2001, a decrease of Ps. 380.2 million, or 23%. This decrease was
attributable primarily to a significant reduction in bad debt expense due to an
improved customer profile, as well as a significant rationalization of our
workforce.
Depreciation and Amortization. Depreciation and amortization from
continuing operations increased to Ps. 810.5 million for the year ended 2002
from Ps. 644.7 million for the year ended 2001, an increase of Ps. 165.8
million, or 26%. This increase in depreciation and amortization expense reflects
the continuing expansion of our asset base.
YEAR ENDED DECEMBER 31, 2001 COMPARED WITH YEAR ENDED DECEMBER 31, 2000
Revenues from Operations
Revenues from operations increased to Ps. 2,242.9 million for the year
ended 2001 from Ps. 1,052.7 million for the year ended 2000, an increase of Ps.
1,190.1 million, or 113%. The number of access lines increased to 290,132 from
216,760, an increase of 34%. During the year 2001, we grew our customer base by
beginning to offer our services in three new cities, Puebla, Toluca and Leon,
which contributed positively to the increase of our revenue and customer base.
We derived our revenues from the following sources:
Local services. Local service revenues increased to Ps. 1,657.4 million for
the year ended 2001 from Ps. 783.0 million for the year ended 2000, an increase
of Ps. 874.5 million, or 112%, attributable primarily to targeted sales to high
consumption customers as well as a 134% and 195% increase in our monthly fees
and usage fees due to an increase in the number of access lines.
Long distance services. Long distance services revenues increased to Ps.
299.8 million for the year ended 2001 from Ps. 106.8 million for the year ended
2000, an increase of Ps. 192.9 million, or 181%. The increase in revenues was
attributable to a higher number of lines in services and higher consumption on a
per line basis.
Other services. Revenue from other services increased to Ps. 285.7 million
for the year ended 2001 from Ps. 163.0 million for the year ended 2000, an
increase of Ps. 122.7 million, or 75%, which was attributable to the
introduction of our internet service products, as well as an increase in
value-added services.
Cost of Revenues and Operating Expenses
Cost of Revenues. Cost of revenues from operations increased to Ps. 521.3
million for the year ended 2001 from Ps. 222.3 million for the year ended 2000,
an increase of Ps. 299.0 million, or 135%. This growth was due primarily to a
Ps. 265.4 million increase in our underlying costs related to calling party pays
calls, as well as increased long distance costs due to higher consumption
levels.
Operating expenses. Operating expenses from operations increased to Ps.
1,642.6 million for the year ended 2001 from Ps. 1,377.5 million for the year
ended 2000, an increase of
44
Ps. 265.2 million, or 19%. The increase was due primarily to our higher reserves
for bad debt expenses, as well as increased costs related to our growth and the
correspondent need for additional personnel and facilities.
Depreciation and Amortization. Depreciation and amortization from
operations increased to Ps. 644.7 million for the year ended 2001 from Ps. 335.4
million for the year ended 2000, an increase of Ps. 309.3 million, or 92%. This
increase in depreciation and amortization expense was attributable to an
increase in capital expenditures for consolidation and expansion of our network
coverage into additional cities.
LIQUIDITY AND CAPITAL RESOURCES
Historically we have relied primarily on vendor financing, private equity
contributions, internal cash from operations and the proceeds from bank debt to
fund our operations, capital expenditures and working capital requirements.
After giving effect to the offering of the outstanding notes and the net
proceeds therefrom, we believe that we will be able to meet our debt service
obligations and fund our operating requirements in the future with cash flow
from operations, although no assurance can be given in this regard. We will
continue to focus on investments in fixed assets and working capital management,
including the collection of accounts receivable and management of accounts
payable. Net cash provided by operating activities was Ps. 159.7 million, Ps.
(11.5) million and Ps. (303.6) million for the years ended December 31, 2003,
2002 and 2001, respectively.
Net cash used in investing activities was Ps. 556.7 million, Ps. 566.8
million and Ps. 1,595.1 million for the years ended December 31, 2003, 2002 and
2001, respectively. These cash flows primarily reflect investments in fixed
assets of Ps. 460.1 million, Ps. 565.4 million and Ps. 1,582.8 million for the
years ended December 31, 2003, 2002 and 2001, respectively.
Net cash provided by (used in) financing activities from continuing
operations was Ps. 1,083.0 million, Ps. 771.3 million and Ps. 1,886.4 million
for the years ended December 31, 2003, 2002 and 2001, respectively.
Since our inception, we have invested over Ps. 7,400 million as we built
out our infrastructure. Our total investment in fixed assets was approximately
Ps. 565.4 million in 2002 and was approximately Ps. 460.1 million in 2003. We
expect to make additional investments in future years as we selectively expand
our network into other areas of Mexico in order to exploit market opportunities
as well as to maintain our existing network and facilities.
Market risks
Our primary foreign currency exposure relates to our US dollar-denominated
debt. Most of our debt obligations at December 31, 2003 were denominated in US
dollars. Substantially all of our debt obligations would have been denominated
in US dollars. Therefore, we are exposed to currency exchange rate risks that
could significantly affect our ability to meet obligations. We have reduced our
exposure through the purchase of options contracts which mature in less than a
year.
45
The following table provides information about the details of our option
contracts as of December 31, 2003 (in thousands except average strike price):
COVERAGE IN FAIR VALUE
MEXICAN AVERAGE IN US
FOREIGN CURRENCY PESOS STRIKE PRICE DOLLARS MATURITY DATE
- ---------------- ----- ------------ ------- -------------
AT DECEMBER 31, 2003:
Purchased puts (Axtel may
sell peso/buy USD)
Mexican peso............... 56,500 11.30 91.1 March 17, 2004
------------ ------------
56,500 $ 91.1
============ ============
Written calls (Counterparty
may buy peso/sell USD)
Mexican peso............... 55,400 11.08 (41.2) March 17, 2004
------------ ------------
55,400 $ (41.2)
============ ============
Prior to entering into foreign currency hedging contracts, we evaluate the
counterparties' credit ratings. Credit risk represents the accounting loss that
would be recognized at the reporting date if counterparties failed to perform as
contracted. We do not currently anticipate non-performance by such
counterparties.
The exchange rate of the peso to the US dollar is a freely floating rate
and the peso has experienced significant devaluation in previous years. Any
significant decrease in the value of the peso relative to the US dollar in the
near term may have a material adverse effect on our results of operations and
financial condition, including our ability to repay or repurchase the notes.
Capitalization of preoperating expenses
We commenced commercial operations in June 1999. As permitted under Mexican
GAAP, during our preoperating stage we were able to capitalize all of our
general and administrative expenses and our net comprehensive cost of financing.
Beginning in June 1999, we are required to amortize all previously
capitalized general and administrative expenses and to depreciate all previously
capitalized net comprehensive cost of financing. These capitalized preoperating
expenses are amortized on a straight-line basis for a period not exceeding ten
years.
Summary of contractual obligations
The following table discloses aggregate information about our contractual
obligations and the periods in which payments are due.
LESS THAN MORE THAN 5
TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS YEARS
----------- ------------ ----------- ----------- -------------
PRO FORMA, PAYMENTS DUE BY PERIOD
(US$ IN MILLIONS)
CONTRACTUAL OBLIGATIONS:
Debt maturing within one year.......... 12.9 12.9 -- -- --
46
LESS THAN MORE THAN 5
TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS YEARS
----------- ------------ ----------- ----------- -------------
PRO FORMA, PAYMENTS DUE BY PERIOD
(US$ IN MILLIONS)
Long-term debt......................... 180.1 -- 5.1 -- 175.0
Operating leases....................... 6.3 4.1 2.2 -- --
Nortel/Airspan......................... 70.1 14.7 35.4 20.0 --
----------- ------------ ----------- ----------- -------------
Total contractual cash obligation...... 269.4 31.7 42.7 20.0 175.0
=========== ============ =========== =========== =============
US GAAP RECONCILIATION
We describe below the principal differences between Mexican GAAP and US
GAAP. See Note 24 to the audited consolidated financial statements for
reconciliation to US GAAP of shareholders' equity and net loss for the
respective periods presented.
Recognition of the effects of inflation on financial information. Under
Mexican GAAP, the effects of inflation are reflected in financial statements and
such a convention has no counterpart under US GAAP. However, although Mexican
GAAP includes the effects of inflation in financial statements, the Securities
and Exchange Commission does not require the restatement of financial statements
to reconcile the effects of the Mexican GAAP inflation accounting.
Preoperating expenses. Under Mexican GAAP, all expenses incurred while a
company is in the preoperating or development stages are deferred and considered
as a component of a company's assets. Such capitalized expenses are amortized on
a straight-line basis for a period not exceeding 10 years after the
corresponding asset commences operations. According to US GAAP, such
preoperating or development expenses are expensed and reported as a deficit to
shareholders' equity recorded during the developing stage.
Deferred income tax and employees statutory profit sharing. Under Mexican
GAAP deferred income tax is accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit (TA) carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. Deferred income tax and employees statutory profit sharing is
recognized only for timing differences arising from the reconciliation of book
income to income for profit sharing purposes, on which it may reasonably be
estimated that a future liability or benefit will arise and there is no
indication that the liabilities or benefits will not materialize. Under US GAAP,
deferred income tax and employees statutory profit sharing are determined under
the asset and liability method recognizing the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss carryforwards.
Statement of changes in financial position. In accordance with Mexican
GAAP, we present statements of changes in financial position in constant pesos.
This presentation identi-
47
fies the generation and application of resources representing differences
between beginning and ending financial statements balances in constant pesos.
The changes in the consolidated financial statement balances included in
our audited consolidated financial statements constitute cash flow activity
stated in constant pesos (including monetary losses which are considered as cash
losses in the financial statements presented in constant pesos). SFAS No. 95
does not provide guidance with respect to inflation adjusted financial
statements. However, US GAAP requires that non-cash financing and investing
transactions should be excluded from the statement of cash flows and reported in
related disclosures.
Vacations. Under Mexican GAAP, vacation expenses are recognized when taken,
rather than in the period when they are earned by an employee, as is required
under US GAAP. Beginning in January of 2003, Mexican GAAP required the
recognition of vacation expense when such is earned.
Severance. Under Mexican GAAP, severance payments should be recognized in
earnings in the period in which they are paid, unless such payments are used by
an entity as a substitution for pension benefits, in which case, they should be
considered as a pension plan. Under US GAAP, post-employment benefits for former
or inactive employees, excluding retirement benefits, are accounted for under
the provisions of SFAS No. 112, which requires recognition of certain benefits,
including severance, over an employee's service life.
Capitalization of interest. In accordance with Mexican GAAP, capitalization
of interest or, during inflationary periods, comprehensive cost of financing or
income incurred in the period of construction and installation of an asset is
permitted. The interest to be capitalized is that of the specific financing
obtained for the construction of the related asset. Under US GAAP,
capitalization of interest is required for certain qualifying assets that
require a period of time to get them ready for their intended use. The amount of
interest to be capitalized is that portion of the interest cost incurred during
the assets' acquisition period that theoretically could have been avoided if
expenditures for the assets had not been made, and is not limited to
indebtedness attributable to the asset.
DEVALUATION AND INFLATION
On December 20, 1994, the Mexican government responded to exchange rate
pressures by increasing the upper limit of the then existing free market peso/US
dollar exchange rate band by 15% and, two days later, by eliminating the band to
allow the peso to fluctuate freely against the US dollar. This resulted in a
major devaluation of the peso relative to the US dollar. While the noon buying
rate had been Ps. 3.45 per US$1.00 on December 19, 1994, by December 31, 1994
the noon buying rate had fallen over Ps. 5.00 per US$1.00, representing a 44.9%
devaluation. The peso continued to decline against the US dollar during 1995,
closing at a noon buying rate of Ps. 7.74 per US$1.00 on December 31, 1995,
which represented a 54.8% devaluation relative to the US dollar for the year.
The Mexican economy began to recover in 1996 and 1997, as exchange rates
stabilized, inflation decreased and real gross domestic product grew by 5.2% and
6.8%, respectively. However, the financial crisis in Asia and Russia, together
with the weakness in the
48
price of oil in 1998, which is a significant source of revenue for the Mexican
government, contributed to renewed weakness in the peso, which devalued 22.7%
relative to the US dollar. In 1999, the peso appreciated 4.2% relative to the US
dollar. From 1999-2000, the peso-to-dollar denominated exchange rate remained
relatively stable. In 2001, the peso-to-dollar exchange rate showed a slight
recovery of 4.8% from Ps. 9.62 on December 31, 2000 to Ps. 9.16 on December 31,
2001. However, in 2002, the peso devaluated 13.9% relative to the US dollar. In
2003, the peso devalued approximately 7.7% relative to the US dollar.
Peso devaluation has contributed to sharp increases in inflation.
Inflation, which had been 7.1% in 1994, increased to 52.0% and 27.7% in 1995 and
1996, respectively. After a reduction to 15.7% in 1997, inflation was 18.6% in
1998. In 1999, 2000 and 2001, the inflation rate decreased to 12.3%, 9.0% and
4.4%, respectively. In 2002 and 2003, the inflation rate was 5.7% and 4.0%,
respectively.
The general economic conditions in Mexico resulting from a devaluation of
the peso and inflation may have a negative impact on our results of operations
and financial condition, primarily as a result of:
o the resulting decrease in the purchasing power of Mexican consumers,
which results in a decrease in the demand for telephony services;
o our inability, due to competitive pressures, to increase our prices in
line with inflation; and
o an increase in the peso-carrying amount of our US dollar-denominated
debt, reflecting the additional amounts of pesos required to meet such
debt.
See Item 3.D. "Risk Factors--We may lose money because of peso
devaluation."
RECENT ACCOUNTING PRONOUNCEMENTS
Financial instruments with characteristics of liabilities, equity, or both
In May 2003, the Mexican Institute of Public Accountants issued Bulletin
C-12, "Financial Instruments with Characteristics of Liabilities, Equity, or
Both." Bulletin C-12 is effective for fiscal years beginning after December 31,
2003, although earlier application is permitted. Bulletin C-12 combines
regulations contained in other bulletins related to the issuance of complex
financial instruments and adds regulations necessary for a comprehensive
resolution of general problems. Bulletin C-12 also defines the basic differences
between liabilities and equity; establishes rules for the classification and
valuation of the liability and equity components of combined financial
instruments upon initial recognition and establishes rules for the disclosure of
combined financial instruments. Under Bulletin C-12 financial instruments should
be classified as liabilities or equity at the beginning of the year of adoption
and comparative financial information for prior years should not be restated,
nor a cumulative-effect-type adjustment recognized in the year of adoption. We
estimate that the adoption of the new Bulletin C-12 will not have a material
effect on our financial position or results of operations.
Recent accounting pronouncements under US GAAP
49
In December 2003, the FASB issued FASB Interpretation No. 46 (revised
December 2003), Consolidation of Variable Interest Entities, which addresses how
a business enterprise should evaluate whether it has a controlling financial
interest in an entity through means other than voting rights and accordingly,
should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46
Consolidation of Variable Interest Entities, which was issued in January 2003.
The Company will be required to apply FIN 46R to variable interests in VIEs
created after December 31, 2003. For variable interests in VIEs created before
January 1, 2004, the Interpretation will be applied beginning on January 1,
2005. For any VIEs that must be consolidated under FIN 46R that were created
before January 1, 2004, the assets, liabilities and noncontrolling interests of
such VIE initially would be measured at their carrying amounts, with any
differences between the net amount added to the balance sheet and any previously
recognized interest being recognized as the cumulative effect of an accounting
change. If determining the carrying amounts is not practicable, fair value at
the date FIN 46R first applies may be used to measure the assets, liabilities,
and noncontrolling interest of the VIE.
FASB Statement No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity, was issued in May 2003. This
Statement establishes standards for the classification and measurement of
certain financial instruments with characteristics of both liabilities and
equity. The Statement also includes required disclosures for financial
instruments within its scope. For the Company, the Statement was effective for
instruments entered into or modified after May 31, 2003 and otherwise will be
effective as of January 1, 2004, except for mandatory redeemable financial
instruments. In the case of certain mandatory redeemable financial instruments,
the Statement will be effective for the Company on January 1, 2005. The
effective date has been deferred indefinitely for certain types of mandatory
redeemable financial instruments. We currently do not have any financial
instruments that are within the scope of this Statement.
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements included elsewhere in this annual
report have been prepared in accordance with Mexican GAAP, which differ in
significant respects from respects from US GAAP. See note 24 to our consolidated
financial statements, included elsewhere in this Offering Circular, for a
description of the principal differences between Mexican GAAP and US GAAP as
they relate to us.
We have identified below the accounting policies we have applied under
Mexican GAAP that are critical to understanding our overall financial reporting.
Income taxes
Under Mexican GAAP, income taxes are accounted for under the asset and
liability method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit (AT) carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be
50
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Significant judgment is required to appropriately assess the amounts of tax
assets. We record tax assets when we believe there will be enough future taxable
income for the realization of such deductible temporary difference. If this
determination cannot be made, a valuation allowance is established to reduce the
carrying value of the asset.
Deferred income tax and employees statutory profit sharing is recognized
only for timing differences arising from the reconciliation of book income to
income for profit sharing purposes, on which it may be reasonably estimated that
a future liability or benefit will arise and there is no indication that the
liabilities or benefits will not materialize.
Recognition of the effects of inflation
Under Mexican GAAP, the financial statements are restated to reflect the
loss of purchasing power (inflation) of their functional currency. The inflation
effects arising from holding monetary assets and liabilities are reflected in
the income statements as monetary position result. Inventories, fixed assets and
deferred charges, with the exception and the equity accounts, are restated to
account for inflation using the Mexican National Consumer price Index (NCPI)
published by Banco de Mexico (central bank). The result is reflected as an
increase in the carrying value of each item. Income statement accounts are also
restated for inflation into constant Mexican Pesos as of the reporting date.
Impairment of long-lived assets
We evaluate periodically the adjusted values of our property, plant,
systems and equipment and other non-current assets, to determine whether there
is an indication of potential impairment.
Recoverability of assets to be held and used is measured by a comparison of
the carrying amount of an asset to future net revenues expected to be generated
by the asset. If such assets are considered to be impaired, the impairment is
measured by the amount by which the carrying amount of the asset exceeds the
expected net revenues. Assets to be disposed of are reported at the lower of the
carrying amount or realizable value. Revenue Recognition
On December 3, 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB
101). This bulletin summarizes the point of view of the Securities and Exchange
Commission in the recognition of revenues in the financial statements according
to US GAAP. The Securities and Exchange Commission concluded that only when all
the following conditions are met is revenue recognition appropriate:
(a) there is persuasive evidence of an agreement;
(b) the delivery was made or the services rendered;
51
(c) the sales price to the purchaser is fixed or determinable;
(d) collection is reasonably assured.
SAB 101, specifically in Topic 13A, Question 5, discusses the situation of
recognizing as revenue certain non-refundable cash items. SAB 101 provides that
the seller should not recognize non-refundable charges generated in certain
transactions when there is continuous involvement by the vendor.
One of the examples provided by SAB 101 is activation revenues from
telecommunication services. The SAB concludes that unless the charge for the
activation service is an exchange for products delivered or services rendered
that represent the culmination of a separate revenue-generating process, the
deferral method of revenue is appropriate.
Based on the provisions and interpretations of SAB 101, for purposes of the
US GAAP reconciliation, the Company has deferred the activation revenues over a
three-year period starting in the month such charge is originated. This period
was determined based on Company experience. The net effect of the deferral and
amortization is presented in the above US GAAP reconciliation.
Item 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and Senior Management
Our Board of Directors is comprised of eleven members. Subject to certain
provisions of the corporate bylaws, the Series A shareholders have the right to
appoint up to six directors, the Series C shareholders have the right to appoint
up to four directors and the holders of the majority of Series N shares have the
right to appoint one independent Series N director. The directors of each series
of shares may be elected at our ordinary general meeting of shareholders or at
special meetings of holders of each series of shares. All board members hold
their positions indefinitely, unless they resign or are removed by the
shareholders. Under the Mexican Companies Law, we are required to have one
statutory auditor, who is elected by our shareholders at the ordinary general
shareholders meeting. Our statutory auditor is Gerardo Gonzalez Rodriguez and
his alternate is Ricardo Gonzalez Villarreal. As statutory auditor, his primary
role is to report to our shareholders at the annual ordinary shareholders
meeting regarding the accuracy and sufficiency of, and reasonable basis for, the
financial information presented to the shareholders by the Board of Directors.
The following table presents information concerning our current directors
and executive officers:
NAME AGE POSITION
- ---- --- --------
Tomas Milmo Santos...................... 38 Chairman, Series A Director and Chief Executive Officer
Patricio Jimenez Barrera................ 38 Chief Financial Officer
Andres Velazquez Romero................. 38 Mass Market Executive Director
Samuel Lee Belmonte..................... 38 Business Market Executive Director
Ivan Alonso Hernandez................... 39 Chief Technology Officer
52
Rafael Garza Blanc...................... 55 Human Resources Vice President
Tomas Milmo Zambrano.................... 68 Series A Director
Alberto Santos de Hoyos................. 62 Series A Director
Lorenzo Zambrano Trevino................ 59 Series A Director
Alberto Garza Santos.................... 39 Series A Director
Hector Medina Aguiar.................... 52 Series A Director
Everett J. Santos(1).................... 63 Series C Director
Bertrand Guillot(1)..................... 40 Series C Director
Iain Aitken(1).......................... 48 Series C Director
Lawrence H. Guffey(1)................... 35 Series C Director
Elias Makris(1)(2)...................... 40 Series N Director
Gabriel Montana(1)...................... 33 Series C Alternate Director(3)
Patricio D'Apice(1)..................... 33 Series C Alternate Director(3)
Benjamin Jenkins(1)..................... 32 Series C Alternate Director(3)
- ----------
(1) See Item 4.B. "Business Overview--Legal Proceedings--Shareholdings
Disputes."
(2) Mr. Makris has submitted his resignation to the board. His successor has
not been appointed.
(3) The role of the alternative director is to perform the role of the primary
director if the primary director is not in attendance.
Set forth below is a brief description of our directors and executive
officers:
Tomas Milmo Santos has held the position of Chief Executive Officer of
Axtel since 1994 and Series A Director since October 1997. Mr. Milmo was also
appointed Chairman of the Board of Directors in October 2003. Prior to joining
Axtel, Mr. Milmo worked at Carbonifera de San Patricio, S.A. de C.V., a
medium-sized mining company in Mexico. In 1988 he was named CEO of that same
company, holding this post until 1990, when he founded and became CEO of Milmar,
S.A. de C.V., a housing development company that developed and sold over 10,000
homes between 1990 and 1993. He is a member of the Board of Directors of Telinor
Telefonia, S. de R.L. de C.V., Cemex, S.A. de C.V. and Universidad de Monterrey.
Mr. Milmo holds a degree in Business Economics from Stanford University.
Patricio Jimenez Barrera has held the position of Chief Financial Officer
of Axtel since January 1998. Prior to joining Axtel, Mr. Jimenez held a variety
of finance-related positions, including an investment banker while at
Invermexico Casa de Bolsa, a corporate treasurer while at Grupo Cydsa, S.A. and
an investment banker, international treasurer, financing and correspondent
banker while at Banca Serfin, S.A. (Mexico's third largest bank). Immediately
prior to joining Axtel, Mr. Jimenez was responsible for the International
Division at Banca Serfin, S.A. He is a member of the board of Seguros Banorte
Generali and Pensiones Banorte Generali. Mr. Jimenez is a CPA and holds a degree
from the Instituto Tecnologico y de Estudios Superiores de Monterrey.
Andres Velazquez Romero has held the position of Mass Market Executive
Director of Axtel since May 2002. Prior to his present position, Mr. Velazquez
held the Treasurer and Administrative Director positions at Axtel. Mr. Velazquez
has been responsible for treasury, risk management, credit lines, funding
structure and foreign exchange for a number of banking institutions. Prior to
joining Axtel, he was the COO in charge of the Banca Serfin International Agency
in New York. Mr. Velazquez holds a degree in Economics from the ITAM in Mexico
City.
53
Samuel Lee Belmonte has held the position of Business Market Executive
Director of Axtel since May 2002. Prior to his present position, Mr. Lee held
the Engineering Director position at Axtel. Mr. Lee has 17 years of experience
in operations and telecommunications areas. He has been responsible for the
technical support of large national companies. Prior to joining Axtel, he was
Product Development Director with Iusacell. Mr. Lee holds a B.S. degree in
Electronic Systems Engineering and an M.B.A.
Ivan Alonso Hernandez has held the position of Technology Vice President of
Axtel since May 2002. Prior to his present position, Mr. Alonso held the
Information Technology and Business Process Director positions at Axtel. Mr.
Alonso has over 17 years experience in information technology and
telecommunications areas with various companies, including Copamex Services &
Real Estate Division. He has also collaborated with financing institutions
including Banco del Atlantico & Banpais, with responsibility for the
telecommunications group of its Northeast Division. Mr. Alonso holds a B.S.
degree in Electronics and Communications Engineering from the Instituto
Tecnologico y de Estudios Superiores de Monterrey.
Rafael Garza Blanc has held the position of Human Resources Vice President
of Axtel since July 1997. Prior to his present position, Mr. Garza Blanc has
held the Administrative and Human Resources Vice President positions at Axtel.
Mr. Garza Blanc has 26 years experience in business. His career with Conductores
Monterrey (now Xignux), one of the main copper-wiring producing companies in
Latin America, evolved from being a plant engineer to becoming the company CEO.
His background includes consulting activities in various firms. Mr. Garza holds
a degree in Electrical Engineering and an M.B.A.
Tomas Milmo Zambrano has been a Series A Director of Axtel since October
1997 and held the position of Chairman of the Board of Directors from October
1997 until 2003. Mr. Milmo Zambrano was founder and Chairman of Grupo Javer S.A.
de C.V., one of the largest housing development companies in Mexico, and of
Incasa, S.A. de C.V., one of the largest aggregate producers in Mexico. He was
also Chairman and CEO of both Carbonifera de San Patricio S.A. de C.V. and
Carbon Industrial, S.A. de C.V., medium-sized mining companies in Mexico. He was
a Director of Cemex, S.A. de C.V. until 1996.
Alberto Santos de Hoyos has been a Series A Director of Axtel since October
1997. Mr. Santos is a director of Banco de Mexico (regional), Grupo Cydsa, S.A.,
Sigma Alimentos and Seguros Comercial America. He has been Senator and
Representative of the Mexican Congress; President and Vice-President of the
Camara de la Industria de Transformacion de Nuevo Leon; Vice-President of the
Mexican Confederacion de Camaras Industriales (CONCAMIN); and President of the
Comision de Productos Basicos of CONCAMIN; President of the Camara Nacional de
la Industria Azucarera y Alcoholera. Mr. Santos has also been Chairman of the
Board, CEO and director of Gamesa. Mr. Santos holds a degree in Business
Administration from the Instituto Tecnologico y de Estudios Superiores de
Monterrey.
Lorenzo Zambrano Trevino has been a Series A Director of Axtel since
October 1997. Mr. Zambrano is the Chairman of the Board and CEO of Cemex, S.A.
de C.V. He is also the Chairman of the Boards of Directors of the Instituto
Tecnologico y de Estudios Superiores de Monterrey and the Americas Society. He
is a member of the Executive Committee of Grupo
54
Financiero Banamex Accival, S.A. de C.V. and the Salomon Smith Barney
International Advisory Board. In addition, he is a member of the Board of
Directors of Coca Cola Femsa, S.A. de C.V. and Televisa, S.A. He is also a
member of the Advisory Council to the Stanford Graduate School of Business, the
Museo de Arte Contemporaneo and the US-Mexico Commission for Educational and
Cultural Exchange. Mr. Zambrano holds a B.S. degree in Mechanical Engineering
from the Tecnologico de Monterrey and an M.B.A. from Stanford University.
Alberto Garza Santos has been a Series A Director of Axtel since October
2003. Mr. Garza is the founder and Chairman of the Board of Promotora del
Viento, S.A de C.V., a company dedicated to wind power in Mexico. He is also
founder and Chairman of the Board of Promotora Ambiental, S.A. de C.V. (PASA), a
leading waste management company in Mexico. Mr. Garza has engineered PASA's
growth through multiple acquisitions, local unit start-ups, municipal
concessions and the development of world-class landfills, including Mexico's
first five privately owned landfills. In 2002, he positioned PASA as PEMEX's
waste services provider of choice, winning various large, multiyear contracts.
Mr. Garza is also a member of the Board of Maquinaria Diesel (MADISA),
Desarrollo Inmobiliario Delta and Gemini. He holds a degree in Business
Administration from the Instituto Tecnologico y de Estudios Superiores de
Monterrey and a B.A. degree in Political Science from Southern Methodist
University.
Hector Medina Aguiar has been a Series A Director of Axtel since October
2003. Mr. Medina is the Executive Vice-President of Planning and Finance of
Cemex, S.A. de C.V. and responsible for worldwide strategic planning and
finance. Mr. Medina is a graduate of the Instituto Tecnologico y de Estudios
Superior de Monterrey with a degree in Chemical Engineering. He also holds an
M.S.C. degree in Management from the University of Bradford Management Center in
England and an M.S. degree from the Escuela de Organizacion Industrial in Spain.
Everett J. Santos has been a Series C Director of Axtel since October 2003
and had previously held the position of Series C Director from October 1997 to
December 1998. Mr. Santos is the Chief Executive Officer of the Latin America
Group of Emerging Markets Partnership and principal advisor of the AIG-GE
Capital Latin American Infrastructure Fund. Mr. Santos is also the Co-Founder
and Chairman of the Latin American Venture Capital Association (LAVCA). From
1992 to 1995, Mr. Santos was director of infrastructure investments of the
International Finance Corporation (IFC) of the World Bank Group. While at the
World Bank, he was also a director for Latin America and the Caribbean for the
IFC. Prior to joining the World Bank Group, Mr. Santos was a capital markets
consultant with the US Agency for International Development in Brazil and with
the Venezuelan National Securities Commission, and he also has worked with the
Securities and Exchange Commission.
Bertrand F. Guillot has been a Series C Director of Axtel since October
2003. Mr. Guillot is the director of the Private Equity Latin America Group of
AIG Global Investment Corp. He is also co-founder of WestNord, an investment
bank boutique specializing in debt and equity raising for projects and mergers
and acquisitions. Previously, he was the Director, Media & Telecom Project
Finance Head, Senior Vice President and Relationship Management Head of ANZ
Investment Bank. He was also the vice-president of the Telecom Unit
55
Head within the Project Finance Group of Citibank N.A. He has been directly
involved in private equity and project finance in emerging markets for the past
10 years. Mr. Guillot studied in Paris, London and Madrid. He holds a
Baccalaureat in Economics and an International Finance degree from the European
Business School.
Iain Aitken has been a Series C Director of Axtel since October 2003. Mr.
Aitken is a Senior Advisor at Soros Private Funds Management LLC, focusing
primarily on private equity transactions. Prior to joining Soros in September
2000, Mr. Aitken was engaged in his private consultancy practice, advising
clients on restructuring and real estate matters. From 1991 to 1999, Mr. Aitken
served as a Senior Vice President of ABN AMRO Bank N.V., one of the world's
largest financial institutions, engaged in real estate and corporate debt
restructuring. Previously, he served in a number of corporate banking positions
in New York with the European American Banking Corporation (EABC), an investment
company representing a consortium of European Banks, including ABN. Mr. Aitken
was seconded to EABC having served in London with the International Division of
Midland Bank PLC, another consortium member. Mr. Aitken is currently a director
of Hainan Airlines Co., Limited (China), UniMark Group Inc. (US), Batavia
Investment Fund Limited, Mustcom Limited, Philippine Discovery Investment
Company Ltd. He holds a B.A. degree in Monetary Economics from the University of
Stirling in Scotland.
Lawrence H. Guffey has been a Series C Director of Axtel since October
2003. Mr. Guffey had served as Series A Director from May 2000 through October
2003. Mr. Guffey is also a Senior Managing Director in the Private Equity group
of Blackstone. Mr. Guffey has led Blackstone's efforts in virtually all media
and communications-related investments and has day-to-day responsibility for
management of Blackstone Communications Advisors. Since joining Blackstone in
1991, Mr. Guffey has been involved in the execution of Blackstone's investments
in Axtel, Bresnan Communications, Centennial Communications Corp., Crowley
Wireless (Salmon PCS), CommNet Cellular, CTI Holdings, Encoda Systems (a
LiveWire Media company), iPCS, Iusacell, LiveWire, PaeTec, TWFanch-one,
TWFanch-two, Universo Online and US Radio. Before joining Blackstone, Mr. Guffey
worked in the Acquisitions Group at Trammell Crow Ventures, the principal
investment arm of Trammell Crow Company. He currently serves as a director of
Centennial Communications, Encoda Systems, Orcom and FiberNet. Mr. Guffey holds
a degree from Rice University.
Elias Makris has been a Series N Director of Axtel since October 2003. Mr.
Makris is the Managing Director in the Structured and Customer Finance of the
Americas Group of Nortel Networks. Elias Makris joined Nortel in 1999 and has
held positions of increasing responsibility within the treasury and customer
finance organizations of Nortel. Prior to his current position, he held the
positions of Director, Customer Finance North America and Director, Global
Credit. Previously, Mr. Makris worked for Bank of Montreal, where he held the
position of Director, Structured Finance. He joined Bank of Montreal in 1996
from Export Development Corporation, where he held various finance positions
since 1988. Mr. Makris has led financing and investing activities in Europe,
Asia and North America, in support of telecom, aerospace and other market
segments. Mr. Makris holds an M.B.A. from the University of Western Ontario in
London and a B.A. degree in Economics from Concordia University in Montreal.
56
Gabriel A. Montana has been a Series C Alternate Director of Axtel since
June 2002. Mr. Montana is an Investment Officer with Emerging Markets
Partnership, principal adviser to the AIG-GE Capital Latin American
Infrastructure Fund (Fund). Since joining in 2000, Mr. Montana has worked in the
telecommunications sector, managing Fund's activities and portfolio companies in
fixed and mobile telephony, cable and broadband. Previously, Mr. Montana was a
senior consultant with KPMG's finance practice, where he worked on
profitability, strategic cost management and valuation assignments within
different industries in the United States. He has also worked with Toyota and
Renault in Latin America. Mr. Montana has a B.S. degree in Mechanical
Engineering from Universidad de Los Andes and an M.B.A. from Georgetown
University.
Patricio D'Apice has been a Series C Alternate Director of Axtel since
October 2003. Mr. D'Apice is manager of the Private Equity Latin America Group
of AIG Global Investment Corp. Mr. D'Apice is also an alternate director of one
of the leading Mexican pay TV companies. He has six years of experience in
private equity funds in Latin America, with AIG, HSBC Bank, the leading
Argentine private bank Banco Galicia, and the Argentine media conglomerate La
Nacion. Previously, he had been a Business Officer at the Argentine consulting
and merchant banking firm Orlando J. Ferreres & Asociados for four years. He
specialized in business plan development, restructuring, mergers and
acquisitions and market research for companies like Perez Companc (now
Petrobras), Coca Cola, Scania and YPF (now Repsol YPF). Mr. D'Apice is also
founding partner of Sobregolf S.A., a software and services company with
operations in Argentina and Chile. He was also financial advisor of two
telecommunication projects, for the design and financing of their business
plans. Mr. D'Apice holds a degree in Economics from the Universidad de Buenos
Aires and a Masters degree in Finance from the Universidad del CEMA.
Benjamin Jenkins has been a Series C Alternate Director of Axtel since
October 2003. Mr. Jenkins is a Principal in the Private Equity group of
Blackstone. Since joining Blackstone in 1999, Mr. Jenkins has been involved in
the execution of Blackstone's investment in Axtel and has evaluated numerous
industrial and communications investments. Previously, Mr. Jenkins was an
Associate at Saunders Karp & Megrue. Prior to that, Mr. Jenkins worked in the
Mergers & Acquisitions Department at Morgan Stanley & Co. Mr. Jenkins holds a
B.A. in Economics from Stanford University and an M.B.A. from Harvard Business
School.
Tomas Milmo Zambrano is the father of Tomas Milmo Santos and cousin of
Lorenzo Zambrano. Alberto Santos is the uncle of Tomas Milmo Santos and of
Alberto Garza Santos.
B. Compensation
For the year ended December 31, 2003, the aggregate compensation, including
benefits, we paid to our directors, alternate directors and executive officers
for services in all capacities was approximately $2.28 million.
In 2003, we and our subsidiaries incurred no costs to provide pension,
retirement or similar benefits to our respective officers and directors pursuant
to retirement plans or pension plans.
57
C. Board Practices
See "Item 6A. Directors and Senior Management" above. None of the directors
of Axtel have any type of arrangement with Axtel whereby such director would
receive benefits upon termination of employment.
AUDIT COMMITTEE
We have established an audit committee and a remuneration committee. The
audit committee recommends the appointment of auditors, oversees accounting and
audit functions and other key financial matters of our company. Everett Santos,
Lawrence Guffey, Hector Medina and Alberto Garza are the members of the audit
committee. The remuneration committee recommends compensation for the executive
officers to board of directors. Lorenzo Zambrano, Alberto Garza, Alberto Santos,
Bertrand Guillot, Everett Santos and Lawrence Guffey are the members of the
remuneration committee.
D. Employees
As of December 31, 2003, we had 2,119 employees. All of our employees,
except our executive officers and certain other managers, are members of one of
two labor unions. We believe we have good relationships with our employees and
their respective unions.
E. Share Ownership
Information on the ownership of our Share Ownership is given under "Item 7.
Major Shareholders and Related Party Transactions."
Item 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholders
Mexican law limits foreign ownership of those companies, like ours, owning
certain telecommunications concessions to 49% of the voting stock of such
companies. The following table sets forth each owner of 5% or more of our voting
stock:
NUMBER OF NUMBER OF
SERIES A SERIES C TOTAL
SHARES SHARES PERCENT OF PERCENT
BENEFICIALLY BENEFICIALLY OUTSTANDING OF VOTING
SHAREHOLDERS OWNED OWNED SHARES(1) SHARES
- ------------------------------------ -------------- ------------- ------------- -----------
(MILLIONS OF SHARES) (%)
Telinor Telefonia, S. de R.L. de
C.V.(2)(3)....................... 1,253.2 -- 53.0 58.5
LAIF X sprl (affiliate of AIG-GE
Capital Latin American
Infrastructure Fund L.P.)(4)(6).. -- 336.0 14.3 15.7
58
The Blackstone Group(5)(6).......... -- 298.0 11.7 13.9
Tapazeca Sprl (affiliate of The
Soros Group)(7).................. -- 122.0 5.0 5.7
All directors and executive officers
as a group (five persons)(8)...... 1,253.2 298.0 64.7 72.4
- ----------
(1) Nortel Networks Limited owns 250.8 million "N" shares, representing 9.9% of
our outstanding shares. The holder of the majority of the Series "N" shares
(which is currently Nortel Networks Limited) has the right to elect one
independent Series "N" and up to one alternate director.
(2) "A" shares held by Telinor Telefonia, S. de R.L. de C.V. may be deemed to
be beneficially owned by Tomas Milmo Santos, Alberto Santos de Hoyos, Tomas
Milmo Zambrano and Lorenzo Zambrano Trevino, as each is a director of
Telinor.
(3) Also owns 88.5 million "N" shares. The business address of Telinor
Telefonia, S. de R.L. de C.V. is Ave. Vasconcelos 210 Ote Piso 12. Colonia
Residencial San Agustin, Garza Garcia, N.L. 66280.
(4) Also owns 25.3 million "N" shares. The business address of LAIF X sprl is
13A Avenue de Tervuren 1040 Brussels, Belgium.
(5) Includes 238.0 million "C" shares owned by Blackstone Capital Partners III
Merchant Banking Fund L.P., 43.2 million "C" shares owned by Blackstone
Offshore Capital Partners III L.P. and 16.4 million "C" shares owned by
Blackstone Family Investment Partnership III L.P. The business address of
the Blackstone entities is c/o The Blackstone Group, 345 Park Avenue, New
York, New York 10154.
(6) See Item 4.B. "Business Overview--Legal Proceedings--Shareholdings
Disputes."
(7) Also owns 4.5 million "N" shares. The business address for Tapazeca Sprl is
Avenue Louise 331-333 B-1050, Brussels, Belgium.
(8) Includes shares attributable to Telinor because of the directorships of
Tomas Milmo Santos, Alberto Santos de Hoyos, Tomas Milmo Zambrano and
Lorenzo Zambrano Trevino and includes shares attributable to Blackstone
because of the directorship of Lawrence H. Guffey.
B. Related Party Transactions
SHAREHOLDERS AGREEMENT
On October 6, 1997, we and our initial shareholders Telinor Telefonia, S.
de R.L. de C.V., Bell Canada International (Mexico Telecom) Limited and Worldtel
Mexico Telecom Ltd (the "Initial Shareholders") entered into a shareholders
agreement (the "Shareholders Agreement"). Soon after, Bell Canada International
Inc. also agreed to be bound by such Shareholders Agreement.
This Shareholders Agreement includes provisions related to, among others,
(i) the form of the Bylaws to be agreed upon and formalized among the Initial
Shareholders, (ii) their initial capital contributions, (iii) the designation of
members to our board of directors, (iv) certain restrictions on transfers of
shares, (v) pre-emptive rights, (vi) transfers to permitted assignees, (vii)
tag-along rights and (viii) rights of first offer.
As a consequence of the capital call of February 28, 2003, the Initial
Shareholders and Bell Canada International Inc. were materially and
significantly diluted.
59
On February 28, 2003, the Extraordinary Meeting of Shareholders of Company
resolved that in the event of any inconsistency between the Shareholders
Agreement and our current Bylaws, the Bylaws will prevail.
SECONDMENT AND TECHNICAL SERVICES AGREEMENT
Simultaneously with the execution of the Shareholders Agreement, we entered
into a Secondment Agreement and a Technical Services Agreement with Bell Canada
International Inc., whereby Bell Canada agreed to provide us personnel with
expertise in telecommunications, as well as engineering, operations, and other
services. Such agreements provided for fixed and variable payments to be made by
us to Bell Canada from time to time. Between 1997 and 2002, we paid Bell Canada
US$11.7 million in fees for services rendered.
On May 30, 2003, we entered into a termination agreement with Bell Canada
International Inc. and Bell Canada International (Mexico Telecom) Limited for
the termination of the Secondment Agreement and the Technical Services Agreement
and the granting of mutual releases between the parties with respect to any and
all outstanding obligations under or arising out from the Secondment Agreement,
the Technical and Assistance Agreement, the Shareholders Agreement, and from any
shareholder, creditor or commercial relationship between the parties. Such
termination agreement provides for our payment to Bell Canada of US$13.2 million
as a full and complete satisfaction of any obligation by us to pay any amounts
under the Secondment Agreement and the Technical Services Agreement. All amounts
owed to Bell Canada were paid in full in December 2003.
SUPPLY CONTRACTS AND FINANCING AGREEMENT
During 1998 and 1999, we entered into several supply and services contracts
with Nortel Networks Limited and Nortel Networks de Mexico, S.A. de C.V., for
the provision of equipment and related services for the building of our network.
The equipment provided under such contracts include Fixed Wireless Access,
Transmission, Switch, Internet Services Routing Platform, Last Mile SDH Fiber
Optic Electronics, Last Mile Point-to-Point Microwave, PDMX, and the
installation of Fiber Optic Materials.
In June 1999, we entered into a Finance Agreement with Toronto Dominion
(Texas), Inc. as administrative and collateral agent, and Nortel Networks
Limited as lender, for the principal amount of US$455.0 million, for the
financing of equipment and services provided under the supply contracts. Such
finance agreement was amended and restated on June 18, 2001, with Nortel
Networks Limited, as administrative agent, Toronto Dominion, as collateral
agent, and Nortel Networks Limited, as lender.
On March 20, 2003, we entered into a Restructuring Agreement with Nortel
Networks Limited and Nortel Networks de Mexico, S.A. de C.V. for the
restructuring of the current outstanding liabilities and indebtedness arising
from the Amended and Restated Finance Agreement and the Supply and Services
Contracts. Such Restructuring Agreement provided for (i) our payment to Nortel
Network of US$125.2 million; (ii) our subscription of a promissory note and a
facility agreement in the principal amount of US$24.2 million; (iii) the
termination and settlement of the Supply and Services Contracts and the granting
of mutual releases of all obligations and liabilities under or arising out of
such Supply and Services Contracts; and
60
(iv) the restructuring of the Amended and Restated Finance Agreement and the
granting of mutual releases of all obligations and liabilities under or arising
out of such Finance Agreement.
During 2002, we paid Nortel Networks US$32.4 million for services and
equipment they provided to us. In March 2003, we also restructured our
commercial relationship with Nortel Networks whereby all of the previous supply
agreements and service contracts we had with Nortel Networks were canceled and
we entered into five new agreements, which are briefly described as follows:
o Purchase and License Agreement among us, Nortel Networks Limited and
Nortel Networks de Mexico, S.A. de C.V. regarding the supply of fixed
wireless access equipment and certain services related thereto. On
December 23, 2003, Airspan Communications Limited ("Airspan") acquired
Nortel's fixed wireless access business, assuming Nortel's rights and
obligations under this agreement. We are Airspan's primary customer
for their fixed wireless access technology. We have a contingent
license from Airspan to produce such technology ourselves or through a
third party (see below).
o Technical Assistance Support Services Agreement for fixed wireless
access equipment, between us and Nortel Networks UK Limited pursuant
to which the latter will provide technical support services for our
fixed wireless access platform. On December 23, 2003, Airspan acquired
Nortel's fixed wireless access business, assuming Nortel's rights and
obligations under this agreement.
o Purchase and License Agreement for non-fixed wireless access
equipment, among us, Nortel Networks Limited and Nortel Networks de
Mexico, S.A. de C.V. regarding the provision of non-fixed wireless
access equipment, such as switches and electronic equipment and
certain services related thereto.
o Technical Assistance Support Services Agreement for non-fixed wireless
access equipment, between us and Nortel Networks de Mexico, S.A. de
C.V. pursuant to which Nortel Networks will provide technical
assistance support services for our switch and SDH platform and other
non-fixed wireless access equipment supplied by Nortel Networks.
o Fixed Wireless Access Technology License Agreement entered into
between us and Nortel Networks Limited pursuant to which Nortel
Networks granted to us a contingent license to produce and manufacture
the fixed wireless access products ourselves or contract a third party
to produce such fixed wireless access products. On December 23, 2003,
Airspan acquired Nortel's fixed wireless access business, assuming
Nortel's obligations under this agreement.
OTHER TRANSACTIONS
o In March 1999, we and GE Capital Fleet Services de Mexico, S. de R.L.
de C.V. (a subsidiary of one of the investors in one of our
shareholders) entered into a lease agreement
61
for the lease of our fleet vehicles. During the year ended December
31, 2003, we paid GE Capital US$1.0 million in rental payments under
these leases.
o In March and May 2000, we and Gemini, S.A. de C.V. (a company
controlled by one of the investors in one of our shareholders) entered
into lease agreements for the lease of land and property on which our
corporate offices and a switch are located. During the year ended
December 31, 2003, we paid Gemini US$1.9 million in rental payments
under these leases.
o In August 2002, we and Neoris de Mexico, S.A. de C.V. (a consulting
firm indirectly controlled by the indirect shareholders) entered into
a professional services agreement for the provision of technical
assistance to us with respect to a customer care platform. During the
year ended December 31, 2003, we paid Neoris approximately US$0.1
million in fees for services.
o In April 2002, we and Instalaciones y Desconexiones Especializadas,
S.A. de C.V. (a company controlled by the son of Alberto Santos de
Hoyos, one of the investors in one of our shareholders) entered into a
services agreement for the provision of installation services with
regard to customer premise equipment. During the year ended December
31, 2003, we paid them approximately US$0.4 million in fees for
services.
o The Blackstone Group advised us in connection with the Restructuring
Agreement dated as of March 20, 2003 that we entered into with Nortel
Networks and Toronto Dominion. We paid the Blackstone Group US$5.6
million in fees under this agreement.
C. Interests of Experts and Counsel
Not applicable.
Item 8. .FINANCIAL INFORMATION
A. Consolidated Statements and Other Financial Information
See "Item 18. Financial Statements."
B. Significant Changes
Not applicable
Item 9. .THE OFFER AND LISTING
A. Offer and Listing Details
Not applicable.
B. Plan of Distribution
Not applicable.
62
C. Markets
Not applicable.
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
Item 10. ADDITIONAL INFORMATION
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
BYLAWS
Below is a brief summary of certain significant provisions of our bylaws
and applicable Mexican law. This description does not purport to be complete and
is qualified in its entirety by reference to our bylaws and the provisions of
applicable Mexican law. For a description of the provisions of our bylaws
relating to the board of directors, executive committee and statutory auditors,
See "Item 6. Directors, Senior Management and Employees."
ORGANIZATION AND REGISTER
We are a sociedad anonima de capital variable organized under the laws of
Mexico. We were incorporated in 1994 under the name Telefonia Inalambrica del
Norte, S.A. de C.V., as evidenced by the public deed number 3680 dated July 22,
1994, granted before Rodolfo Vela de Leon, Notary Public number 80 of Monterrey,
N.L., and registered in the Public Registry of Commerce of Monterrey, N.L. on
August 5, 1994 under the mercantile number 1566, page 273, volume 417, third
book, second auxiliary of the Registry. Thereafter, our corporate name changed
to Axtel, S.A. de C.V., as evidenced by the public deed number 1719 dated March
26, 1999, granted before Jose Luis Farias Montemayor, Notary Public number 120
of Monterrey, N.L., and registered in the Public Registry of Commerce of
Monterrey, N.L., on March 29, 1999 under the mercantile number 2182, volume
209-44, fourth book, third auxiliary of the Registry.
According to Articles 2 and 3 of our bylaws, our corporate domicile is
located in San Pedro Garza Garcia, N.L., and our corporate purpose is to
install, operate and exploit a public telecommunications network for the
provision of telephony, internet and other value added telecommunication
services to the public, using primarily fixed wireless technology, and/or use,
utilize and exploit frequency bands of the radioelectric spectrum.
BOARD OF DIRECTORS
Under our bylaws, our Board of Directors may be formed by up to eleven (11)
directors. Subject to certain provisions of our corporate bylaws, the Series A
shareholders have the right to appoint up to six directors, the Series C
shareholders have the right to appoint up to four directors and the holders of
the majority of Series N shares have the right to appoint one independent Series
N director. None of our shares has cumulative voting rights.
CAPITAL STOCK
Axtel currently has two series of outstanding voting shares: Series A and
Series C shares. Such voting shares confer on their holders one vote per share
at any extraordinary, ordinary or special meeting of shareholders and equal
rights and obligations. Additionally, Axtel has one series of outstanding
non-voting shares: Series N shares. All of our outstanding shares are fully paid
and non-assessable.
SHAREHOLDER MEETINGS
Meetings of the shareholders shall be either ordinary, extraordinary or
special. Extraordinary meetings are those called to consider certain matters
specified in Article 182 of the Mexican General Corporations Law and our bylaws.
Such matters include, among others: dissolution; liquidation; amendments to our
bylaws; increases or reductions of the fixed and/or variable portion of our
capital; change of our corporate purpose; transforming our corporate nature or
status; the issuance of preferred, limited or non-voting stock; amortization of
our shares or the issuance of participating securities; the issuance of bonds or
debentures or other debt securities; the listing of any of our shares on a stock
or securities exchange. Ordinary meetings are those called to resolved any other
matters not specifically reserved to an extraordinary meeting or special
meeting. An ordinary meeting must be held at least once each year within the
first four months following the end of the preceding fiscal year to (i) consider
the approval of the financial statements of Axtel for the preceding fiscal year,
(ii) to appoint, remove, ratify or elect directors and statutory auditors and to
determine their compensation and (iii) to determine the allocation of profits
and losses of the preceding year. Special meetings are those called to resolve
any matters relating to any specific series of voting shares voting as a class.
According to our bylaws, shareholders meetings may be called by (i) the
board of directors, (ii) any shareholder owning at 5% of the voting shares,
(iii) any director, or (iv) any statutory auditor. Notice of each meeting shall
be delivered in writing to all shareholders not less than 30 days in advance. In
extraordinary or urgent circumstances such notice may be delivered within a
shorter period as determined by the Chairman of the Board or the Corporate
Secretary.
PREEMPTIVE RIGHTS
According to our bylaws, the fixed and/or variable portion of our capital
stock may be increased only by a resolution adopted by an extraordinary meeting
of shareholders. In the event of a capital increase, a holder of existing shares
of a given class has a preemptive right to subscribe to shares of the same class
sufficient to maintain the holder's existing proportionate holding of shares of
that class. Our bylaws provide that for purposes of preemptive rights, the
Series A and Series C shares shall be considered the same class, and the "Series
N" shares shall be considered an independent class.
Under our bylaws, every offer to subscribe for additional shares shall be
made in writing to each shareholder and shall give each shareholder 30 days to
accept the offer. Under Mexican law, preemptive rights must be exercised during
a term fixed by the shareholders at the meeting declaring the capital increase,
which term must last at least 15 business days following (i) the announcement of
the resolution of the shareholders meeting in the Official State Gazette and any
other major newspaper in our corporate domicile, and the simultaneous
transmission of such notice to each foreign resident shareholder or (ii) on the
date of such meeting if all shareholders attended, in person or by proxy. Shares
issued or to be issued pursuant to any capital increase with respect to which
preemptive rights have not been exercised shall be subscribed for as provided
for in the resolution by the shareholders meeting which authorized such
increase.
LIMITATIONS ON SHARE OWNERSHIP
Ownership by non-Mexican nationals of shares of Mexican enterprises is
regulated by the 1993 Ley de Inversion Extranjera (the Foreign Investment Law)
and its regulations. The Foreign Investment Law and its regulations require that
Mexican shareholders retain the power to determine the administrative control
and the management of corporations in industries in which special restrictions
on foreign holdings are applicable. Foreign investment in our shares is limited
to 49% of the total voting stock. Our bylaws provide that the Series A shares
shall always represent at least 51% of the total outstanding voting shares, and
may only be subscribed for by Mexican investors. The Series C shares may
represent up to the remaining 49% of the outstanding voting shares and may be
freely subscribed for by Mexican or non-Mexican investors.
OTHER PROVISIONS
Forfeiture of shares. As required by Mexican law, the bylaws provide that
non-Mexican holders of our shares (i) are considered Mexican with respect to
such shares that they acquire or hold and (ii) may not invoke the protection of
their own governments in respect of the investment represented by those shares.
Failure to comply with the bylaws may result in a penalty of forfeiture of a
shareholder's capital interests in favor of the Mexican state. If a shareholder
should invoke governmental protection in violation of this provision, its shares
could be forfeited to the Mexican state.
Duration. Article 4 of our bylaws provides that the term of our company is
unlimited.
Conflict of interest. Any shareholder or director that has a conflict of
interest with respect to a transaction of our company is required to abstain
from voting with respect to such transaction at the relevant shareholders or
board of directors meeting. A shareholder that votes on a business transaction
in which its interests conflict with those of our company may be liable for
damages, but only if the transaction would not have been approved without its
vote.
Liquidation. Upon dissolution of Axtel, one or more liquidators must be
appointed by an extraordinary general meeting of the shareholders to wind up its
affairs. All fully paid and outstanding shares of capital stock will be entitled
to participate equally in any distribution upon liquidation.
Actions Against Directors. Action for civil liabilities against directors
may be initiated by resolution of an ordinary shareholders meeting. In the event
the ordinary shareholders meeting decides to bring such action, the directors
against whom such action is to be brought will immediately cease to be
directors. Additionally, shareholders representing not less than 33% of the
outstanding shares may directly exercise such action against the directors,
provided that (i) such shareholders shall not have voted in favor of releasing
such director at the relevant shareholders meeting, and (ii) the claim covers
all the damages alleged to have been caused to Axtel and not only the portion
corresponding to such shareholders. Any recovery of damages with respect to such
action will be for the benefit of Axtel.
Limited Liability. Shareholders' liability for Axtel's losses are limited
to their shareholdings in our company.
C. Material Contracts
Not applicable.
D. Exchange Controls
There are currently no exchange controls in Mexico.
E. Taxation
Not applicable.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
63
H. Documents on Display
WHERE YOU MAY FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a Registration
Statement on Form F-4 (Registration Statement No. 333-114196) under the
Securities Act of 1933, as amended. As of the date of this Form 20-F, this
Registration Statement has not yet been declared effective by the Securities and
Exchange Commission.
This Registration Statement as well as other reports and information, when
so filed, may be inspected and copied from the Public Reference Section of the
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C.
20549 at prescribed rates. Also, any filings we make electronically will be
available to the public over the Internet at the and Exchange Commission's web
site at http://www.sec.gov .
I. Subsidiary Information
Not applicable.
Item 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 5. "Operating and Financial Review and Prospectus"
Item 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
PART II
Item 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Not applicable.
Item 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE
OF PROCEEDS
Not applicable.
Item 15. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain a set of disclosure controls and procedures designed to ensure
that information required to be disclosed by the Company in report that it files
or submits under the U.S. Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms. Within the 90-day period
prior to the filing of this report, an evaluation was carried
64
out under the supervision and with the participation of the Company's
management, including the Chief Executive Officer and Chief Financial Officer,
of the effectiveness of our disclosure controls and procedures. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures are effective.
Subsequent to the date of their evaluation, there have been no significant
changes in our internal controls or in other factors that could significantly
affect these controls.
Item 16A AUDIT COMMITTEE FINANCIAL EXPERT
Our board of directors has determined that Hector Medina Aguiar is an audit
committee financial expert as defined under appropriate Securities and Exchange
Commission Guidelines. Our board of directors is in the process of determining
whether Hector Medina Aguiar is "independent" as that term is defined under the
rules of a national securities exchange or national securities association. See
"Item 6A. Directors and Senior Management."
Item 16B CODE OF ETHICS
We have established a code of ethics that applies to our Chief Executive
Officer, Chief Financial Officer, principal accounting officer and other
corporate and divisional employees. However, our board of directors has not, as
of yet made a determination whether modification of our code of ethics will be
required to comply with Securities and Exchange Commission requirements.
Item 16C PRINCIPAL ACCOUNTANT FEES AND SERVICES
KPMG Cardenas Dosal S.C. ("KPMG") served as our auditors for the years
ended December 31, 2003 and 2002. The following table sets forth the fees paid
to KPMG for the financial years ended December 31, 2002 and 2003.
YEAR ENDED DECEMBER 31
2003 2002
(in millions of pesos)
Audit Fees(1) Ps. 2.6 Ps. 0.6
Tax Fees(2) - 0.2
Total Fees Ps. 2.6 0.8
- ----------
(1) Audit fees include fees associated with the annual audit of our
consolidated financial statements. Audit fees also include fees associated
with various audit requirements relating to the offering of the 2013 Senior
Notes.
(2) Tax fees include fees principally incurred for assistance with tax planning
and compliance matters.
We have introduced procedures for the review and pre-approval of any
services performed by KPMG. The procedures require that all proposed engagements
of KPMG for audit and permitted non-audit services are submitted to the audit
committee for approval prior to the beginning of any such services.
We did not have an audit committee prior to January 2004.
65
Item 16D EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable.
Item 16E PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
Not applicable.
PART III
Item 17. FINANCIAL STATEMENTS
The Company has responded to Item 18 in lieu of this item.
Item 18. FINANCIAL STATEMENTS
See page F-1 through F-41.
66
Item 19. EXHIBITS
Exhibit Number Exhibit
1.1 Corporate By-laws (Estatutos Sociales) of Axtel, S.A. de C.V.
("Axtel"), together with an English translation (incorporated herein
by reference to Exhibit 3.1 of our Registration Statement on Form F-4,
File No. 333-114196)
2.1 Indenture, dated as of December 16, 2003, among Axtel, the Subsidiary
Guarantors named therein and The Bank of New York, as Trustee,
governing Axtel's $175,000,000 aggregate principal amount of 11%
Senior Notes due 2013 (incorporated herein by reference to Exhibit 4.1
of our Registration Statement on Form F-4, File No. 333-114196).
2.2 Specimen Global Note representing Axtel's 11% Senior Notes due 2013
(incorporated herein by reference to Exhibit 4.2 of our Registration
Statement on Form F-4, File No. 333-114196).
2.3 Form of Specimen Global Note representing the exchange notes
(incorporated herein by reference to Exhibit 4.3 of our Registration
Statement on Form F-4, File No. 333-114196).
2.4 Registration Rights Agreement, dated as of December 16, 2003 among
Axtel, the Subsidiary Guarantors named therein and Credit Suisse First
Boston LLC (incorporated herein by reference to Exhibit 4.4 of our
Registration Statement on Form F-4, File No. 333-114196).
4.1 Unanimous Shareholders Agreement, dated as of October 6, 1997, among
Bell Canada International (Mexico Telecom) Limited, Telinor Telefonia,
S.A. de C.V. ("Telinor"), Worldtel Mexico Telecom Ltd. and Axtel
(formerly known as Telefonia Inalambrica Del Norte, S.A. de C.V.)
(incorporated herein by reference to Exhibit 9.1 of our Registration
Statement on Form F-4, File No. 333-114196).
4.2 Joinder Agreement, dated as of March 20, 2003, among Axtel and Nortel
Networks Limited (incorporated herein by reference to Exhibit 9.2 of
our Registration Statement on Form F-4, File No. 333-114196).
4.3 Concession title granted by the Mexican Ministry of Communications and
Transportation (the "Ministry") in favor of Axtel (formerly known as
Telefonia Inalambrica Del Norte, S.A. de C.V.), dated June 17, 1996,
together with an English translation of such concession title
(incorporated herein by reference to Exhibit 10.1 of our Registration
Statement on Form F-4, File No. 333-114196).
4.4 Amendment, dated December 19, 2002, of concession title granted by the
Ministry in favor of Axtel, dated June 17, 1996, together with an
English translation of such amendment (incorporated
67
herein by reference to Exhibit 10.2 of our Registration Statement on
Form F-4, File No. 333-114196).
4.5 Concession title granted by the Ministry in favor of Axtel, dated
October 7, 1998, together with an English translation of such
concession title (incorporated herein by reference to Exhibit 10.3 of
our Registration Statement on Form F-4, File No. 333-114196).
4.6 Concession title granted by the Ministry in favor of Axtel, dated
April 1, 1998, together with an English translation of such concession
title (incorporated herein by reference to Exhibit 10.4 of our
Registration Statement on Form F-4, File No. 333-114196).
4.7 Concession title granted by the Ministry in favor of Axtel, dated June
4, 1998, together with an English translation of such concession title
(incorporated herein by reference to Exhibit 10.5 of our Registration
Statement on Form F-4, File No. 333-114196).
4.8 Engagement Letter, dated as of May 15, 2002, by and among Axtel and
The Blackstone Group L.P. (incorporated herein by reference to Exhibit
10.6 of our Registration Statement on Form F-4, File No. 333-114196).
4.9 Restructuring Agreement, dated as of March 20, 2003 by and among
Axtel, Nortel Networks Limited, Nortel Networks de Mexico, S.A. de
C.V. and Toronto Dominion (Texas), Inc. (incorporated herein by
reference to Exhibit 10.7 of our Registration Statement on Form F-4,
File No. 333-114196).
4.10 Assignment and Assumption Agreement, dated as of December 23, 2003,
among Nortel Networks Limited, Nortel Networks de Mexico, S.A. de
C.V., Nortel Networks UK Limited, Airspan Communications Limited and
Axtel (incorporated herein by reference to Exhibit 10.8 of our
Registration Statement on Form F-4, File No. 333-114196).
4.11 Master Agreement for the Provision of Local Interconnection Services,
dated as of February 25, 1999, entered into by and between Telefonos
de Mexico, S.A. de C.V., Telefonia Inalambrica Del Norte, S.A. de C.V.
(predecessor company to Axtel, S.A. de C.V.) (incorporated herein by
reference to Exhibit 10.9 of our Registration Statement on Form F-4,
File No. 333-114196).
7.1 Statement regarding computation of ratio of earnings to fixed charges
(according to Mexican GAAP) (incorporated herein by reference to
Exhibit 12.1 of our Registration Statement on Form F-4, File No.
333-114196).
7.2 Statement regarding computation of ratio of earnings to fixed charges
(according to U.S. GAAP) (incorporated herein by reference to Exhibit
12.2 of our Registration Statement on Form F-4, File No. 333-114196).
68
8.1 List of Subsidiaries of Axtel (incorporated herein by reference to
Exhibit 21.1 of our Registration Statement on Form F-4, File No.
333-114196).
12.1 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
12.2 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
69
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Audited Consolidated Financial Statements
Report of Independent Auditors.............................................. F-1
Consolidated Balance Sheet as of December 31, 2003 and 2002 ................ F-2
Consolidated Statement of Operations for the fiscal years
ended December 31, 2003, 2002 and 2001.................................... F-3
Consolidated Statement of Changes in Financial Position for the
fiscal years ended December 31, 2003, 2002, 2001 and 2000................. F-4
Consolidated Statement of Changes in Stockholders' Equity for
the fiscal years ended December 31, 2003, 2002, 2001 and 2000............. F-5
Notes to the Audited Consolidated Financial Statements ..................... F-6
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 2003
(With comparative figures for 2002 and 2001)
(With Independent Auditors' Report Thereon)
(Translation from Spanish Language Original)
Independent Auditors' Report
(Translation from Spanish Language Original)
The Board of Directors and Stockholders
Axtel, S.A. de C.V.:
We have examined the consolidated balance sheets of Axtel, S.A. de C.V. and
subsidiaries as of December 31, 2003 and 2002, and the related consolidated
statements of operations, changes in stockholders' equity, and changes in
financial position for each of the years in the three-year period ended December
31, 2003. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America and Mexico. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Axtel,
S.A. de C.V. and its subsidiaries as of December 31, 2003 and 2002, and the
consolidated results of their operations, the changes in their stockholders'
equity and the changes in their financial position for each of the years in the
three-year period ended December 31, 2003, in conformity with accounting
principles generally accepted in Mexico.
Accounting principles generally accepted in Mexico vary in certain significant
respects from accounting principles generally accepted in the United States of
America. The application of accounting principles in the United States of
America would have affected the results of operations for each of the years in
the three-year period ended December 31, 2003, and the stockholders' equity as
of December 31, 2003 and 2002 to the extent summarized in note 24 to the
consolidated financial statements.
KPMG Cardenas Dosal, S.C.
Rafael Gomez Eng
Monterrey, N,L., Mexico
February 20, 2004
F-1
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Consolidated Balance Sheets
(Thousand pesos of constant purchasing power as of December 31, 2003)
December 31
-----------------------------------
Assets 2003 2002
----------------- ----------------
Current assets:
Cash and cash equivalents (including $4,497 and $7,491 of restricted
cash as of December 31, 2003 and 2002) $ 1,012,974 326,989
Accounts receivable (note 5) 421,843 348,641
Refundable taxes and other accounts receivable 19,992 14,440
Prepaid expenses (note 8) 183,886 19,004
Inventories (note 9) 21,552 21,537
----------------- ----------------
Total current assets 1,660,247 730,611
Property, systems and equipment, net (notes 10 and 14) 5,192,361 5,504,798
Telephone concession rights, net of accumulated amortization of $196,866
and $148,481 in 2003 and 2002, respectively 715,446 763,831
Pre-operating expenses, net (note 11) 200,128 235,514
Deferred income taxes (note 16) 251,986 736,143
Other assets, net (note 12) 109,250 113,579
----------------- ----------------
Total assets $ 8,129,418 8,084,476
================= ================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 310,192 364,253
Accrued interest 66,982 277,313
Notes payable (note 13) 24,000 51,805
Current maturities of long-term debt (note 14) 54,408 179,347
Taxes payable 69,250 76,162
Bell Canada International, Inc. (note 7) - 26,810
Other accounts payable (note 17) 194,317 31,001
----------------- ----------------
Total current liabilities 719,149 1,006,691
Long-term debt, excluding current maturities (note 14) 2,023,987 5,027,865
Other long-term accounts payable (note 17) 2,172 211,485
Seniority premiums (note 15) 2,000 1,332
----------------- ----------------
Total liabilities 2,747,308 6,247,373
----------------- ----------------
Stockholders' equity (note 18):
Common stock 6,738,148 4,074,389
Additional paid-in capital 133,323 148,138
Deficit (1,601,722) (2,497,785)
Cumulative deferred income tax effect 112,361 112,361
----------------- ----------------
Total stockholders' equity 5,382,110 1,837,103
Commitments and contingencies (note 22)
----------------- ----------------
Total liabilities and stockholders' equity $ 8,129,418 8,084,476
================= ================
The accompanying notes are an integral part of the consolidated financial statements.
F-2
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Consolidated Statements of Operations
(Thousand pesos of constant purchasing power as of December 31, 2003)
Years ended December 31,
-----------------------------------------------------
2003 2002 2001
-----------------------------------------------------
Rental, installation, service and other revenues 2,919,515 2,452,412 2,242,859
(note 19) $
---------------- ----------------- ----------------
Operating costs and expenses:
Cost of sales and services (808,427) (612,211) (521,315)
Selling and administrative expenses (note 7) (1,138,106) (1,262,446) (1,642,629)
Depreciation and amortization (860,574) (810,544) (644,719)
---------------- ----------------- ----------------
(2,807,107) (2,685,201) (2,808,663)
---------------- ----------------- ----------------
Operating income (loss) 112,408 (232,789) (565,804)
---------------- ----------------- ----------------
Comprehensive financing result:
Interest expense (218,305) (432,165) (411,782)
Interest income 19,358 10,176 9,953
Foreign exchange (loss) gain, net (319,443) (618,226) 99,643
Monetary position gain 92,809 280,515 216,934
---------------- ----------------- ----------------
Comprehensive financing result, net (425,581) (759,700) (85,252)
---------------- ----------------- ----------------
Other income (expenses), net (notes 14 and 21) 1,714,456 (27,590) (30,908)
---------------- ----------------- ----------------
Special item (note 20) (10,417) (32,421) (63,027)
---------------- ----------------- ----------------
---------------- ----------------- ----------------
Income (loss) before income taxes, tax on
asset and employee statutory profit sharing 1,390,866 (1,052,500) (744,991)
---------------- ----------------- ----------------
Deferred income tax (note 16) (493,451) 241,717 132,296
Deferred employees statutory profit sharing (note 16) - - 27,979
---------------- ----------------- ----------------
Total income tax (expense) benefit, tax on asset and
employee's statutory profit sharing (493,451) 241,717 160,275
---------------- ----------------- ----------------
Net income (loss) $ 897,415 (810,783) (584,716)
================ ================= ================
The accompanying notes are an integral part of the consolidated financial statements.
F-3
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Consolidated Statements of Changes in Financial
Position (Thousand pesos of constant purchasing power as of December 31, 2003)
Years ended December 31,
--------------------------------------------------------
2003 2002 2001
--------------------------------------------------------
Operating activities:
Net income (loss) $ 897,415 (810,783) (584,716)
Add charges (deduct credits) to operations not requiring
(providing) resources:
Depreciation 772,561 723,777 538,978
Amortization 88,013 86,767 105,741
Accrual for seniority premiums 681 231 790
Deferred income tax and employee statutory
profit sharing 493,451 (241,717) (160,275)
Gain on debt restructuring (1,858,462) - -
----------------- ----------------- ------------------
Resources provided by (used in) operations 393,659 (241,725) (99,482)
Net (investment in) financing from operations (233,996) 230,179 (204,144)
----------------- ----------------- ------------------
Resources provided by (used in) operating activities 159,663 (11,546) (303,626)
----------------- ----------------- ------------------
Financing activities:
Increase in common stock 2,663,759 51,941 1,019,039
Additional paid-in capital (2,043) (31,655)
(14,815)
(Payments) proceeds from loans, net (1,508,491) 630,558 741,680
Deferred financing costs (18,452) 27,020 9,707
Other long-term accounts payable (38,978) 63,837 147,648
----------------- ----------------- ------------------
Resources (used in) provided by financing activities 1,083,023 771,313 1,886,419
----------------- ----------------- -----------------
Investing activities:
Acquisition and construction of property, systems
and equipment, net (460,124) (565,367) (1,582,754)
Pre-operating expenses - - (2,600)
Other assets (96,577) (1,417) (9,784)
----------------- ----------------- -----------------
Resources used in investing activities (556,701) (566,784) (1,595,138)
----------------- ----------------- -----------------
Increase (decrease) in cash and cash equivalents 685,985 192,983 (12,345)
Cash and cash equivalents at beginning of year 326,989 134,006 146,351
----------------- ----------------- -----------------
Cash and cash equivalents at end of year $ 1,012,974 326,989 134,006
================= ================= =================
The accompanying notes are an integral part of the consolidated financial statements.
F-4
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders'
Equity (Thousand pesos of constant purchasing power as of December 31, 2003)
Additional Cumulative Total
Common paid-in deferred income stockholders'
stock capital Deficit tax effect equity
-------------- ------------ ----------- ---------------- ------------
Balances as of December 31, 2000 $ 3,003,409 181,836 (1,102,286) 112,361 2,195,320
Common stock contribution (note 18a) 1,019,039 (31,655) - - 987,384
Comprehensive loss - - (584,716) - (584,716)
-------------- ------------ ----------- ---------------- ------------
Balances as of December 31, 2001 4,022,448 150,181 (1,687,002) 112,361 2,597,988
Common stock contribution (note 18a) 51,941 (2,043) - - 49,898
Comprehensive loss - - (810,783) - (810,783)
-------------- ------------ ----------- ---------------- ------------
Balances as of December 31, 2002 4,074,389 148,138 (2,497,785) 112,361 1,837,103
Common stock contribution (note 18a) 2,663,759 (14,815) - - 2,648,944
Cumulative effect of vacation accrual (note 3a) - - (1,352) - (1,352)
Comprehensive income - - 897,415 - 897,415
-------------- ------------ ----------- ---------------- ------------
Balances as of December 31, 2003 $ 6,738,148 133,323 (1,601,722) 112,361 5,382,110
============== ============ =========== ================ ============
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2003 and 2002
(Thousand pesos of constant purchasing power as of December 31, 2003)
(1) Organization and description of business
Axtel, S.A. de C.V. and subsidiaries (the Company or AXTEL) is a Mexican
corporation engaged in operating and/or exploiting a public
telecommunication network to provide voice, sound, data, text, and image
conducting services, and local, national, and international long-distance
calls. To provide these services and carry out the Company's activity, a
concession is required (see note 22 d). In June 1996, the Company obtained
a concession from the Mexican Federal Government to install, operate and
exploit public telecommunication networks for an initial period of thirty
years.
The Company's capital structure has Mexican majority share ownership, with
58.52% of shares with voting rights owned by Telinor Telefonia, S. de R.L.
de C.V. The remaining 41.48% is distributed among other entities.
AXTEL offers different access technologies, including fixed wireless
access, point-to-point, point-to-multipoint, a fiber optic radio links and
copper technology, depending on the communication needs of the clients.
The Company has been granted the following licenses over the spectrum of
frequencies necessary to provide the services:
o 60MHz for Point-to-Multi-Point in the 10.5GHz band to cover each one of the
nine regions of the Mexican territory. The acquisition of these twenty-year
concessions, with an extension option, represented an investment of
$136,814 for the Company.
o 112MHz for Point-to-Point in the 15GHz band and a 100MHz in the 23GHz band
with countrywide coverage. The acquisition of these twenty-year
concessions, with an extension option, represented an investment of $68,998
for the Company.
o 50MHz in the 3.4GHz. The licenses obtained allow coverage in the nine
regions of the country, and the investment was $706,500 for a period of
twenty years with an extension option.
F-6
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2003)
The Company has commercial services in Monterrey, Mexico City, Guadalajara,
Puebla, Toluca and Leon.
(2) Summary of significant accounting policies
The accounting policies and practices followed by the Company in the
preparation of the consolidated financial statements are described below:
(a) Financial statement presentation
The accompanying consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in Mexico
(Mexican GAAP), which include the recognition of the effects of
inflation on the financial information, and are expressed in Mexican
pesos of constant purchasing power as of December 31, 2003 based on
the National Consumer Price Index (NCPI) published by Banco de Mexico.
The following national consumer price indexes (NCPI) were used to
recognize the effects of inflation:
Inflation
NCPI %
-------------- --------------
December 2003 390.299 3.99
December 2002 375.324 5.70
December 2001 355.084 5.00
December 2000 338.175 9.08
For purposes of disclosure in the notes to the financial statements,
references to pesos or "$", are to Mexican pesos; likewise, references
to dollars, are to dollars of the United States of America.
F-7
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2003)
(b) Principles of consolidation
The consolidated financial statements include the assets, liabilities,
equity and results of operations of the subsidiaries listed below. The
balances and transactions between companies have been eliminated in
the preparation of the consolidated financial statements.
% ownership
------------------
Instalaciones y Contrataciones, S.A. de C.V. 99.998%
Impulsora e Inmobiliaria Regional, S.A. de C.V. 99.998%
Servicios Axtel, S.A. de C.V. 99.998%
(c) Cash equivalents
Cash equivalents are expressed at the lower of acquisition cost plus
accrued interest as of the most recent balance sheet date or net
estimated realizable value. Interest and foreign currency exchange
fluctuation are included in the statements of operations as part of
the comprehensive financing result. Cash equivalents includes $4,497
and $7,491 of restricted cash for the payment of interest.
(d) Inventories
Inventories are carried at the lower of restated cost and net
realizable value. The restated cost is determined by application of
the NCPI factor to current costs.
(e) Property, systems and equipment
Property, systems and equipment are recorded at acquisition cost and
restated by NCPI factors.
Comprehensive financing results incurred during construction or
installation periods is capitalized as part of the cost of the assets.
Depreciation of property, systems and equipment is calculated using
the straight-line method, based on useful lives estimated by Company
management. Useful lives are described in note 10.
Leasehold improvements are amortized over the shorter of the useful
life of the improvement and the term of the lease.
Maintenance and minor-repair expenses are expensed as incurred.
F-8
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2003)
(f) Telephone concession rights
Telephone concession rights are restated by NCPI factors and amortized
under the straight-line method over a period of 20 years (the initial
term of the concession).
(g) Pre-operating expenses
Pre-operating expenses include administrative services, technological
advice and comprehensive financing results incurred through June 1999
and the expenses incurred during 2000 in opening offices in other
cities throughout the country. The Company started providing business
services beginning in 2001. These expenses were capitalized, and
restated by NCPI factors and are amortized under the straight-line
method over a period of 10 years (see note 11).
(h) Other assets
Other assets mainly include deferred financing costs, guarantee
deposits, and notes issuance costs (see notes 12 and 14).
(i) Seniority premiums
The accumulated seniority premium benefits to which workers are
entitled by law are recognized in the results of each period at the
current value of the obligation, based on actuarial calculations
prepared by independent experts.
Other benefits to which employees may be entitled, principally
severance benefits and vacations, are recognized as an expense in the
year in which they are paid.
(j) Financial instruments
To reduce the risks resulting from foreign exchange rate fluctuations
of the peso with respect to the dollar, the Company uses selected
exchange rate option contracts that meet the characteristics of
derivative financial instruments. The fluctuations in the exchange
rates established in the market and those established in such
contracts are recognized in the comprehensive financing result (CFR).
F-9
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2003)
(k) Income tax (IT) tax on assets (TA) and employee's statutory profit
sharing (ESPS)
IT is accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Deferred ESPS is recognized for timing differences arising from the
reconciliation of book income to income for profit sharing purposes
with respect to which it may reasonably be estimated that a future
liability or benefit will arise and there is no indication that the
liabilities or benefits will not materialize.
(l) Inflation adjustment of common stock, other contributions and deficit
This adjustment is determined by multiplying stockholder contributions
and deficit by NCPI factors, which measure accumulated inflation from
the dates contributions were made and losses arising through the most
recent year end. The resulting amounts represent the constant value of
stockholders' equity.
(m) Comprehensive loss
The comprehensive loss represents the net income or loss for the year
plus the effect of those items reflected directly in stockholders'
equity, other than capital contributions, reductions and
distributions.
(n) Cumulative deferred income tax effect
The Company adopted Bulletin D-4, "Accounting for income tax, tax on
assets and employee statutory profit sharing" effective January 1,
2000, which required the adoption of the asset and liability method
for determining deferred income taxes. The cumulative effect
represents the cumulative previously unrecognized deferred taxes as of
the date of adoption.
(o) Comprehensive financing result (CFR)
The CFR includes interest, currency exchange differences and the
monetary effect, less the amounts capitalized, as part of fixed
assets.
F-10
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2003)
Foreign currency transactions are recorded at the rate of exchange
prevailing on the date of execution or settlement. Foreign currency
assets and liabilities are translated at the exchange rate in force at
the balance sheet date. Exchange differences arising from assets and
liabilities denominated in foreign currencies are recognized in the
results of operations.
Monetary position gains and losses are determined by multiplying the
difference between monetary assets and liabilities at the beginning of
each month, including the deferred taxes, by inflation factors through
year-end. The aggregate of these results represents the monetary gain
or loss for the year arising from inflation, which is recognized in
the CFR.
(p) Revenue recognition
The Company's revenues are recognized when earned, as follows:
o Telephone service - Based on monthly service fees, measured usage
charges based on the number of calls made and other service
charges to customers.
o Activation - At the time the equipment is installed
o Equipment - At the time of sale
(q) Business and risk concentration
The Company rendered services to one client that represents
approximately 18%, 16% and 5% of total net revenues during 2003, 2002
and 2001, respectively. This client's accounts receivable balances as
of December 31, 2003 and 2002 represent approximately 1% of total
accounts receivable in both years. The Company provides an allowance
for doubtful accounts based on management's analyses and estimations.
The allowance expense is included as selling and administrative
expenses in the consolidated statement of operations.
(r) Contingencies
Liabilities for loss contingencies are recorded when it is probable
that a liability has been incurred and the amount of the assessment
and/or remediation can be reasonably estimated. When a reasonable
estimation can not be made, qualitative disclosure is provided in the
notes to the consolidated financial statements. Contingent revenues,
earnings or assets are not recognized until their realization is
virtually assured.
F-11
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2003)
(s) Impairment of property, systems and equipment and other non-current
assets
The Company evaluates periodically the adjusted values of its
property, systems and equipment and other non-current assets to
determine whether there is an indication of potential impairment.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net revenues
expected to be generated by the asset. If such assets are considered
to be impaired, the impairment is measured by the amount by which the
carrying amount of the asset exceeds the expected net revenues. Assets
to be disposed of are reported at the lower of the carrying amount or
realizable value.
(t) Use of estimates
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities, the disclosure of contingent assets and liabilities
as of the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results may
differ.
(3) Accounting changes
(a) Liabilities, accruals, contingent assets and liabilities, and
commitments-
In December 2001, the Mexican Institute of Public Accountants issued
the new Bulletin C-9, "Liabilities, Accruals, Contingent Assets and
Liabilities, and Commitments." New Bulletin C-9, effective for fiscal
years beginning after December 31, 2002, supersedes former Bulletins
C-9, "Liabilities," and C-12, "Contingencies and Commitments." New
Bulletin C-9 establishes additional guidance clarifying the accounting
for liabilities, accruals, and contingent assets and liabilities, and
establishes new standards for the use of present value techniques to
measure liabilities, and accounting for the early extinguishment of
liabilities and convertible debt. Additionally, new Bulletin C-9
establishes new rules for disclosing commitments arising from current
business operations.
The Company adopted this Bulletin in 2003 and, as a result, recognized
as initial effect vacation accrual $1,352 which was recorded directly
in stockholders equity, net of its deferred income tax effect of $697.
As of December 31, 2003, the vacation accrual amounts is $7,221 and is
included in accounts payable and accrued liabilities in the
accompanying consolidated financial statements.
F-12
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2003)
(b) Intangible assets-
In January 2002, the Mexican Institute of Public Accountants issued
the new Bulletin C-8, "Intangible Assets," effective for fiscal years
beginning after December 31, 2002. New Bulletin C-8 supersedes former
Bulletin C-8, "Intangibles," and establishes that qualifying project
development costs be capitalized as intangible assets if the criteria
for intangible asset recognition are met. The principal criteria are
that these costs be identifiable, that there is reasonable certainty
that these costs will generate future benefits to the Company, and
that the Company has control over such benefits. Other costs, not
meeting the new criteria and incurred after the effective date of new
Bulletin C-8, should be expensed as incurred. Pre-operating expenses
previously recognized under former Bulletin C-8 will continue to be
amortized, subject to periodic impairment evaluations. Development
costs incurred in a pre-operating stage may be capitalized after
meeting certain conditions, under new Bulletin C-8.
This Bulletin also requires that intangibles acquired in a business
combination be accounted for at fair value at the date of the purchase
and be separately reported, unless their cost cannot be reasonably
determined, in which case, they should be reported as goodwill. Also,
if there is no active market for these assets, they should be
written-down to the excess of their book value over the purchase price
or to zero. These assets are also subject to periodic impairment
evaluations. Amortization of goodwill should be reported in operating
expenses on the statements of operations.
The initial adoption of this Bulletin had no material effects on the
financial position nor the result of operations of the Company.
(4) Foreign currency exposure
Monetary assets and liabilities denominated in dollars as of December 31,
2003 and 2002 are as follows:
(Thousands of dollars)
-----------------------------------
2003 2002
---- ----
Current assets 85,048 2,931
Current liabilities (36,146) (60,892)
Long-term liabilities (180,266) (488,530)
--------------- -----------------
Foreign currency
liability position, net (131,364) (546,491)
=============== =================
F-13
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2003)
The US dollar exchange rates as of December 31, 2003 and 2002 were $11.2360
and $10.3125, respectively. As of February 20, 2004, the exchange rate was
$10.9058.
As of December 31, 2003, the Company had foreign exchange derivative
instruments (see note 6).
As of December 31, 2003 and 2002, the Company had the following
non-monetary assets of foreign origin, the replacement cost of which may
only be determined in dollars:
(Thousands of dollars)
----------------------------------
2003 2002
---- ----
Inventories 1,029 1,470
Systems and equipment, gross 663,225 621,846
--------------- ---------------
664,254 623,316
=============== ===============
Following is a summary for the years ended December 31, 2003, 2002 and
2001, of transactions carried out with foreign entities, excluding imports
and exports of machinery and equipment:
(Thousands of dollars)
--------------------------------------------
2003 2002 2001
---- ---- ----
Interest expense 14,926 38,475 36,829
Commissions 11,174 1,978 2,594
Administrative and technical
advisory services 243 3,325 2,500
-------- ------------- --------------
26,343 43,778 41,923
======== ============= ==============
(5) Accounts receivable
Accounts receivable consist of the following:
2003 2002
---- ----
Trade $ 488,562 590,226
Less allowance for doubtful accounts 66,719 241,585
----------- -----------
Accounts receivable, net $ 421,843 348,641
=========== ===========
F-14
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2003)
The activity in the allowance for doubtful accounts for the years ended
December 31, 2003, 2002 and 2001 was as follows:
2003 2002 2001
---- ---- ----
Balances at beginning of year $ 232,316 73,461 34,757
Bad debt expense 57,658 158,855 251,673
Write-offs (223,255) - (212,969)
----------- ----------- -----------
Balances at end of year not
adjusted for inflation 66,719 232,316 73,461
Effects of inflation - 9,269 7,285
----------- ----------- -----------
Balances at year end at constant pesos $ 66,719 241,585 80,746
=========== =========== ===========
(6) Derivative instruments
The Company minimizes the risk associated with foreign currency position by
entering into transactions with high-quality counterparties whose credit
rating is higher than AA.
The contracts entered into are European-style-type option contracts, which
establish a floor and a ceiling exchange rate between the peso and the US
dollar at specified dates on specified notional amounts.
As of December 31, 2003, the Company has a contract outstanding with the
following characteristics:
Changes in the
fair value
Notional Notional recorded within
Inception and amount/exchange rate - amount/exchange rate - the CFR earnings
expiration dates floor ceiling item
--------------------------------- ------------------------ ------------------------ --------------------
Sept 23, 2003/March 17,
2004 55,400/11.08 56,500/11.30 560
(7) Related-party transactions
Until March 2003 Bell Canada International Inc. (Bell Canada) was a
related-party of the Company. During 2002 and 2001, AXTEL received
administrative and technical advisory services from Bell Canada for
approximately $2.5 million dollars, each year.
F-15
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2003)
(8) Prepaid expenses
Prepaid expenses consist of the following:
2003 2002
---- ----
Nortel Networks $ 161,153 -
Other 22,733 19,004
--------------- ---------------
Total prepaid expenses $ 183,886 19,004
=============== ===============
In accordance with the debt-restructuring agreement (See note 14b) all new
purchases from Nortel should be either secured through the issuance of a
letter of credit or prepaid.
(9) Inventories
Inventories consist of the following:
2003 2002
---- ----
Telephones and caller identification devices $ 4,095 3,620
Installation material 4,161 4,836
Tools 1,312 1,670
Network spare parts 7,823 6,415
Other 4,161 4,996
------------- -----------
Total inventories $ 21,552 21,537
============= ===========
(10) Property, systems and equipment
Property, systems and equipment are analyzed as follows:
Useful
2003 2002 lives
---- ---- -----
Land $ 35,849 40,853
Building 116,552 116,115 25 years
Computer and electronic equipment 847,413 711,094 3 years
Transportation equipment 14,439 13,864 4 years
Furniture and fixtures 88,443 82,810 10 years
Network equipment 5,766,985 5,536,154 6 to 28 years
Leasehold improvements 131,854 102,281
Construction in progress 413,377 369,317
-------------- --------------
7,414,912 6,972,488
Less accumulated depreciation 2,222,551 1,467,690
-------------- --------------
Property, systems and equipment, net $ 5,192,361 5,504,798
============== ==============
F-16
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2003)
The Company has capitalized CFR as a component of the acquisition cost of
property, systems and equipment, aggregating $2,171 as of December 31,
2003.
All of the assets indicated above secure the lines of credit and the
contracts with Hewlet Packard de Mexico, S. de R.L. de C.V., SR Telecom
Inc. and Siemens Financial Services Inc. (see note 14). The line of credit
with Agilent Technologies Mexico, S. de R.L. de C.V., as well as other
long-term financing is secured by specific collaterals.
(11) Pre-operating expenses, net
The capitalized pre-operating expenses incurred up to June 1999 and
expenses incurred during 2000 in opening operations in new cities are as
follows:
2003 2002
---- ----
Salaries $ 176,004 176,004
Legal and financial advisory 100,519 100,519
Operating expenses 54,695 54,695
Depreciation 8,735 8,735
Comprehensive financing result (22,044) (22,044)
Service and other revenues (12,460) (12,460)
Other 34,739 34,739
-------------- ---------------
340,188 340,188
Less accumulated amortization 140,060 104,674
-------------- ---------------
Pre-operating expenses, net $ 200,128 235,514
============== ===============
(12) Other assets
Other assets consist of the following:
2003 2002
---- ----
Deferred financing costs $ - 134,250
Notes issuance costs 59,849 -
Guarantee deposits 14,132 12,898
Other 35,269 4,016
------------- ----------------
109,250 151,164
Less accumulated amortization - 37,585
------------- ----------------
Other assets, net $ 109,250 113,579
============= ================
F-17
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2003)
Deferred financing costs were incurred in connection with the Company's
credit with Nortel and were amortized under the straight-line method over
the life of the related debt. On March 20, 2003, the debt with Nortel was
restructured, and the total unamortized deferred financing costs amounting
to $92,188 related to this debt were charged as expense (see notes 14 and
21).
Notes issuance cost mainly consists of legal and audit fees, documentation,
advising, printing, rating agencies, registration fees and out of pocket
expenses incurred in relation to the issuance of notes payable and will be
amortize over the life of the related debt.
(13) Notes payable
The notes payable as of December 31, 2003 and 2002 and their main
characteristics are as follows:
2003 2002
Revolving line of credit with SR Telecom Canada Inc. denominated in U.S.
dollars. The payments are made 50% net 30 days and 50% net 360 days. The
interest rate is LIBOR plus 6.25 percent points applicable only to the
360-day portion $ 4,172 12,989
Revolving line of credit with Banco Mercantil del Norte S.A. (Banorte) used
for letters of credit, denominated in U.S. dollars up to 360 days 14,098 36,461
Other short-term financing with several institutions and/or suppliers with
interest rates fluctuating between 10% and 11% 5,730 2,355
--------------- ---------------
Total short-term notes payable $ 24,000 51,805
=============== ===============
(14) Long-term debt
Long-term debt as of December 31, 2003 and 2002 and its main
characteristics is as follows:
2003 2002
---- ----
U.S. $175,000,000 in aggregate principal amount of 11% Senior Notes due
2013. Interest will be payable semi-annually in arrears on June 15, and
December 15 of each year commencing June 15, 2004. $ 1,966,300 -
Nortel Networks Ltd. denominated in U.S. dollars, payable in ten semiannual
installments beginning in 2003 and through 2007. The interest rate was
LIBOR plus 5 percentage points (6.96% in 2002). Interest is payable
semiannually - 5,101,956
F-18
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2003)
Hewlett Packard de Mexico, S. de R. L. de C.V. denominated in U.S. dollars,
payable in 36 monthly installments with a 6-month grace period maturing in
2005. The interest rate is 9.8 % 4,464 59,812
Promissory Notes with Hewlett Packard Operations Mexico, S. de R.L. de C.V.
denominated in U.S. dollars, payable in 12 quarterly installments maturing in
September 2006. The interest rate is 9.5% 21,569 -
Line of credit with Siemens Financial Services Inc. denominated in U.S.
dollars. The payments are made in six semiannual installments through 2005.
The interest rate is LIBOR plus 5.5 percentage points (6.35% average in 2003
and 7.24% in 2002). Interest is payable semiannually 51,525 25,001
Line of credit with Agilent Technologies Mexico S. de R.L. de C.V.
denominated in U.S. dollars. The payments are made in six semiannual
installments through 2005. The interest rate is 9.8% 2,416 3,459
Other long-term financing with several credit institutions with rates
fluctuating between 9% and 10% for those denominated in dollars and TIIE
(Mexican average interbank rate) plus six percentage points for those
denominated in pesos 32,121 16,984
-------------- ---------------
Total long-term debt 2,078,395 5,207,212
Less current maturities 54,408 179,347
-------------- ---------------
Long-term debt, excluding current maturities $ 2,023,987 5,027,865
============== ===============
Annual installments of long-term debt are as follows:
Year Amount
2005 $ 40,637
2006 17,050
2007 -
2008 and thereafter 1,966,300
----------------
$ 2,023,987
================
The following are the most important changes in the Company long-term debt
during 2003 and 2002:
a) On March 18, 2003, the Company obtained a loan for 75 million dollars
from Banco Mercantil del Norte, S.A. (Banorte) at a variable Libor
interest rate to 90 days plus certain basis points, payable quarterly.
The loan payments were set in four equal consecutive quarterly
installments of 4.5 million and one last installment of 57 million,
beginning 24 months after the credit disposition date, which was March
20, 2003. On December 17, 2003 this loan was paid. (See note 14d).
F-19
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2003)
b) On March 20, 2003, the Company entered into a debt-restructuring
agreement with Nortel Networks Limited and Nortel Networks de Mexico
(Nortel), as follows: payment in cash of 125.2 million dollars,
issuance by the Company of a promissory note for 24.2 million dollars
and the capitalization of debt of 178.5 million dollars in exchange
for 250,836,980 Series "N" shares of common stock (see note 18). As a
result of this transaction, Axtel recognized a gain on the forgiveness
of debt of approximately $1,858,000 pesos (See note 21). The
promissory note for 24.2 million dollars was paid in December 2003.
(See note 14 d). After this transaction and in accordance with the
debt restructuring agreement all new purchases from Nortel should be
either secured through the issuance of a letter of credit or prepaid
(See note 8).
c) On May 2003 the Company entered in an agreement with Bell Canada
International (BCI) to terminate all of the rights and obligations of
both parties under the technical services agreement and a secondment
agreement dated as of October 6, 1997, including Axtel's obligations
to pay fees in the future based on the Company's financial performance
and in full settlement of any and all claims that BCI may have against
Axtel arising out of or related to the above mentioned agreements. The
termination agreement was for 15,585,000 dollars, which is included in
other income (expense) line item; originally payable as follows:
2,734,000 dollars at closing of the agreement, 1,129,000 dollars in
June 2003, 1,152,000 dollars in September 2003, 1,175,000 dollars in
December 2003 and 9,395,000 dollars, maturing thirty seven (37) months
after closing payable without interest and in a single installment. As
of December 31, 2002 the long term portion was discounted at an
interest rate of 10%. On December 17, 2003 this debt was paid (Se note
14d).
d) On December 16, 2003, the Company completed an offering of senior
unsecured notes, for a value of US $175 Millions (1,996 million pesos)
maturing on December 15, 2013. Interest on the Notes are payable
semiannually at a annual rate of 11%, beginning on June 15, 2004.
The indenture of the notes contain certain affirmative and negative
covenants.
With the proceeds of the offering the Company prepaid in full the Banorte
facility, the Nortel promissory note and the BCI Indebtedness.
F-20
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2003)
Each of the Company's consolidated subsidiaries, Instalaciones y
Contrataciones, S.A. de C.V. (Instalaciones), Impulsora e Inmobiliaria
Regional, S.A. de C.V. (Impulsora) and Servicios Axtel, S.A. de C.V.
(Servicios), are guaranteeing the notes with unconditional guaranties that
are unsecured. The subsidiaries have no revenues or cash flows other than
those derived from their parent. The following tables show certain
condensed financial information of the subsidiaries' financial statements
after elimination of inter-company amounts, assets, revenues and cash flows
which are not material to the consolidated group:
As of and for the year ended December 31, 2003
Instalaciones Impulsora Servicios Combined
Guarantors
Total assets 6,655 11,184 92,738 110,577
==================== =============== ============= =================
Stockholders' equity 3,029 1,817 17,755 22,601
==================== =============== ============= =================
Service revenues 44,622 1,960 720,593 767,175
==================== =============== ============= =================
Income (loss) before taxes (483) 216 (1,779) (2,046)
==================== =============== ============= =================
Resource provides (used) by operating
activities (568) 657 (1,044) (955)
==================== =============== ============= =================
(1) Includes inter-company balances amounting to $81,704
As of and for the year ended December 31, 2002
Instalaciones Impulsora Servicios Combined
Guarantors
Total assets 5,233 12,122 95,164 112,519
==================== =============== ============== =================
Stockholders' equity 2,948 468 22,135 25,551
==================== =============== ============== =================
Service revenues 36,068 2,052 773,251 811,371
==================== =============== ============== =================
Income (loss) before taxes (1,763) 266 (26,732) (28,269)
==================== =============== ============== =================
Resource provides (used) by operating
activities (1,922) 1,300 (40,324) (40,946)
==================== =============== ============== =================
(1) Includes inter-company balances amounting to $83,519.
F-21
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2003)
Some of the debt agreements that remain outstanding establish certain
covenants, the most important of which refer to limitations on dividend
payments and comprehensive insurance on pledged assets, among others. At
December 31, 2003, the Company was in compliance in all its covenants and
obligations.
(15) Seniority premiums
The cost of the obligations and other elements of seniority premiums
mentioned in note 2(i) have been determined based on independent actuarial
calculations as of December 31, 2003 and 2002.
The components of the net periodic cost for the years ended December 31,
2003, 2002 and 2001 are the following:
2003 2002 2001
---- ---- ----
Net periodic cost
Labor cost $ 576 175 720
Financial cost 62 41 38
Amortization of transition obligation 1 1 (13)
Variances in assumptions and experience
adjustments 16 - 12
Inflationary effect 26 14 33
------- -------- --------
Net periodic cost $ 681 231 790
======= ======== ========
The actuarial present value of plan benefit obligations is as follows:
2003 2002
---- ----
Present benefit obligation $ 2,064 1,271
-------- -----------
Present value of benefits attributable to
future salary increases 70
127
-------- -----------
Projected benefit obligation (PBO) 2,191 1,341
Items pending amortization:
Variances in assumptions and
experience adjustments (407) -
Transition liability (8) (9)
Minimum additional liability 224 -
-------- -----------
Net projected liability recognized
on the balance sheets
$ 2,000 1,332
======== ===========
F-22
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2003)
The most significant assumptions used in the determination of the net
periodic cost of plan are the following:
2003 2002
---- ----
Discount rate 4.00% 4.00%
=========== ===========
Rate of increase in future salary levels 1.00% 1.00%
=========== ===========
Estimated inflation for the period 4.00% 5.70%
=========== ===========
Amortization period of the transition liability 11 years 11 years
=========== ===========
(16) Income tax (IT), tax on assets (TA), employee statutory profit sharing
(ESPS) and tax loss carryforwards
The parent company and its subsidiaries file their tax returns on a
stand-alone basis, and the consolidated financial statements show the
aggregate of the amounts determined by each company.
In accordance with the current tax legislation, companies must pay either
the IT or TA, whichever is greater. Both taxes recognize the effects of
inflation, in a manner different from MexGAAP.
The TA law establishes a 1.8% tax on assets adjusted for inflation in the
case of inventory, property, systems and equipment and deducted from
certain liabilities. TA levied in excess of IT for the year can be
recovered in the succeeding ten years, updated for inflation, provided that
in any of such years IT exceeds TA.
A new Income Tax Law was enacted on January 1, 2002. This law provides for
a 1% annual reduction in the income tax rate beginning in 2003, so that the
income tax rate would be 32% in 2005. As a result of these changes, during
the years ended December 31, 2003, 2002 and 2001 the Company recognized an
increase (decrease) in net deferred tax assets of $(19,320) $15,603 and
$(89,833) in 2003, 2002 and 2001, respectively.
F-23
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2003)
The tax (expense) benefit attributable to the income (loss) before IT
differed from the amount computed by applying the tax rate of 34% in 2003
and 35% in 2002 and 2001 to pretax loss, as a result of the items mentioned
below:
2003 2002 2001
---- ---- ----
Computed "expected" income tax
(expense) benefit $ (472,895) 368,375 260,747
Increase (decrease) resulting from:
Effects of inflation, net 3,786 (26,011) (9,584)
Increase in beginning-of-the-year balance of the
valuation allowance for deferred tax assets allocated
to income tax expense (8,623) (1,078) (205)
Adjustments to deferred tax assets and liabilities for
enacted changes in tax rates (19,320) 15,603 (89,833)
Non-deductible expenses (1,600) (41,264) (5,584)
Other 5,201 (73,908) (23,245)
-------------- -------------- ---------------
Deferred income tax (expense) benefit $ (493,451) 241,717 132,296
============== ============== ===============
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as of
December 31, 2003 and 2002 are presented below:
2003 2002
---- ----
Deferred tax assets:
Net operating loss carryforwards $ 499,499 1,089,941
Allowance for doubtful accounts and write-off 173,430 161,163
Accrued liabilities 22,189 18,539
Tax on assets 8,596 -
Accrued vacations 2,455 -
----------- -----------
Total gross deferred tax assets 706,169 1,269,643
Less valuation allowance 11,053 2,430
----------- -----------
Net deferred tax assets 695,116 1,267,213
----------- -----------
Deferred tax liabilities:
Property, systems and equipment 215,893 262,970
Telephone concession rights 153,027 151,451
Pre-operating expenses 65,032 76,396
Other assets 1,850 32,930
Inventories 7,328 7,323
----------- -----------
Total deferred tax liabilities 443,130 531,070
----------- -----------
Deferred tax assets, net $ 251,986 736,143
=========== ===========
F-24
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2003)
The Company assesses realizability of deferred tax assets based on the
existence of taxable temporary differences expected to reverse in the same
periods as the realization of deductible temporary differences or in later
periods in which the tax loss carryforwards can be applied and when, in the
opinion of Company management, there will be enough future taxable income
for the realization of such deductible temporary differences. However, the
amounts of realizable deferred tax assets could be reduced if the taxable
income is lower. As of December 31, 2003, a deferred tax asset valuation
allowance was established for tax loss carryforwards from the subsidiaries
and TA from the Company. No deferred tax asset valuation allowance was
established for AXTEL tax loss carryforwards, since, in the opinion of
Company management, there is a high probability that there will be enough
future taxable income to realize the net deferred tax assets.
According to the IT law, the tax loss of a year, restated by inflation, may
be carried to the succeeding ten years. The tax losses have no effect on
ESPS. As of December 31, 2003, the tax loss carryforwards expire as
follows:
Inflation-adjusted
tax loss
Year Carryforwards
---- -------------
2009 $ 564
2010 929,090
2011 210,256
2012 421,025
-------------------
$ 1,560,935
===================
Effective January 1, 2002, the Company transferred all of its personnel to
a subsidiary Company, which eliminated any deferred ESPS liability.
(17) Other long-term accounts payable
As of December 31, 2003 and 2002 the long-term accounts payable consist of
the following: 2003 2002
Guarantee deposits (note 22a) $ - 139,411
Interest payable (note 22a) - 16,636
Long-term trade payables 2,172 55,438
---------------- ----------------
$ 2,172 211,485
================ ================
As of December 31, 2003, the guarantee deposits and interest payable
corresponding to Spectra Site Communications Mexico, S. de R.L. de C.V.
(see note 22a) were presented as other current accounts payable in
accordance with the terms and clauses agreed in the contract.
F-25
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2003)
(18) Stockholders' equity
The main characteristics of stockholders' equity are described below:
(a) Common stock structure
The main characteristics and issuances of common stock for 2003, 2002
and 2001 are described below:
Amount Additional
(thousand Amount (nominal Amount paid-in capital
Date dollars) pesos) (constant pesos) (constant pesos)
---- -------- ------ ---------------------------------
April 30, 2001 25,000 $ 238,450 271,570 (1,805)
August 31, 2001 45,000 429,210 484,211 (19,882)
October 31, 2001 10,000 95,380 105,999 (3,017)
December 31, 2001 15,000 143,070 157,259 (6,951)
---------------- ---- ---------------- ---------------- ----------------
Total 2001 95,000 $ 906,110 1,019,039 (31,655)
---------------- ---- ---------------- ---------------- ----------------
February 28, 2002 5,000 $ 47,690 51,941 (2,043)
---------------- ---- ---------------- ---------------- ----------------
Total 2002 5,000 $ 47,690 51,941 (2,043)
---------------- ---- ---------------- ---------------- ----------------
February 28, 2003 35,336 $ 389,854 400,693 (7,925)
October 7, 2003 203,164 2,202,544 2,263,066 (6,890)
---------------- ---- ---------------- ---------------- ----------------
Total 2003 238,500 $ 2,592,398 2,663,759 (14,815)
================ ==== ================ ================ ================
At a General Stockholders' Meeting, held on February 28, 2003 the
stockholders approved the following:
1. Cancellation of the stockholders' outstanding contribution of 10 million
dollars according to the resolutions of the General Stockholders' Meeting
held on March 30, 2001, releasing the Company's stockholders from their
obligation to make this contribution to capital. Consequently, a 10
million-dollar decrease was approved of the variable portion of common
stock of the Company.
F-26
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2003)
2. Additional contribution to the variable portion of common stock for an
amount equivalent in Mexican pesos to 60 million dollars payable in
cash. Consequently, it was approved to issue 2,156,184,303 shares,
which will be distributed as follows: 1,041,437,018 Series A shares
Variable; 549,355,873 Series B shares Variable; 451,232,470 Series C
shares Variable and 114,158,942 Series N shares, all of them with no
par value. In addition the Shareholder's Meeting also resolved that
all Series "B" shares were to be exchanged for either Series "A"
shares, in the case of investors of Mexican nationality, or Series "C"
shares, in the case of investors of non-Mexican nationality.
3. Additional contribution to the variable portion of common stock of the
Company for up to the amount equivalent in Mexican pesos to 200
million dollars through the capitalization of liabilities payable to
Nortel (See note 14). Consequently, it was approved to issue
250,836,980 registered shares, with no par value and no right to vote.
All the shares were Series "N" shares of the Company's common stock in
favor of Nortel, that when issued, will represent 9.9% of the total
number of shares issued and paid of the Company's common stock.
In addition, the Company entered in a subscription agreement with Nortel
Networks Limited (Nortel), where Nortel agrees to subscribe for 250,836,980
nominative, non par value and non-voting Series "N" Shares for a total
subscription price of $1,984,961 ($178.5 million dollars). Such
subscription price shall be considered to be satisfied by means of the debt
capitalization as contemplated in the Restructuring Agreement (see note
14). Upon subscription of the shares, such shares represent 9.9% of the
total issued and outstanding shares of the common stock of the Corporation.
Also, the Company entered in a subscription agreements with LAIF X Sprl,
Tapazeca Sprl and New Hampshire Insurance Company whereby these entities
agreed to subscribe and pay for 115,068,613 Series "B" shares, and
426,843,722 Series "C" shares all of which are nominative, non par value
and voting shares, and 36,181,412 Series "N" shares which are nominative,
non par value and non-voting for a total subscription price of
US$16,086,577 dollars.
F-27
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2003)
The Company common stock consists of 1,253,233,984 Series "A" shares,
888,152,627 Series "C" shares and 392,320,255 series "N" shares.
Series "A" and "C" shares have the right to vote, and series "N"
shares have no par value and no voting rights. Series "A" is
restricted to Mexican individuals or corporations.
(b) Stockholders' equity restrictions
Stockholder contributions, restated as provided in the tax law,
totaling of $6,816,416 may be refunded to stockholders tax-free.
No dividends may be paid while the Company has a deficit.
(19) Rental, installation, service and other revenues
Revenues consist of the following:
2003 2002 2001
Measured service $ 603,445 633,984 531,757
Rents 745,905 594,730 614,625
Cellular 758,983 552,554 359,276
Long-distance 296,061 289,767 299,770
Interconnection 223,384 136,228 88,268
Internet 67,724 69,430 62,936
Activation 72,423 51,067 151,765
Value added services 48,286 44,311 29,888
Equipment sales 8,679 10,210 31,396
Other 94,625 70,131 73,178
------------ ------------- -------------
$ 2,919,515 2,452,412 2,242,859
============ ============= =============
(20) Special item
In order to improve productivity and comply with the strategic plans, the
Company restructured some of its operating areas during the years ended
December 31, 2003, 2002 and 2001. The costs of restructuring, comprising
compensation and benefits to personnel, were $10,417, $32,421 and $63,027,
respectively, and are presented as a special item in the statements of
operations for the years ended December 31, 2003, 2002 and 2001.
F-28
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2003)
(21) Other income (expenses), net
Other income (expenses) consist of the following:
2003 2002 2001
----------------- --------------- -----------------
Gain on debt-restructuring $ 1,858,462 - -
Nortel prepayment 30,622 - -
Nortel withholding cancellation 29,777 - -
Banorte prepayment (79,109) - -
BCI termination agreement (120,214) - -
Other (5,082) (27,590) (30,908)
----------------- --------------- -----------------
Other income (expenses), net $ 1,714,456 (27,590) (30,908)
================= =============== =================
(22) Commitments and contingencies
As of December 31, 2003, there are the following commitments and
contingencies:
(a) On January 24, 2001 a contract was signed with Spectra Site
Communications Mexico, S. de R.L. de C.V. (Spectra Site) expiring on
January 24, 2004, to provide the Company with services to locate,
construct, set up and sell sites within the Mexican territory. As part
of the operation, the Company agreed to build 650 sites, subject to
approval and acceptance by Spectra Site and, in turn, sell or lease
them under an operating lease plan.
On January 24, 2001, the Company received 13 million dollars from
Spectra Site to secure the acquisition of the 650 sites at 20,000
dollars per site. These funds are not subject to restriction per the
contract for use and destination. However, the contract provides for
the payment of interest at a Prime rate in favor of Spectra Site on
the amount corresponding to the number of sites that as of June 24,
2004 had not been sold or leased in accordance with the terms of the
contract. As of December 31, 2003, the Company has recognized a
liability to cover such interest for $24,267, presenting it as a
short-term liability in the balance sheet as of December 31, 2003.
As of December 31, 2003, the Company has completed the construction of
206 sites pending the approval and acceptance of Spectra Site.
F-29
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2003)
During 2002, Spectra Site Communications filed an Ordinary Mercantile
Trial against the Company before the Thirtieth Civil Court of Mexico
City, demanding the refund of the guarantee deposit mentioned above,
plus interest and trial-related expenses. The Company countersued
Spectra Site for unilateral rescission of the contract. As of December
31, 2003, the trial is at a stage where evidence is being shown, and
thus it is impossible to determine whether there is a contingency for
the Company.
(b) The Company is involved in a number of lawsuits and claims arising in
the normal course of business. It is expected that the final outcome
of these matters will not have significant adverse effects on the
Company's financial position and results of operations.
(c) In compliance with commitments made in the acquisition of concession
rights, the Company has granted surety bonds to the Federal Treasury
and to the Ministry of Communication and Transportation of $30,172 and
to other service providers for $41,397.
(d) The concessions granted by the Ministry of Communications and
Transportation (SCT), mentioned in note 1, establish certain
obligations of the Company, including, but not limited to: (i) filing
annual reports with the SCT, including identifying main shareholders
of the Company, (ii) reporting any increase in common stock, (iii)
providing continuous services with certain technical specifications,
(iv) filing monthly reports about disruptions, (v) filing the
services' tariff, and (vi) providing a bond.
(e) The Company leases some equipment and facilities under operating
leases. Some of these leases have renewal clauses. Lease expense for
2003, 2002 and 2001 was $195,038, $210,655 and $261,714, respectively.
The annual payments under these leases as of December 31, 2003 are as
follows:
Contracts in:
-----------------------------------------------------------------
Pesos Dollars UDIS
(thousands) (Investment units)
---------------- --------------- ---------------------------
2004 $ 54,471 7,164 54,833
2005 47,508 4,630 54,833
2006 34,411 3,448 54,833
2007 29,113 2,920 54,833
2008 23,841 2,644 54,833
Thereafter 47,784 13,572 45,694
--------------
---------------- ---------------
$ 237,128 34,378 319,859
================ =============== ==============
F-30
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2003)
(f) As of December 31, 2003, the Company has placed purchase orders which
are pending delivery from suppliers for approximately $625,115.
(g) The Company has certain supply contracts establishing commitments to
purchase an established minimum amount per year. These contracts are
for a term of five years
(h) Those arising from labor obligations mentioned in note 2(i).
(23) New accounting pronouncements
Financial instruments with characteristics of liabilities, equity, or both
In May 2003, the Mexican Institute of Public Accountants issued Bulletin
C-12, "Financial Instruments with Characteristics of Liabilities, Equity,
or Both." Bulletin C-12, is effective for fiscal years beginning after
December 31, 2003, although earlier application is permitted. Bulletin C-12
puts together regulations contained in other bulletins related to issuance
of complex financial instruments, and adds regulations necessary for a
comprehensive resolution of general problems. Therefore, Bulletin C-12
defines the basic differences between liabilities and equity; establishes
rules for the classification and valuation of the liability and equity
components of combined financial instruments, upon initial recognition; and
establishes rules for disclosure of combined financial instruments. Under
Bulletin C-12, financial instruments should be classified as liabilities or
equity at the beginning of the year of adoption, and comparative financial
information for prior years should not be restated, nor a
cumulative-effect-type adjustment recognized in the year of adoption.
The Company estimates that the adoption of the new Bulletin C-12 will not
have a material effect on its financial position or results of operations.
(24) Differences between Mexican and United States accounting principles
The consolidated financial statements of the Company are prepared according
to accounting principles generally accepted in Mexico (Mexican GAAP), which
differ in certain significant respects from those applicable in the United
States (US GAAP).
The consolidated financial statements under Mexican GAAP include the
effects of inflation provided for by Bulletin B-10, whereas the financial
statements prepared under US GAAP are presented on a historical cost basis.
The following reconciliation does not eliminate the inflation adjustments
for Mexican GAAP, since they represent an integral measurement of the
effects of the changes in the price levels in the Mexican economy and, as
such, are considered a more meaningful presentation than the financial
reports based on historic costs for book purposes for Mexico and the United
States.
F-31
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2003)
The main differences between Mexican GAAP and US GAAP and their effect on
consolidated net loss and stockholders' equity as of December 31, 2003,
2002 and 2001 is presented below, with an explanation of the adjustments.
Year ended December 31,
-----------------------------------------------------
2003 2002 2001
-----------------------------------------------------
Net income (loss) reported under Mexican GAAP .............. $ 897,415 (810,783) (584,716)
--------------- ---------------- --------------
Approximated US GAAP adjustments
1. Deferred income taxes (see 24a).......................... 484,854 (241,717) (132,296)
2. Deferred employee statutory profit sharing (see 24a) .... - - 90,853
3. Amortization of start up cost (see 24c).................. 35,386 35,771 35,810
4. Start up costs of the year (see 24c)..................... - - (32)
5. Allowance for post retirement benefits (see 24d)......... 188 11,045 (10,334)
6. Revenue recognition (see 24b)............................ 28,912 61,026 (27,994)
7. Deferred financing cost amortization (see 24f)........... 13,286 (2,204) (4,418)
8. Accrued vacations (see 24d).............................. - 1,221 (2,412)
9. Capitalized interest (see 24e)........................... (988) - 25,077
10. Gain on the forgiveness of debt (see 24g)................ 1,280,676 - -
--------------- ---------------- --------------
Total approximate US GAAP adjustments....................... 1,842,314 (134,858) (25,746)
--------------- ---------------- --------------
Approximate net income (loss) under US GAAP................. $ 2,739,729 (945,641) (610,462)
=============== ================ ==============
Year ended December 31,
-----------------------------------
2003 2002
-----------------------------------
Total stockholders' equity reported under Mexican GAAP...... $ 5,382,110 1,837,103
--------------- ----------------
Approximate US GAAP adjustments
1. Deferred income taxes (see 24a).......................... (251,986) (736,143)
2. Start up costs (see 24c)................................c (200,128) (235,514)
3. Revenue recognition (see 24b)............................ (73,369) (102,281)
4. Allowance for post retirement benefits (see 24d)......... (27,184) (27,372)
5. Deferred financing cost amortization (see 24f)........... - (13,286)
6. Accrued vacations (see 24d).............................. - (2,050)
7. Capitalized interest (see 24e)........................... 24,753 25,741
--------------- ----------------
Total approximate US GAAP adjustments....................... (527,914) (1,090,905)
--------------- ----------------
Total approximate stockholders' equity under US GAAP........ $ 4,854,196 746,198
=============== ================
F-32
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2003)
The term "SFAS" as used in this document refers to Statement of Financial
Accounting Standards.
(a) Deferred income taxes (IT) and employee's statutory profit sharing
("ESPS")
Deferred IT are accounted for under the asset and liability method.
All of the Company's pretax income (loss) and reported income tax
(expense) benefit is derived from domestic operations.
Deferred ESPS is recognized only for timing differences arising from
the reconciliation of book income to income for profit sharing
purposes, which can be reasonably presumed to result in a future
liability or benefit, with no indication that the liabilities or
benefits will not materialize.
For US GAAP purposes, the Company accounts for income taxes and
employee statutory profit sharing under SFAS 109 "Accounting for
Income Taxes," which uses the asset and liability method to account
for deferred tax assets and liabilities. Under the asset and liability
method, deferred tax assets and liabilities are recognized for the
future tax consequences of "temporary differences," by applying the
enacted statutory tax rates applicable to future years to the
differences between the book amounts of the financial statements and
the tax bases of existing assets and liabilities and the tax loss
carryforwards. The amount of deferred income taxes charged or credited
to the operations in each period, for US GAAP purposes, is based on
the difference between the beginning and ending balances of the
deferred tax assets and liabilities for each period, expressed in
nominal pesos. The deferred tax effect of a change in the tax rate is
recognized in the results of operations of the period in which the
change is enacted.
F-33
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2003)
The tax (expense) benefit attributable to the income (loss) before IT
differed from the amount computed by applying the tax rate of 34% in
2003 and 35% in 2002 and 2001 to pretax loss, as a result of the items
mentioned below:
2003 2002 2001
---- ---- ----
Computed "expected" income tax
(expense) benefit $ (931,508) 330,975 213,662
Increase (decrease) resulting from:
Effects of inflation, net 3,786 (26,011) (9,584)
Increase in beginning-of-the-year balance of
the valuation allowance for deferred tax
assets allocated to income tax expense 492,398 (188,906) (132,649)
Gain on the forgiveness of debt 435,430 - -
Adjustments to deferred tax assets and
liabilities for enacted changes in tax rates (19,320) 15,603 (89,833)
Non-deductible expenses (1,600) (41,264) (5,584)
Other 20,814 (90,397) 23,988
-------------- -------------- ---------------
Deferred income tax (expense) benefit $ - - -
============== ============== ===============
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities as of December 31,
2003 and 2002 for US GAAP are presented below:
2003 2002
Deferred tax assets:
Net operating loss carryforwards............... $ 499,499 1,089,941
Allowance for doubtful accounts................ 173,430 161,163
Deferred revenues.............................. 24,945 34,776
Seniority premium and allowance for
post retirement benefits.................... 8,698 9,185
Accrued vacations.............................. 2,445 656
Accrued liabilities............................ 22,189 18,539
Tax on assets.................................. 8,596 -
---------------- --------------
Total gross deferred tax assets........ 739,802 1,314,260
Less valuation allowance....................... (355,633) (856,654)
---------------- --------------
Net deferred tax assets................ 384,169 457,606
---------------- --------------
F-34
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2003)
Deferred tax liabilities:
Property, systems and equipment ..................... 223,814 270,461
Telephone concession rights.......................... 153,027 151,451
Other assets......................................... - 28,371
Inventories.......................................... 7,328 7,323
---------------- --------------
Total deferred tax liabilities............... 384,169 457,606
---------------- --------------
Net deferred tax liabilities under US GAAP - -
Less net deferred tax assets recognized
under Mexican GAAP.............................. 251,986 736,143
---------------- --------------
US GAAP adjustment to stockholders' equity........... $ (251,986) (736,143)
================ ==============
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary
differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Since the
Company has not generated taxable income in its three years of
operations, a deferred tax asset valuation allowance of $355,633 and
$856,654 as of December 31, 2003 and 2002, respectively, was recorded
for US GAAP. This represents a (decrease) and increase in the
valuation allowance of $(501,021) and $195,322 for the years ended
December 31, 2003 and December 31, 2002, respectively.
F-35
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2003)
(b) Revenue recognition
On December 3, 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" (SAB 101). This bulletin
summarizes the point of view of the SEC in the recognition of revenues
in the financial statements according to US GAAP. The SEC concluded
that only when all the following conditions are met is revenue
recognition appropriate:
a) there is persuasive evidence of an agreement; b) the delivery was
made or the services rendered; c) the sales price to the purchaser is
fixed or determinable; and d) collection is reasonable assured.
SAB 101, specifically in Topic 13A, Question 5, discusses the
situation of recognizing as revenue certain non-refundable cash items.
SAB 101 provides that the seller should not recognize non-refundable
charges generated in certain transactions when there is continuous
involvement by the vendor.
One of the examples provided by SAB 101 is activation revenues from
telecommunication services. The SAB concludes that unless the charge
for the activation service is an exchange for products delivered or
services rendered that represent the culmination of a separate
revenue-generating process, the deferral method of revenue is
appropriate.
Based on the provisions and interpretations of SAB 101, for purposes
of the US GAAP reconciliation, the Company has deferred the activation
revenues over a three-year period starting in the month such charge is
originated. This period was determined based on Company experience.
The net effect of the deferral and amortization is presented in the
above US GAAP reconciliation.
(c) Start-up costs
In April 1998, the AICPA issued Statement of Position 98-5, "Report of
Start-up Costs" (SOP 98-5), which requires start-up costs, including
organization costs, to be expensed as incurred. SOP 98-5 is effective,
except for certain investment companies, for fiscal years beginning
after December 15, 1998. Under Mexican GAAP, this type of costs were
recognized when incurred as a deferred asset and amortized over a
period of 10 years. The Company has reversed the amortization of
$35,386, $35,771 and $35,810 in 2003, 2002 and 2001, as shown in the
US GAAP reconciliation, and has reduced stockholders' equity by
$200,128 and $235,514 to write off the unamortized balance at each
year end.
F-36
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2003)
(d) Other employee benefits
Vacation
For years ended December 31, 2002 and before, under Mexican GAAP the
vacation expense was recognized when taken rather than during the
period the employees earn it. In order to comply with SFAS 43, for the
years ended December 31, 2002 and 2001, the Company recorded an
increase or decrease in net income of $1,221, and ($2,412),
respectively. Starting on January 2003, Mexican GAAP requires the
recognition of vacation expense when earn (see note 3a).
Severance
Under Mexican GAAP (Bulletin D-3), severance payments should be
recognized in earnings in the period in which they are paid, unless
such payments are used by an entity as a substitution of pension
benefits, in which case, they should be considered as a pension plan.
Under US GAAP, post-employment benefits for former or inactive
employees, excluding retirement benefits, are accounted for under the
provisions of SFAS 112, which requires recognition of certain
benefits, including severance, over an employee's service life. For
the years ended December 31, 2003, 2002 and 2001 the Company recorded
an increase or decrease in net income of $188, $11,045 and $(10,334),
respectively, and recognized an accrual amounting to $27,184 and
$27,372 as of December 31, 2003 and 2002, respectively.
(e) Capitalized interest
Under Mexican GAAP, the Company capitalizes interest on property,
systems and equipment under construction. The amount of financing cost
to be capitalized is comprehensively measured in order to include
properly the effects of inflation. Therefore, the amount capitalized
includes: (i) the interest cost of the debt incurred, plus (ii) any
foreign currency fluctuations that result from the related debt, and
less (iii) the monetary position result recognized on the related
debt. Under US GAAP, only interest is considered an additional cost of
constructed assets to be capitalized and depreciated over the lives of
the related assets.
The US GAAP reconciliation removes the foreign currency gain or loss
and the monetary position result capitalized for Mexican GAAP derived
from borrowings denominated in foreign currency.
(f) Deferred financing cost amortization
Under Mexican GAAP, the Company amortizes deferred financing cost
under the straight-line method over the life of the related debt. For
US GAAP, this cost is amortized on the interest method over the life
of the related debt.
F-37
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2003)
(g) Gain on the forgiveness of debt
As disclosed in note 14 to the financial statements, on March 20,
2003, the Company entered into a debt-restructuring agreement with
Nortel Networks Limited and Nortel Networks de Mexico (Nortel). The
Company paid Nortel $125.2 million dollars in cash, issued a new note
for $24.2 million dollar and capitalized 178.5 million dollars in
exchange for 250,836,980 Series "N" shares of common stock to settled
all the debt outstanding with Nortel as of the date of the
transaction.
For US GAAP, and as required by SFAS 15 "Accounting for Debtors and
Creditors for Troubled Debt Restructurings", the equity provided by
the Company to Nortel was recorded at the fair market value resulting
in a net gain on the forgiveness of the debt of approximately
$3,139,138.
(h) Supplemental cash flow information under US GAAP
Under Mexican GAAP, statements of changes in financial position
identify the sources and uses of resources based on the differences
between beginning and ending consolidated financial statement balances
in constant pesos. Monetary position results and unrealized foreign
exchange results are treated as cash items in the determination of
resources provided by operations. Under US GAAP (SFAS 95), statements
of cash flows present only cash items and exclude non-cash items. SFAS
95 does not provide guidance with respect to inflation-adjusted
financial statements. The differences between Mexican GAAP and US GAAP
in the amounts reported are mainly due to: (i) elimination of
inflationary effects of monetary assets and liabilities from financing
and investing activities against the corresponding monetary position
result in operating activities, (ii) elimination of foreign exchange
results from financing and investing activities against the
corresponding unrealized foreign exchange result included in operating
activities, and (iii) the recognition in operating, financing and
investing activities of the US GAAP adjustments.
The following table summarizes the cash flow items as required under
SFAS 95 provided by operating, financing and investing activities,
giving effect to the US GAAP adjustments, excluding the effects of
inflation required by Bulletin B-10. The following information is
presented in thousands of pesos on a historical peso basis and is not
presented in pesos of constant purchasing power:
Years Ended December 31,
-----------------------------------------------
2003 2002 2001
---------------- ------------------------------
Net cash (used in) provided by operating activities........... (11,160) 668,419 (363,561)
Net cash provided by (used in) financing activities........... 1,038,913 (210,035) 993,751
Net cash used in investing activities......................... (329,221) (265,855) (635,081)
---------------- ------------------------------
F-38
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2003)
Net cash flows from operating activities reflect cash payments for
interest and income taxes as follows:
Years Ended December31,
---------------------------------------------
2003 2002 2001
-------------- --------------- --------------
Interest paid......... 463,711 103,958 318,390
Income taxes paid..... 8,597 - -
-------------- --------------- --------------
During the years ended December 31, 2003, 2002 and 2001, the Company
acquired property, systems and equipment through notes payable
financing amounting to approximately $119,655, $243,523 and $785,953,
respectively.
(i) Condensed financial information under US GAAP
The following table presents consolidated condensed statements of
operations for the years ended December 31, 2003, 2002 and 2001,
prepared under US GAAP, and includes all differences described in this
note as well as certain other reclassifications required for purposes
of US GAAP:
Years Ended December 31,
----------------------------------------------
Statements of operations 2003 2002 2001
----------------------------------------------
Revenues...................................................... 2,944,503 2,513,438 2,214,865
Operating income (loss)....................................... 170,933 (123,726) (570,766)
Comprehensive financing result................................ (407,322) (761,904) (64,593)
Other income (expenses) income, net........................... 2,984,715 (60,011) 24,897
Tax on assets................................................. (8,597) - -
----------------------------------------------
Consolidated net income (loss)................................ 2,739,729 (945,641) (610,462)
==============================================
The following table presents consolidated condensed balance sheets at
December 31, 2003 and 2002, prepared under US GAAP, including all
differences and reclassifications as compared to Mexican GAAP
described in this note 24:
At December 31,
--------------------------------------
Balance sheets 2003 2002
----------------- ------------------
Current assets.............................................. 1,660,247 730,611
Property, systems and equipment............................. 5,217,114 5,530,539
Deferred charges............................................ 824,696 864,124
----------------- ------------------
Total assets......................................... 7,702,057 7,125,274
----------------- ------------------
Current liabilities 719,149 1,008,741
Long-term debt.............................................. 2,023,987 5,027,865
Other non-current liabilities............................... 104,725 342,470
----------------- ------------------
Total liabilities.................................... 2,847,861 6,379,076
----------------- ------------------
Stockholders' equity................................. 4,854,196 746,198
----------------- ------------------
Total liabilities and stockholders' equity........... 7,702,057 7,125,274
----------------- ------------------
F-39
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2003)
(j) Fair value of financial instruments
The carrying amount of cash, trade accounts receivable, other accounts
receivable, trade accounts payable, other accounts payable and accrued
expenses and short-term debt, approximates fair value because of the
short-term maturity of these financial assets and liabilities.
The carrying value of the Company's long-term debt and the related
fair value based on quoted market prices for the same or similar
instruments or on current rates offered to the Company for debt of the
same remaining maturities (or determined by discounting future cash
flows using borrowing rates currently available to the Company) at
December 31, 2003 is summarized as follows:
Carrying amount Estimated fair value
--------------------------------------------
Long-term debt....... 175,000 59,978
--------------------------------------------
(k) Segment information
The Company believes that it operates in one business segment.
Management does review the business as consisting of two revenues
information streams (Mass market and Business Market), however it is
not possible to attribute direct or indirect costs to the individual
streams other than selling expenses. Additionally management believes
that the two revenue streams are so similar that they can be expected
to have essentially the same economic characteristics.
(l) Recently Issued Accounting Standards
In December 2003, the FASB issued FASB Interpretation No. 46 (revised
December 2003), Consolidation of Variable Interest Entities, which
addresses how a business enterprise should evaluate whether it has a
controlling financial interest in an entity through means other than
voting rights and accordingly should consolidate the entity. FIN 46R
replaces FASB Interpretation No. 46 Consolidation of Variable Interest
Entities, which was issued in January 2003. The Company will be
required to apply FIN 46R to variable interests in VIEs created after
December 31, 2003. For variable interests in VIEs created before
January 1, 2004, the Interpretation will be applied beginning on
January 1, 2005. For any VIEs that must be consolidated under FIN 46R
that were created before January 1, 2004, the assets, liabilities and
noncontrolling interests of the VIE initially would be measured at
their carrying amounts, with any differences between the net amount
added to the balance sheet and any previously recognized interest
begin recognized as the cumulative effect of an accounting change. If
determining the carrying amounts is not practicable, fair value at the
date FIN 46R first applies may be used to measure the assets,
liabilities and noncontrolling interest of the VIE.
F-40
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2003)
FASB Statements No. 150, Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity, was issued in May
2003. This Statement establishes standards for the classification and
measurement of certain financial instruments with characteristics of
both liabilities and equity. The Statement also includes required
disclosures for financial instruments within its scope. For the
Company, the Statement was effective for instruments entered into or
modified after May 31, 2003 and otherwise will be effective as of
January 1, 2004, except for mandatory redeemable financial
instruments. For certain mandatory redeemable financial instruments,
the Statement will be effective for the Company on January 1, 2005.
The effective date has been deferred indefinitely for certain types of
mandatory redeemable financial instruments. The Company currently does
not have any financial instruments that are within the scope of this
Statement.
F-41
SIGNATURES
The Registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf.
Axtel, S.A. de C.V.
/s/ Patricio Jimenez Barrera
----------------------------------------
Patricio Jimenez Barrera
Chief Financial Officer
April 29, 2004
EXHIBIT 12.1
CERTIFICATION
I, Patricio Jimenez Barrera, certify that:
1. I have reviewed this annual report on Form 20-F of Axtel, S.A. de C.V. ("the
registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this annual
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: April 29, 2004
/s/ Patricio Jimenez Barrera
-----------------------------
Patricio Jimenez Barrera
Chief Financial Officer
EXHIBIT 12.2
CERTIFICATION
I, Tomas Milmo Santos, certify that:
1. I have reviewed this annual report on Form 20-F of Axtel, S.A. de C.V. ("the
registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this annual
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: April 29, 2004
/s/ Tomas Milmo Santos
-------------------------------
Tomas Milmo Santos
Chief Executive Officer