As filed with the Securities and Exchange Commission on March 28, 2005
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM F-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AXTEL, S.A. DE C.V.
AND THE GUARANTORS LISTED ON THE TABLE OF ADDITIONAL REGISTRANTS
(Exact name of registrant as specified in its charter)
United Mexican States 4813 Not Applicable
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification
incorporation or organization) Classification Code Number) Number)
Blvd. Gustavo Diaz Ordaz 3.33 No. L-1
Col. Unidad San Pedro
San Pedro Garza Garcia, N.L.
Mexico, LP 66215
(52)(81) 8114-0000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
__________________________
CT Corporation System
111 Eighth Avenue, 13th Floor
New York, New York 10011
(212) 590-9200
(Name, address, including Zip Code, and telephone number, including
area code, of agent for service)
with copies to:
Roger Andrus, Esq. Alberto J. Morales, Esq.
Cahill Gordon & Reindel LLP D&A Morales y Asociados, S.C.
80 Pine Street Av. Vallarta 811 Sur
New York, NY 10005-1702 Colonia Mirador
U.S.A. Monterrey, N.L., Mexico 64070
(212) 701-3000 (52)(81) 8129-9200
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this registration statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 426(b) under the Securities Act, check the following and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_| __________________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_| __________________
CALCULATION OF REGISTRATION FEE
=============================================================================================================================
Proposed Maximum
Title of each Class of Securities Amount to be Offering Price Per Proposed Maximum Amount of
to be Registered Registered Unit Aggregate Offering Price (1) Registration Fee (2)
- -----------------------------------------------------------------------------------------------------------------------------
11% Senior Notes due 2013 $75,000,000 100.000% $75,000,000 $8,827.50
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Subsidiary Guarantees $75,000,000 -- -- None (3)
=============================================================================================================================
(1) The notes being registered are being offered in exchange for 11% senior
notes due 2013 previously sold in transactions exempt from registration
under the Securities Act of 1933. The registration fee was computed based
on the face value of the 11% senior notes due 2013 solely for the purpose
of calculating the registration fee pursuant to Rule 457 under the
Securities Act of 1933, as amended (the "Securities Act").
(2) Calculated pursuant to Rule 457(f)(2) under the Securities Act.
(3) Pursuant to Rule 457(n), no separate fee is payable with respect to the
subsidiary guarantees.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with section 8(a) of
the Securities Act of 1933 or until this registration statement shall become
effective on such date as the Commission, acting pursuant to said section 8(a),
may determine.
Additional Registrants
Exact name of registrant as State or other jurisdiction of Primary Standard Industrial I.R.S. Employer
specified in its charter incorporation or organization Classification Code Number Identification No.
------------------------ ----------------------------- -------------------------- ------------------
Impulsora e Inmobiliaria United Mexican States 4813 Not applicable
Regional, S.A. de C.V.*
Instalaciones y Contrataciones, United Mexican States 4813 Not applicable
S.A. de C.V.*
Servicios Axtel, S.A de C.V.* United Mexican States 4813 Not applicable
*The address and telephone number of the principal executive offices of each
additional registrant are the same as the address and telephone number of the
principal executive offices of Axtel, S.A. de C.V.
Information contained in this prospectus is subject to completion or amendment.
A registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any jurisdiction in which such offer, solicitation or sale would be unlawful
prior to registration or qualification under the securities laws of the relevant
jurisdiction.
SUBJECT TO COMPLETION, DATED , 2005
PROSPECTUS
Axtel, S.A. de C.V.
Offer to exchange our 11% senior notes due 2013,
which have been registered under the Securities Act,
for our 11% senior notes due 2013, which have not been registered
Terms of the Exchange Offer:
o Offer to exchange (the "exchange offer") up to $75,000,000 aggregate
principal amount of our new 11% senior notes, which will mature in
2013 (the "exchange notes"), for an equal amount of our old 11% senior
notes, which will mature in 2013 (the "2005 notes").
o The exchange offer expires at 5:00 p.m., New York City time, on , 2005
(the "expiration date") unless extended.
o You may withdraw your tender of 2005 notes any time before the
expiration date.
o We will accept any and all 2005 notes validly tendered and not
withdrawn for exchange before the expiration date.
o Not subject to any condition, other than that the exchange offer does
not violate applicable law or any applicable interpretation of the
staff of the Securities and Exchange Commission and certain other
customary conditions.
o We will not receive any proceeds from the exchange offer.
o The exchange of notes will not be a taxable exchange for U.S. or
Mexican federal income tax purposes.
o The terms of the exchange notes and the 2005 notes are identical in
all material respects, except for certain transfer restrictions
relating to the 2005 notes.
o The exchange notes will be evidence of the same indebtedness as the
2005 notes and will be issued under, and entitled to the benefits of,
the same indentures that govern the 2005 notes.
o We issued $175,000,000 of our 11% senior notes due 2013 on December
16, 2003 (the "2003 notes"). We completed an exchange offer for the
2003 notes on July 13, 2004. The exchange offer described in this
prospectus does not relate to the 2003 notes.
The Exchange notes:
o Interest Payment: semiannually in arrears on June 15 and December 15,
beginning on June 15, 2005.
o Redemption: The exchange notes will be redeemable, in whole or in
part, at any time on or after December 15, 2008 at the redemption
prices set forth under "Description of the Exchange Notes--Optional
Redemption." In addition, prior to December 15, 2006, up to 35% of the
notes may be redeemed with the proceeds from certain equity offerings.
In the event of a change of control or if we sell certain assets, we
will be required to offer to purchase all or part of the notes.
See "Risk Factors," which begins on page , for a discussion of certain
factors that should be considered by holders before tendering their 2005 notes
in the exchange offer.
The information contained in this prospectus is exclusively the
responsibility of Axtel and has not been reviewed or authorized by the Comision
Nacional Bancaria y de Valores or CNBV of Mexico. The registration with the
special section of the Registro Nacional de Valores maintained by the CNBV does
not imply a certification of the investment quality of the exchange notes or the
solvency of Axtel. The exchange notes are not registered in the securities
section of the Registro Nacional de Valores and, therefore, are not subject to
public offering or intermediation in Mexico. The acquisition of the exchange
notes by any investor of Mexican nationality will be made at the sole
responsibility of such investor.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
The date of this prospectus is , 2005.
_____________________
TABLE OF CONTENTS
Page Page
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INDUSTRY AND MARKET DATA...........................ii SUPERVISION AND REGULATION OF THE MEXICAN
FORWARD-LOOKING STATEMENTS.........................ii TELECOMMUNICATIONS INDUSTRY .....................52
PRESENTATION OF FINANCIAL INFORMATION.............iii BUSINESS...........................................56
SERVICE OF PROCESS AND ENFORCEMENT OF MANAGEMENT.........................................72
CIVIL LIABILITIES...............................iv PRINCIPAL SHAREHOLDERS.............................76
PROSPECTUS SUMMARY..................................1 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....77
SUMMARY OF THE TERMS OF THE EXCHANGE OFFER..........5 DESCRIPTION OF OTHER INDEBTEDNESS..................79
SUMMARY OF THE TERMS OF THE EXCHANGE NOTES..........8 DESCRIPTION OF THE EXCHANGE NOTES..................80
RISK FACTORS.......................................12 MATERIAL US FEDERAL INCOME TAX CONSEQUENCES.......123
USE OF PROCEEDS....................................24 MATERIAL MEXICAN TAX CONSEQUENCES.................125
THE EXCHANGE OFFER.................................25 PLAN OF DISTRIBUTION..............................128
CAPITALIZATION.....................................35 WHERE YOU CAN FIND MORE INFORMATION...............128
EXCHANGE RATES..................................... LEGAL MATTERS.....................................129
SELECTED FINANCIAL DATA............................37 INDEPENDENT AUDITORS..............................129
MANAGEMENT'S DISCUSSION AND ANALYSIS OF INDEX TO CONSOLIDATED FINANCIAL STATEMENTS........F-1
FINANCIAL CONDITION AND RESULTS OF OPERATIONS ...39
OVERVIEW OF THE MEXICAN TELECOMMUNICATIONS
INDUSTRY ........................................50
_____________________
Unless we indicate differently, when we use the term "notes" in this
prospectus, we mean the 2003 notes, the 2005 notes and the exchange notes and
the related guarantees.
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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. WE ARE NOT
MAKING AN OFFER TO EXCHANGE 2005 NOTES IN ANY JURISDICTION WHERE THE EXCHANGE
OFFER IS NOT PERMITTED, AND WILL NOT ACCEPT SURRENDERS FOR EXCHANGE FROM HOLDERS
IN ANY SUCH JURISDICTION. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED
IN THIS PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT
COVER OF THIS PROSPECTUS OR THE DATE OF SUCH INFORMATION AS SPECIFIED IN THIS
PROSPECTUS, IF DIFFERENT.
Since the 2005 notes have been registered with the special section of the
Registro Nacional de Valores maintained by the Comision Nacional Bancaria y de
Valores of Mexico, no further registration of the exchange notes with such
special section is required. However, once the exchange notes are registered
under the Securities Act of 1933, we will inform the Comision Nacional Bancaria
y de Valores of Mexico about such registration and the exchange offer being
made, for the purpose of updating such registration with the special section of
the Registro Nacional de Valores. Registration with the special section of the
Registro Nacional de Valores maintained by the Comision Nacional Bancaria y de
Valores does not imply a certification of the investment quality of the notes or
the solvency of the Company.
Each broker-dealer that receives exchange notes for its own account
pursuant to the exchange offer in exchange for 2005 notes that it acquired as a
result of market-making activities or other trading activities must acknowledge
in the letter of transmittal accompanying this prospectus that it will deliver a
prospectus in connection with any resale of such exchange notes. The letter of
transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the U.S. Securities Act of 1933 (the "Securities Act"). This
prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of exchange notes received in
exchange for 2005 notes where such 2005 notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities. We have agreed that starting on the expiration date and ending 180
days after the expiration date, we will make this prospectus available to a
broker-dealer for use in connection with any such resale. See "Plan of
Distribution." We have agreed to use our reasonable best efforts to keep the
exchange offer registration statement (as defined herein) effective,
supplemented and amended as required, to ensure that it is available for such
resale of exchange notes during such period.
INDUSTRY AND MARKET DATA
We obtained the market and certain other data used in this prospectus from
our own research, surveys or studies conducted by third parties and industry or
general publications, such as Pyramid Research (an Economist Intelligence unit
subsidiary) and other publicly available sources. Industry and general
publications and surveys generally state that they have obtained information
from sources believed to be reliable, but do not guarantee the accuracy and
completeness of such information. While we believe that each of these studies
and publications is reliable, we have not independently verified such data, and
we make no representations as to the accuracy of such information. Certain
market share data is based on published information available for the Mexican
states. There is no comparable data available relating to the particular cities
we serve. In presenting market share estimates for the cities, therefore, we
have estimated the size of the market on the basis of the published information
for the state in which the particular city is located. We believe this method is
reasonable, but the results have not been verified by any independent source.
FORWARD-LOOKING STATEMENTS
Many statements under the captions "Prospectus Summary," "Risk Factors,"
"Use of Proceeds," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Business," "Regulation" and elsewhere in this
prospectus are "forward-looking statements." These forward-looking statements
include, but are not limited to, statements about our plans, objectives,
expectations and intentions and other statements contained in the prospectus
that are not historical facts. When used in this prospectus, the words
"expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates"
and similar expressions are generally intended to identify forward-looking
statements.
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These forward-looking statements reflect our best assessment at the time
and thus involve uncertainty and risk. Therefore, these forward-looking
statements are qualified by reference to the cautionary statements set forth in
this prospectus. It is possible that our future financial performance may differ
materially from our expectations due to a variety of factors, some of which
include, without limitation, the following:
o ability to attract subscribers;
o expansion of our business to new cities;
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
o other factors described in this prospectus.
Any forward-looking statements in this prospectus 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.
PRESENTATION OF FINANCIAL INFORMATION
Our financial statements have been prepared in accordance with Mexican
generally accepted accounting principles, which we refer to as "Mexican GAAP,"
which differ in significant respects from US generally accepted accounting
principles, which we refer to as "US GAAP," including the treatment of the
capitalization of pre-operating expenses, the capitalization of interest,
severance, and deferred income taxes and employees' profit sharing and in the
presentation of cash flow information. Note 24 to our audited consolidated
financial statements, which are part of this prospectus, contains a
reconciliation of our net loss and shareholders' equity to US GAAP as of and for
the years ended December 31, 2004, 2003 and 2002.
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Pursuant to Bulletin B-10, "Recognition of the Effects of Inflation on
Financial Information," and Bulletin B-12, "Statement of Changes in Financial
Position," issued by the Mexican Institute of Public Accountants, our
consolidated financial statements are reported in period-end pesos to adjust for
the inter-period effects of inflation. The presentation of financial information
in period-end, or constant, currency units is intended to eliminate the
distorting effect of inflation on the financial statements and to permit
comparisons across periods in comparable monetary units.
Bulletin B-10 requires us to restate nonmonetary assets (other than
inventory) using the Mexican national consumer price index. Bulletin B-10 also
requires restatement of all financial statements to constant pesos as of the
date of the most recent balance sheet presented. Accordingly, all data in the
financial statements and in the selected financial data set forth below has been
restated in constant pesos as of December 31, 2004. References in this
prospectus to "real" amounts are to inflation-adjusted pesos and references to
"nominal" amounts are to unadjusted historical pesos. In the calendar years
2004, 2003 and 2002, the rates of inflation in Mexico, as measured by changes in
the Mexican national consumer price index, published by Banco de Mexico, were
5.5%, 4.0% and 5.7%, respectively.
When reporting under Mexican GAAP and in accordance with Bulletin B-10, we
are required to quantify all financial effects of operating and financing the
business under inflationary conditions. For presentation purposes,
"comprehensive (income) cost of financing" refers to the combined financial
effects of:
o net interest expense or interest income;
o net gains or losses on monetary position; and
o net foreign exchange gains or losses.
The gain or loss on monetary position refers to gains or losses realized
from holding net monetary assets or liabilities and reflect the impact of
inflation on monetary assets and liabilities. For example, a gain on monetary
position results from holding net monetary liabilities in pesos during periods
of inflation, as the purchasing power of the peso declines over time.
Net foreign exchange gains or losses reflect the impact of changes in
foreign exchange rates on assets and liabilities denominated in currencies other
than pesos. A foreign exchange loss arises if a liability is denominated in a
foreign currency which appreciates relative to the peso between the time the
liability is incurred and the date it is repaid, as the appreciation of the
foreign currency results in an increase in the amount of pesos which must be
exchanged to repay the specified amount of the foreign currency liability.
The US dollar amounts provided in this prospectus are translations from the
peso amounts, solely for the convenience of the reader, at the exchange rate
reported by the Banco de Mexico on December 31, 2004 as its noon buying rate for
pesos. However, where peso denominated data is given "in nominal pesos," the
amounts provided are the peso amounts actually paid at the time of the
expenditure. On February 25, 2005, the noon buying rate for pesos was Ps.
11.0807 per US dollar. On December 31, 2004, the noon buying rate for pesos was
Ps. 11.2648. These transactions should not be construed as representations that
the peso amounts represent such US dollar amounts or could be converted into US
dollars at the rate indicated as of any dates mentioned in this prospectus.
Sums presented in this prospectus may not add due to rounding.
SERVICE OF PROCESS AND ENFORCEMENT OF CIVIL LIABILITIES
We and our subsidiaries are variable capital corporations (sociedades
anonimas de capital variable) organized under the laws of Mexico, and are
headquartered, managed and operated outside of the United States (principally in
Mexico). Most of our directors and all of our officers reside in Mexico. All or
a substantial portion of our assets and the assets of most of our directors and
all of our officers are located outside of the United States (principally in
Mexico). As a result, it may not be possible for the investors or holders of the
notes to effect service of process outside of Mexico or within the United States
upon us or such persons, or to enforce a judgment obtained in
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the United States against us or them outside of Mexico or in the United States
courts that is based on the civil liability provisions under laws of
jurisdictions other than Mexico including the federal and state securities laws
or other laws of the United States.
We have been advised by our special Mexican counsel, D & A Morales y
Asociados, S.C., that no treaty is in effect between the United States and
Mexico calling for the mutual recognition and enforcement of their respective
judgments. The recognition by Mexican courts of a judgment rendered in the
United States is usually done under the principle of reciprocity, which means
that Mexican courts would reexamine judgments rendered in the United States if
such foreign country would reexamine Mexican judgments. Mexican courts may
enforce judgments rendered in the United States through a homologation procedure
consisting of the review by such Mexican courts of the foreign judgment to
ascertain whether certain requirements of due process, reciprocity and public
policy have been complied with, without reviewing the merits of the subject
matter of the case. A judgment rendered in the United States may or need not be
recognized if, among others:
o the foreign court did not have jurisdiction over the subject matter in
a manner that is compatible with or analogous to Mexican laws or the
subject matter is within the exclusive jurisdiction of Mexican courts,
o the judgment was rendered under a system which does not provide
procedures compatible with due process requirements,
o enforcement of the judgment would be contrary to public policy,
o the defendant did not receive adequate personal notice in sufficient
time to defend itself,
o the judgment is not final in the rendering state,
o the judgment conflicts with another final judgment, or
o there is no reciprocity with the rendering state.
Furthermore, there is doubt as to the enforceability, in actions originated
in Mexico, of liabilities based in whole or in part on the United States federal
or state securities laws and as to the enforceability of judgments obtained in
the United States in actions based in whole or in part on the civil liability
provisions of United States federal or state securities laws.
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
It is not complete and may not contain all the information that may be important
to you. You should read the entire prospectus, including the financial data and
related notes, before making an investment decision. The terms "Axtel," "our
company," "our" and "we" used in this prospectus refer to Axtel, S.A. de C.V.,
the issuer of the notes, and its wholly owned subsidiaries, Servicios Axtel,
S.A. de C.V., Impulsora e Inmobiliaria Regional, S.A. de C.V. and Instalaciones
y Contrataciones, S.A. de C.V., as a combined entity, except where it is made
clear that such terms mean only the parent company. You should pay special
attention to the "Risk Factors" section beginning on page 12 of this prospectus
to determine whether an investment in the exchange notes is appropriate for you.
All financial data have been restated in constant pesos as of December 31, 2004,
except as otherwise indicated.
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 453,519 lines in service as of December 31, 2004. For the year
ended December 31, 2004, we generated revenues and operating income of Ps.
3,861.3 million (US$342.8 million) and Ps. 252.3 million (US$22.4 million),
respectively.
We hold concessions to offer local and long distance telecommunications
services throughout Mexico. 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
over Ps. 9,328 million in the aggregate in our network, which includes 12
digital switches, 265 fixed wireless access sites, 88 point-to-multipoint sites
and 466 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, 2004, approximately 69% of our
revenues were generated from business lines and 31% of our revenues were
generated from residential lines.
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. 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
twelve of the largest metropolitan areas in Mexico (Mexico City, Monterrey,
Guadalajara, Puebla, Toluca, Leon, Queretaro, San Luis Potosi, Aguascalientes,
Saltillo, Ciudad Juarez and Tijuana), which represent more than 31% of the total
population of Mexico. We estimate that our total lines represent approximately
9% of this total addressable market. 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.
The Mexican Telecommunications Industry
The Mexican telecommunications market is the second largest in Latin
America. According to Pyramid Research (an Economist Intelligence unit
subsidiary), revenues from telephony communications services in Mexico,
including both fixed and mobile, are expected to grow at a compound annual
growth rate of 5.5%, from US$16.3 billion in 2003 to US$21.3 billion in 2008. We
believe the following factors will continue to drive the growth in the Mexican
telecommunications market:
Stable and Expanding Economy. Mexico is the second largest economy in Latin
America in terms of gross domestic product (US$643.8 billion in 2004). According
to information made available by Banco de Mexico, Mexico's rate of inflation for
2004 was 5.5% and the economic growth for the same year was forecast by Pyramid
Research to be 4.1%. Continued strong oil prices, more effective tax collection
and controlled spending have been important factors in meeting government
deficit targets.
Significant Market Growth Potential. Although Mexico has one of the highest
gross domestic product per capita in Latin America, it has relatively low
teledensity. According to Pyramid Research, at the end of 2004, the fixed-line
penetration rate in Mexico was 17.2 telephone lines per 100 inhabitants,
compared to 23 in Chile, 22.3 in Brazil, 21.9 in Argentina and 17.9 in Colombia.
Pyramid Research forecasts that lines in service in Mexico will grow at a
compound annual growth rate of 5.82% between 2003 and 2008. Moreover, the
Mexican government has announced that it is committed to improving the
teledensity rate in Mexico.
Favorable Regulatory Environment. The Mexican telecommunications market has
long been dominated by Telefonos de Mexico, S.A. de C.V. ("Telmex"), the former
government-owned telecommunications monopoly. Since the Mexican government
completed the privatization of Telmex in 1990, the Mexican telecommunications
sector has become increasingly open to competition. The opening of the Mexican
telecommunications market has created an opportunity for competitive carriers to
capture market share from Telmex. As the owner and operator of a network serving
Mexico's largest metropolitan markets, we believe we are well positioned to
continue to take advantage of this market opportunity.
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
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 what we estimate to be approximately 9% market share of
our total addressable market in the twelve cities where we offer services. In
the cities of Monterrey and Guadalajara, the first two markets where we launched
operations in 1999, we estimate that we have achieved approximately 14% market
share of our coverage market in both of these cities.
Comprehensive Voice and Data Service Portfolio. We provide our customers
with 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 fixed
wireless access 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, 2004, our network consisted of 12
digital switches, 265 fixed wireless access sites, 88 point-to-multipoint sites,
and 466 kilometers of metropolitan fiber optic rings in order to service our
453,519 access lines.
Compelling Financial Profile. We have a diversified revenue base, a
favorable average revenue per user, positive free cash flow and strong
capitalization.
o Diversified revenue base. Our wide array of service offerings and our
453,519 lines in service and 288,379 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, 2004, we had an average revenue per user of Ps. 662.6.
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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.
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
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, 2004, approximately
69% of our revenues were generated from business lines and 31% 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 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 other 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 twelve 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 Investors
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 59.5% of our voting stock and has a 54.3% 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 14.1% of our voting shares and has an
11.9% economic interest in
-3-
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.
Corporate Information
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).
-4-
SUMMARY OF THE TERMS OF THE EXCHANGE OFFER
Set forth below is a summary description of the terms of the exchange
offer. We refer you to "The Exchange Offer" for a more complete description of
the terms of the exchange offer.
Exchange Notes ................................ Up to $75.0 million aggregate
principal amount of our 11%
Senior Notes due 2013. The
terms of the exchange notes
are identical in all material
respects to the terms of the
2005 notes, except that,
because the offer of the
exchange notes will have been
registered under the
Securities Act, the exchange
notes will not be subject to
transfer restrictions,
registration rights or the
related provisions for
increased interest if we
default under the related
registration rights agreement.
The Exchange Offer............................. We are offering to exchange up
to $75.0 million aggregate
principal amount of exchange
notes for a like aggregate
principal amount of 2005
notes. 2005 notes may only be
tendered in multiples of
$1,000. In connection with the
private offering of the 2005
notes on January 13, 2005, we
entered into a registration
rights agreement which grants
holders of the 2005 notes
certain exchange and
registration rights. This
exchange offer is intended to
satisfy our obligations under
the registration rights
agreement. If the exchange
offer is not completed within
the time period specified in
the registration rights
agreement, we will be required
to pay additional interest on
the 2005 notes.
Resale of Exchange Notes....................... Based on existing
interpretations by the staff
of the SEC set forth in
interpretive letters issued to
third parties, we believe that
the exchange notes may be
offered for resale, resold or
otherwise transferred by you
without compliance with the
registration and prospectus
delivery requirements of the
Securities Act, except as set
forth below, so long as:
o you are acquiring the
exchange notes in the ordinary
course of your business;
o at the time of the
consummation of the exchange
offer, you are not
participating in, you do not
intend to participate in and
you have no arrangement or
understanding with any person
to participate in the
distribution of the 2005 notes
or exchange notes within the
meaning of the Securities Act;
and
o you are not our "affiliate"
within the meaning of Rule 405
under the Securities Act.
If any of the statements above
are not true and you transfer
any exchange notes without
delivering a prospectus that
meets the requirements of the
Securities Act or without an
exemption from registration of
your exchange notes from those
requirements, you may incur
liability under the Securities
Act.
-5-
Each broker-dealer that
receives exchange notes for
its own account in exchange
for 2005 notes that were
acquired by such broker-dealer
as a result of market-making
or other trading activities
may be a statutory underwriter
and must acknowledge that it
will deliver a prospectus in
connection with any resale of
the exchange notes. See "Plan
of Distribution."
Consequences of Failure to Exchange 2005
notes for Exchange Notes....................... If you do not exchange 2005
notes for exchange notes, you
will not be able to offer,
sell or otherwise transfer
your 2005 notes except:
o in compliance with the
registration requirements of
the Securities Act or any
other applicable securities
laws;
o pursuant to an exemption
from the securities laws; or
o in a transaction not subject
to the securities laws.
2005 notes that remain
outstanding after completion
of the exchange offer will
continue to bear a legend
reflecting these restrictions
on transfer. In addition, upon
completion of the exchange
offer, you will not be
entitled to any rights to have
the resale of 2005 notes
registered under the
Securities Act, and we
currently do not intend to
register under the Securities
Act the resale of any 2005
notes that remain outstanding
after the completion of the
exchange offer.
Expiration Date................................ The exchange offer will expire
at 5:00 p.m., New York City
time, on , 2005, unless
extended. We do not currently
intend to extend the exchange
offer.
Interest on the Exchange Notes................. Interest on the exchange notes
will accrue at the rate of 11%
from December 15, 2004, the
date of the last periodic
payment of interest on the
2003 notes. No additional
interest will be paid on 2005
notes tendered and accepted
for exchange.
Conditions to Exchange Offer................... The exchange offer is subject
to customary conditions,
including that:
o the exchange offer does not
violate applicable law or any
applicable interpretations of
the SEC staff;
o the 2005 notes are validly
tendered in accordance with
the exchange offer;
o no action or proceeding
would impair our ability to
proceed with the exchange
offer; and
o any governmental approval
has been obtained, that we
believe, in our sole
discretion, is necessary for
the consummation of the
exchange offer as outlined in
this prospectus.
-6-
Procedures for Tendering 2005 notes............ If you wish to accept the
exchange offer, you must
complete, sign and date the
letter of transmittal
accompanying this prospectus
and mail or otherwise deliver
it, together with your 2005
notes to be exchanged and any
other required documentation
to The Bank of New York, the
exchange agent, at the address
specified on the cover page of
the letter of transmittal.
Alternatively, if your 2005
notes are held through DTC,
you can tender your 2005 notes
through DTC by following the
procedures for book-entry
transfer. See "The Exchange
Offer Book Entry Transfer."
Questions regarding the tender
of 2005 notes or the exchange
offer generally should be
directed to the exchange agent
at one of its addresses
specified in "The Exchange
Offer--Exchange Agent." See
"The Exchange
Offer--Procedures for
Tendering" and "The Exchange
Offer--Guaranteed Delivery
Procedures."
Guaranteed Delivery Procedures................. If you wish to tender your
2005 notes and you cannot
deliver the required documents
to the exchange agent by the
expiration date, you may
tender your 2005 notes
according to the guaranteed
delivery procedures described
under the heading "The
Exchange Offer--Guaranteed
Delivery Procedures."
Acceptance of 2005 Notes and Delivery of
Exchange Notes................................. We will accept for exchange
all 2005 notes that are
properly tendered in the
exchange offer before 5:00
p.m., New York City time, on
the expiration date, as long
as all of the terms and
conditions of the exchange
offer are met. We will deliver
the exchange notes promptly
following the expiration date.
Withdrawal Rights.............................. You may withdraw the tender of
your 2005 notes at any time
before 5:00 p.m., New York
City time, on the expiration
date of the exchange offer. To
withdraw, you must send a
written notice of withdrawal
to the exchange agent at one
of its addresses specified in
"The Exchange Offer--Exchange
Agent" before 5:00 p.m., New
York City time, on the
expiration date. See "The
Exchange Offer--Withdrawal of
Tenders."
Taxation....................................... We believe that the exchange
of 2005 notes for exchange
notes should not be a taxable
transaction for U.S. federal
income tax purposes. For a
discussion of certain other
U.S. and Mexican federal tax
considerations relating to the
exchange of the 2005 notes for
the exchange notes and the
purchase, ownership and
disposition of the exchange
notes, see "Taxation."
Exchange Agent................................. The Bank of New York is the
exchange agent. The address,
telephone number and facsimile
number of the exchange agent
are set forth in "The Exchange
Offer--Exchange Agent" and on
the inside back cover of this
prospectus.
Use of Proceeds................................ We will not receive any
proceeds from the issuance of
the exchange notes. We are
making the exchange offer
solely to satisfy our
obligations under the
registration rights agreement.
See "Use of Proceeds" for a
description of our use of the
net proceeds received in
connection with the issuance
of the 2005 notes.
-7-
SUMMARY OF THE TERMS OF THE EXCHANGE NOTES
Issuer........................................ Axtel, S.A. de C.V.
Exchange Notes Offered........................ US$75,000,000 in aggregate
principal amount of 11% Senior
Notes due 2013 which have been
registered under the
Securities Act.
Maturity Date................................. December 15, 2013.
Guarantees.................................... Each of our current
subsidiaries and certain of
our future subsidiaries will
guarantee the notes with
guarantees that will be
unsecured. From and after the
issue date, subject to certain
exceptions, each subsidiary
that guarantees any of our
indebtedness will be required
to guarantee the notes on the
same basis.
Interest Payments............................. Interest will be payable
semi-annually in arrears on
June 15 and December 15 of
each year, commencing June 15,
2005.
Ranking....................................... The notes are our senior
unsecured obligations.
Accordingly, the notes will
rank:
o effectively junior in right
of payment to all existing and
future secured indebtedness
and indebtedness owed to
statutorily preferred
creditors;
o equal in right of payment to
any of our existing and future
senior unsecured indebtedness;
and
o senior in right of payment
to any of our existing and
future subordinated
indebtedness.
In addition, the guarantees of
the notes by our subsidiaries
will rank equally to all of
such non-guarantor
subsidiaries' existing and
future senior unsecured
obligations. The notes and the
guarantees thereof will be
effectively subordinated to
all secured indebtedness of
the guarantors to the extent
of the assets securing such
indebtedness. As of December
31, 2004, we had approximately
US$194.8 million of
outstanding indebtedness
(excluding intercompany
liabilities and guarantees)
and the 2005 notes would have
ranked effectively junior in
right of payment to
approximately $4.5 million of
secured liabilities.
Optional Redemption........................... We may redeem any of the notes
at any time on or after
December 15, 2008, in whole or
in part, in cash, at the
redemption prices described in
this prospectus, plus accrued
and unpaid interest to the
date of redemption.
At any time prior to December
15, 2006, we may redeem up to
35% of the aggregate principal
amount of the notes issued
under the indenture governing
the notes with the net
proceeds of certain equity
offerings at a redemption
price equal to 111% of the
principal amount of the notes
plus accrued and unpaid
interest to the date of
redemption. We may make that
redemption only if, after the
redemption, at least 65% of
the aggregate principal amount
of
-8-
notes issued under the
indenture governing the notes
remains outstanding.
Redemption for Tax Reasons.................... Under certain circumstances,
we may redeem the notes in
whole but not in part upon not
less than 30 and no more than
60 days' prior notice at a
price equal to 100% of the
principal amount thereof,
together with accrued and
unpaid interest to the date
fixed for redemption plus any
additional amounts. See
"Description of the Exchange
Notes--Redemption for Changes
in Withholding Taxes."
Change of Control............................. If we experience a Change of
Control (as defined under
"Description of the Exchange
Notes--Repurchase at the
Option of Holders"), we will
be required to make an offer
to repurchase the notes at a
price equal to 101% of the
principal amount thereof, plus
accrued and unpaid interest to
the date of repurchase.
Certain Covenants............................. The terms of the notes will
restrict our ability and the
ability of our restricted
subsidiaries to, among other
things:
o incur additional
indebtedness or issue
preferred stock;
o pay dividends or make other
distributions to our
stockholders;
o purchase or redeem capital
stock or subordinated
indebtedness;
o make investments;
o create liens;
o incur restrictions on the
ability of our restricted
subsidiaries to pay dividends
or make other payments to us;
o sell assets;
o consolidate or merge with or
into other companies or
transfer all or substantially
all of our assets; and
o engage in transactions with
affiliates.
These limitations will be
subject to a number of
important qualifications and
exceptions. See "Description
of the Exchange Notes--Certain
Covenants."
-9-
Summary Historical Consolidated Financial Information
The following table provides a summary of our historical consolidated
financial data. The summary historical consolidated financial data for the years
ended December 31, 2000, 2001, 2002, 2003 and 2004 have been derived from our
audited consolidated financial statements.
The information presented below should be read in conjunction with "Use of
Proceeds," "Capitalization," "Selected Financial Data," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
consolidated financial statements included elsewhere in this prospectus.
Year Ended December 31,
------------------------------------------------------------
2000 2001 2002 2003 2004
----------- ---------- ---------- --------- -----------
(Constant Ps. in millions as of December 31, 2004)
Statement of Income Data:
Revenues............................... 1,110.3 2,365.5 2,586.6 3,079.2 3,861.3
Cost of sales and operating expenses... (2,041.0) (2,962.3) (2,832.1) (2,960.7) (3,609.0)
Income (loss) from operations.......... (930.7) (596.8) (245.5) 118.6 252.3
Interest expense, net.................. (256.3) (423.8) (445.1) (209.8) (257.4)
Foreign exchange gain (loss), net...... (20.0) 105.1 (652.0) (336.9) (7.3)
Monetary position...................... 175.0 228.8 295.9 97.9 64.8
Other income (expense), net(1)......... 13.9 (32.6) (29.1) 1,808.2 21.0
Cash severance and other special items. -- (66.5) (34.2) (11.0) --
----------- ---------- ---------- --------- -----------
Income (loss) before income taxes and
employee profit...................... (1,018.0) (785.7) (1,110.1) 1,466.9 73.3
Income tax and employee profit sharing
benefit (expense).................... 233.3 169.0 254.9 (520.4) (150.5)
----------- ---------- ---------- --------- -----------
Net income (loss)...................... (784.7) (616.7) (855.1) 946.5 (77.1)
=========== ========== ========== ========= ===========
Operating Data:
Depreciation and amortization.......... 353.8 680.0 854.9 907.6 1,001.2
Investment in fixed assets (end of 3,252.3 1,669.3 596.3 485.3 1,532.6
period)..............................
Net Cash Flow:
Operating activities................. (654.3) (320.2) (12.2) 168.4 1,183.0
Investing activities................. (3,351.1) (1,682.4) (597.8) (587.2) (1,603.4)
Financing activities................. 4,051.6 1,989.6 813.5 1,142.3 (93.6)
----------- ---------- ---------- --------- -----------
Total net cash flows................... 46.2 (13.0) 203.5 723.5 (514.0)
Total access lines in service (in
thousands) (end of period)
Business............................. 72.5 121.0 116.4 132.4 177.6
Residential.......................... 144.3 169.1 178.7 216.7 275.9
----------- ---------- ---------- --------- -----------
Total................................ 216.8 290.1 295.1 349.1 453.5
=========== ========== ========== ========= ===========
As of
December 31, 2004
------------------
(Constant Ps. in
millions)
Balance Sheet Data:
Cash and cash equivalents........................ 554.4
Net working capital investment................... (57.3)
Total assets..................................... 8,637.9
Total debt....................................... 2,194.5
Net debt......................................... 1,640.1
Total liabilities................................ 3,038.9
Total shareholders' equity....................... 5,599.1
-10-
Data in Accordance with US GAAP(2):
Year Ended December 31,
--------------------------------------------------------
2000 2001 2002 2003 2004
--------- --------- --------- --------- ---------
(Constant Ps. in millions as of December 31, 2004)
Financial Data:
Income (loss) from operations........... (1,059.2) (602.0) (130.5) 180.3 255.6
Net income (loss)....................... (1,201.4) (643.9) (997.4) 2,889.6 73.3
Total assets............................ 6,727.1 7,717.3 7,515.0 8,123.4 8,336.0
Total debt.............................. 4,391.9 5,174.1 5,839.2 2,288.0 2,194.5
Total shareholders' equity (deficit).... 1,310.9 1,720.3 787.0 5,119.7 5,192.7
____________________________
(1) Other income for the year ended December 31, 2003 includes a net gain of
1,960.1 million (US$174.0 million) due to our repurchase of certain debt.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Debt Repurchase."
(2) Reconciled in accordance with Note 24 of our consolidated financial
statements.
-11-
RISK FACTORS
You should carefully consider the following risk factors, as well as other
information set forth in this prospectus, prior to making an investment in the
exchange notes. The risks described below are not the only ones that may affect
the notes. Additional risks not presently known to us or that we currently deem
immaterial may also impair our business operations. In general, investing in the
securities of issuers in emerging-market countries such as Mexico involves risks
not typically associated with investing in the securities of US companies. To
the extent it relates to the Mexican government or Mexican macroeconomic data,
the following information has been extracted from official publications of the
Mexican government.
Risks Relating to Our Company
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 operations 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.
During 2004 we launched operations in the cities of Queretaro, San Luis Potosi,
Aguascalientes, Saltillo, Ciudad Juarez and Tijuana. 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 our inception we have invested in the aggregate
approximately Ps. 9,328 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
all of our requirements for fixed wireless access products, 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 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 "Certain Relationships and
Related 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
-12-
and upgrade such systems or that they will continue to perform as expected. Any
failure 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. For the year ended December 31, 2004, our
sales to Nextel de Mexico accounted for approximately 17% of our net sales. In
the event that 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 expires on December 31, 2005. Its terms
and conditions (including the interconnection rates) are automatically extended
after the expiration date until the parties mutually agree to extend the
agreement or execute a new interconnection agreement. If a new interconnection
agreement is entered into with Telmex, its terms and conditions (including
interconnection rates) 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;
-13-
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 14% and 21% 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.
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 the 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
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.
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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 1.1% during the year ended
December 31, 2004 from 1.6% and 2.2% in 2003 and 2002, respectively, 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 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 pending 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 notes and no
action is required at the Board of Directors level. See "Business--Legal
Proceedings--Shareholdings Disputes."
Risks Relating to the Mexican Telecommunications Industry
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 re-
-15-
gions. 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.
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 40.5%
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.
Risks Relating to Mexico
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 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 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.
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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 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 and/or the Partido Verde Ecologista de Mexico 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, 2004, the peso was devalued by 0.2% (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-
-17-
denominated obligations, including the notes. In addition, any further
devaluation of the peso may negatively affect the value of Mexican securities
such as the 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 "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 24 to the audited consolidated financial
statements.
Risks Relating to the Exchange Notes
We and our subsidiary guarantors may incur substantially more debt, which could
further exacerbate the risks associated with our indebtedness.
Although the agreements governing our and our subsidiary guarantors'
outstanding indebtedness and the indenture governing the notes contain
restrictions on the incurrence of additional indebtedness, these restrictions
are subject to a number of qualifications and exceptions, and the indebtedness
incurred in compliance with these restrictions could be substantial. Also, these
restrictions do not prevent us or our subsidiary guarantors from incurring
obligations that do not constitute "indebtedness" as defined in the relevant
agreement. If new debt is added to the current indebtedness levels, the related
risks that we now face could intensify.
Our indebtedness could adversely affect our financial condition and impair our
ability to fulfill our obligations under the notes.
Our ability to meet our debt service requirements, including our
obligations with respect to the notes, will depend on our future performance,
which is subject to a number of factors, many of which are outside our control.
We cannot assure you that we will generate sufficient cash flow from operating
activities to meet our debt service and working capital requirements.
As of December 31, 2004, we had approximately US$194.8 million of
outstanding indebtedness.
Our level of indebtedness may have important negative effects on our future
operations, including:
o impairing our ability to obtain additional financing in the future for
working capital, capital expenditures, acquisitions or other general
corporate purposes or to repurchase the notes from you upon a change
of control;
o requiring us to dedicate a substantial portion of our cash flow to the
payment of principal and interest on our indebtedness, which reduces
the availability of our cash flow to fund working capital, capital
expenditures, acquisitions and other general corporate purposes;
o subjecting us to the risk of increased sensitivity to interest rate
increases on our indebtedness with variable interest rates, including
our borrowings under our credit facilities;
o increasing the possibility of an event of default under the financial
and operating covenants contained in our debt instruments; and
-18-
o limiting our ability to adjust to rapidly changing market conditions,
reducing our ability to withstand competitive pressures and making us
more vulnerable to a downturn in general economic conditions or our
business than our competitors with less debt.
If we are unable to generate sufficient cash flow from operations in the
future to service our debt, we may be required to refinance all or a portion of
our existing debt, including the notes, or to obtain additional financing. We
cannot assure you that any such refinancing would be possible or that any
additional financing could be obtained. Our inability to obtain such refinancing
or financing may have a material adverse effect on us.
The instruments governing our debt, including the exchange notes offered hereby,
contain cross-default provisions that may cause all of the debt issued under
such instruments to become immediately due and payable as a result of a default
under an unrelated debt instrument.
The indenture governing the notes contains numerous operating covenants and
requires us and our subsidiaries to meet certain financial ratios and tests.
Instruments governing our other debt also contain certain affirmative and
negative covenants. Our failure to comply with the obligations contained in the
indenture or other instruments governing our indebtedness could result in an
event of default under the applicable instrument, which could result in the
related debt and the debt issued under other instruments becoming immediately
due and payable. In such event, we would need to raise funds from alternative
sources, which may not be available to us on favorable terms, on a timely basis
or at all. Alternatively, such default could require us to sell our assets and
otherwise curtail operations in order to pay our creditors.
The notes and the guarantees will be unsecured and effectively subordinated to
our secured indebtedness.
The notes and the obligations of the subsidiary guarantors under their
respective guarantees will not be secured by any of our assets. As of December
31, 2004, we had US$4.6 million of secured debt outstanding. The indenture
governing the notes will permit the incurrence of additional debt, some of which
may be secured debt. Holders of our secured debt will have claims that are
effectively senior to your claims as holders of the notes, to the extent of the
value of the assets securing the secured debt.
If we become insolvent or are liquidated, or if payment under any secured
debt is accelerated, the lenders thereunder would be entitled to exercise the
remedies available to a secured lender. Accordingly, the lender will have
priority over any claim for payment under the notes to the extent of the value
of the assets that constitute its collateral. If this were to occur, it is
possible that there would be no assets remaining from which claims of the
holders of the notes could be satisfied. Further, if any assets did remain after
payment of these lenders, the remaining assets might be insufficient to satisfy
the claims of the holders of the notes and holders of other unsecured debt that
is deemed the same class as the notes, and potentially all other general
creditors who would participate ratably with holders of the notes.
Restrictive covenants in our debt agreements may restrict the manner in which we
can operate our business.
The indenture governing the notes limits, among other things, our ability
and the ability of our restricted subsidiaries to:
o borrow money or issue guarantees;
o pay dividends, redeem capital stock or make other restricted payments;
o create liens to secure indebtedness;
o make certain investments;
o sell certain assets;
-19-
o pledge assets;
o enter into transactions with our affiliates; and
o merge with another entity or sell substantially all of our assets.
If we fail to comply with these covenants, we would be in default under our
credit facility and the indenture, and the principal and accrued interest on the
notes and our other outstanding indebtedness may become due and payable. See
"Description of Other Indebtedness" and "Description of the Exchange
Notes--Certain Covenants." In addition, our future indebtedness agreements may
contain additional affirmative and negative covenants which could be more
restrictive than those contained in the indenture.
We may not have the ability to repurchase the notes upon a change of control as
required by the indenture.
Upon the occurrence of a change of control (as defined in the indenture),
we will be required to offer to purchase all the notes at 101% of their
principal amount plus accrued and unpaid interest to the date of repurchase.
Upon such a change of control, we may not have sufficient funds available to
repurchase all of the notes tendered pursuant to this requirement. In addition,
we may be prohibited by future credit facilities from repurchasing any of the
notes unless the lenders thereunder consent to such repurchase. Our failure to
repurchase the notes would be a default under the indenture, which would, in
turn, be a default under our credit facility and, potentially, other debt. If
the payment of any debt were to be accelerated, we may be unable to repay these
amounts or make the required repurchase of the notes. See "Description of the
Exchange Notes--Change of Control."
We may not be able to make payments in US dollars.
In the past, the Mexican economy has experienced balance of payments
deficits and shortages in foreign exchange reserves. While the Mexican
government does not currently restrict the ability of Mexican or foreign persons
or entities to convert pesos to foreign currencies, to US dollars in particular,
it has done so in the past and could do so again in the future. We cannot assure
you that the Mexican government will not implement a restrictive exchange
control policy in the future. Any such restrictive exchange control policy could
prevent or restrict our access to US dollars to meet our US dollar obligations
and could also have a material adverse effect on our business, financial
condition and results of operations. We cannot predict the impact of any such
measures on the Mexican economy.
No public market exists for the exchange notes. An active trading market may not
develop for the exchange notes, which may limit your ability to resell them.
There is no established trading market for the notes. We do not intend to
list the exchange notes on a stock exchange or seek their admission for trading
in the National Association of Securities Dealers Automated Quotation System. We
cannot assure you that an active trading market for the exchange notes will
develop or, if a trading market develops, that it will continue. The lack of an
active trading market for the exchange notes would have a material adverse
effect on the market price and liquidity of the exchange notes. If a market for
the exchange notes develops, the exchange notes may trade at a discount from
their initial offering price.
In addition, you may not be able to sell your exchange notes at a
particular time or at a price favorable to you. Future trading prices of the
exchange notes will depend on many factors, including:
o our operating performance and financial condition;
o our ability to complete the offer to exchange the 2005 notes for
exchange notes or to register the 2005 notes for resale;
o the interest of securities dealers in making a market;
-20-
o the market for similar securities; and
o prevailing interest rates.
Historically, the market for non-investment grade debt has been subject to
disruptions that have caused substantial volatility in prices. The market for
the exchange notes, if any, may be subject to similar disruptions. A disruption
may have a negative effect on you as a holder of the exchange notes, regardless
of our prospects or performance.
You may not be able to effect service of process on us, our subsidiaries or
directors or to enforce in Mexican courts judgments obtained against us in the
US.
We and our subsidiaries are variable capital corporations (sociedades
anonimas de capital variable) organized under the laws of Mexico, and are
headquartered, managed and operated outside of the United States (principally in
Mexico). Most of our directors and all of our officers reside in Mexico. All or
a substantial portion of our assets and the assets of most of our directors and
all of our officers are located outside of the United States (principally in
Mexico). As a result, it may not be possible for the investors or holders of the
notes to effect service of process outside of Mexico or within the United States
upon us or such persons, or to enforce a judgment obtained in the United States
against us or them outside of Mexico or in the United States courts that is
based on the civil liability provisions under laws of jurisdictions other than
Mexico including the federal and state securities laws or other laws of the
United States.
We have been advised by our special Mexican counsel, D & A Morales y
Asociados, S.C., that no treaty is in effect between the United States and
Mexico calling for the mutual recognition and enforcement of their respective
judgments. The recognition by Mexican courts of a judgment rendered in the
United States is usually done under the principle of reciprocity, which means
that Mexican courts would reexamine judgments rendered in the United States if
such foreign country would reexamine Mexican judgments. Mexican courts may
enforce judgments rendered in the United States through a homologation procedure
consisting of the review by such Mexican courts of the foreign judgment to
ascertain whether certain requirements of due process, reciprocity and public
policy have been complied with, without reviewing the merits of the subject
matter of the case. A judgment rendered in the United States may or need not be
recognized if, among others:
o the foreign court did not have jurisdiction over the subject matter in
a manner that is compatible with or analogous to Mexican laws or the
subject matter is within the exclusive jurisdiction of Mexican courts,
o the judgment was rendered under a system which does not provide
procedures compatible with due process requirements,
o enforcement of such judgment would be contrary to public policy,
o the defendant did not receive adequate personal notice in sufficient
time to defend itself,
o the judgment is not final in the rendering state,
o the judgment conflicts with another final judgment, or
o there is no reciprocity with the rendering state.
Furthermore, there is doubt as to the enforceability, in actions originated
in Mexico, of liabilities based in whole or in part on the United States federal
or state securities laws and as to the enforceability of judgments obtained in
the United States in actions based in whole or in part on the civil liability
provisions of United States federal or state securities laws.
-21-
Payment of judgments entered against us in Mexico will be in pesos, which may
expose you to exchange rate risks.
If proceedings to enforce our obligations under the notes are brought in
Mexico, Mexican law permits us to pay a resulting judgment in pesos. Under the
Ley Monetaria de Mexico (the "Mexican Monetary Law"), an obligation payable in
Mexico in a currency other than pesos may be satisfied in pesos at the exchange
rate in effect on the date the payment is made. This rate is currently
determined and published by the Banco de Mexico every business day.
Under Mexico's Ley de Concursos Mercantiles (the "Mexican Bankruptcy Law"),
upon our declaration of insolvency or bankruptcy, or in the event that actions
and claims are initiated in the courts of Mexico, our obligations under the
notes:
(i) would be converted into pesos at the exchange rate published by
the Banco de Mexico prevailing at the time of such declaration and would
subsequently be converted into Unidades de Inversion, which is a unit
pegged to the consumer price index determined by Banco de Mexico, and
payment would occur at the time claims of our other creditors are
satisfied;
(ii) would be subject to any provisional remedy ("providencia
precautoria") which may be issued in such proceedings;
(iii) would be dependent upon the outcome of the insolvency or
bankruptcy proceedings;
(iv) would not be adjusted to take into account depreciation of the
peso against the dollar occurring after such declaration of insolvency or
bankruptcy; and
(v) would be subject to certain statutory preferences including tax,
social security and labor claims and secured creditors.
Under the Mexican Bankruptcy Law, it is possible that in the event we are
declared bankrupt, any amount by which the stated principal amount of the notes
exceeds their accreted value may be regarded as not mature and, therefore,
claims of holders of the notes may only be allowed to the extent of the accreted
value of the notes. It is believed that there are no Mexican precedents in
bankruptcy addressing this point and there exists significant uncertainty as to
how a Mexican court would measure the claims to holders of the notes,
particularly given the recent enactment of the Mexican Bankruptcy Law in May
2000.
The collection of interest on interest may not be enforceable in Mexico.
Mexican law does not permit the collection of interest on interest and,
therefore, the accrual of default interest on past due ordinary interest accrued
in respect of the notes may be unenforceable in Mexico.
It is possible that guarantees may not be enforceable.
All of our current Subsidiary Guarantors are Mexican corporations. The
Guarantees being given by the Subsidiary Guarantors provide a basis for a direct
claim against the Subsidiary Guarantors. However, it is possible that the
Guarantees may not be enforceable. For those Subsidiary Guarantors located in
Mexico, we have been advised by our special Mexican counsel, D & A Morales y
Asociados, S.C., that the laws of Mexico do not prevent their respective
Guarantees from being valid, binding and enforceable against such Subsidiary
Guarantors in accordance with their terms. However, in the event that such a
Subsidiary Guarantor is declared bankrupt, the Guarantee may be deemed to have
been a fraudulent transfer and declared void if such Subsidiary Guarantor failed
to receive fair consideration or reasonably equivalent value in exchange for
such Guarantee. In addition, under Mexican Bankruptcy Law (Ley de Concursos
Mercantiles), if the Company or any of the Subsidiary Guarantors that are
located in Mexico are judicially declared bankrupt, our obligations under the
notes and each of such Subsidiary Guarantors' obligations under its Guarantee
will be subordinated to secured creditors and certain statutorily preferred
creditors, such as those holding labor, tax and social security related claims,
which will have preference over any other claims,
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including claims by any investor in respect of the notes or such Guarantees.
Furthermore, we have been advised that under Mexican laws, the validity of each
Guarantee is subject to the existence and validity of the obligation being
guaranteed. As a consequence thereof, its enforcement is not independent or
irrespective of such obligation being guaranteed. Furthermore, under Mexican
law, a Subsidiary Guarantor may be released from its obligations under the
Guarantee if (i) the holder of the note gives the Company an extension for
payment under the notes without the express consent of such Subsidiary
Guarantor, or (ii) the Company waives any cause that would otherwise release the
Company of its obligations under the notes, including expirations or statute of
limitation provisions.
The obligation of each Subsidiary Guarantor may be subject to review under
United States state or federal fraudulent transfer laws. Under such laws, if a
court in a lawsuit by an unpaid creditor or representative of creditors of a
Subsidiary Guarantor, such as a trustee in a bankruptcy of such Subsidiary
Guarantor as debtor in possession, were to find that at the time such obligation
was incurred such Subsidiary Guarantor, among other things, (a) did not receive
fair consideration or reasonably equivalent value therefor and (b) (i) was
insolvent, (ii) was rendered insolvent, (iii) was engaged in a business or
transaction for which its remaining unencumbered assets constituted unreasonably
small capital or (iv) intended to incur or believed that it would incur debts
beyond its ability to pay such debts as they matured, such court could avoid
such Subsidiary Guarantor's obligation and direct the return of any payments
made thereunder to such Subsidiary Guarantor or to a fund for the benefit of its
creditors. Moreover, regardless of the factors identified in the foregoing
clauses (i) through (iv), such court could avoid such obligation and direct such
repayment if it found that the obligation was incurred with an intent to hinder,
delay or defraud such Subsidiary Guarantor's creditors.
The measure of insolvency for purposes of the preceding paragraphs will
vary depending upon the law of the jurisdiction being applied. Generally,
however, an entity would be considered insolvent if it is unable to pay or
satisfy its obligations as they become due, the sum of its debts is greater than
all of its property (including collection rights) at a fair valuation or the
present fair salable value of its assets is less than the amount that will be
required to pay its probable liability on its existing debts as they become
absolute and matured.
If the Guarantees become unenforceable under the conditions described
above, the notes would effectively be subordinated to all liabilities, including
trade payables, of the Subsidiary Guarantors. On December 31, 2004, the
Subsidiary Guarantors had total balance sheet liabilities of Ps. 96.1 million.
Your failure to tender the 2005 notes in the exchange offer may affect their
marketability.
If 2005 notes are tendered for exchange notes and accepted in the exchange
offer, the trading market, if any, for the untendered and tendered but
unaccepted 2005 notes will be adversely affected. Your failure to participate in
the exchange offer will substantially limit, and may effectively eliminate,
opportunities to sell your 2005 notes in the future. We issued the 2005 notes in
a private offering exempt from the registration requirements of the Securities
Act.
Accordingly, you may not offer, sell or otherwise transfer your 2005 notes
except in compliance with the registration requirements of the Securities Act
and any other applicable securities laws, or pursuant to an exemption from the
securities laws, or in a transaction not subject to the securities laws. If you
do not exchange your 2005 notes for exchange notes in the exchange offer, or if
you do not properly tender your 2005 notes in the exchange offer, your 2005
notes will continue to be subject to these transfer restrictions after the
completion of the exchange offer. In addition, after the completion of the
exchange offer, you will no longer be able to obligate us to register the 2005
notes under the Securities Act.
-23-
USE OF PROCEEDS
We will not receive any cash proceeds from the exchange offer. We are
making this exchange offer solely to satisfy our obligations under the
registration rights agreement. In consideration for issuing the exchange notes,
we will receive the 2005 notes in an aggregate principal amount equal to the
value of the exchange notes. The 2005 notes surrendered in exchange for the
exchange notes will be retired and canceled. Accordingly, the issuance of the
exchange notes will not result in any change in our indebtedness.
We received approximately US$79 million in net proceeds from the sale of
the 2005 notes, after deducting discounts and offering expenses. We will use the
entire amount of net proceeds for general corporate purposes including the
continued expansion of our network.
-24-
THE EXCHANGE OFFER
Purpose of the Exchange Offer
We issued and sold the 2005 notes in a private offering on January 13,
2005. In connection with that issuance and sale, we entered into a registration
rights agreement with the initial purchasers of the 2005 notes. In the
registration rights agreement, we agreed, among other things, to
o prepare and file with the SEC, as promptly as practicable, a
registration statement relating to the offer to exchange the 2005
notes for the exchange notes (the "exchange offer registration
statement"), or, under certain circumstances, a "shelf" registration
with respect to the 2005 notes or exchange notes, (the "shelf
registration statement");
o use our reasonable best efforts to cause the exchange offer
registration statement to be declared effective under the Securities
Act within 210 days of January 13, 2005 or, in the case of a shelf
registration statement, as applicable, to be declared effective within
certain specified time periods after a shelf registration is required
or requested; and
o keep the registered exchange offer open for not less than 30 business
days (or longer if required by applicable law) after the date that
notice of the registered exchange offer is mailed to the holders of
the 2005 notes,
These requirements under the registration rights agreement will be
satisfied when we complete the exchange offer. However, if we fail to meet any
of these requirements, and under some other circumstances, the interest rate
borne by the 2005 notes that are affected by the registration default with
respect to the first 90-day period, or portion thereof, will be increased by an
additional interest of 0.25% per annum upon the occurrence of each registration
default. The amount of additional interest will increase by an additional 0.25%
per annum each 90-day period, or portion thereof, while a registration default
is continuing until all registration defaults have been cured, provided that the
maximum aggregate increase in the interest rate will in no event exceed one
percent (1%) per annum. Upon
o the effectiveness of the registration statement, in the case of a
registration default caused by a registration statement that was not
declared effective on or prior to the date by which best efforts are
to be used to cause such effectiveness; or
o the effectiveness of the registration statement which had ceased to be
effective, in the case of a registration default caused by a
registration statement that had been declared effective, but ceased to
be effective at any time at which it was required to be effective,
the registration default damages (additional interest) shall cease to accrue.
We have agreed to provide each holder of 2005 notes a copy of the
prospectus that forms part of the registration statement. We have also agreed to
keep the registered exchange offer open for not less than 30 business days and
after the date on which notice of the exchange offer is mailed to holders (or
longer if required by applicable law).
Under the registration rights agreement, our obligations to register the
exchange notes will terminate upon the completion of the exchange offer.
However, we will be required to file a shelf registration statement for a
continuous offering by the holders of the 2005 notes if:
o a change in law or applicable interpretations of the staff of the SEC
do not permit us to effect such an exchange offer; or
o for any other reason we do not consummate the exchange offer within
240 days of January 13, 2005; or
-25-
o an Initial Purchaser shall notify us following consummation of the
exchange offer that 2005 notes held by it are not eligible to be
exchanged for exchange notes in the exchange offer; or
o certain holders are prohibited by law or SEC policy from participating
in the exchange offer or may not resell the exchange notes acquired by
them in the exchange offer to the public without delivering a
prospectus.
During any 365-day period, upon the occurrence of certain events, we will
have the ability to suspend the disposition of 2005 notes pursuant to a
registration statement or shelf registration statement for up to 30 days, if we
determine in our reasonable judgment and upon written advice of counsel that the
continued effectiveness and use of the shelf registration statement would
require the disclosure of confidential information or interfere with any
financing, acquisition, reorganization or other material transaction involving
us.
We will, in the event of the filing of a shelf registration statement,
provide to each holder of 2005 notes that are covered by the shelf registration
statement copies of the prospectus included in the shelf registration statement
and notify each such holder when the shelf registration statement has become
effective. The names of holders of 2005 notes that propose to sell the 2005
notes pursuant to the shelf registration statement will be included, as selling
security holders, in such prospectus. We may require such holders to furnish us
with information we require to include in the shelf registration statement and
we may exclude them from such shelf registration statement if they fail to do so
within a reasonable time. Selling holders of 2005 notes that are included in the
shelf registration statement will be subject to certain of the civil liability
provisions under the Securities Act in connection with such sales and will be
bound by the provisions of the registration rights agreement which are
applicable to the holder (including certain indemnification obligations).
Once the exchange offer is complete, we will have no further obligation,
other than as set forth above, to register any of the 2005 notes not tendered to
us in the exchange offer. See "Risk Factors--Factors Relating to the Exchange
Notes and the Exchange Offer--Your failure to tender 2005 notes in the exchange
offer may affect their marketability."
Effect of the Exchange Offer
Based on interpretations by the SEC staff, as set forth in no-action
letters the SEC issued to third parties, we believe that you may offer for
resale, resell and otherwise transfer the exchange notes issued to you in the
exchange offer without compliance with the registration and prospectus delivery
requirements of the Securities Act, except as set forth below, so long as you
are able to make the following representations:
o you are acquiring the exchange notes in the ordinary course of your
business;
o at the time of the consummation of the registered exchange offer, you
are not participating in, you do not intend to participate in and you
have no arrangement or understanding with any person to participate in
the distribution of the 2005 notes or exchange notes within the
meaning of the Securities Act; and
o you are not our "affiliate" within the meaning of Rule 405 under the
Securities Act.
However, we have not sought a no-action letter with respect to the exchange
offer and we cannot assure you that the staff of the SEC would make a similar
determination with respect to the exchange offer. If you are not able to make
the representations set forth in the immediately preceding paragraph, and any
such other representations as may be necessary under applicable SEC rules,
regulations and interpretations, you are a "restricted holder." As a restricted
holder, you will not be able to participate in the exchange offer, you may not
rely on the interpretations of the SEC staff set forth in the no-action letters
referred to above and you may sell your 2005 notes only in compliance with the
registration and prospectus delivery requirements of the Securities Act or under
an exemption from the registration requirements of the Securities Act or in a
transaction not subject to the Securities Act.
-26-
In addition, each broker-dealer that receives exchange notes for its own
account pursuant to the exchange offer must acknowledge in the letter of
transmittal that it will deliver a prospectus in connection with any resale of
such exchange notes. The letter of transmittal states that by so acknowledging
and by delivering a prospectus, a broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the Securities Act. This
prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of exchange notes received in
exchange for securities where such securities were acquired by such
broker-dealer as a result of market-making activities or other trading
activities. We have agreed that, starting on the expiration date and ending on
the close of business 180 days after the expiration date, we will make this
prospectus available to any broker-dealer for use in connection with any such
resale. See "Plan of Distribution." In the registration rights agreement, we
agreed to use our best efforts to keep the exchange offer registration statement
effective, supplemented and amended as required, to ensure that it is available
for such resales of exchange notes during such period.
Except as described above, this prospectus may not be used for an offer to
resell, resale or other transfer of exchange notes.
To the extent 2005 notes are tendered and accepted in the exchange offer,
the principal amount of 2005 notes that will be outstanding will decrease with a
resulting decrease in the liquidity in the market for the 2005 notes. 2005 notes
that are still outstanding following the completion of the exchange offer will
continue to be subject to transfer restrictions.
Terms of the Exchange Offer
Upon the terms and subject to the conditions of the exchange offer
described in this prospectus and in the accompanying letter of transmittal, we
will accept for exchange all 2005 notes validly tendered and not withdrawn
before 5:00 p.m., New York City time, on the expiration date. We wi1l issue
$1000 principal amount of exchange notes in exchange for each $1000 principal
amount of 2005 notes accepted in the exchange offer. You may tender some or all
of your 2005 notes pursuant to the exchange offer. However, 2005 notes may be
tendered only in integral multiples of $1000 principal amount.
The terms of the exchange notes will be in all material respects identical
to those of the 2005 notes, except for the elimination of certain transfer
restrictions, registration rights, restrictions on holding notes in certificated
form and additional interest provisions. The exchange notes will evidence the
same debt as the 2005 notes and will be issued under and be entitled to the
benefits of the same indenture under which the 2005 notes were issued. The notes
will be treated as a single series of debt securities under the indenture. For a
description of the terms of the indenture and the notes, see "Description of the
Exchange Notes."
The exchange offer is not conditioned upon any minimum aggregate principal
amount of 2005 notes being tendered for exchange. As of the date of this
prospectus, an aggregate of $75.0 million principal amount of 2005 notes is
outstanding. This prospectus is being sent to all registered holders of 2005
notes. There will be no fixed record date for determining registered holders of
2005 notes entitled to participate in the exchange offer.
We intend to conduct the exchange offer in accordance with the applicable
requirements of the Securities Act and the U.S. Securities Exchange Act of 1934
(the "Exchange Act") and the rules and regulations of the SEC. Holders of 2005
notes do not have any appraisal or dissenters' rights under applicable law or
under the indenture in connection with the exchange offer. 2005 notes that are
not tendered for exchange in the exchange offer will remain outstanding and
continue to accrue interest and will be entitled to the rights and benefits
their holders have under the indenture relating to the 2005 notes.
We will be deemed to have accepted for exchange validly tendered 2005 notes
when we have given oral or written notice of the acceptance to the exchange
agent. The exchange agent will act as agent for the tendering holders of 2005
notes for the purposes of receiving the exchange notes from us and delivering
the exchange notes to the tendering holders. Subject to the terms of the
registration rights agreement, we expressly reserve the right to amend or
terminate the exchange offer, and not to accept for exchange any 2005 notes not
previously accepted for exchange, upon the occurrence of any of the conditions
specified below under "--Conditions." All 2005 notes ac-
-27-
cepted for exchange will be exchanged for exchange notes promptly following the
expiration date. If we decide for any reason to delay for any period our
acceptance of any 2005 notes for exchange, we will extend the expiration date
for the same period.
If we do not accept for exchange any tendered 2005 notes because of an
invalid tender, the occurrence of certain other events described in this
prospectus or otherwise, such unaccepted 2005 notes will be returned, without
expense, to the holder tendering them or the appropriate book-entry will be
made, in each case, as promptly as practicable after the expiration date.
We are not making, nor is our board of directors making, any recommendation
to you as to whether to tender or refrain from tendering all or any portion of
your 2005 notes in the exchange offer. No one has been authorized to make any
such recommendation. You must make your own decision whether to tender in the
exchange offer and, if you decide to do so, you must also make your own decision
as to the aggregate amount of 2005 notes to tender after reading this prospectus
and the letter of transmittal and consulting with your advisers, if any, based
on your own financial position and requirements.
Expiration Date; Extensions; Amendments
The term "expiration date" means 5:00 p.m., New York City time, on , 2005,
unless we, in our sole discretion, extend the exchange offer, in which case the
term "expiration date" shall mean the latest date and time to which the exchange
offer is extended.
If we determine to extend the exchange offer, we will notify the exchange
agent of any extension by oral or written notice. We will notify the registered
holders of 2005 notes of the extension no later than 5:00 p.m., New York City
time, on the business day immediately following the previously scheduled
expiration date.
We reserve the right, in our sole discretion:
o to delay accepting for exchange any 2005 notes;
o to extend the exchange offer or to terminate the exchange offer and to
refuse to accept 2005 notes not previously accepted if any of the
conditions set forth below under "--Conditions" have not been
satisfied by the expiration date; or
o subject to the terms of the registration rights agreement to amend the
terms of the exchange offer in any manner.
Any such delay in acceptance, extension, termination or amendment will be
followed as promptly as practicable by oral or written notice to the registered
holders of 2005 notes. If we amend the exchange offer in a manner that we
determine to constitute a material change, we will promptly disclose the
amendment in a manner reasonably calculated to inform the holders of the 2005
notes of the amendment.
During any extension of the exchange offer, all 2005 notes previously
tendered will remain subject to the exchange offer, and we may accept them for
exchange. We will return any 2005 notes that we do not accept for exchange for
any reason without expense to the tendering holder as promptly as practicable
after the expiration or earlier termination of the exchange offer.
Interest on the Exchange Notes and the 2005 notes
Any 2005 notes not tendered or accepted for exchange will continue to
accrue interest at the rate of 11% per annum in accordance with their terms. The
exchange notes will accrue interest at the rate of 11% per annum from December
15, 2004, the date of the last periodic payment of interest on the 2003 notes.
Interest on the exchange notes and any 2005 notes not tendered or accepted for
exchange will be payable semi-annually in arrears on June 15 and December 15 of
each year, commencing on June 15, 2005.
-28-
Procedures For Tendering
Only a registered holder of 2005 notes may tender those 2005 notes in the
exchange offer. To tender in the exchange offer:
o a holder must complete, sign and date the letter of transmittal, have
the signatures thereon guaranteed if required by the letter of
transmittal, and mail or otherwise deliver such letter of transmittal,
together with the 2005 notes and all other documents required by the
letter of transmittal, to the exchange agent at one of the addresses
set forth below under "--Exchange Agent," before 5:00 p.m., New York
City time, on the expiration date; or
o the exchange agent must receive, before the expiration date, a timely
confirmation of a book-entry transfer of the tendered 2005 notes into
the exchange agent's account at The Depository Trust Company, or DTC,
or the depositary, and timely receipt by the exchange agent of an
agent's message (as defined below under "--Book-Entry Transfer") and
any other documents required by the letter of transmittal according to
the procedure for book-entry transfer described below; or
o the holder must comply with the guaranteed delivery procedures
described below.
A tender of 2005 notes by a holder that is not withdrawn prior to the
expiration date will constitute an agreement between that holder and us in
accordance with the terms and subject to the conditions set forth in this
prospectus and in the letter of transmittal.
The method of delivery of 2005 notes, letters of transmittal and all other
required documents to the exchange agent, including delivery through DTC, is at
the holder's election and risk. Instead of delivery by mail, we recommend that
holders use an overnight or hand delivery service. If delivery is by mail, we
recommend that holders use certified or registered mail, properly insured, with
return receipt requested. In all cases, holders should allow sufficient time to
assure delivery to the exchange agent before the expiration date. Holders should
not send letters of transmittal or other required documents to us. Holders may
request their respective brokers, dealers, commercial banks, trust companies or
other nominees to effect the above transactions for them.
Any beneficial owner whose 2005 notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender those 2005 notes should contact the registered holder promptly and
instruct it to tender on the beneficial owner's behalf.
We will determine, in our sole discretion, all questions as to the
validity, form, eligibility (including time of receipt), acceptance of tendered
2005 notes and withdrawal of tendered 2005 notes, and our determination will be
final and binding. We reserve the absolute right to reject any and all 2005
notes not properly tendered or any 2005 notes the acceptance of which would, in
the opinion of us or our counsel, be unlawful. We also reserve the absolute
right to waive any defects or irregularities or conditions of the exchange offer
as to any particular 2005 notes either before or after the expiration date. Our
interpretation of the terms and conditions of the exchange offer as to any
particular 2005 notes either before or after the expiration date, including the
instructions in the letter of transmittal, will be final and binding on all
parties. Unless waived, any defects or irregularities in connection with tenders
of 2005 notes for exchange must be cured within such time as we shall determine.
Although we intend to notify holders of any defects or irregularities with
respect to tenders of 2005 notes for exchange, neither we nor the exchange agent
nor any other person shall be under any duty to give such notification, nor
shall any of them incur any liability for failure to give such notification.
Tenders of 2005 notes will not be deemed to have been made until all defects or
irregularities have been cured or waived. Any 2005 notes received by the
exchange agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by the exchange
agent to the tendering holders or, in the case of 2005 notes delivered by
book-entry transfer within DTC, will be credited to the account maintained
within DTC by the participant in DTC which delivered such 2005 notes, unless
otherwise provided in the letter of transmittal, as soon as practicable
following the expiration date.
In addition, we reserve the right in our sole discretion (a) to the extent
permitted by applicable law, to purchase or make offers for any 2005 notes that
remain outstanding after the expiration date, in privately negotiated
-29-
transactions or otherwise and (b) as set forth below under "--Conditions," to
terminate the exchange offer. The terms of any such purchases or offers could
differ from the terms of the exchange offer.
By signing, or otherwise becoming bound by, the letter of transmittal, each
tendering holder of 2005 notes (other than certain specified holders) will
represent to us that:
o it is acquiring the exchange notes in the ordinary course of its
business;
o it is not engaging in and does not intend to engage in a distribution
of the exchange notes;
o it has no arrangements or understandings with any person to
participate in the exchange offer for the purpose of distributing the
exchange notes within the meaning of the Securities Act; and
o it is not our "affiliate," within the meaning of Rule 405 under the
Securities Act, or, if it is our affiliate, it will comply with the
registration and prospectus delivery requirements of the Securities
Act to the extent applicable.
If the tendering holder is a broker-dealer that will receive exchange notes
for its own account in exchange for 2005 notes that were acquired as a result of
market-making activities or other trading activities, it may be deemed to be an
"underwriter" within the meaning of the Securities Act. Any such holder will be
required to acknowledge in the letter of transmittal that it will deliver a
prospectus in connection with any resale of these exchange notes. However, by so
acknowledging and by delivering a prospectus, the holder will not be deemed to
admit that it is an "underwriter" within the meaning of the Securities Act.
Book-Entry Transfer
The exchange agent will establish a new account or utilize an existing
account with respect to the 2005 notes at DTC promptly after the date of this
prospectus. Any financial institution that is a participant in DTC's systems may
make book-entry delivery of 2005 notes by causing DTC to transfer these 2005
notes into the exchange agent's account in accordance with DTC's procedures for
transfer. Exchange for the 2005 notes so tendered will only be made after timely
confirmation of this book-entry transfer of 2005 notes into the exchange agent's
account and timely receipt by the exchange agent of an agent's message and any
other documents required by the letter of transmittal. The term "agent's
message" means a message transmitted by DTC to, and received by, the exchange
agent and forming a part of a book-entry confirmation, that states that DTC has
received an express acknowledgment from a participant in DTC tendering 2005
notes that are the subject of the book-entry confirmation stating (1) the
aggregate principal amount of 2005 notes that have been tendered by such
participant, (2) that such participant has received and agrees to be bound by
the terms of the letter of transmittal and (3) that we may enforce such
agreement against the participant.
Although delivery of 2005 notes may be effected through book-entry transfer
into the exchange agent's account at DTC, the letter of transmittal, properly
completed and validly executed, with any required signature guarantees, or an
agent's message in lieu of the letter of transmittal, and any other required
documents, must be delivered to and received by the exchange agent at one of its
addresses listed below under "--Exchange Agent," before 5:00 p.m., New York City
time, on the expiration date, or the guaranteed delivery procedure described
below must be complied with.
Delivery of documents to DTC in accordance with its procedures does not
constitute delivery to the exchange agent.
All references in this prospectus to deposit or delivery of 2005 notes
shall be deemed to also refer to DTC's book-entry delivery method.
-30-
Guaranteed Delivery Procedures
Holders who wish to tender their 2005 notes and (1) whose 2005 notes are
not immediately available or (2) who cannot deliver a confirmation of book-entry
transfer of 2005 notes into the exchange agent's account at DTC, the letter of
transmittal or any other required documents to the exchange agent prior to the
expiration date or (3) who cannot complete the procedure for book-entry transfer
on a timely basis, may effect a tender if:
o the tender is made through an eligible institution;
o before the expiration date, the exchange agent receives from the
eligible institution a properly completed and duly executed notice of
guaranteed delivery, by facsimile transmission, mail or hand delivery,
listing the principal amount of 2005 notes tendered, stating that the
tender is being made thereby and guaranteeing that, within three
business days after the expiration date, a duly executed letter of
transmittal together with a confirmation of book-entry transfer of
such 2005 notes into the exchange agent's account at DTC, and any
other documents required by the letter of transmittal and the
instructions thereto, will be deposited by such eligible institution
with the exchange agent; and
o the properly completed and executed letter of transmittal and a
confirmation of book-entry transfer of all tendered 2005 notes into
the exchange agent's account at DTC and all other documents required
by the letter of transmittal are received by the exchange agent within
three business days after the expiration date.
Upon request to the exchange agent, a notice of guaranteed delivery will be
sent to holders who wish to tender their 2005 notes according to the guaranteed
delivery procedures described above.
Withdrawal of Tenders
Except as otherwise provided in this prospectus, tenders of 2005 notes may
be withdrawn at any time prior to 5:00 p.m., New York City time, on the
expiration date.
For a withdrawal to be effective, the exchange agent must receive a written
or facsimile transmission notice of withdrawal at one of its addresses set forth
below under "--Exchange Agent." Any notice of withdrawal must:
o specify the name of the person who tendered the 2005 notes to be
withdrawn;
o identify the 2005 notes to be withdrawn, including the principal
amount of such 2005 notes;
o if certificates for 2005 notes have been delivered or otherwise
identified to the exchange agent, be signed by the holder in the same
manner as the original signature on the letter of transmittal by which
the 2005 notes were tendered and include any required signature
guarantees; and
o if 2005 notes have been tendered pursuant to the procedure for
book-entry transfer described above, specify the name and number of
the account at DTC to be credited with the withdrawn 2005 notes and
otherwise comply with the procedures of DTC.
We will determine, in our sole discretion, all questions as to the
validity, form and eligibility (including time of receipt) of any notice of
withdrawal, and our determination shall be final and binding on all parties. Any
2005 notes so withdrawn will be deemed not to have been validly tendered for
exchange for purposes of the exchange offer and no exchange notes will be issued
with respect thereto unless the 2005 notes so withdrawn are validly retendered.
Properly withdrawn 2005 notes may be retendered by following one of the
procedures described above under "--Procedures for Tendering" at any time prior
to the expiration date.
-31-
Any 2005 notes that are tendered for exchange through the facilities of DTC
but that are not exchanged for any reason will be credited to an account
maintained with DTC for the 2005 notes as soon as practicable after withdrawal,
rejection of tender or termination of the exchange offer.
Conditions
Despite any other term of the exchange offer, we will not be required to
accept for exchange, or to issue exchange notes in exchange for, any 2005 notes,
and we may terminate the exchange offer as provided in this prospectus prior to
the expiration date, if:
o the exchange offer, or the making of any exchange by a holder of 2005
notes, would violate applicable law or any applicable interpretation
of the SEC staff; or
o the 2005 notes are not tendered in accordance with the exchange offer;
or
o the tendering holder cannot make the representations set forth in the
first paragraph under "--Effect of the Exchange Offer" and any such
other representations as may be necessary under applicable SEC rules,
regulations and interpretations to render available the use of an
appropriate form for registration of the exchange notes under the
Securities Act; or
o any action or proceeding is instituted or threatened in any court or
by or before any governmental agency with respect to the exchange
offer which, in our judgment, would reasonably be expected to impair
our ability to proceed with the exchange offer; or
o any governmental approval has not been obtained which we believe, in
our sole discretion, is necessary for the consummation of the exchange
offer as outlined in this prospectus.
These conditions are for our sole benefit and may be asserted by us
regardless of the circumstances giving rise to any of these conditions or may be
waived by us, in whole or in part, at any time and from time to time in our
discretion. Our failure at any time to exercise any of the foregoing rights
shall not be deemed a waiver of the right and each right shall be deemed an
ongoing right which may be asserted at any time and from time to time.
If we determine that any of the conditions are not satisfied, we may:
o refuse to accept and return to the tendering holder any 2005 notes or
credit any tendered 2005 notes to the account maintained within DTC by
the participant in DTC which delivered the 2005 notes; or
o extend the exchange offer and retain all 2005 notes tendered before
the expiration date, subject to the rights of holders to withdraw the
tenders of 2005 notes (see "--Withdrawal of Tenders" above); or
o waive the unsatisfied conditions with respect to the exchange offer
prior to the expiration date and accept all properly tendered 2005
notes that have not been withdrawn or otherwise amend the terms of the
exchange offer in any respect as provided under "-- Expiration Date;
Extensions; Amendments."
In addition, we will not accept for exchange any 2005 notes tendered, and
we will not issue exchange notes in exchange for any of the 2005 notes, if at
that time any stop order is threatened or in effect with respect to the
registration statement of which this prospectus constitutes a part or the
qualification of the indenture under the Trust Indenture Act of 1939.
Exchange Agent
The Bank of New York has been appointed as the exchange agent for the
exchange offer. All signed letters of transmittal and other documents required
for a valid tender of your 2005 notes should be directed to the exchange agent
at one of the addresses set forth below. Questions and requests for assistance,
requests for additional copies of
-32-
this prospectus or of the letter of transmittal and requests for notices of
guaranteed delivery should be directed to the exchange agent addressed as
follows:
BY HAND DELIVERY, REGISTERED MAIL OR OVERNIGHT CARRIER
The Bank of New York
101 Barclay Street
Floor 7E
Corporate Trust Operations, Reorganization
New York, New York 10286
Attention: Ms. Giselle Guadalupe
FACSIMILE TRANSMISSION:
212-298-1915
Confirm by Telephone:
(212) 815-6331
FOR INFORMATION WITH RESPECT TO THE EXCHANGE OFFER, CALL:
Giselle Guadalupe of the Exchange Agent
at (212) 815-6331
Delivery to other than the above addresses or facsimile number will not
constitute a valid delivery.
Fees and Expenses
We will bear the expenses of soliciting tenders. We have not retained any
dealer-manager in connection with the exchange offer and will not make any
payments to brokers, dealers or others soliciting acceptance of the exchange
offer. The principal solicitation is being made by mail; however, additional
solicitation may be made by facsimile, telephone or in person by our officers
and employees.
We will pay the expenses to be incurred in connection with the exchange
offer. These expenses include fees and expenses of the exchange agent and the
trustee, accounting and legal fees, printing costs, and related fees and
expenses.
Transfer Taxes
Holders of 2005 notes who tender their 2005 notes for exchange notes will
not be obligated to pay any transfer taxes in connection therewith, except that
holders who instruct us to register exchange notes in the name of, or request
that 2005 notes not tendered or not accepted in the exchange offer be returned
to, a person other than the registered tendering holder will be responsible for
the payment of any applicable transfer tax thereon.
Accounting Treatment
We will record the exchange notes in our accounting records at the same
carrying values as the 2005 notes on the date of the exchange. Accordingly, we
will recognize no gain or loss, for accounting purposes, as a result of the
exchange offer. Under Mexican GAAP, the expenses of the exchange offer and the
unamortized expenses relating to the issuance of the 2005 notes will be
amortized over the term of the exchange notes.
Consequences of Failure to Exchange
Holders of 2005 notes who do not tender and exchange their 2005 notes for
exchange notes pursuant to the exchange offer will continue to be subject to the
restrictions on transfer of the 2005 notes as set forth in the legend printed
thereon as a consequence of the issuance of the 2005 notes pursuant to an
exemption from the Securities Act and applicable state securities laws. 2005
notes not exchanged pursuant to the exchange offer will continue to accrue
interest at 11% per annum, and the 2005 notes will otherwise remain outstanding
in accordance with their
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terms. Holders of 2005 notes do not have any appraisal or dissenters' rights
under applicable law in connection with the exchange offer.
In general, the 2005 notes may not be offered or sold unless registered
under the Securities Act, except pursuant to an exemption from, or in a
transaction not subject to, the Securities Act and applicable state securities
laws. Upon completion of the exchange offer, holders of 2005 notes will not be
entitled to any rights to have the resale of 2005 notes registered under the
Securities Act, and we currently do not intend to register under the Securities
Act the resale of any 2005 notes that remain outstanding after completion of the
exchange offer.
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CAPITALIZATION
Our consolidated capitalization set forth below was calculated in
accordance with Mexican GAAP. This table should be read in conjunction with, and
is qualified in its entirety by reference to, the information under the section
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and our consolidated financial statements and the notes
thereto included elsewhere in this prospectus.
The following table sets forth our cash and cash equivalents and our
capitalization on a consolidated basis as of December 31, 2004:
As of
December 31, 2004(1)
-----------------------------------
(US$
(Ps. millions) millions)(1)
-------------- ------------
Cash and cash equivalents............. 554.4 49.2
Total debt:...........................
Other debt(2).................... 223.2 19.8
2003 notes....................... 1,971.3 175.0
2005 notes.......................
-------------- ------------
Total debt....................... 2,194.5 194.8
Total stockholders' equity....... 5,599.1 497.0
-------------- ------------
Total capitalization.......... 7,793.6 691.8
============== ============
____________________________
(1) Other than liabilities denominated in US dollars, peso amounts have been
translated into US dollars, solely for the convenience of the reader, at
the rate of 11.2648 pesos per US dollar, the exchange rate on December 31,
2004.
(2) Other debt includes US$7.5 under a Banorte letter of credit facility,
US$5.3 million to HP Operations (including Compaq Financial Services),
US$3.2 million to Arrendadora Banamex, US$2.8 million with other financial
institutions, accrued interest as of December 31, 2004 of US$0.8 million
with respect to the 2004 notes and US$0.2 million with respect to other
debt.
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EXCHANGE RATES
As of February 9, 2005, the noon buying rate in the spot market for the
purchase of US dollars (in nominal pesos per US dollar) was Ps. 11.19 (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, 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
Year ended December 31, 2004............. 11.15 11.20 11.33 11.11
____________________________
(1) Source: Federal Reserve Bank of New York.
The following table sets forth for the period indicated, the period end,
average, the 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)
-----------------------------
Month/Year High Low
- ---------- ---- ---
August 2004............................... 11.46 11.35
September 2004............................ 11.60 11.39
October 2004.............................. 11.54 11.24
November 2004............................. 11.53 11.24
December 2004............................. 11.33 11.11
January 2005.............................. 11.41 11.17
____________________________
(1) Source: Federal Reserve Bank of New York.
The notes constitute substantially all of our indebtedness. Devaluation of
the peso in relation to the US dollar will adversely affect our ability to meet
our US dollar-denominated obligations, including the notes. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Risk Factors--Risks Relating
to Mexico--We may lose money because of peso devaluation."
In the past, the Mexican economy has suffered balance of payment deficits
and shortages in foreign exchange reserves. While the Mexican government does
not currently restrict the ability of Mexican or foreign persons or entities to
convert pesos to US dollars, it has done so in the past and may do so in the
future. Any such restrictive exchange control policy could adversely affect our
ability to make payments in US dollars, and could also have a material adverse
effect on our financial condition and results of operations.
-36-
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, 2000, 2001, 2002, 2003 and 2004 have been derived from our audited
consolidated financial statements.
The information presented below should be read in conjunction with "Use of
Proceeds," "Capitalization," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements
included elsewhere in this prospectus.
Year Ended December 31,
-------------------------------------------------------------
2000 2001 2002 2003 2004
------------ --------- ---------- --------- -----------
(Constant Ps. in millions as of December 31, 2004)
Statement of Income Data:
Revenues............................... 1,110.3 2,365.5 2,586.6 3,079.2 3,861.3
Cost of sales and operating expenses... (2,041.0) (2,962.3) (2,832.1) (2,960.7) (3,609.0)
------------ --------- ---------- --------- -----------
Income (loss) from operations.......... (930.7) (596.8) (245.5) 118.6 252.3
Interest expense, net.................. (256.3) (423.8) (445.1) (209.8) 257.4
Foreign exchange gain (loss), net...... (20.0) 105.1 (652.0) (336.9) (7.3)
Monetary position...................... 175.0 228.8 295.9 97.9 64.8
Other income (expense), net(1)......... 13.9 (32.6) (29.1) 1,808.2 21.0
Cash severance and other special items. -- (66.5) (34.2) (11.0) --
------------ --------- ---------- --------- -----------
Income (loss) before income taxes and
employee profit...................... (1,018.0) (785.7) (1,110.1) 1,466.9 73.3
Income tax and employee profit sharing
benefit (expense).................... 233.3 169.0 254.9 (520.4) (150.5)
------------ --------- ---------- --------- -----------
Net income (loss)...................... (784.7) (616.7) (855.1) 946.5 (77.1)
============ ========= ========== ========= ===========
Operating Data:
Depreciation and amortization.......... 353.8 680.0 854.9 907.6 1,001.2
Investment in fixed assets (end of 3,252.3 1,669.3 596.3 485.3 1,532.6
period)..............................
Net Cash Flow:
Operating activities................. (654.3) (320.2) (12.2) 168.4 1,183.0
Investing activities................. (3,351.1) (1,682.4) (597.8) (587.2) (1,603.4)
Financing activities................. 4,051.6 1,989.6 813.5 1,142.3 (93.6)
------------ --------- ---------- --------- -----------
Total net cash flows................... 46.2 (13.0) 203.5 723.5 (514.0)
Ratio of earnings to fixed charges
under Mexican GAAP(2)................ N/A N/A N/A 5.7x 1.2x
Ratio of earnings to fixed charges
under US GAAP(2)..................... N/A N/A N/A 10.4x 1.2x
Total access lines in service (in
thousands) (end of period)
Business............................. 72.5 121.0 116.4 132.4 177.6
Residential.......................... 144.3 169.1 178.7 216.7 275.9
------------ --------- ---------- --------- -----------
Total................................ 216.8 290.1 295.1 349.1 453.5
============ ========= ========== ========= ===========
As of
December 31, 2004
--------------------------
(Constant Ps. in millions)
Balance Sheet Data:
Cash and cash equivalents........................ 554.4
Net working capital investment................... (57.3)
Total assets..................................... 8,637.9
Total debt....................................... 2,194.5
Total liabilities................................ 3,038.9
Total shareholders' equity....................... 5,599.1
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Data in Accordance with US GAAP(3):
Year Ended December 31,
------------------------------------------------------------
2000 2001 2002 2003 2004
----------- -------- --------- ---------- ----------
(Constant Ps. in millions as of December 31, 2004)
Financial Data:
Income (loss) from operations........... (1,059.2) (602.0) (130.5) 180.3 255.6
Net income (loss)....................... (1,201.4) (643.9) (997.4) 2,889.6 73.3
Total assets............................ 6,727.1 7,717.3 7,515.0 8,123.4 8,336.0
Total debt.............................. 4,391.9 5,174.1 5,839.2 2,288.0 2,194.5
Total shareholders' equity (deficit).... 1,310.9 1,720.3 787.0 5,119.7 5,192.7
____________________________
(1) Other income for the year ended December 31, 2003 includes a net gain of
Ps. 1,960.1 (US$174.0 million) due to our repurchase of certain debt. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Debt Repurchase."
(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 2000, 2001 and 2002 were
insufficient to cover fixed charges by Ps. 664.6 million, Ps. 244.7 million
and Ps. 558.9 million, respectively. According to U.S. GAAP, earnings in
2000, 2001 and 2002 were insufficient to cover fixed charges by Ps. 790.7
million, Ps. 98.1 million and Ps. 443.9 million, respectively.
(3) Reconciled in accordance with Note 24 of our consolidated financial
statements.
-38-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our financial
statements and the notes thereto included elsewhere in this prospectus. 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 "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, 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 we 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:
2002 2003 2004(4)
---------------------------------- ------------------------------ ------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
------ ----- ----- ------- ----- ----- ----- ------ ----- ----- ----- --------
Revenues(1)...... 593.8 647.0 660.7 685.1 701.1 749.0 787.6 841.5 898.1 926.8 996.2 1,040.3
Cost of Revenues
and Operating (498.3) (505.0) (491.2) (482.6) (483.1) (511.4) (515.1) (543.4) (585.6) (610.5)(671.3) (740.4)
Expenses(1)
Access Lines(2)(4) 290.7 285.7 289.0 295.1 300.2 311.1 332.7 349.1 369.2 388.2 418.0 453.5
Average Revenue
Per User (3)(4).. 604.4 667.4 680.8 692.5 690.9 717.8 707.8 688.2 671.7 676.2 668.9 633.3
_________________________________
(1) Amounts in constant Ps. in millions as of December 31, 2004.
(2) Amounts in thousands at end of period.
(3) Amounts in constant Ps. as of December 31, 2004.
(4) Data for Average Revenue Per User; Access Lines and all 2004 data is
audited.
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," or CPP, 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.
The following summarizes our revenues and percentage of revenues from
operations from these sources:
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Revenues (1) % of Revenues
---------------------------------------------- ---------------------------------
Year ended December 31, Year Ended December 31,
Revenue Source 2001 2002 2003 2004 2001 2002 2003 2004
- ----------------------------- --------- ---------- ---------- ----------- -------- -------- -------- ------
Local calling services... Ps.1,748.1 Ps.1,932.6 Ps.2,300.0 Ps. 2,722.1 73.9% 74.7% 74.7% 70.5%
Long distance services... 316.2 305.6 312.3 381.9 13.4% 11.8% 10.1% 9.9%
Other services........... 301.3 348.4 466.9 757.4 12.7% 13.5% 15.2% 19.6%
---------- ---------- ---------- ----------- ------ ------ ------ ------
Total.................... Ps.2,365.5 Ps.2,586.6 Ps.3,079.2 Ps. 3,861.3 100.0% 100.0% 100.0% 100.0%
========== ========== ========== =========== ====== ====== ====== ======
_______________________________
(1) Amounts in constant Ps. in millions as of December 31, 2004.
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.
Average Revenue Per User (ARPU)
Average revenue per user is used as an industry-standard measurement of a
telecommunications company's ability to maximize the amount of revenue it
derives 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.
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 2003 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 (cus-
-40-
tomer premise equipment) in year 2003; 20,000 customer premise equipment units
in year 2004; 25,000 customer premise equipment units in year 2005; 30,000
customer premise equipment units in year 2006; and 35,000 customer premise
equipment units 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, a former shareholder, 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$15.6 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$15.6 million amount was evidenced by a cash payment of
US$2.7 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$1.1 million payable on December 31, 2003. In addition, we
issued in favor of BCI another promissory note with a future value of US$9.3
million payable in June 2006. Due to these transactions with BCI, in 2003 we
recorded an extraordinary expense of US$10.7 million. In December 2003, all
amounts owed to BCI were repaid in full with the net proceeds received in
connection with the issuance of the 2003 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.
Period Over Period Comparisons
Year Ended December 31, 2004 Compared with Year Ended December 31, 2003
Revenues from Operations
Revenues from operations increased to Ps. 3,861.3 million for year 2004
from Ps. 3,079.2 million for the year ended 2003, an increase of Ps. 782.1
million, or 25%. The number of access lines increased to 453,519 from 349,144,
an increase of 30%, and our average revenue per user decreased to Ps. 662.6 from
Ps. 701.3. During the year 2004, the Company expanded its coverage to six new
cities which combined with new and innovative commercial offers the Company was
able to increase the number of lines in service, having a favorable impact on
the 2004 revenues.
Local services. Local service revenues increased to Ps. 2,722.1 million for
year 2004 from Ps. 2,300.0 mil-lion for the year ended 2003, an increase of Ps.
422.0 million, or 18%. 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.
381.9 million for 2004 from Ps. 312.3 million for 2003, an increase of Ps. 69.6
million, or 22%. This is a consequence of a higher number of access lines.
Other services. Revenue from other services increased to Ps. 757.4 million
in the year 2004 from Ps. 466.9 million during 2003, an increase of Ps. 290.5
million, or 62%. The increase was due to a higher termination of calls
-41-
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. 1,229.5
million for 2004 from Ps. 852.6 million in 2003, an increase of Ps. 376.9
million, or 44%. This growth was due primarily to a Ps. 223.8 million increase
in our underlying costs related to calling party pays calls, and Ps. 148.6
increased long distance costs due to our augment in access lines during the
year.
Operating expenses. Operating expenses for the year 2004 grew Ps. 177.9
million, totaling Ps. 1,378.3 mil-lion. During the year 2003 this amount was Ps.
1,200.4 million. This increase was attributable primarily to increases in rents,
salaries, maintenance and outsourcing fees, which were in connection with our
geographical expansion. Also the increase in expenses was partially offset by an
uncollectible reserve reduction attributable to our policies in collections.
Depreciation and Amortization. Depreciation and amortization from
continuing operations increased to Ps. 1,001.2 million for 2004 from Ps. 907.6
million for the year 2003, an increase of Ps. 93.5 million, or 10%. This
increase in depreciation and amortization reflects the Company's growth and
capital expenditures.
Year Ended December 31, 2003 Compared with Year Ended December 31, 2002
Revenues from Operations
Revenues from operations increased to Ps. 3,079.2 million for year 2003
from Ps. 2,586.6 million for the year ended 2002, an increase of Ps. 492.7
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. 686.8 from
Ps. 647.9. During the year 2003, we 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. 2,300.0 million for
the year ended 2003 from Ps. 1,932.6 million for the year ended 2002, an
increase of Ps. 367.5 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.
312.3 million for the year ended 2003 from Ps. 305.6 million for the year ended
2002, an increase of Ps. 6.6 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. 466.9 million
in 2003 from Ps. 348.4 million in 2002, an increase of Ps. 118.5 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. 852.6
million for the year ended 2003 from Ps. 645.7 million for the year ended 2002,
an increase of Ps. 206.9 million, or 32%. This increase was due primarily to a
Ps. 206.6 million increase in our underlying costs related to calling party pays
call revenues.
Operating expenses. Operating expenses decreased to Ps. 1,200.4 million for
the year ended 2003 from Ps. 1,331.5 million for the year ended 2002, a decrease
of Ps. 131.1 million, or 10%. This decrease was attributable mainly to the
improvements made on collections policies/processes which resulted in less
provision for doubtful accounts.
-42-
Depreciation and Amortization. Depreciation and amortization from
continuing operations increased to Ps. 907.6 million for the year ended 2003
from Ps. 854.9 million for the year ended 2002, an increase of Ps. 52.8
mil-lion, 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. 2,586.6 million for year 2002
from Ps. 2,365.5 million for the year ended 2001, an increase of Ps. 221.0
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. 647.9 from Ps.
595.8. 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 in 2002. We derived our revenues from the following
sources:
Local services. Local service revenues increased to Ps. 1,932.6 million for
the year ended 2002 from Ps. 1,748.1 million for the year ended 2001, an
increase of Ps. 184.5 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.
305.6 million for the year ended 2002 from Ps. 316.2 million for the year ended
2001, a decrease of Ps. 10.6 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. 348.4 million
in 2002 from Ps. 301.3 million in 2001, an increase of Ps. 47.1 million, or 16%.
Cost of Revenues and Operating Expenses
Cost of Revenues. Cost of revenues from operations increased to Ps. 645.7
million for the year ended 2002 from Ps. 549.8 million for the year ended 2001,
an increase of Ps. 95.9 million, or 17%. This increase was due primarily to a
Ps. 134.3 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.
Operating expenses. Operating expenses from operations decreased to Ps.
1,331.5 million for the year ended 2002 from Ps. 1,732.5 million for the year
ended 2001, a decrease of Ps. 401.0 million, or 23%. This de-crease 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. 854.9 million for the year ended 2002
from Ps. 680.0 million for the year ended 2001, an increase of Ps. 174.9
mil-lion, or 26%. This increase in depreciation and amortization expense
reflects the continuing expansion of our asset base.
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 offerings of the 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 ac-counts
payable. Net cash provided by operating activities was Ps. 1,183.0 million, Ps.
168.4 million and Ps. (12.2) million for the years ended 2004, 2003 and 2002,
respectively.
-43-
Net cash used in investing activities was Ps. 1,603.4 million, Ps. 587.2
million and Ps. 597.8 million for the years ended December 31, 2004, 2003 and
2002, respectively. These cash flows primarily reflect investments in fixed
assets of Ps. 1,532.6 million, Ps. 485.3 million and Ps. 596.3 million for the
years ended December 31, 2004, 2003 and 2002, respectively.
Net cash provided by (used in) financing activities from continuing
operations was Ps. (93.6) million, Ps. 1,142.3 million and Ps. 813.5 million for
the years ended December 31, 2004, 2003 and 2002, respectively.
Since our inception, we have invested over Ps. 9,328 million as we built
out our infrastructure. Our total investment in fixed assets was approximately
Ps. 1,532.6 million in 2004. 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 net-work and
facilities.
Market risks
Our primary foreign currency exposure relates to our US dollar-denominated
debt. Most of our debt obligations at December 31, 2004 were denominated in US
dollars. Therefore, we are exposed to currency exchange rate risks that could
significantly affect our ability to meet obligations. On March 29, 2004, we
entered into a swap transaction under which we will pay the swap counterparty
approximately Ps. 79 million semiannually and, on the same date, the swap
counterparty will pay us approximately US$6.2 million. This transaction will
cease in December 2008.
In certain events we will have to transfer collateral to the swap
counterparty to protect it from exposure to us arising from the swap
transaction. 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 devaluations 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 1 More than 5
Total year 1-3 years 3-5 years years
---------- ----------- --------- --------- -----------
pro forma, payments due by period
(US $in millions)
Contractual obligations:
Debt maturing within one year................. 14.9 14.9 -- -- --
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Less than 1 More than 5
Total year 1-3 years 3-5 years years
---------- ----------- --------- --------- -----------
pro forma, payments due by period
(US $in millions)
Long-term debt................................ 254.7 -- 4.7 -- 250.0
Operating leases.............................. 7.3 3.5 3.8 0.0 --
Nortel........................................ 10.9 2.7 3.2 5.0 --
Airspan....................................... 38.7 28.7 10.0 -- --
---------- ----------- --------- --------- -----------
Total contractual cash obligation............. 326.5 49.8 21.9 5.0 250.0
---------- ----------- --------- --------- -----------
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 SEC 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 identifies 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 were 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 earned.
-45-
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 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, 2003 and 2004, the inflation rate was 5.7%, 4.0%
and 5.5%, 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 "Risk Factors--Risks Relating to Mexico--We may lose money because of
peso devaluation."
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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
In December 2004, the FASB issued FASB Statement No. 123 (revised 2004),
Share-Based Payment, which addresses the accounting for transactions in which an
entity exchanges its equity instruments for goods or services, with a primary
focus on transactions in which an entity obtains employee services in
share-based payment transactions. This Statement is a revision to Statement 123
and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and
its related implementation guidance. For nonpublic companies, this Statement
will require measurement of the cost of employee services received in exchange
for stock compensation based on the grant-date fair value of the employee stock
options. Incremental compensation costs arising from subsequent modifications of
awards after the grant date must be recognized. This Statement will be effective
for the Company as of January 1, 2006.
In December 2004, the FASB issued FASB Statement No. 153, Exchanges of
Non-monetary Assets, which eliminates an exception in APB 29 for non-monetary
exchanges of similar productive assets and replaces it with a general exception
for exchanges of non-monetary assets that do not have commercial substance. This
Statement will be effective for the Company for non-monetary asset exchanges
occurring on or after January 1, 2006.
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 prospectus, 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 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 differ-
-47-
ence. 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 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;
(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, we have deferred the activation revenues over a
three-year period starting in the month such charge is originated. This
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period was determined based on our experience. The net effect of the deferral
and amortization is presented in the above US GAAP reconciliation.
Estimated Useful Lives of Plant, Property and Equipment
We estimate the useful lives of particular classes of plant, property and
equipment in order to determine the amount of depreciation expense to be
recorded in each period. Depreciation expense is a significant element of our
costs, amounting in 2003 to PS. 658 .3 million, or 31% of our operating costs
and expenses.
The estimates are based on historical experience with similar assets,
anticipated technological changes and other factors, taking into account the
practices of other telecommunications companies. We review estimated useful
lives each year to determine whether they should be changed, and at times we
have changed them for particular classes of assets. We may shorten the estimated
useful life of an asset class in response to technological changes, changes in
the market or other developments.
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OVERVIEW OF THE MEXICAN TELECOMMUNICATIONS INDUSTRY
General
Mexico is a unique telecommunications market in Latin America as it
combines a stable macroeconomic environment, a strong currency and relatively
low penetration of fixed lines. As a result, Mexico's importance in Latin
America's telecommunications market is expected to become more pronounced over
the next four years.
Since the Mexican government initiated the liberalization of the Mexican
telecommunications sector, which began with the privatization of Telefonos de
Mexico, S.A. de C.V., known as Telmex, in 1990, the Mexican telecommunications
sector has become increasingly open to competition. Some of the measures
implemented by the government in its liberalization process include the
introduction of competition in long distance and local telephony services, the
auctioning of spectrum and tariff rebalancing. The opening of the Mexican
telecommunications market has created an opportunity for competitive carriers to
capture market share from Telmex.
Mexican Market Characteristics
Mexico is the second largest country in Latin America in terms of
population, with approximately 105 mil-lion people as of December 31, 2004. In
addition, with a gross domestic product of US$643.8 billion and gross domestic
product per capita of US$6,130 as of December 31, 2004, Mexico is the second
largest economy and has one of the highest incomes per capita in Latin America.
However, according to Pyramid Research, Mexico has relatively low wireline
penetration compared to other countries in Latin America, with 16.9 lines per
100 inhabitants at the end of 2004.
Mexico's under-penetrated fixed communications market leaves significant
room for growth. According to Pyramid Research, Mexico's fixed line penetration
is expected to grow from 15.8 lines per 100 inhabitants in 2003 to 19.7 lines
per 100 inhabitants in 2008.
Market Size and Projected Growth Trends
The Mexican communications services market, in terms of revenues, is the
second largest in Latin America. Revenues from communications services in
Mexico, including both fixed and mobile, are expected by Pyramid Research to
grow at a 5.5% compound annual growth rate, from US$16.3 billion in 2003 to
US$21.3 billion in 2008.
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MEXICAN COMMUNICATIONS SERVICES MARKET GROWTH
GRAPHIC OMITTED
__________________________
Source: Pyramid Research, 4Q 2004
The fixed communications sector, which includes basic telephony, such as
local and long distance voice services, and data telecommunications services, is
an important part of the Mexican telecommunications industry because of its size
and the various areas of opportunity. In 2004, revenues from the fixed
communications sector were approximately US$11.0 billion, or 62% of the total
Mexican telecommunications industry. Driven by pent-up demand and a wider
availability of services, revenues from fixed communications services in Mexico
are expected to reach US$13.0 billion in 2008.
Mobile telephony services is one of the fastest growing segments of the
Mexican communications services market. In 2004, revenues from the mobile
communications sector were approximately US$6.7 billion, or 38% of the total
Mexican communications services industry. According to Pyramid Research, in
2004, there were approximately 36.4 million mobile subscribers in Mexico, giving
Mexico the third largest penetration rate in Latin America. Pyramid anticipates
that Mexico will continue to experience rapid growth in the number of mobile
subscribers growing from approximately 29.4 million subscribers in 2003 to 45.4
million subscribers in 2008, representing a compound annual growth rate of 8%.
Basic telephony services, with US$8.8 billion in revenues in 2004, account
for the largest share of revenues in the Mexican communications services market.
Furthermore, within basic telephony, local telephony services are, and are
expected to continue to be, the predominant source of revenue. According to
Pyramid Research, in 2004, revenues from local telephony services in Mexico were
US$6.4 billion, accounting for 73% of basic telephony revenues and 36% of total
fixed and mobile communications revenues. By 2008, revenues from local telephony
services in Mexico are expected to reach US$6.9 billion, accounting for 75% of
basic telephony revenues and 33% of total fixed and mobile communications
revenues.
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SUPERVISION AND REGULATION OF THE MEXICAN
TELECOMMUNICATIONS INDUSTRY
Current Regulatory Environment
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 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;
-52-
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.
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;
-53-
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 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 mi-
-54-
crowave 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 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.
-55-
BUSINESS
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 453,519 lines in service as of December 31, 2004. For the year
ended December 31, 2004, we generated revenues and operating income of Ps.
3,861.3 million (US$342.8million) and Ps. 252.3 million (US$22.4million),
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. 9,328 million in our network, which includes 12
digital switches, 265 FWA sites, 88 point-to-multipoint sites and 466 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, 2004, approximately 69 % of our
revenues were generated from business lines and 31 % of our revenues were
generated from residential lines.
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. 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
twelve of the largest metropolitan areas in Mexico (Mexico City, Monterrey,
Guadalajara, Puebla, Toluca, Leon, Queretaro, San Luis Potosi, Saltillo,
Aguascalientes, Cd. Juarez and Tijuana), which represent more than 31% of the
total 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.
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 what we estimate to be
approximately 9% market share of our total addressable market in the twelve
cities where we offer services. In Monterrey and Guadalajara, the first two
markets where we launched operations in 1999, we estimate that we have achieved
approximately 14% 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.
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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 fixed
wireless access 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, 2004, our network consisted of 12
digital switches, 265 fixed wireless access sites, 88 point-to-multipoint sites
and 466 kilometers of metropolitan fiber optic rings in order to service our
453,519 access lines.
Compelling Financial Profile. We have a diversified revenue base, a
favorable average revenue per user and a strong overall financial profile.
o Diversified revenue base. Our wide array of service offerings and our
453,519 lines in service and 288,379 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, 2004, we had an average revenue per user of Ps. 662.6.
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, 2004, approximately
69% of our revenues were generated from business lines and 31% 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 customers the convenience of receiving voice, data and
internet services from a single provider.
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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, 2004:
Revenue Source % Revenue Description
- -------------- --------- -----------
Local services...................... 70% 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.
Long distance services.............. 10% We generate revenues by providing long distance services
for our customers' completed calls.
Other services...................... 20% 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%
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As of December 31, 2004 we offered the following 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 o Dedicated Internet
ID, 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 twelve of the largest metropolitan areas in Mexico
(Mexico City, Monterrey, Guadalajara, Puebla, Toluca, Leon, Queretaro, San Luis
Potosi, Saltillo, Aguascalientes, Cd. Juarez and Tijuana), which represent more
than 31% of the total population of Mexico. As of December 31, 2004, we had
453,519 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:
o Size of telecommunications opportunity. According to COFETEL, for the
year ended December 31, 2004, nearly 63% 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. Eight of the
twelve cities we currently serve are in these states and five of them
are state capitals.
o Regional economy. According to INEGI (Instituto Nacional de
Estadistica Geografia e Informatica), in 2002, 57% of the total gross
domestic product in Mexico was generated in the eight 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, Leon is close to Guadalajara and
Saltillo is close to Monterey 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 what
we estimate to be approximately 9% market share of our total addressable market
in the twelve cities in which we offer services. In Monter-
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rey and Guadalajara, the first two markets where we launched services, we
estimate that we have achieved market shares of approximately 14% in both
cities. In particular, in the business segment, we estimate that in Monterrey
and Guadalajara we have achieved a 16.2% and 18.6% market share, respectively.
The table below provides our access lines and estimated market share as of
December 31, 2004 for each of the cities where we offer services.
Market Share Within Coverage Market
As of December 31, 2004
Date Residential Business Total
----------------------- ---------------------- --------------------
City Launched Lines Share Lines Share Lines Share
- ----------------------- --------------- ---------- ---------- --------- ----------- ------- ---------
Monterrey June 1999 84,428 12.9% 47,648 16.2 % 132,076 14.0 %
Guadalajara December 1999 47,332 11.7% 32,993 18.6 % 80,325 13.8 %
Mexico City March 2000 94,490 8.5% 63,045 8.9 % 157,535 8.7 %
Puebla January 2001 17,082 6.5% 10,441 10.2 % 27,523 7.6 %
Toluca January 2001 7,647 5.8% 3,753 9.9 % 11,400 6.7 %
Leon January 2001 9,534 6.8% 8,810 15.6 % 18,344 9.3%
Queretaro July 2004 3,794 4.0% 2,735 6.9 % 6,529 4.9 %
San Luis Potosi July 2004 4,111 3.4% 3,017 6.4 % 7,128 4.2 %
Aguascalientes October 2004 2,245 2.1% 1,726 4.7 % 3,971 2.7 %
Saltillo October 2004 1,762 1.9% 1,196 3.3 % 2,958 2.3 %
Cd. Juarez November 2004 1,738 1.7% 816 1.5 % 2,554 1.6 %
Tijuana November 2004 1,734 1.3% 1,442 2.8 % 3,176 1.8 %
-------- --------- -------- ---------- ------- --------
Total 12 Cities 275,897 8.2% 77,622 10.8% 453,519 9.1%
======== ========= ======== ========== ======= ========
____________________________
Source: Market 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 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 17% our net sales for the year
ended December 31, 2004.
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.
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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 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 1.1 % during the
year ended December 31, 2004 from 1.6% and 2.2% for the same period in 2003 and
2002, respectively, 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.
Fixed Wireless Point-To-
Access Sites Multipoint Sites Switches Fiber (Kms)
-------------- ---------------- -------- -----------
Mexico....................... 101 34 3 154
Monterrey.................... 55 16 2 109
Guadalajara.................. 49 11 2 89
Puebla....................... 18 3 1 63
Toluca....................... 8 3 1 7
Leon......................... 10 4 1 14
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Fixed Wireless Point-To-
Access Sites Multipoint Sites Switches Fiber (Kms)
-------------- ---------------- -------- -----------
Queretaro(1)................. 5 2 0 1
San Luis Potosi(1)........... 3 2 0 3
Saltillo(1) ................. 3 3 0 15
Aguascalientes(1) ........... 3 2 0 3
Cd. Juarez................... 4 3 1 2
Tijuana...................... 6 5 1 3
-------------- ---------------- -------- -----------
Total................... 265 88 12 466
============== ================ ======== ===========
_______________________
(1) Use Remote Switch.
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 industry 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 customer access equipment
(manufactured by Airspan), microwave radios, DMS switching equipment and other
equipment supplied by various other vendors including Nortel Networks and
Siemens. 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 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. 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.
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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.
We have contracts with Telefonica Data de Mexico, a subsidiary of
Telefonica de Espana, pursuant to which we acquired the right to use capacity in
Telefonica's long haul fiber infrastructure which is located between the
northern border of Mexico and Mexico City. Pursuant to such contracts Telefonica
Data de Mexico has the right to use a pair of dark fibers in a portion of our
metropolitan fiber rings.
Network backbone
As of December 31, 2004, our network backbone consisted of 466 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. Six of the twelve cities
we currently reach are served by a Nortel DMS-100 digital switch which collect
all calls originated and terminated in our network.
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 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, CSG Systems International 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 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 COFETEL to install and
operate an international gateway, which allows us to establish interconnection
agreements with other countries for incoming and outgoing traffic. Tariffs are
applied to this international traffic in accordance with international
settlement rates. See "--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
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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;
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 obtained waivers from COFETEL to comply with such requirements. 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.
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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:
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 expires on December 31, 2005. Its terms and conditions
(including the interconnection rate) are automatically extended after the
expiration date until the parties mutually agree to extend the agreement or
execute a new interconnection agreement subject to the approval of the competent
authorities.
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 18% 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, long duration
calls, traffic generated by call centers, trunking operators and the traffic
generated by new customers (for a six-month period) so that these will not
affect the calculation of the permitted imbalance percentage currently at 18%.
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,
Norcel, Bajacel, Movitel and Pegaso PCS) within each of the local coverage areas
in which we operate. As of December 31, 2004, 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 though Telmex. As of December 31, 2004, the
interconnection fee we receive from long distance carriers was US$0.00975 per
minute.
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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
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.
In August 2004, COFETEL modified these rules. One of the most important
modifications is the elimination of the "Rules of Proportional Return System."
Mexican carriers entitled to operate an international gateway do not have any
restriction on the volume of international traffic that they can terminate in
Mexico, as long as they comply with the Mexican telecommunications regulations.
In addition, each carrier is free to negotiate the applicable rates for
international calls terminating in Mexico. Prior to its application, rates must
be registered in COFETEL.
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 24/7 operation 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.
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.
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:
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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.
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 "Risk Factors--Risks Relating to Our
Company--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."
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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.
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 five
years of operations, its customer base has grown to approximately 155,000 lines.
We currently compete in Puebla, Queretaro and Mexico City and we believe we
compete effectively on the basis of outstanding customer service and price.
Properties
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 twelve cities where we operate. These are the
facilities in which we have installed our switches and administrative offices.
We have over 200 towers on leased land throughout our service areas.
Employees
As of December 31, 2004, 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.
Legal Proceedings
We are currently party to the following material legal proceedings:
Metronet Dispute
In 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. Then, on appeal, the State
Superior Court of Appeals ruled in our favor, releasing us of any liability and
responsibility. On November 12, 2004, Metronet requested constitutional review
challenging such State Superior Court's decision.
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
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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. On December 15, 2004, Spectrasite Communications Inc.
was duly served. This procedure is in the discovery stage.
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 subscription
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, was 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
WorldTel'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:
LAIF X Mexican Litigation:
On or about October 24, 2003, LAIF X sprl filed a petition before the civil
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 civil trial court denied the admission of
such petition and ordered its dismissal on November 14, 2003; the State Superior
Court of Appeals (Sala Novena Civil) confirmed such dismissal on March 18, 2004.
LAIF X sprl requested constitutional review on April 20, 2004, challenging the
State Superior Court's decision confirming the dismissal by the civil trial
court. The Federal District Court denied such relief and confirmed the
dismissal. LAIF X sprl requested review by the Federal Circuit Court of the
decision rendered by the Federal District Court; final decision by the Federal
Circuit Court is still pending.
LAIF X Arbitral Proceeding:
On December 23, 2003, LAIF X sprl filed a Demand for Arbitration before the
International Centre for Dispute Resolution of the American Arbitration
Association against us, Telinor and Blackstone (collectively "respondents"). In
this arbitral proceeding, LAIF X sprl seeks among other relief, (a) a
declaration that the allocation of the Series C shares to Blackstone was not
made in compliance with our bylaws, (b) an order to nullify the Series C shares
allocated to Blackstone, to cancel the corresponding stock certificates and to
re-issue instead the same number of Series A shares to Telinor, (c) an order to
remove the Series C directors appointed during the Ordinary Shareholders Meeting
held on October 9, 2003 and to hold a Special Meeting of the Series C
shareholders to elect
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new Series C directors and (d) damages for an unspecified amount. LAIF X amended
its complaint in March 2004, requesting a declaration that LAIF X sprl is a
legitimate shareholder of the Company. Each of the respondents filed their
answers to LAIF X sprl's Demand for Arbitration and requested, among other
things, (a) the dismissal of the arbitration for lack of an arbitrable dispute,
(b) alternatively, a stay of the arbitration until resolution of the pending
litigation filed by Telinor in Mexico challenging LAIF X sprl status as a
shareholder of the Company (more fully described below under the caption Telinor
Mexican Litigation) and (c) a denial of LAIF X sprl's request for relief in its
entirety and a declaration that our issuance of Series A shares to Telinor, as
agent for Blackstone, and the subsequent exchange of those shares for Series C
shares, were properly executed in accordance with the resolutions of our
Extraordinary Shareholders Meeting dated February 28, 2003, our bylaws and
Mexican law. Respondents have also challenged on jurisdictional grounds the
Tribunal's right to consider the issue of whether LAIF X is a legitimate
shareholder of the Company. The hearing on the merits of this matter was
scheduled for early December 2004. Upon agreement of the parties and consent of
the arbitrators, the hearing is being rescheduled to a later date in order to
give the parties an opportunity to resolve the matters raised in the arbitration
in a consensual manner.
Telinor Mexican Litigation:
On or about January 26, 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 an assignment of pre-emptive subscription rights by
LAIF IV Ltd. in favor of LAIF X sprl, and as a consequence thereof, the validity
of the subscription of shares made by LAIF X sprl in us. If Telinor prevails,
the re-assignment of pre-emptive 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. This action has not yet been served upon
defendants. As noted, LAIF X sprl has raised in the arbitration described above
the question of its status as a legitimate shareholder of us; therefore, at this
stage, we cannot predict how or where this issue will be finally adjudicated.
LAIF X New York Litigation:
On or about February 17, 2004, LAIF X sprl filed a petition against us,
Blackstone and Telinor (the "respondents") before the United States District
Court for the 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, including the Telinor Mexican
Litigation described above, arising directly or indirectly out of our bylaws in
any jurisdiction absent a prior determination by the arbitration tribunal that
such action would indeed be outside the scope of its jurisdiction. The District
Court denied LAIF X sprl's petition as to all respondents. In November 2004, the
Second Circuit Court of Appeals affirmed the District Court's order.
Environmental, Health and Safety Matters
We are subject to laws and regulations relating to the protection of the
environment and human health and safety, including those governing the
management and disposal of hazardous substances and wastes and the cleanup of
contamination. As an owner or operator of property and in connection with the
current or historical use of hazardous substances at our sites, we could incur
costs, including cleanup costs, fines and third-party claims, as a result of
violations of or liabilities under environmental or health and safety laws and
regulations. We believe, however, that our operations are in substantial
compliance with all such laws and regulations.
Enforceability of Civil Liabilities Against Foreign Persons
We and our subsidiaries are variable capital corporations (sociedades
anonimas de capital variable) organized under the laws of Mexico, and are
headquartered, managed and operated outside of the United States (principally in
Mexico). Most of our directors and all of our officers reside in Mexico. All or
a substantial portion of our assets and the assets of most of our directors and
all of our officers are located outside of the United States (principally in
Mexico). As a result, it may not be possible for the investors or holders of the
notes to effect service of process outside of Mexico or within the United States
upon us or such persons, or to enforce a judgment obtained in the United States
against us or them outside of Mexico or in the United States courts that is
based on the civil liabil-
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ity provisions under laws of jurisdictions other than Mexico including the
federal and state securities laws or other laws of the United States.
We have been advised by our special Mexican counsel, D & A Morales y
Asociados, S.C., that no treaty is in effect between the United States and
Mexico calling for the mutual recognition and enforcement of their respective
judgments. The recognition by Mexican courts of a judgment rendered in the
United States is usually done under the principle of reciprocity, which means
that Mexican courts would reexamine judgments rendered in the United States if
such foreign country would reexamine Mexican judgments. Mexican courts may
enforce judgments rendered in the United States through a homologation procedure
consisting of the review by such Mexican courts of the foreign judgment to
ascertain whether certain requirements of due process, reciprocity and public
policy have been complied with, without reviewing the merits of the subject
matter of the case. A judgment rendered in the United States may or need not be
recognized if, among others:
o the foreign court did not have jurisdiction over the subject matter in
a manner that is compatible with or analogous to Mexican laws or the
subject matter is within the exclusive jurisdiction of Mexican courts,
o the judgment was rendered under a system which does not provide
procedures compatible with due process requirements,
o enforcement of the judgment would be contrary to public policy,
o the defendant did not receive adequate personal notice in sufficient
time to defend itself,
o the judgment is not final in the rendering state,
o the judgment conflicts with another final judgment, or
o there is no reciprocity with the rendering state.
Furthermore, there is doubt as to the enforceability, in actions originated
in Mexico, of liabilities based in whole or in part on the United States federal
or state securities laws, and as to the enforceability of judgments obtained in
the United States in actions based in whole or in part on the civil liability
provisions of United States federal or state securities laws.
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MANAGEMENT
Our Board of Directors is comprised of ten 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....................... 40 Chairman, Series A Director and Chief Executive Officer
Patricio Jimenez Barrera................. 39 Chief Financial Officer
Andres Velazquez Romero.................. 39 Regional Executive Director
Samuel Lee Belmonte...................... 38 Regional Executive Director
Ivan Alonso Hernandez.................... 40 Chief Technology Officer
Rafael Garza Blanc....................... 56 Human Resources Vice President
Tomas Milmo Zambrano..................... 69 Series A Director
Alberto Santos de Hoyos.................. 63 Series A Director
Lorenzo Zambrano Trevino................. 60 Series A Director
Alberto Garza Santos..................... 40 Series A Director
Hector Medina Aguiar..................... 53 Series A Director
Everett J. Santos(1)..................... 64 Series C Director
Bertrand Guillot(1)...................... 41 Series C Director
Iain Aitken(1)........................... 50 Series C Director
Lawrence H. Guffey(1).................... 36 Series C Director
Gabriel Montana(1)....................... 33 Series C Alternate Director(2)
Patricio D'Apice(1)...................... 34 Series C Alternate Director(2)
Benjamin Jenkins(1)...................... 33 Series C Alternate Director(2)
_______________________
(1) See "Business--Legal Proceedings--Shareholdings Disputes."
(2) The role of Alternate 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
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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 Regional 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.
Samuel Lee Belmonte has held the position of Regional 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 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
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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
US 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 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 Director of Bedminster Capital Management LLC, an advisor to Soros
Funds Management LLC, focusing primarily on private equity transactions. Prior
to joining Bedminster/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),
Batavia Investment Fund Limited, and 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 Advi-
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sors. 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.
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.
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PRINCIPAL 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 C Total
Series A Shares Shares Percent of
Beneficially Beneficially Outstanding Percent of
Shareholders Owned Owned Shares(1) Voting Shares
- ---------------------------------------------- --------------- ------------ ----------- -------------
(millions of shares) (%)
Telinor Telefonia, S. de R.L. de
C.V.(2)(3)................................. 1,253.2 21.6 54.3 59.5
LAIF X sprl (affiliate of AIG-GE
Capital Latin American
Infrastructure Fund L.P.)(4)(6)............ -- 336.0 14.3 15.7
The Blackstone Group(5)(6).................... -- 302.7 11.9 14.1
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).................... 1,253.2 324.3 66.2 73.7
_______________________
(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 99.8 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 242.1 million "C" shares owned by Blackstone Capital Partners III
Merchant Banking Fund L.P., 43.9 million "C" shares owned by Blackstone
Offshore Capital Partners III L.P. and 16.7 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 "Business--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.
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CERTAIN RELATIONSHIPS AND RELATED 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. On March 20, 2003,
Nortel Networks Limited agreed to join in the Shareholders Agreement through the
execution and delivery of a Joinder Agreement and a supplemental agreement to
such Joinder 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, (viii) rights of first offer and (ix) registration rights with
respect to our equity securities.
As a consequence of the capital call of February 28, 2003, the Initial
Shareholders were materially diluted.
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.
Supply Contracts and Financing Agreement
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. 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 (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. In
December 2003, the promissory note in the amount of US$24.2 million in favor of
Nortel was repaid in full.
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.
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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 rights and obligations under the: (i) Purchase and
License Agreement for fixed wireless access equipment, (ii) the Technical
Assistance Support Services Agreement for fixed wireless access equipment and
(iii) the Fixed Wireless Access Technology License Agreement. We are Airspan's
primary customer for their fixed wireless access technology.
In July 2004 we and Nortel Networks Limited and Nortel Networks de Mexico,
S.A. de C.V., entered into a Purchase and License Agreement for the supply of
next generation soft switch equipment and certain related services thereto.
During fiscal year ended December 31, 2004, we have paid Nortel Networks US$[ ]
million for services and equipment they provided to us.
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 for the lease of our
fleet vehicles. During the three year period ended December 31, 2004,
we paid GE Capital approximately US$3.9 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$1.5 million in rental payments
under these leases. During the three year period ended December 31,
2004, we paid Gemini approximately US$6.4 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 certain shareholders of Telinor) entered
into a professional services agreement for the provision of technical
assistance to us with respect to a customer care platform. As of the
fiscal year ended December 31, 2004, we paid Neoris approximately
US$0.2 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. As of the fiscal year ended
December 31, 2004, we paid them approximately US$4.4 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. As of the fiscal year ended December
31, 2004, we paid the Blackstone Group approximately US$5.6 million in
fees under this agreement.
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DESCRIPTION OF OTHER INDEBTEDNESS
The following is a description of our other indebtedness, after giving
effect to this offering and the application of the net proceeds therefrom.
Banorte Short Term Letter Of Credit
We have issued letters of credit in favor of different suppliers; as of
December 31, 2004 we have approximately US$7.5 million outstanding.
HP Operations Unsecured Promissory Notes
We signed promissory notes for an aggregate amount of US$5.1 million in
favor of HP Operations Mexico S. de R.L. de C.V. The term of the notes is for 3
years accruing at an interest rate of 7.0%. Principal and interests are payable
on a quarterly basis. The outstanding balance is US$4.8 million.
Arrendadora Banamex
We have entered into a financial leasing agreement with Arrendadora Banamex
S.A. de C.V. (Banamex), to finance the acquisition of certain equipment for our
network the terms of the lease are up to thirty six months with a monthly
payment structure. The aggregate outstanding amount as of December 31, 2004 is
approximately US$3.2 million.
11% Senior Notes Due 2013
On December 16, 2013, we completed the private placement of the 2003 notes,
which consisted of US$175.0 million of 11% senior notes due 2013. On July 13,
2004, we completed an exchange offer for the 2003 notes of new 2003 notes with
substantially identical terms, except that the new 2003 notes are generally
freely tradeable. The notes constitute a single class of debt securities and
have the same terms. See "Description of the Exchange Notes."
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DESCRIPTION OF THE EXCHANGE NOTES
We issued the 2005 notes and will issue the exchange notes as additional
notes under an Indenture (the "Indenture") among itself, the Subsidiary
Guarantors and The Bank of New York, as Trustee. The terms of the 2005 notes and
any exchange notes include those stated in the Indenture and those made part of
the Indenture by reference to the Trust Indenture Act.
On December 16, 2013, we completed the private placement of the 2003 notes,
which consisted of US$175.0 million of 11% senior notes due 2013. On July 13,
2004, we completed an exchange offer for the 2003 notes of new 2003 notes with
substantially identical terms, except that the new 2003 notes are generally
freely tradeable.
The exchange notes offered hereby are part of a single class of securities
together with the 2005 notes, the 2003 notes and the new 2003 notes. The terms
of the exchange notes are identical in all material respects to the terms of the
new 2003 notes and substantially similar to the 2005 notes, except for transfer
restrictions and registration rights relating to the 2005 notes.
Unless the context otherwise requires, for purposes of this section, the
"Notes" shall be deemed to refer collectively to the 2003 notes, the new 2003
notes, the 2005 notes and any exchange notes.
Certain terms used in this description are defined under the subheading
"--Certain Definitions." In this description, the word "Company" refers only to
AXTEL, S.A. de C.V. and not to any of its subsidiaries.
The following description is only a summary of the material provisions of
the Indenture and the Registration Rights Agreement. We urge you to read the
Indenture and the Registration Rights Agreement because they, not this
description, define your rights as holders of the Notes. You may request copies
of these agreements at our address set forth under the heading "Additional
Information."
Brief Description of the Exchange Notes
The Notes:
o are unsecured senior obligations of the Company;
o are senior in right of payment to any future Subordinated Obligations
of the Company;
o are guaranteed by each Subsidiary Guarantor; and
o are subject to registration with the SEC pursuant to the Registration
Rights Agreement.
Principal, Maturity and Interest
The Company will issue the 2005 Notes and the exchange notes initially with
a maximum aggregate principal amount of US$75.0 million. The Company will issue
the Notes in denominations of $1,000 and any integral multiple of $1,000. The
Notes will mature on December 15, 2013. Subject to our compliance with the
covenant described under the subheading "--Certain Covenants--Limitation on
Indebtedness," we are entitled to, without the consent of the holders, issue
more Notes under the Indenture on the same terms and conditions and with the
same CUSIP numbers as the Notes being offered hereby in an unlimited aggregate
principal amount (the "Additional Notes"). The 2005 Notes and the exchange notes
constitute an issuance of Additional Notes under the Indenture. The Notes and
all subsequent Additional Notes, if any, provided that such Additional Notes are
treated as fungible with the Notes for US Federal income tax purposes, will be
treated as a single class for all purposes of the Indenture, including waivers,
amendments, redemptions and offers to purchase. Unless the context otherwise
requires, for all purposes of the Indenture and this "Description of the
Exchange Notes," references to the Notes include any Additional Notes actually
issued.
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Interest on the 2005 Notes and the exchange notes will accrue at the rate
of 11% per annum and will be payable semiannually in arrears on June 15 and
December 15, commencing on June 15, 2005. We will make each interest payment to
the holders of record of the Notes on the immediately preceding June 1 and
December 1. We will pay interest on overdue principal at 1% per annum in excess
of the above rate and will pay interest on overdue installments of interest at
such higher rate to the extent lawful.
Interest on the 2005 Notes and the exchange notes will accrue from December
15, 2004, the last interest payment date in respect of the 2003 notes. Interest
will be computed on the basis of a 360-day year comprised of twelve 30-day
months.
Additional interest may accrue on the 2005 notes in certain circumstances
pursuant to the Registration Rights Agreement.
Optional Redemption
Except as set forth below, we will not be entitled to redeem the Notes at
our option prior to December 15, 2008.
On and after December 15, 2008, we will be entitled at our option to redeem
all or a portion of the Notes upon not less than 30 nor more than 60 days'
notice, at the redemption prices (expressed in percentages of principal amount
on the redemption date), plus accrued interest to the redemption date (subject
to the right of Holders of record on the relevant record date to receive
interest due on the relevant interest payment date), if redeemed during the
12-month period commencing on December 15 of the years set forth below:
Period Redemption Price
------ ----------------
2008................................. 105.500%
2009................................. 103.667%
2010................................. 101.833%
2011 and thereafter.................. 100.000%
Prior to December 15, 2006, we may at our option on one or more occasions
redeem Notes (which includes Additional Notes, if any) in an aggregate principal
amount not to exceed 35% of the aggregate principal amount of the Notes (which
includes Additional Notes, if any) originally issued prior to the redemption
date at a redemption price (expressed as a percentage of principal amount) of
111%, plus accrued and unpaid interest to the redemption date, with the net cash
proceeds from one or more Equity Offerings; provided, however, that
(1) at least 65% of such aggregate principal amount of Notes (which
includes Additional Notes, if any) remains outstanding immediately
after the occurrence of each such redemption (other than Notes held,
directly or indirectly, by the Company or its Affiliates); and
(2) each such redemption occurs within 75 days after the date of the
related Equity Offering.
Selection and Notice of Redemption
If we are redeeming less than all the Notes at any time, the Trustee will
select Notes on a pro rata basis, by lot or by such other method as the Trustee
in its sole discretion shall deem to be fair and appropriate.
We will redeem Notes of $1,000 or less in whole and not in part. We will
cause notices of redemption to be mailed by first-class mail at least 30 but not
more than 60 days before the redemption date to each holder of Notes to be
redeemed at its registered address.
If any Note is to be redeemed in part only, the notice of redemption that
relates to that Note will state the portion of the principal amount thereof to
be redeemed. We will issue a new Note in a principal amount equal to the
unredeemed portion of the original Note in the name of the holder upon
cancellation of the original Note. Notes
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called for redemption become due on the date fixed for redemption. On and after
the redemption date, interest ceases to accrue on Notes or portions of them
called for redemption.
Mandatory Redemption; Offers to Purchase; Open Market Purchases
We are not required to make any mandatory redemption or sinking fund
payments with respect to the Notes. However, under certain circumstances, we may
be required to offer to purchase Notes as described under the captions "--Change
of Control" and "--Certain Covenants--Limitation on Sales of Assets and
Subsidiary Stock." We may at any time and from time to time purchase Notes in
the open market or otherwise.
Additional Amounts
We and the Subsidiary Guarantors are required to make all our payments
under or with respect to the Notes free and clear of and without withholding or
deduction for or on account of any present or future tax, duty, levy, impost,
assessment or other governmental charge (including penalties, interest and other
liabilities related thereto) (hereinafter "Taxes") imposed or levied by any
jurisdiction in which the payor is organized or incorporated or resident for tax
purposes or any jurisdiction from or through which any such payment is made
(each, a "Relevant Taxing Jurisdiction"), unless we are required to withhold or
deduct Taxes by law.
If we or any Subsidiary Guarantor are so required to withhold or deduct any
amount for or on account of Taxes imposed by a Relevant Taxing Jurisdiction from
any payment made under or with respect to the Notes, we will be required to pay
such additional amounts ("Additional Amounts") as may be necessary so that the
net amount received by you (including Additional Amounts) after such withholding
or deduction will not be less than the amount you would have received if such
Taxes had not been withheld or deducted. However, no additional amounts will be
paid for or on account of:
(1) Taxes that would not have been imposed but for the fact that:
(A) the Holder of Notes has or had a present or former connection (or
imputed connection) with the Relevant Taxing Jurisdiction
(including, without limitation, being resident, domiciled or a
national of, or engaging in business or maintaining a permanent
establishment in, or being physically present in, the Relevant
Taxing Jurisdiction) other than by merely owning, or receiving
payment under, the Notes;
(B) the Holder of Notes presented the Notes more than 30 days after
the payment in question first became due and payable or the date
on which payment thereof is duly provided for, whichever is
later, except to the extent the Holder would have been entitled
to the Additional Amounts if it had presented the Notes for
payment during that 30-day period;
(2) estate, inheritance, gift, sales, excise, transfer, personal property
or similar Taxes;
(3) Taxes payable otherwise than by withholding or deduction from payments
of, or in respect of, principal of, or any premium or interest on, the
Notes;
(4) Taxes imposed or withheld because the Holder failed to comply with our
reasonable request:
(A) to provide information concerning the nationality, residence,
identity or address of the Holder; or
(B) to make any declaration or similar claim or satisfy
any information or reporting requirement, required by
law, regulation, or other practice of the Relevant
Taxing Jurisdiction as a precondition to any
exemption from all or part of any Taxes, but only to
the extent the Holder is legally entitled to such
exemption; or
(5) any combination of these Tax matters above.
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Furthermore, no Additional Amounts will be paid with respect to any payment
under the Notes to any Holder who is a fiduciary or partnership or any person
other than the sole beneficial owner of the payment, to the extent the payment
would, under the laws of the Relevant Taxing Jurisdiction, be treated as being
derived or received for tax purposes by a beneficiary or settlor with respect to
the fiduciary or a member of the partnership or a beneficial owner who would not
have been entitled to the Additional Amounts had it been the Holder of the
Notes.
Upon request, we will provide the Trustee with official receipts or other
documentation satisfactory to the Trustee evidencing the payment of the Taxes
with respect to which Additional Amounts are paid.
Whenever in the Indenture there is mentioned, in any context:
(1) the payment of principal;
(2) purchase prices in connection with a purchase of Notes;
(3) interest; or
(4) any other amount payable on or with respect to any of the Notes,
such reference shall be deemed to include payment of Additional Amounts as
described under this heading to the extent that, in such context, Additional
Amounts are, were or would be payable in respect thereof.
We will pay any present or future stamp, documentary or other similar
excise taxes, governmental charges or levies that arise in any jurisdiction from
the execution, delivery, enforcement or registration of the Notes, the Indenture
or any other document or instrument related to them (including, without
limitation, any such taxes that are referred to as "court" or "property" taxes)
excluding such taxes, charges or levies imposed by any jurisdiction outside of
the United Mexican States and the jurisdiction of incorporation of any
Subsidiary Guarantor, the jurisdiction of incorporation of any successor of the
Company or any jurisdiction in which a paying agent of the Company, a successor
or a subsidiary Guarantor (as the case may be) is located, and we will agree to
indemnify the Holders for any such taxes paid by such Holders.
The obligations described under this heading will survive any termination,
defeasance or discharge of the Indenture and will apply mutatis mutandis to any
jurisdiction in which any successor Person to the Company or any Subsidiary
Guarantor is organized or any political subdivision or taxing authority or
agency thereof or therein.
For a discussion of Mexican withholding taxes applicable to payments under
or with respect to the Notes, see "Material US Federal Income Tax
Considerations" and "Material Mexican Tax Consequences."
Redemption for Changes in Withholding Taxes
The Company may redeem the Notes in whole, but not in part, upon giving not
less than 30 nor more than 60 days' prior notice mailed by first class mail to
each holder's registered address, at 100% of their principal amount, plus
accrued and unpaid interest to the redemption date (subject to the right of
holders of record on the relevant record date to receive interest due on the
relevant interest payment date) and including Additional Amounts payable in
respect of such payment, if (i) the Company certifies to the Trustee immediately
prior to the giving of such notice that as a result of any change in or
amendment to the laws, regulations, general rules or treaties of any Relevant
Taxing Jurisdiction, or any change in the application or official interpretation
of such laws, regulations, general rules or treaties, which change or amendment
becomes effective after the Issue Date, the Company has become or will become
obligated to pay Additional Amounts with respect to the Notes in excess of the
Additional Amounts that would be payable were payments of interest or discounts
deemed to be interest on the Notes subject to a 10% withholding tax ("Excessive
Additional Amounts") and (ii) such obligations cannot be avoided by the Company
taking reasonable measures available to it; provided, however, that (a) no such
notice of redemption will be given earlier than 60 days prior to the earliest
date on which the Company would be obligated to pay such Excessive Additional
Amounts and (b) at the time such notice is given, the Company's obligation to
pay such Additional Amounts (including any Excessive Additional Amounts) remains
in effect. Prior to giving of any notice of redemp-
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tion described in this paragraph, the Company will deliver to the Trustee an
Officers' Certificate stating that the Company is entitled to effect such
redemption in accordance with the terms set forth in the Indenture and setting
forth in reasonable detail a statement of the facts relating thereto (together
with a written Opinion of Counsel to the effect that the Company has become
obligated to pay such Excessive Additional Amounts as a result of a change or
amendment described above and that the Company cannot avoid payment of such
Excessive Additional Amounts by taking reasonable measures available to it and
that all governmental approvals necessary for the Company to effect such
redemption have been obtained and are in full force and effect or specifying any
such necessary approvals that as of the date of such opinion have not been
obtained)
Guaranties
Each of the Subsidiary Guarantors jointly and severally guarantees, on a
senior unsecured basis, our obligations under the Notes. The Subsidiary
Guarantors include certain of our Subsidiaries existing on the Issue Date and
will include any of our future Restricted Subsidiaries that Incur Indebtedness.
The obligations of each Subsidiary Guarantor under its Subsidiary Guaranty will
be limited as necessary to prevent that Subsidiary Guaranty from constituting a
fraudulent conveyance under applicable law. See "Risk Factors--Risks Relating to
the Exchange Notes--It is possible that Guarantees may not be enforceable."
Each Subsidiary Guarantor that makes a payment under its Subsidiary
Guaranty will be entitled upon payment in full of all guaranteed obligations
under the Indenture to a contribution from each other Subsidiary Guarantor in an
amount equal to such other Subsidiary Guarantor's pro rata portion of such
payment based on the respective net assets of all the Subsidiary Guarantors at
the time of such payment determined in accordance with GAAP.
If a Subsidiary Guaranty were rendered voidable, it could be subordinated
by a court to all other indebtedness (including guarantees and other contingent
liabilities) of the applicable Subsidiary Guarantor, and, depending on the
amount of such indebtedness, a Subsidiary Guarantor's liability on its
Subsidiary Guaranty could be reduced to zero. See "Risk Factors--It is possible
that Guarantees may not be enforceable."
Pursuant to the Indenture, (A) a Subsidiary Guarantor may consolidate with,
merge with or into, or transfer all or substantially all its assets to any other
Person to the extent described below under "--Certain Covenants--Merger and
Consolidation" and (B) the Capital Stock of a Subsidiary Guarantor may be sold
or otherwise disposed of to another Person to the extent described below under
"--Certain Covenants--Limitation on Sales of Assets and Subsidiary Stock";
provided, however, that in the case of the consolidation, merger or transfer of
all or substantially all the assets of such Subsidiary Guarantor, if such other
Person is not the Company or a Subsidiary Guarantor, such Subsidiary Guarantor's
obligations under its Subsidiary Guaranty must be expressly assumed by such
other Person, except that such assumption will not be required in the case of:
(1) the sale or other disposition (including by way of
consolidation or merger) of a Subsidiary Guarantor, including
the sale or disposition of Capital Stock of a Subsidiary
Guarantor following which such Subsidiary Guarantor is no
longer a Subsidiary; or
(2) the sale or disposition of all or substantially all the assets
of a Subsidiary Guarantor;
in each case other than to the Company or an Affiliate of the Company and as
permitted by the Indenture. Upon any sale or disposition described in clause (1)
or (2) above, the obligor on the related Subsidiary Guaranty will be released
from its obligations thereunder.
The Subsidiary Guaranty of a Subsidiary Guarantor also will be released:
(1) upon the designation of such Subsidiary Guarantor as an
Unrestricted Subsidiary;
(2) at such time as such Subsidiary Guarantor does not have any
Indebtedness outstanding that would have required such Subsidiary
Guarantor to enter into a Guaranty Agreement pursuant to the
covenant described under "--Certain Covenants--Future
Guarantors"; or
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(3) if we exercise our legal defeasance option or our covenant
defeasance option as described under "--Defeasance."
Ranking
Senior Indebtedness versus Notes
The indebtedness evidenced by the Notes and the Subsidiary Guaranties will
be unsecured and will rank pari passu in right of payment to the Senior
Indebtedness of the Company and the Subsidiary Guarantors, as the case may be.
The Notes are guaranteed by the Subsidiary Guarantors.
As of December 31, 2004, after giving pro forma effect to the issuance of
the Notes:
(1) the Company's Senior Indebtedness would have been approximately
US$194.8 million, including US$4.5 million of secured
indebtedness; and
(2) the Subsidiary Guarantors would have had no indebtedness.
The Notes are unsecured obligations of the Company. Secured debt and other
secured obligations of the Company will be effectively senior to the Notes to
the extent of the value of the assets securing such debt or other obligations.
Liabilities of Subsidiaries versus Notes
A substantial portion of our operations is conducted through our
subsidiaries. Any right we have to receive the assets of any such subsidiary
upon such subsidiary's liquidation or reorganization (and the consequent right
of the Holders of the Notes to participate in the distribution of the proceeds
of those assets) effectively will be subordinated by operation of law to the
claims of such subsidiary's creditors (including trade creditors) and holders of
its preferred stock, except to the extent that such subsidiaries guarantee our
obligations under the Notes, and except to the extent that we are recognized as
a creditor or preferred stockholder of such subsidiary, in which case our claims
would still be subordinate to any indebtedness or preferred stock of such
subsidiary senior in right of payment to that held by us.
As of the Issue Date, all our continuing existing subsidiaries will be
Subsidiary Guarantors. Although the Indenture limits the incurrence of
Indebtedness and preferred stock of certain of our subsidiaries, such limitation
is subject to a number of significant qualifications. Moreover, the Indenture
does not impose any limitation on the incurrence by such subsidiaries of
liabilities that are not considered Indebtedness under the Indenture. See
"--Certain Covenants--Limitation on Indebtedness."
Book-Entry, Delivery And Form
The 2005 notes have been, and the exchange notes will be represented by a
single, permanent Global Security (which may be subdivided) in definitive, fully
registered form without interest coupons (each a "Global Security") in minimum
denominations of $1000 and integral multiples in excess thereof. Each Global
Security will be deposited with the Trustee as custodian for DTC and registered
in the name of a nominee of DTC for credit to the respective accounts of the
purchaser at DTC.
Except in the limited circumstances described below under "--Certificated
Notes," owners of beneficial interest in the Global Security will not be
entitled to receive physical delivery of Certificated Notes. The notes are not
issuable in bearer form. The Global Security may be transferred, in whole or in
part, only to another nominee of DTC.
The Global Security. Ownership of beneficial interests in the Global
Security will be limited to persons who have accounts with DTC ("participants")
or persons who hold interests through participants. Ownership of beneficial
interests in the Global Security will be shown on, and the transfer of that
ownership will be effected only
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through, records maintained by DTC or its nominee (with respect to interests of
participants) and the records of participants (with respect to interests of
persons other than participants).
So long as DTC, or its nominee, is the registered owner or holder of the
Global Security, DTC or such nominee, as the case may be, will be considered the
sole owner or holder of the notes represented by the Global Security for all
purposes under the Indenture and the notes. No beneficial owner of an interest
in the Global Security will be able to transfer that interest except in
accordance with the applicable procedures of DTC, in addition to those provided
for under the Indenture and, if applicable, those of Euroclear and Clearstream
Banking.
Payments of the principal of, premium, if any, and interest on, the Global
Security will be made to DTC or its nominee, as the case may be, as the
registered owner thereof. Neither us, the notes trustee nor any paying agent
will have any responsibility or liability for any aspect of the records relating
to or payments made on account of beneficial ownership interests in the Global
Security or for maintaining, supervising or reviewing any records relating to
such beneficial ownership interests.
We expect that DTC or its nominee, upon receipt of any payment of
principal, premium, if any, or interest in respect of the Global Security, will
credit participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount at maturity of the
Global Security as shown on the records of DTC or its nominee. We also expect
that payments by participants to owners of beneficial interests in the Global
Security held through such participants will be governed by standing
instructions and customary practices, as is now the case with securities held
for the accounts of customers registered in the names of nominees for such
customers. Such payments will be the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in same-day funds. Transfers
between participants in Euroclear and Clearstream Banking will be effected in
the ordinary way in accordance with their respective rules and operating
procedures.
We expect that DTC will take any action permitted to be taken by a Holder
of notes (including the presentation of notes for exchange as described below)
only at the direction of one or more participants to whose account the DTC
interests in the Global Security is credited and only in respect of such portion
of the aggregate principal amount at maturity of notes as to which such
participant or participants have given such direction. However, if there is an
Event of Default under the notes, DTC will exchange the Global Security for
notes.
We understand that DTC is a limited purpose trust company organized under
the laws of the State of New York, a "banking organization" within the meaning
of the New York Banking Law, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the Uniform Commercial Code and a "Clearing
Agency" registered pursuant to the provisions of Section 17A under the Exchange
Act. DTC was created to hold securities for its participants and facilitate the
clearance and settlement of securities transactions between participants through
electronic book-entry changes in accounts of its participants, thereby
eliminating the need for physical movement of certificates and certain other
organizations. Indirect access to the DTC system is available to others such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly
("indirect participants").
Although DTC, Euroclear and Clearstream Banking are expected to follow the
foregoing procedures in order to facilitate transfers of interests in the Global
Security among participants of DTC, Euroclear and Clearstream Banking, they are
under no obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. Neither we nor the notes trustee
will have any responsibility for the performance by DTC, Euroclear or
Clearstream Banking or their respective participants or indirect participants of
their respective obligations under the rules and procedures governing their
operations.
Certificated Notes
If DTC is at any time unwilling or unable to continue as a depositary for
the Global Security and a successor depositary is not appointed by us within 90
days, we will issue Certificated Notes in exchange for the Global
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Security. Holders of an interest in the Global Security may receive Certificated
Notes in accordance with DTC's rules and procedures in addition to those
provided for under the Indenture.
Change of Control
Upon the occurrence of any of the following events (each, a "Change of
Control"), each Holder shall have the right to require that the Company
repurchase such Holder's Notes at a purchase price in cash equal to 101% of the
principal amount thereof on the date of purchase plus accrued and unpaid
interest, if any, to the date of purchase (subject to the right of holders of
record on the relevant record date to receive interest due on the relevant
interest payment date):
(1) prior to the first public offering of common stock of the Company, any
"person" (as such term is used in Sections 13(d) and 14(d) of the
Exchange Act), other than one or more Permitted Holders, is or becomes
the beneficial owner (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act, except that for purposes of this clause (1) and clause
(2) below, (x) such person shall be deemed to have "beneficial
ownership" of all shares that any such person has the right to
acquire, whether such right is exercisable immediately or only after
the passage of time and (y) such person shall not be deemed to have
"beneficial ownership" of any shares solely as a result of a voting or
similar agreement entered into in connection with a merger agreement
or asset sale agreement), directly or indirectly, of more than 50% of
the total voting power of the Voting Stock of the Company (for
purposes of this clause (1) such "person" (the "specified person")
shall be deemed to beneficially own any Voting Stock of the Company
held by any other Person (the "parent entity") so long as such
"specified person" beneficially owns (as so defined), directly or
indirectly, in the aggregate a majority of the voting power of the
Voting Stock of the parent entity);
(2) after the first public offering of common stock of the Company, any
"person" (as such term is used in Sections 13(d) and 14(d) of the
Exchange Act), other than one or more Permitted Holders, is or becomes
the beneficial owner (as defined in clause (1) above), directly or
indirectly, of more than 35% of the total voting power of the Voting
Stock of the Company; provided, however, that Permitted Holders
beneficially own (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act), directly or indirectly, in the aggregate a lesser
percentage of the total voting power of the Voting Stock of the
Company than such other person and do not have the right or ability by
voting power, contract or otherwise to elect or designate for election
a majority of the Board of Directors (for the purposes of this clause
(2), such other person shall be deemed to beneficially own any Voting
Stock of a specified person held by a parent entity, if such other
person is the beneficial owner (as defined in clause (1)), directly or
indirectly, of more than 35% of the voting power of the Voting Stock
of such parent entity and the Permitted Holders beneficially own (as
defined in this clause (2)), directly or indirectly, in the aggregate
a lesser percentage of the voting power of the Voting Stock of such
parent entity and do not have the right or ability by voting power,
contract or otherwise to elect or designate for election a majority of
the board of directors of such parent entity);
(3) individuals who on the Issue Date constituted the Board of Directors
(together with any new directors whose election by such Board of
Directors or whose appointment or nomination for election by the
shareholders of the Company was approved by a vote of a majority of
the directors of the Company then still in office who were either
directors on the Issue Date or whose appointment, election or
nomination for election was approved by the Permitted Holders or by
directors previously so approved) cease for any reason to constitute a
majority of the Board of Directors then in office;
(4) the adoption of a plan relating to the liquidation or dissolution of
the Company; provided, however, that this clause (4) will not be
applicable to (A) a Restricted Subsidiary consolidating with, merging
into or transferring all or part of its properties and assets to the
Company or (B) the Company merging with an Affiliate of the Company
solely for the purpose and with the sole effect of reincorporating the
Company in another jurisdiction; or
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(5) the merger or consolidation of the Company with or into another Person
or the merger of another Person with or into the Company, or the sale
of all or substantially all the assets of the Company (determined on a
consolidated basis) to another Person other than a transaction in
which holders of securities that represented 100% of the Voting Stock
of the Company immediately prior to such transaction (or other
securities into which such securities are converted as part of such
merger or consolidation transaction) own directly or indirectly at
least a majority of the voting power of the Voting Stock of the
transferee Person or surviving Person in such merger or consolidation
transaction immediately after such transaction.
Within 30 days following any Change of Control, we will mail a notice to
each Holder with a copy to the Trustee (the "Change of Control Offer") stating:
(1) that a Change of Control has occurred and that such Holder has the
right to require us to purchase such Holder's Notes at a purchase
price in cash equal to 101% of the principal amount thereof on the
date of purchase, plus accrued and unpaid interest, if any, to the
date of purchase (subject to the right of Holders of record on the
relevant record date to receive interest on the relevant interest
payment date);
(2) the circumstances and relevant facts regarding such Change of Control
(including information with respect to pro forma historical income,
cash flow and capitalization, in each case after giving effect to such
Change of Control);
(3) the purchase date (which shall be no earlier than 30 days nor later
than 60 days from the date such notice is mailed); and
(4) the instructions, as determined by us, consistent with the covenant
described hereunder, that a Holder must follow in order to have its
Notes purchased.
We will not be required to make a Change of Control Offer following a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer made by us and
purchases all Notes validly tendered and not withdrawn under such Change of
Control Offer.
We will comply, to the extent applicable, with the requirements of Section
14(e) of the Exchange Act and any other securities laws or regulations in
connection with the repurchase of Notes as a result of a Change of Control. To
the extent that the provisions of any securities laws or regulations conflict
with the provisions of the covenant described hereunder, we will comply with the
applicable securities laws and regulations and shall not be deemed to have
breached our obligations under the covenant described hereunder by virtue of our
compliance with such securities laws or regulations.
The Change of Control purchase feature of the Notes may in certain
circumstances make more difficult or discourage a sale or takeover of the
Company and, thus, the removal of incumbent management. The Change of Control
purchase feature is a result of negotiations between the Company and the Initial
Purchaser. We have no present intention to engage in a transaction involving a
Change of Control, although it is possible that we could decide to do so in the
future. Subject to the limitations discussed below, we could, in the future,
enter into certain transactions, including acquisitions, refinancings or other
recapitalizations, that would not constitute a Change of Control under the
Indenture, but that could increase the amount of indebtedness outstanding at
such time or otherwise affect our capital structure or credit ratings.
Restrictions on our ability to Incur additional Indebtedness are contained in
the covenants described under "--Certain Covenants--Limitation on Indebtedness,"
"--Limitation on Liens" and "--Limitation on Sale/Leaseback Transactions." Such
restrictions can only be waived with the consent of the holders of a majority in
principal amount of the Notes then outstanding. Except for the limitations
contained in such covenants, however, the Indenture will not contain any
covenants or provisions that may afford holders of the Notes protection in the
event of a highly leveraged transaction.
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Future indebtedness that we may incur may contain prohibitions on the
occurrence of certain events that would constitute a Change of Control or
require the repurchase of such indebtedness upon a Change of Control. Moreover,
the exercise by the holders of their right to require us to repurchase their
Notes could cause a default under such indebtedness, even if the Change of
Control itself does not, due to the financial effect of such repurchase on us.
Finally, our ability to pay cash to the holders of Notes following the
occurrence of a Change of Control may be limited by our then existing financial
resources. There can be no assurance that sufficient funds will be available
when necessary to make any required repurchases.
The definition of "Change of Control" includes a disposition of all or
substantially all of the assets of the Company to any Person. Although there is
a limited body of case law interpreting the phrase "substantially all," there is
no precise established definition of the phrase under applicable law.
Accordingly, in certain circumstances there may be a degree of uncertainty as to
whether a particular transaction would involve a disposition of "all or
substantially all" of the assets of the Company. As a result, it may be unclear
as to whether a Change of Control has occurred and whether a holder of Notes may
require the Company to make an offer to repurchase the Notes as described above.
The provisions under the Indenture relative to our obligation to make an
offer to repurchase the Notes as a result of a Change of Control may be waived
or modified with the written consent of the holders of a majority in principal
amount of the Notes.
Certain Covenants
The Indenture contains covenants including, among others, the following:
Limitation on Indebtedness
(a) The Company will not, and will not permit any Restricted Subsidiary to,
Incur, directly or indirectly, any Indebtedness; provided, however, that the
Company and the Subsidiary Guarantors will be entitled to Incur Indebtedness if,
on the date of such Incurrence and after giving effect thereto on a pro forma
basis the Consolidated Leverage Ratio would be less than 4.0 to 1.
(b) Notwithstanding the foregoing paragraph (a), the Company and the
Restricted Subsidiaries will be entitled to Incur any or all of the following
Indebtedness:
(1) Indebtedness owed to and held by the Company or a Wholly Owned
Subsidiary; provided, however, that (A) any subsequent issuance or
transfer of any Capital Stock which results in any such Wholly Owned
Subsidiary ceasing to be a Wholly Owned Subsidiary or any subsequent
transfer of such Indebtedness (other than to the Company or a Wholly
Owned Subsidiary) shall be deemed, in each case, to constitute the
Incurrence of such Indebtedness by the obligor thereon, (B) if the
Company is the obligor on such Indebtedness, such Indebtedness is
expressly subordinated to the prior payment in full in cash of all
obligations with respect to the Notes, and (C) if a Subsidiary
Guarantor is the obligor on such Indebtedness, such Indebtedness is
expressly subordinated to the prior payment in full in cash of all
obligations of such obligor with respect to its Subsidiary Guaranty;
(2) the Exchange Notes;
(3) Indebtedness outstanding on the Issue Date (other than Indebtedness
described in clause (1) or (2) of this covenant);
(4) Refinancing Indebtedness in respect of Indebtedness Incurred pursuant
to paragraph (a) or pursuant to clause (2) or (3) or this clause;
(5) edging Obligations consisting of Interest Rate Agreements directly
related to Indebtedness permitted to be Incurred by the Company and
its Restricted Subsidiaries pursuant to the Indenture;
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(6) obligations in respect of performance, bid and surety bonds and
completion guarantees provided by the Company or any Restricted
Subsidiary in the ordinary course of business;
(7) Indebtedness arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument drawn against
insufficient funds in the ordinary course of business; provided,
however, that such Indebtedness is extinguished within two Business
Days of its Incurrence;
(8) Purchase Money Obligations and Capital Lease Obligations, in an
aggregate principal amount at any time outstanding not exceeding an
amount equal to 5% of Consolidated Total Assets at any time
outstanding;
(9) Indebtedness consisting of the Subsidiary Guaranty of a Subsidiary
Guarantor and any Guarantee by a Subsidiary Guarantor of Indebtedness
Incurred pursuant to paragraph (a) or pursuant to clause (1), (2), (3)
or pursuant to clause (4) to the extent the Refinancing Indebtedness
Incurred thereunder directly or indirectly Refinances Indebtedness
Incurred pursuant to paragraph (a) or pursuant to clause (2) or (3);
and
(10) Indebtedness of the Company or of any of its Restricted Subsidiaries
in an aggregate principal amount which, when taken together with all
other Indebtedness of the Company and its Restricted Subsidiaries
outstanding on the date of such Incurrence (other than Indebtedness
permitted by clauses (1) through (9) above or paragraph (a)) does not
exceed $15 million.
(c) Notwithstanding the foregoing, neither the Company nor any Subsidiary
Guarantor will Incur any Indebtedness pursuant to the foregoing paragraph (b) if
the proceeds thereof are used, directly or indirectly, to Refinance any
Subordinated Obligations of the Company or any Subsidiary Guarantor unless such
Indebtedness shall be subordinated to the Notes or the applicable Subsidiary
Guaranty to at least the same extent as such Subordinated Obligations.
(d) For purposes of determining compliance with this covenant:
(1) in the event that an item of Indebtedness (or any portion thereof)
meets the criteria of more than one of the types of Indebtedness
described above, the Company, in its sole discretion, will classify
such item of Indebtedness (or any portion thereof) at the time of
Incurrence and will only be required to include the amount and type of
such Indebtedness in one of the above clauses; and
(2) the Company will be entitled to divide and classify an item of
Indebtedness in more than one of the types of Indebtedness described
above.
(e) For purposes of determining compliance with any US dollar denominated
restriction on the Incurrence of Indebtedness where the Indebtedness Incurred is
denominated in a different currency, the amount of such Indebtedness will be the
US Dollar Equivalent determined on the date of the Incurrence of such
Indebtedness; provided, however, that if any such Indebtedness denominated in a
different currency is subject to a Currency Agreement with respect to US dollars
covering all principal, premium, if any, and interest payable on such
Indebtedness, the amount of such Indebtedness expressed in US dollars will be as
provided in such Currency Agreement. The principal amount of any Refinancing
Indebtedness Incurred in the same currency as the Indebtedness being Refinanced
will be the US Dollar Equivalent of the Indebtedness Refinanced, except to the
extent that (1) such US Dollar Equivalent was determined based on a Currency
Agreement, in which case the Refinancing Indebtedness will be determined in
accordance with the preceding sentence, and (2) the principal amount of the
Refinancing Indebtedness exceeds the principal amount of the Indebtedness being
Refinanced, in which case the US Dollar Equivalent of such excess will be
determined on the date such Refinancing Indebtedness is Incurred.
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Limitation on Restricted Payments
(a) The Company will not, and will not permit any Restricted Subsidiary,
directly or indirectly, to make a Restricted Payment if at the time the Company
or such Restricted Subsidiary makes such Restricted Payment:
(1) a Default shall have occurred and be continuing (or would result
therefrom);
(2) the Company is not entitled to Incur an additional $1.00 of
Indebtedness pursuant to paragraph (a) of the covenant described under
"--Limitation on Indebtedness"; or
(3) the aggregate amount of such Restricted Payment and all other
Restricted Payments since the Issue Date would exceed the sum of
(without duplication):
(A) 50% of the Adjusted Consolidated Net Income accrued during the
period (treated as one accounting period) from October 1, 2003 to
the end of the most recent fiscal quarter ending at least 45 days
prior to the date of such Restricted Payment (or, in case such
Adjusted Consolidated Net Income shall be a deficit, minus 100%
of such deficit); plus
(B) 100% of the aggregate Net Cash Proceeds received by the Company
from the issuance or sale of its Capital Stock (other than
Disqualified Stock) subsequent to the Issue Date (other than an
issuance or sale to a Subsidiary of the Company and other than an
issuance or sale to an employee stock ownership plan or to a
trust established by the Company or any of its Subsidiaries for
the benefit of their employees) and 100% of any cash capital
contribution received by the Company from its shareholders
subsequent to the Issue Date; plus
(C) the amount by which Indebtedness of the Company is reduced on the
Company's balance sheet upon the conversion or exchange (other
than by a Subsidiary of the Company) subsequent to the Issue Date
of any Indebtedness of the Company convertible or exchangeable
for Capital Stock (other than Disqualified Stock) of the Company
(less the amount of any cash, or the fair value of any other
property, distributed by the Company upon such conversion or
exchange); provided, however, that the foregoing amount shall not
exceed the Net Cash Proceeds received by the Company or any
Restricted Subsidiary from the sale of such Indebtedness
(excluding Net Cash Proceeds from sales to a Subsidiary of the
Company or to an employee stock ownership plan or to a trust
established by the Company or any of its Subsidiaries for the
benefit of their employees); plus
(D) an amount equal to the sum of (i) the net reduction in the
Investments (other than Permitted Investments) made by the
Company or any Restricted Subsidiary in any Person resulting from
repurchases, repayments or redemptions of such Investments by
such Person, proceeds realized on the sale of such Investment and
proceeds representing the return of capital (excluding dividends
and distributions), in each case received by the Company or any
Restricted Subsidiary, and (ii) to the extent such Person is an
Unrestricted Subsidiary, the portion (proportionate to the
Company's equity interest in such Subsidiary) of the fair market
value of the net assets of such Unrestricted Subsidiary at the
time such Unrestricted Subsidiary is designated a Restricted
Subsidiary; provided, however, that the foregoing sum shall not
exceed, in the case of any such Person or Unrestricted
Subsidiary, the amount of Investments (excluding Permitted
Investments) previously made (and treated as a Restricted
Payment) by the Company or any Restricted Subsidiary in such
Person or Unrestricted Subsidiary.
(b) The preceding provisions will not prohibit:
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(1) any Restricted Payment made out of the Net Cash Proceeds of the
substantially concurrent sale of, or made by exchange for,
Capital Stock of the Company (other than Disqualified Stock and
other than Capital Stock issued or sold to a Subsidiary of the
Company or an employee stock ownership plan or to a trust
established by the Company or any of its Subsidiaries for the
benefit of their employees) or a substantially concurrent cash
capital contribution received by the Company from its
shareholders; provided, however, that (A) such Restricted Payment
shall be excluded in the calculation of the amount of Restricted
Payments and (B) the Net Cash Proceeds from such sale or such
cash capital contribution (to the extent so used for such
Restricted Payment) shall be excluded from the calculation of
amounts under clause (3)(B) of paragraph (a) above;
(2) any purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value of Subordinated Obligations
of the Company or a Subsidiary Guarantor made by exchange for, or
out of the proceeds of the substantially concurrent sale of,
Indebtedness of such Person which is permitted to be Incurred
pursuant to the covenant described under "--Limitation on
Indebtedness"; provided, however, that such purchase, repurchase,
redemption, defeasance or other acquisition or retirement for
value shall be excluded in the calculation of the amount of
Restricted Payments;
(3) dividends paid within 60 days after the date of declaration
thereof if at such date of declaration such dividend would have
complied with this covenant; provided, however, that at the time
of payment of such dividend, no other Default shall have occurred
and be continuing (or result therefrom); provided further,
however, that such dividend shall be included in the calculation
of the amount of Restricted Payments;
(4) so long as no Default has occurred and is continuing, the
repurchase or other acquisition of shares of Capital Stock of the
Company or any of its Subsidiaries from employees, former
employees, directors or former directors of the Company or any of
its Subsidiaries (or permitted transferees of such employees,
former employees, directors or former directors), pursuant to the
terms of the agreements (including employment agreements) or
plans (or amendments thereto) approved by the Board of Directors
under which such individuals purchase or sell or are granted the
option to purchase or sell, shares of such Capital Stock;
provided, however, that the aggregate amount of such repurchases
and other acquisitions (excluding amounts representing
cancellation of Indebtedness) shall not exceed $2 million in any
calendar year; provided further, however, that such repurchases
and other acquisitions shall be excluded in the calculation of
the amount of Restricted Payments;
(5) payments of dividends on Disqualified Stock issued pursuant to
the covenant described under "--Limitation on Indebtedness";
provided, however, that such dividends shall be excluded in the
calculation of the amount of Restricted Payments;
(6) repurchases of Capital Stock deemed to occur upon exercise of
stock options if such Capital Stock represents a portion of the
exercise price of such options; provided, however, that such
Restricted Payments shall be excluded in the calculation of the
amount of Restricted Payments;
(7) cash payments in lieu of the issuance of fractional shares in
connection with the exercise of warrants, options or other
securities convertible into or exchangeable for Capital Stock of
the Company; provided, however, that any such cash payment shall
not be for the purpose of evading the limitation of the covenant
described under this subheading (as determined in good faith by
the Board of Directors); provided further, however, that such
payments shall be excluded in the calculation of the amount of
Restricted Payments;
(8) in the event of a Change of Control, and if no Default shall have
occurred and be continuing, the payment, purchase, redemption,
defeasance or other acquisition or retirement of Subordinated
Obligations of the Company or any Subsidiary Guarantor, in each
case, at a purchase price not greater than 101% of the principal
amount of such Subordinated Obligations, plus any accrued and
unpaid interest thereon; provided, however, that prior to such
payment, purchase, redemption, defeasance or other acquisition or
retirement, the Company (or a third party to the extent permitted
by the In-
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denture) has made a Change of Control Offer with respect to the
Notes as a result of such Change of Control and has repurchased
all Notes validly tendered and not withdrawn in connection with
such Change of Control Offer; provided further, however, that
such repurchase and other acquisitions shall be included in the
calculation of the amount of Restricted Payments;
(9) payments of intercompany subordinated Indebtedness, the
Incurrence of which was permitted under clause (3) of paragraph
(b) of the covenant described under "--Limitation on
Indebtedness"; provided, however, that no Default has occurred
and is continuing or would otherwise result therefrom; provided
further, however, that such payments shall be excluded in the
calculation of the amount of Restricted Payments; or
(10) Restricted Payments in an amount which, when taken together with
all Restricted Payments made pursuant to this clause (10), does
not exceed $10 million; provided, however, that (A) at the time
of each such Restricted Payment, no Default shall have occurred
and be continuing (or result therefrom) and (B) such dividends
shall be included in the calculation of the amount of Restricted
Payments.
Limitation on Restrictions on Distributions from Restricted Subsidiaries
The Company will not, and will not permit any Restricted Subsidiary to,
create or otherwise cause or permit to exist or become effective any consensual
encumbrance or restriction on the ability of any Restricted Subsidiary to (a)
pay dividends or make any other distributions on its Capital Stock to the
Company or a Restricted Subsidiary or pay any Indebtedness owed to the Company,
(b) make any loans or advances to the Company or (c) transfer any of its
property or assets to the Company, except:
(1) with respect to clauses (a), (b) and (c),
(A) any encumbrance or restriction pursuant to an agreement in effect
at or entered into on the Issue Date;
(B) any encumbrance or restriction with respect to a Restricted
Subsidiary pursuant to an agreement relating to any Indebtedness
Incurred by such Restricted Subsidiary on or prior to the date on
which such Restricted Subsidiary was acquired by the Company
(other than Indebtedness Incurred as consideration in, or to
provide all or any portion of the funds or credit support
utilized to consummate, the transaction or series of related
transactions pursuant to which such Restricted Subsidiary became
a Restricted Subsidiary or was acquired by the Company) and
outstanding on such date;
(C) any encumbrance or restriction pursuant to an agreement effecting
a Refinancing of Indebtedness Incurred pursuant to an agreement
referred to in clause (A) or (B) of clause (1) of this covenant
or this clause (C) or contained in any amendment to an agreement
referred to in clause (A) or (B) of clause (1) of this covenant
or this clause (C); provided, however, that the encumbrances and
restrictions with respect to such Restricted Subsidiary contained
in any such refinancing agreement or amendment are no less
favorable to the Noteholders than encumbrances and restrictions
with respect to such Restricted Subsidiary contained in such
predecessor agreements; and
(D) any encumbrance or restriction with respect to a Restricted
Subsidiary imposed pursuant to an agreement entered into for the
sale or disposition of all or substantially all the Capital Stock
or assets of such Restricted Subsidiary pending the closing of
such sale or disposition; and
(2) with respect to clause (c) only,
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(A) any encumbrance or restriction consisting of customary
nonassignment provisions in leases governing leasehold interests
to the extent such provisions restrict the transfer of the lease
or the property leased thereunder; and
(B) any encumbrance or restriction contained in security agreements
or mortgages securing Indebtedness of a Restricted Subsidiary to
the extent such encumbrance or restriction restricts the transfer
of the property subject to such security agreements or mortgages.
Limitation on Sales of Assets and Subsidiary Stock
(a) The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, consummate any Asset Disposition unless:
(1) the Company or such Restricted Subsidiary receives consideration at
the time of such Asset Disposition at least equal to the fair market
value (including as to the value of all non-cash consideration), as
determined in good faith by the Board of Directors, of the shares and
assets subject to such Asset Disposition;
(2) except in the case of a Permitted Asset Swap, at least 75% of the
consideration thereof received by the Company or such Restricted
Subsidiary is in the form of cash or cash equivalents; and
(3) an amount equal to 100% of the Net Available Cash from such Asset
Disposition is applied by the Company (or such Restricted Subsidiary,
as the case may be)
(A) first, to the extent the Company elects (or is required by the
terms of any Indebtedness), to prepay, repay, redeem, purchase,
defease or otherwise acquire Senior Indebtedness of the Company
or Indebtedness (other than any Disqualified Stock) of a Wholly
Owned Subsidiary (in each case other than Indebtedness owed to
the Company or an Affiliate of the Company) within one year from
the later of the date of such Asset Disposition or the receipt of
such Net Available Cash;
(B) second, to the extent of the balance of such Net Available Cash
after application in accordance with clause (A), to the extent
the Company elects, to acquire Additional Assets within one year
from the later of the date of such Asset Disposition or the
receipt of such Net Available Cash; and
(C) third, to the extent of the balance of such Net Available Cash
after application in accordance with clauses (A) and (B), to make
an offer to the holders of the Notes (and to holders of other
Senior Indebtedness of the Company designated by the Company) to
purchase Notes (and such other Senior Indebtedness of the
Company) pursuant to and subject to the conditions contained in
the Indenture;
provided, however, that in connection with any prepayment, repayment, purchase,
redemption, defeasance or other acquisition of Indebtedness pursuant to clause
(A) or (C) above, the Company or such Restricted Subsidiary shall permanently
retire such Indebtedness and shall cause the related loan commitment (if any) to
be permanently reduced in an amount equal to the principal amount so prepaid,
repaid, purchased, redeemed, defeased or otherwise acquired.
Notwithstanding the foregoing provisions of this covenant, the Company and
the Restricted Subsidiaries will not be required to apply any Net Available Cash
in accordance with this covenant except to the extent that the aggregate Net
Available Cash from all Asset Dispositions which is not applied in accordance
with this covenant exceeds $5 million. Pending application of Net Available Cash
pursuant to this covenant, such Net Available Cash shall be invested in
Temporary Cash Investments or applied to temporarily reduce revolving credit
indebtedness.
For the purposes of this covenant, the following are deemed to be cash or
cash equivalents:
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(1) the assumption of Indebtedness of the Company (other than obligations
in respect of Disqualified Stock of the Company) or any Restricted
Subsidiary (other than obligations in respect of Disqualified Stock or
Preferred Stock of a Subsidiary Guarantor) and the release of the
Company or such Restricted Subsidiary from all liability on such
Indebtedness in connection with such Asset Disposition; and
(2) securities received by the Company or any Restricted Subsidiary from
the transferee that are promptly converted by the Company or such
Restricted Subsidiary into cash, to the extent of cash received in
that conversion.
(b) In the event of an Asset Disposition that requires the purchase of
Notes (and other Senior Indebtedness of the Company) pursuant to clause
(a)(3)(C) above, the Company will purchase Notes tendered pursuant to an offer
by the Company for the Notes (and such other Senior Indebtedness) at a purchase
price of 100% of their principal amount (or, in the event such other Senior
Indebtedness of the Company was issued with significant original issue discount,
100% of the accreted value thereof) without premium, plus accrued but unpaid
interest (or, in respect of such other Senior Indebtedness of the Company, such
lesser price, if any, as may be provided for by the terms of such Senior
Indebtedness) in accordance with the procedures (including prorating in the
event of oversubscription) set forth in the Indenture. If the aggregate purchase
price of the securities tendered exceeds the Net Available Cash allotted to
their purchase, the Company will select the securities to be purchased on a pro
rata basis but in round denominations, which in the case of the Notes will be
denominations of $1,000 principal amount or multiples thereof. The Company shall
not be required to make such an offer to purchase Notes (and other Senior
Indebtedness of the Company) pursuant to this covenant if the Net Available Cash
available therefor is less than $2 million (which lesser amount shall be carried
forward for purposes of determining whether such an offer is required with
respect to the Net Available Cash from any subsequent Asset Disposition). Upon
completion of such an offer to purchase, Net Available Cash will be deemed to be
reduced by the aggregate amount of such offer.
(c) The Company will comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of Notes pursuant to this
covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, the Company will comply
with the applicable securities laws and regulations and will not be deemed to
have breached its obligations under this covenant by virtue of its compliance
with such securities laws or regulations.
Limitation on Affiliate Transactions
(a) The Company will not, and will not permit any Restricted Subsidiary to,
enter into or permit to exist any transaction (including the purchase, sale,
lease or exchange of any property, employee compensation arrangements or the
rendering of any service) with, or for the benefit of, any Affiliate of the
Company (an "Affiliate Transaction") unless:
(1) the terms of the Affiliate Transaction are no less favorable to the
Company or such Restricted Subsidiary than those that could be
obtained at the time of the Affiliate Transaction in arm's-length
dealings with a Person who is not an Affiliate;
(2) if such Affiliate Transaction involves an amount in excess of $1
million, the terms of the Affiliate Transaction are set forth in
writing and two Officers of the Company have certified that the
criteria set forth in clause (1) are satisfied in an Officers'
Certificate;
(3) if such Affiliate Transaction involves an amount in excess of $5
million, a majority of the directors of the Company disinterested with
respect to such Affiliate Transaction have determined in good faith
that the criteria set forth in clause (1) are satisfied and have
approved the relevant Affiliate Transaction as evidenced by a
resolution of the Board of Directors; provided, however, that a
director will not be deemed disinterested with respect to transactions
between the Company or a Restricted Subsidiary on the one hand and an
immediate family member of such director or an entity affiliated with
such immediate family member on the other; and
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(4) if such Affiliate Transaction involves an amount in excess of $10
million, the Board of Directors shall also have received a written
opinion from an Independent Qualified Party to the effect that such
Affiliate Transaction is fair, from a financial standpoint, to the
Company and its Restricted Subsidiaries or is not less favorable to
the Company and its Restricted Subsidiaries than could reasonably be
expected to be obtained at the time in an arm's-length transaction
with a Person who was not an Affiliate.
(b) The provisions of the preceding paragraph (a) will not prohibit:
(1) any Investment (other than a Permitted Investment) or other Restricted
Payment, in each case permitted to be made pursuant to (but only to
the extent included in the calculation of the amount of Restricted
Payments made pursuant to paragraph (a)(3) of) the covenant described
under "--Limitation on Restricted Payments";
(2) any issuance of securities, or other payments, awards or grants in
cash, securities or otherwise pursuant to, or the funding of,
employment arrangements, stock options and stock ownership plans
approved by the Board of Directors;
(3) loans or advances to employees in the ordinary course of business in
accordance with the past practices of the Company or its Restricted
Subsidiaries, but in any event not to exceed $2 million in the
aggregate outstanding at any one time;
(4) the payment of reasonable fees to directors of the Company and its
Restricted Subsidiaries who are not employees of the Company or its
Restricted Subsidiaries;
(5) any transaction with a Restricted Subsidiary or joint venture or
similar entity which would constitute an Affiliate Transaction solely
because the Company or a Restricted Subsidiary owns an equity interest
in or otherwise controls such Restricted Subsidiary, joint venture or
similar entity;
(6) the issuance or sale of any Capital Stock (other than Disqualified
Stock) of the Company; and
(7) transactions entered into in the ordinary course of business,
consistent with past practices, on terms that are substantially
similar to those that could be obtained at the time of such
transactions in arm's-length dealings with a Person who is not an
Affiliate.
Limitation on Line of Business
The Company will not, and will not permit any Restricted Subsidiary, to
engage in any business other than a Related Business.
Limitation on the Sale or Issuance of Capital Stock of Restricted
Subsidiaries
The Company
(1) will not, and will not permit any Restricted Subsidiary to, sell,
lease, transfer or otherwise dispose of any Capital Stock of any
Restricted Subsidiary to any Person (other than the Company or a
Wholly Owned Subsidiary), and
(2) will not permit any Restricted Subsidiary to issue any of its Capital
Stock (other than, if necessary, shares of its Capital Stock
constituting directors' or other legally required qualifying shares)
to any Person (other than to the Company or a Wholly Owned
Subsidiary),
unless
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(A) immediately after giving effect to such issuance, sale or other
disposition, neither the Company nor any of its Subsidiaries own
any Capital Stock of such Restricted Subsidiary; or
(B) immediately after giving effect to such issuance, sale or other
disposition, such Restricted Subsidiary would no longer
constitute a Restricted Subsidiary and any Investment in such
Person remaining after giving effect thereto is treated as a new
Investment by the Company and such Investment would be permitted
to be made under the covenant described under "--Limitation on
Restricted Payments" if made on the date of such issuance, sale
or other disposition.
For purposes of this covenant, the creation of a Lien on any Capital Stock
of a Restricted Subsidiary to secure Indebtedness of the Company or any of its
Restricted Subsidiaries will not be deemed to be a violation of this covenant;
provided, however, that any sale or other disposition by the secured party of
such Capital Stock following foreclosure of its Lien will be subject to this
covenant.
Limitation on Liens
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, Incur or permit to exist any Lien (the "Initial Lien")
of any nature whatsoever on any of its properties (including Capital Stock of a
Restricted Subsidiary), whether owned at the Issue Date or thereafter acquired,
securing any Indebtedness, other than Permitted Liens, without effectively
providing that the Notes shall be secured equally and ratably with (or prior to)
the obligations so secured for so long as such obligations are so secured.
Any Lien created for the benefit of the Holders of the Notes pursuant to
the preceding sentence shall provide by its terms that such Lien shall be
automatically and unconditionally released and discharged upon the release and
discharge of the Initial Lien.
Limitation on Sale/Leaseback Transactions
The Company will not, and will not permit any Restricted Subsidiary to,
enter into any Sale/Leaseback Transaction with respect to any property unless:
(1) the Company or such Restricted Subsidiary would be entitled to (A)
Incur Indebtedness in an amount equal to the Attributable Debt with
respect to such Sale/Leaseback Transaction pursuant to the covenant
described under "--Limitation on Indebtedness" and (B) create a Lien
on such property securing such Attributable Debt without equally and
ratably securing the Notes pursuant to the covenant described under
"--Limitation on Liens";
(2) the net proceeds received by the Company or any Restricted Subsidiary
in connection with such Sale/Leaseback Transaction are at least equal
to the fair market value (as determined by the Board of Directors) of
such property; and
(3) the Company applies the proceeds of such transaction in compliance
with the covenant described under "--Limitation on Sale of Assets and
Subsidiary Stock."
Merger and Consolidation
The Company will not consolidate with or merge with or into, or convey,
transfer or lease, in one transaction or a series of transactions, directly or
indirectly, all or substantially all its assets to, any Person, unless:
(1) the resulting, surviving or transferee Person (the "Successor
Company") shall be a Person organized and existing under the laws of
the United Mexican States or the laws of any political subdivision
thereof, the laws of the United States of America, any State thereof
or the District of Columbia, or the European Union or any of its
member nations and the Successor Company (if not the Company) shall
expressly assume, by an indenture supplemental thereto, executed and
delivered
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to the Trustee, in form satisfactory to the Trustee, all the
obligations of the predecessor Company under the Notes and the
Indenture;
(2) immediately after giving pro forma effect to such transaction (and
treating any Indebtedness which becomes an obligation of the Successor
Company or any Subsidiary as a result of such transaction as having
been Incurred by such Successor Company or such Subsidiary at the time
of such transaction), no Default shall have occurred and be
continuing;
(3) immediately after giving pro forma effect to such transaction, the
Successor Company would be able to Incur an additional $1.00 of
Indebtedness pursuant to paragraph (a) of the covenant described under
"--Limitation on Indebtedness";
(4) the Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such
consolidation, merger or transfer and such supplemental indenture (if
any) comply with the Indenture;
(5) the Company shall have delivered to the Trustee an Opinion of Counsel
to the effect that the holders will not recognize income, gain or loss
for US Federal income tax purposes as a result of such transaction and
will be subject to US Federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such
transaction had not occurred; and
(6) the Company shall have delivered an Opinion of Counsel in the United
Mexican States to the effect that the holders of the Notes will not
recognize income, gain or loss for income tax purposes of such
jurisdiction as a result of such transaction and will be subject to
income tax in such jurisdiction on the same amounts, in the same
manner and at the same times as would have been the case if such
transaction had not occurred;
provided, however, that clause (3) will not be applicable to (A) a Restricted
Subsidiary consolidating with, merging into or transferring all or part of its
properties and assets to the Company or (B) the Company merging with an
Affiliate of the Company solely for the purpose and with the sole effect of
reincorporating the Company in another jurisdiction.
For purposes of this covenant, the sale, lease, conveyance, assignment,
transfer or other disposition of all or substantially all of the properties and
assets of one or more Subsidiaries of the Company, which properties and assets,
if held by the Company instead of such Subsidiaries, would constitute all or
substantially all of the properties and assets of the Company on a consolidated
basis, shall be deemed to be the transfer of all or substantially all of the
properties and assets of the Company.
The Successor Company will be the successor to the Company and shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under the Indenture, and the predecessor Company, except in the case
of a lease, shall be released from the obligation to pay the principal of and
interest on the Notes.
The Company will not permit any Subsidiary Guarantor to consolidate with or
merge with or into, or convey, transfer or lease, in one transaction or a series
of transactions, all or substantially all of its assets to any Person unless:
(1) except in the case of a Subsidiary Guarantor (x) that has been
disposed of in its entirety to another Person (other than to the
Company or an Affiliate of the Company), whether through a merger,
consolidation or sale of Capital Stock or assets or (y) that, as a
result of the disposition of all or a portion of its Capital Stock,
ceases to be a Subsidiary, the resulting, surviving or transferee
Person (if not such Subsidiary) shall be a Person organized and
existing under the laws of the jurisdiction under which such
Subsidiary was organized or under the laws of the United States of
America, or any State thereof or the District of Columbia or the
United Mexican States, and such Person shall expressly assume, by a
Guaranty Agreement, in a form satisfactory to the Trustee, all the
obligations of such Subsidiary, if any, under its Subsidiary Guaranty;
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(2) immediately after giving effect to such transaction or transactions on
a pro forma basis (and treating any Indebtedness which becomes an
obligation of the resulting, surviving or transferee Person as a
result of such transaction as having been issued by such Person at the
time of such transaction), no Default shall have occurred and be
continuing; and
(3) the Company delivers to the Trustee an Officers' Certificate and an
Opinion of Counsel, each stating that such consolidation, merger or
transfer and such Guaranty Agreement, if any, complies with the
Indenture.
Future Guarantors
The Company will cause each Restricted Subsidiary that Incurs any
Indebtedness to, at the same time, execute and deliver to the Trustee a Guaranty
Agreement pursuant to which such Restricted Subsidiary will Guarantee payment of
the Notes on the same terms and conditions as those set forth in the Indenture.
SEC Reports
The Company will furnish to the Noteholders and the Trustee and make
available to securities analysts and prospective investors upon request: (i)
within 120 days from the end of each fiscal year, an annual report on Form 20-F
containing the information required to be contained therein for such fiscal year
and (ii) within 45 days after the end of each of the first three fiscal quarters
in each fiscal year, quarterly reports on Form 6-K containing all the
information that would be required to be contained in a filing with the SEC on
Form 10-Q if the Company were required to file such Form, including a
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." All reports required by this paragraph will be prepared in all
material respects in accordance with all the rules and regulations applicable to
the relevant Form, which for purposes of filings on Form 6-K will require
including all the information required to be included in such Form 6-K by the
preceding sentence. In addition, whether or not the Company is subject to the
periodic reporting requirements of the Exchange Act, the Company will file a
copy of each of the reports with the SEC for public availability within the time
periods specified above (unless the SEC will not accept such a filing). The
Company agrees that it will not take any action for the purpose of causing the
SEC not to accept any such filings. If, notwithstanding the foregoing, the SEC
will not accept the Company's filings for any reason, the Company will post the
reports referred to in this paragraph on its website within the time periods
specified above.
At any time that any of the Company's Subsidiaries are Unrestricted
Subsidiaries, then the quarterly and annual financial information required by
the preceding paragraph will include a reasonably detailed presentation, either
on the face of the financial statements or in the footnotes thereto, and in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," of the financial condition and results of operations of the Company
and its Restricted Subsidiaries separate from the financial condition and
results of operations of the Unrestricted Subsidiaries of the Company.
In addition, the Company will furnish to the Holders of the Notes and to
prospective investors, upon the requests of such Holders, any information
required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act so
long as the Notes are not freely transferable under the Securities Act. Defaults
Each of the following is an Event of Default:
(1) a default in the payment of interest on the Notes when due, continued
for 30 days;
(2) a default in the payment of principal of any Note when due at its
Stated Maturity, upon optional redemption, upon required purchase,
upon declaration of acceleration or otherwise;
(3) the failure by the Company to comply with its obligations under
"--Certain Covenants--Merger and Consolidation" above;
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(4) the failure by the Company to comply for 30 days after notice with any
of its obligations in the covenants described above under "Change of
Control" (other than a failure to purchase Notes) or under "--Certain
Covenants" under "--Limitation on Indebtedness," "--Limitation on
Restricted Payments," "--Limitation on Restrictions on Distributions
from Restricted Subsidiaries," "--Limitation on Sales of Assets and
Subsidiary Stock" (other than a failure to purchase Notes),
"--Limitation on Affiliate Transactions," "--Limitation on Line of
Business," "--Limitation on the Sale or Issuance of Capital Stock of
Restricted Subsidiaries" or "--Limitation on Liens," "--Limitation on
Sale/Leaseback Transactions," "--Future Guarantors" or "--SEC
Reports";
(5) the failure by the Company or any Subsidiary Guarantor to comply for
60 days after notice with its other agreements contained in the
Indenture;
(6) Indebtedness of the Company, any Subsidiary Guarantor or any
Significant Subsidiary is not paid within any applicable grace period
after final maturity or is accelerated by the holders thereof because
of a default and the total amount of such Indebtedness unpaid or
accelerated exceeds $10 million (the "cross acceleration provision");
(7) certain events of bankruptcy, insolvency or reorganization of the
Company, a Subsidiary Guarantor or any Significant Subsidiary (the
"bankruptcy provisions");
(8) any judgment or decree for the payment of money in excess of $10
million is entered against the Company, a Subsidiary Guarantor or any
Significant Subsidiary, remains outstanding for a period of 60
consecutive days following such judgment and is not discharged, waived
or stayed (the "judgment default provision"); or
(9) a Subsidiary Guaranty ceases to be in full force and effect (other
than in accordance with the terms of such Subsidiary Guaranty) or a
Subsidiary Guarantor denies or disaffirms its obligations under its
Subsidiary Guaranty.
However, a default under clauses (4) and (5) will not constitute an Event of
Default until the Trustee or the holders of 25% in principal amount of the
outstanding Notes notify the Company of the default and the Company does not
cure such default within the time specified after receipt of such notice.
If an Event of Default occurs and is continuing, the Trustee or the holders
of at least 25% in principal amount of the outstanding Notes may declare the
principal of and accrued but unpaid interest on all the Notes to be due and
payable. Upon such a declaration, such principal and interest shall be due and
payable immediately. If an Event of Default relating to certain events of
bankruptcy, insolvency or reorganization of the Company occurs and is
continuing, the principal of and interest on all the Notes will ipso facto
become and be immediately due and payable without any declaration or other act
on the part of the Trustee or any holders of the Notes. Under certain
circumstances, the holders of a majority in principal amount of the outstanding
Notes may rescind any such acceleration with respect to the Notes and its
consequences.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default occurs and is continuing, the Trustee will
be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the holders of the Notes unless
such holders have offered to the Trustee reasonable indemnity or security
against any loss, liability or expense. Except to enforce the right to receive
payment of principal, premium (if any) or interest when due, no holder of a Note
may pursue any remedy with respect to the Indenture or the Notes unless:
(1) such holder has previously given the Trustee notice that an Event of
Default is continuing;
(2) holders of at least 25% in principal amount of the outstanding Notes
have requested the Trustee to pursue the remedy;
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(3) such holders have offered the Trustee reasonable security or indemnity
against any loss, liability or expense;
(4) the Trustee has not complied with such request within 60 days after
the receipt thereof and the offer of security or indemnity; and
(5) holders of a majority in principal amount of the outstanding Notes
have not given the Trustee a direction inconsistent with such request
within such 60-day period.
Subject to certain restrictions, the holders of a majority in principal amount
of the outstanding Notes are given the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Trustee or of
exercising any trust or power conferred on the Trustee. The Trustee, however,
may refuse to follow any direction that conflicts with law or the Indenture or
that the Trustee determines is unduly prejudicial to the rights of any other
holder of a Note or that would involve the Trustee in personal liability.
If a Default occurs, is continuing and is known to the Trustee, the Trustee
must mail to each holder of the Notes notice of the Default within 90 days after
it occurs. Except in the case of a Default in the payment of principal of or
interest on any Note, the Trustee may withhold notice if and so long as a
committee of its Trust Officers determines that withholding notice is not
opposed to the interest of the holders of the Notes. In addition, we are
required to deliver to the Trustee, within 120 days after the end of each fiscal
year, a certificate indicating whether the signers thereof know of any Default
that occurred during the previous year. We are required to deliver to the
Trustee, within 30 days after the occurrence thereof, written notice of any
event which would constitute certain Defaults, their status and what action we
are taking or propose to take in respect thereof.
Amendments and Waivers
Subject to certain exceptions, the Indenture may be amended with the
consent of the holders of a majority in principal amount of the Notes then
outstanding (including consents obtained in connection with a tender offer or
exchange for the Notes) and any past default or compliance with any provisions
may also be waived with the consent of the holders of a majority in principal
amount of the Notes then outstanding. However, without the consent of each
holder of an outstanding Note affected thereby, an amendment or waiver may not,
among other things:
(1) reduce the amount of Notes whose holders must consent to an amendment;
(2) reduce the rate of or extend the time for payment of interest on any
Note;
(3) reduce the principal of or change the Stated Maturity of any Note;
(4) change the provisions applicable to the redemption of any Note as
described under "--Optional Redemption" or "--Redemption for Changes
in Withholding Taxes" above;
(5) make any Note payable in money other than that stated in the Note;
(6) impair the right of any holder of the Notes to receive payment of
principal of and interest on such holder's Notes on or after the due
dates therefor or to institute suit for the enforcement of any payment
on or with respect to such holder's Notes;
(7) make any change in the amendment provisions which require each
holder's consent or in the waiver provisions;
(8) make any change in the ranking or priority of any Note that would
adversely affect the Noteholders;
(9) make any change in, or release other than in accordance with the
Indenture, any Subsidiary Guaranty that would adversely affect the
Noteholders; or
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(10) make any change in the provisions of the Indenture described under
"--Additional Amounts" that adversely affects the rights of any
Noteholder or amend the terms of the Notes or the Indenture in any way
that would result in the loss of an exemption from any of the Taxes
described thereunder.
Notwithstanding the preceding, without the consent of any holder of the
Notes, the Company, the Subsidiary Guarantors and Trustee may amend the
Indenture:
(1) to cure any ambiguity, omission, defect or inconsistency;
(2) to provide for the assumption by a successor corporation of the
obligations of the Company, or any Subsidiary Guarantor under the
Indenture;
(3) to provide for uncertificated Notes in addition to or in place of
certificated Notes (provided that the uncertificated Notes are issued
in registered form for purposes of Section 163(f) of the Code, or in a
manner such that the uncertificated Notes are described in Section
163(f)(2)(B) of the Code);
(4) to add Guarantees with respect to the Notes, including any Subsidiary
Guaranties, or to secure the Notes;
(5) to add to the covenants of the Company or a Subsidiary Guarantor for
the benefit of the holders of the Notes or to surrender any right or
power conferred upon the Company or a Subsidiary Guarantor;
(6) to make any change that does not adversely affect the rights of any
holder of the Notes;
(7) to comply with any requirement of the SEC in connection with the
qualification of the Indenture under the Trust Indenture Act; or
(8) to make any amendment to the provisions of the Indenture relating to
the form, authentication, transfer and legending of Notes; provided,
however, that (a) compliance with the Indenture as so amended would
not result in Notes being transferred in violation of the Securities
Act or any other applicable securities law and (b) such amendment does
not materially affect the rights of Holders to transfer Notes.
The consent of the holders of the Notes is not necessary under the
Indenture to approve the particular form of any proposed amendment. It is
sufficient if such consent approves the substance of the proposed amendment.
After an amendment under the Indenture becomes effective, we are required
to mail to holders of the Notes a notice briefly describing such amendment.
However, the failure to give such notice to all holders of the Notes, or any
defect therein, will not impair or affect the validity of the amendment.
Transfer
The Notes will be issued in registered form and will be transferable only
upon the surrender of the Notes being transferred for registration of transfer.
We may require payment of a sum sufficient to cover any tax, assessment or other
governmental charge payable in connection with certain transfers and exchanges.
Defeasance
At any time, we may terminate all our obligations under the Notes and the
Indenture ("legal defeasance"), except for certain obligations, including those
respecting the defeasance trust and obligations to register the transfer or
exchange of the Notes, to replace mutilated, destroyed, lost or stolen Notes and
to maintain a registrar and paying agent in respect of the Notes.
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In addition, at any time we may terminate our obligations under "--Change
of Control" and under the covenants described under "--Certain Covenants" (other
than the covenant described under "--Merger and Consolidation"), the operation
of the cross acceleration provision, the bankruptcy provisions with respect to
Subsidiary Guarantors and Significant Subsidiaries and the judgment default
provision described under "--Defaults" above and the limitations contained in
clause (3) of the first paragraph under "--Certain Covenants--Merger and
Consolidation" above ("covenant defeasance").
We may exercise our legal defeasance option notwithstanding our prior
exercise of our covenant defeasance option. If we exercise our legal defeasance
option, payment of the Notes may not be accelerated because of an Event of
Default with respect thereto. If we exercise our covenant defeasance option,
payment of the Notes may not be accelerated because of an Event of Default
specified in clause (4), (6), (7) (with respect only to Significant Subsidiaries
and Subsidiary Guarantors) or (8) under "--Defaults" above or because of the
failure of the Company to comply with clause (3) of the first paragraph under
"--Certain Covenants--Merger and Consolidation" above. If we exercise our legal
defeasance option or our covenant defeasance option, each Subsidiary Guarantor
will be released from all of its obligations with respect to its Subsidiary
Guaranty.
In order to exercise either of our defeasance options, we must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or US
Government Obligations for the payment of principal and interest on the Notes to
redemption or maturity, as the case may be, and must comply with certain other
conditions, including delivery to the Trustee of (1) an Opinion of Counsel to
the effect that holders of the Notes will not recognize income, gain or loss for
US Federal income tax purposes as a result of such deposit and defeasance and
will be subject to US Federal income tax on the same amounts and in the same
manner and at the same times as would have been the case if such deposit and
defeasance had not occurred (and, in the case of legal defeasance only, such
Opinion of Counsel must be based on a ruling of the Internal Revenue Service or
other change in applicable US Federal income tax law) and (2) an Opinion of
Counsel in the United Mexican States to the effect that holders of the Notes
will not recognize income, gain or loss for income tax purposes of such
jurisdiction as a result of such deposit and defeasance and will be subject to
income tax of such jurisdiction on the same amounts and in the same manner and
at the same times as would have been the case if such deposit and defeasance had
not occurred.
Concerning the Trustee
The Bank of New York is to be the Trustee under the Indenture. We have
appointed The Bank of New York as Registrar and Paying Agent with regard to the
Notes. In addition, The Bank of New York will act as Exchange Agent in
connection with the Exchange Offer contemplated hereby.
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company or any Subsidiary Guarantor, to
obtain payment of claims in certain cases, or to realize on certain property
received in respect of any such claim as security or otherwise. The Trustee will
be permitted to engage in other transactions; provided, however, if it acquires
any conflicting interest it must either eliminate such conflict within 90 days,
apply to the SEC for permission to continue or resign.
The Holders of a majority in principal amount of the outstanding Notes will
have the right to direct the time, method and place of conducting any proceeding
for exercising any remedy available to the Trustee, subject to certain
exceptions. If an Event of Default occurs (and is not cured), the Trustee will
be required, in the exercise of its power, to use the degree of care of a
prudent man in the conduct of his own affairs. Subject to such provisions, the
Trustee will be under no obligation to exercise any of its rights or powers
under the Indenture at the request of any Holder of Notes, unless such Holder
shall have offered to the Trustee security and indemnity satisfactory to it
against any loss, liability or expense and then only to the extent required by
the terms of the Indenture.
No Personal Liability of Directors, Officers, Employees and Stockholders
No director, officer, employee, incorporator or stockholder of the Company
or any Subsidiary Guarantor will have any liability for any obligations of the
Company or any Subsidiary Guarantor under the Notes, any Subsidiary Guaranty or
the Indenture or for any claim based on, in respect of, or by reason of such
obligations or their creation. Each Holder of the Notes by accepting a Note
waives and releases all such liability. The waiver and re-
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lease are part of the consideration for issuance of the Notes. Such waiver and
release may not be effective to waive liabilities under the US Federal
securities laws, and it is the view of the SEC that such a waiver is against
public policy.
Governing Law
The Indenture and the Notes will be governed by, and construed in
accordance with, the laws of the State of New York.
Enforceability of Judgments
Since all of our operating assets and the operating assets of our
subsidiaries are situated outside the United States, any judgment obtained in
the United States against us or our subsidiaries, including judgments with
respect to the payment of principal, interest, redemption price and any purchase
price with respect to the Notes, may not be collectible within the United
States.
A judgment obtained in a competent State or Federal court sitting in the
Borough of Manhattan, City of New York, United States of America arising out of
or in relation to the obligations of the Company under the Notes would be
enforceable in Mexico against us or our subsidiaries, provided that all federal
and state procedural requirements under Mexican law (as the applicable case may
be), including laws concerning statute of limitations and expirations, are
satisfied; and further provided that:
(1) such judgment is obtained in compliance with legal requirements of the
jurisdiction of the court rendering such judgment and in compliance
with all legal requirements of the Notes;
(2) such judgment is strictly for the payment of a certain sum of money,
based on an in personam (as opposed to an in rem) action;
(3) service of process was made personally on the defendant or a duly
authorized process agent;
(4) such judgment does not contravene Mexican law, public policy of
Mexico, international treaties or agreements binding upon Mexico or
generally accepted principles of international law;
(5) the applicable procedure under the laws of Mexico with respect to the
enforcement of foreign judgments (including issuance of a letter
rogatory by the competent authority of such jurisdiction requesting
enforcement of such judgment and the certification of such judgment as
authentic by the corresponding authorities of such jurisdiction in
accordance with the laws thereof) is complied with;
(6) such judgment is final in the jurisdiction where obtained; and
(7) the courts of such jurisdiction recognize the principles of
reciprocity in connection with the enforcement of Mexican judgments in
such jurisdiction.
Consent to Jurisdiction and Service
The Company, each Subsidiary Guarantor and the Trustee consent that any
legal action, suit or proceeding arising out of or relating to the Notes may be
instituted in the United States District Court of the Southern District of New
York and the courts of the State of New York sitting in New York, Borough of
Manhattan, and will submit to and accept the jurisdiction of any such court.
The Company and each Subsidiary Guarantor has irrevocably appointed CT
Corporation System, domiciled at 1633 Broadway, New York, New York 10019 as its
agent for service of process for actions relating to the Notes, the Registration
Rights Agreement or the Indenture brought under Federal or state securities laws
brought in the
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United States District Court of the Southern District of New York and the courts
of the State of New York sitting in New York, Borough of Manhattan.
Certain Definitions
"Additional Assets" means:
(1) any property, plant, equipment or licenses used in a Related Business;
(2) the Capital Stock of a Person that becomes a Restricted Subsidiary as
a result of the acquisition of such Capital Stock by the Company or
another Restricted Subsidiary; or
(3) Capital Stock constituting a minority interest in any Person that at
such time is a Restricted Subsidiary;
provided, however, that any such Restricted Subsidiary described in clause (2)
or (3) above is primarily engaged in a Related Business.
"Adjusted Capital Expenditures" means
(1) for any period ending on or before September 30, 2005, the product
obtained by multiplying (A) Eight Quarter Average Capital Expenditures
by (B) the Number of Test Quarters; or
(2) for any period ending on or after October 1, 2005, capital
expenditures made by the Company and its Restricted Subsidiaries for
such period.
"Adjusted Consolidated Net Income" for any period means Consolidated Net
Income
(1) plus, to the extent deducted in calculating such Consolidated Net
Income, depreciation and amortization expense of the Company and its
consolidated Restricted Subsidiaries (excluding amortization expense
attributable to a prepaid operating activity item that was paid in
cash in a prior period) for such period; and
(2) less Adjusted Capital Expenditures for such period.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing. For
purposes of the covenants described under "--Certain Covenants--Limitation on
Restricted Payments," "--Certain Covenants--Limitation on Affiliate
Transactions" and "--Certain Covenants--Limitation on Sales of Assets and
Subsidiary Stock" only, "Affiliate" shall also mean any beneficial owner of
Capital Stock representing 10% or more of the total voting power of the Voting
Stock (on a fully diluted basis) of the Company or of rights or warrants to
purchase such Capital Stock (whether or not currently exercisable) and any
Person who would be an Affiliate of any such beneficial owner pursuant to the
first sentence hereof.
"Asset Disposition" means any sale, lease, transfer or other disposition
(or series of related sales, leases, transfers or dispositions) by the Company
or any Restricted Subsidiary, including any disposition by means of a merger,
consolidation or similar transaction (each referred to for the purposes of this
definition as a "disposition"), of:
(1) any shares of Capital Stock of a Restricted Subsidiary (other than
directors' qualifying shares or shares required by applicable law to
be held by a Person other than the Company or a Restricted
Subsidiary);
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(2) all or substantially all the assets of any division or line of
business of the Company or any Restricted Subsidiary; or
(3) any other assets of the Company or any Restricted Subsidiary outside
of the ordinary course of business of the Company or such Restricted
Subsidiary
(other than, in the case of clauses (1), (2) and (3) above,
(A) a disposition by a Restricted Subsidiary to the Company or by the
Company or a Restricted Subsidiary to a Wholly Owned Subsidiary;
(B) for purposes of the covenant described under "--Certain
Covenants--Limitation on Sales of Assets and Subsidiary Stock"
only, (i) a disposition that constitutes a Restricted Payment (or
would constitute a Restricted Payment but for the exclusions from
the definition thereof) and that is not prohibited by the
covenant described under "--Certain Covenants--Limitation on
Restricted Payments" and (ii) a disposition of all or
substantially all the assets of the Company in accordance with
the covenant described under "--Certain Covenants--Merger and
Consolidation";
(C) a disposition of assets with a fair market value of less than
$500,000;
(D) a disposition of cash or Temporary Cash Investments; and
(E) the creation of a Lien (but not the sale or other disposition of
the property subject to such Lien)).
"Attributable Debt" in respect of a Sale/Leaseback Transaction means, as at
the time of determination, the present value (discounted at the interest rate
borne by the Notes, compounded annually) of the total obligations of the lessee
for rental payments during the remaining term of the lease included in such
Sale/Leaseback Transaction (including any period for which such lease has been
extended); provided, however, that if such Sale/Leaseback Transaction results in
a Capital Lease Obligation, the amount of Indebtedness represented thereby will
be determined in accordance with the definition of "Capital Lease Obligation."
"Average Life" means, as of the date of determination, with respect to any
Indebtedness, the quotient obtained by dividing:
(1) the sum of the products of the numbers of years from the date of
determination to the dates of each successive scheduled principal
payment of or redemption or similar payment with respect to such
Indebtedness multiplied by the amount of such payment by
(2) the sum of all such payments.
"Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board.
"Business Day" means each day which is not a Legal Holiday.
"Capital Lease Obligation" means an obligation that is required to be
classified and accounted for as a capital lease for financial reporting purposes
in accordance with GAAP, and the amount of Indebtedness represented by such
obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be terminated by the lessee without payment of a
penalty. For purposes of the covenant described under "--Certain
Covenants--Limitations on Liens," a Capital Lease Obligation will be deemed to
be secured by a Lien on the property being leased.
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"Capital Stock" of any Person means any and all shares, interests
(including partnership interests), rights to purchase, warrants, options,
participations or other equivalents of or interests in (however designated)
equity of such Person, including any Preferred Stock, but excluding any debt
securities convertible into such equity.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its consolidated Restricted Subsidiaries.
"Consolidated Leverage Ratio" as of any date of determination means the
ratio of (a) the aggregate amount of Indebtedness of the Company and its
Restricted Subsidiaries as of such date of determination to (b) EBITDA for the
most recent four consecutive fiscal quarters ending at least 45 days prior to
such date of determination (the "Reference Period"); provided, however, that:
(1) if the transaction giving rise to the need to calculate the
Consolidated Leverage Ratio is an Incurrence of Indebtedness, the
amount of such Indebtedness shall be calculated after giving effect on
a pro forma basis to such Indebtedness;
(2) if the Company or any Restricted Subsidiary has repaid, repurchased,
defeased or otherwise discharged any Indebtedness that was outstanding
as of the end of such fiscal quarter or if any Indebtedness is to be
repaid, repurchased, defeased or otherwise discharged on the date of
the transaction giving rise to the need to calculate the Consolidated
Leverage Ratio (other than, in each case, Indebtedness Incurred under
any revolving credit agreement), the aggregate amount of Indebtedness
shall be calculated on a pro forma basis and EBITDA shall be
calculated as if the Company or such Restricted Subsidiary had not
earned the interest income, if any, actually earned during the
Reference Period in respect of cash or Temporary Cash Investments used
to repay, repurchase, defease or otherwise discharge such
Indebtedness;
(3) if since the beginning of the Reference Period the Company or any
Restricted Subsidiary shall have made any Asset Disposition, the
EBITDA for the Reference Period shall be reduced by an amount equal to
the EBITDA (if positive) directly attributable to the assets which are
the subject of such Asset Disposition for the Reference Period or
increased by an amount equal to the EBITDA (if negative) directly
attributable thereto for the Reference Period;
(4) if since the beginning of the Reference Period the Company or any
Restricted Subsidiary (by merger or otherwise) shall have made an
Investment in any Restricted Subsidiary (or any Person which becomes a
Restricted Subsidiary) or an acquisition of assets which constitutes
all or substantially all of an operating unit of a business, EBITDA
for the Reference Period shall be calculated after giving pro forma
effect thereto (including the Incurrence of any Indebtedness) as if
such Investment or acquisition occurred on the first day of the
Reference Period; and
(5) if since the beginning of the Reference Period any Person (that
subsequently became a Restricted Subsidiary or was merged with or into
the Company or any Restricted Subsidiary since the beginning of such
Reference Period) shall have made any Asset Disposition, any
Investment or acquisition of assets that would have required an
adjustment pursuant to clause (3) or (4) above if made by the Company
or a Restricted Subsidiary during the Reference Period, EBITDA for the
Reference Period shall be calculated after giving pro forma effect
thereto as if such Asset Disposition, Investment or acquisition
occurred on the first day of the Reference Period.
For purposes of this definition, whenever pro forma effect is to be given to an
acquisition of assets, the amount of income or earnings relating thereto and the
amount of Consolidated Interest Expense associated with any Indebtedness
Incurred in connection therewith, the pro forma calculations shall be determined
in good faith by a responsible financial or accounting Officer of the Company.
If any Indebtedness bears a floating rate of interest and is being given pro
forma effect, the interest on such Indebtedness shall be calculated as if the
rate in effect on the date of
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determination had been the applicable rate for the entire period (taking into
account any Interest Rate Agreement applicable to such Indebtedness if such
Interest Rate Agreement has a remaining term in excess of 12 months).
If any Indebtedness is Incurred under a revolving credit facility and is
being given pro forma effect, the interest on such Indebtedness shall be
calculated based on the average daily balance of such Indebtedness for the four
fiscal quarters subject to the pro forma calculation to the extent that such
Indebtedness was incurred solely for working capital purposes.
"Consolidated Net Income" means, for any period, the net income of the
Company and its consolidated Subsidiaries; provided, however, that there shall
not be included in such Consolidated Net Income:
(1) any net income of any Person (other than the Company) if such Person
is not a Restricted Subsidiary, except that:
(A) subject to the exclusion contained in clause (4) below, the
Company's equity in the net income of any such Person for such
period shall be included in such Consolidated Net Income up to
the aggregate amount of cash actually distributed by such Person
during such period to the Company or a Restricted Subsidiary as a
dividend or other distribution (subject, in the case of a
dividend or other distribution paid to a Restricted Subsidiary,
to the limitations contained in clause (3) below); and
(B) the Company's equity in a net loss of any such Person for such
period shall be included in determining such Consolidated Net
Income;
(2) any net income (or loss) of any Person acquired by the Company or a
Subsidiary in a pooling of interests transaction (or any transaction
accounted for in a manner similar to a pooling of interests) for any
period prior to the date of such acquisition;
(3) any net income of any Restricted Subsidiary if such Restricted
Subsidiary is subject to restrictions, directly or indirectly, on the
payment of dividends or the making of distributions by such Restricted
Subsidiary, directly or indirectly, to the Company, except that:
(A) subject to the exclusion contained in clause (4) below, the
Company's equity in the net income of any such Restricted
Subsidiary for such period shall be included in such Consolidated
Net Income up to the aggregate amount of cash actually
distributed by such Restricted Subsidiary during such period to
the Company or another Restricted Subsidiary as a dividend or
other distribution (subject, in the case of a dividend or other
distribution paid to another Restricted Subsidiary, to the
limitation contained in this clause); and
(B) the Company's equity in a net loss of any such Restricted
Subsidiary for such period shall be included in determining such
Consolidated Net Income;
(4) any gain (or loss) realized upon the sale or other disposition of any
assets of the Company, its consolidated Subsidiaries or any other
Person (including pursuant to any sale-and-leaseback arrangement)
which is not sold or otherwise disposed of in the ordinary course of
business and any gain (or loss) realized upon the sale or other
disposition of any Capital Stock of any Person;
(5) any net, after-tax, extraordinary or non-recurring gains or losses or
income or expenses; and
(6) the cumulative effect of a change in accounting principles;
in each case, for such period. Notwithstanding the foregoing, for the purposes
of the covenant described under "--Certain Covenants--Limitation on Restricted
Payments" only, there shall be excluded from Consolidated Net Income any
repurchases, repayments or redemptions of Investments, proceeds realized on the
sale of Investments or return of capital to the Company or a Restricted
Subsidiary to the extent such repurchases, repayments, redemptions,
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proceeds or returns increase the amount of Restricted Payments permitted under
such covenant pursuant to clause (a)(3)(D) thereof.
"Consolidated Secured Leverage Ratio" means, as of any date of
determination, the ratio of (1) the aggregate amount of Indebtedness of the
Company and its Restricted Subsidiaries that is secured by Liens as of such date
of determination to (2) EBITDA for the period of (i) the most recent four
consecutive fiscal quarters ending at least 45 days prior to the date of
determination or (ii) if quarterly information is available for the immediately
preceding fiscal quarter and such financial information is included in the
reports filed or delivered pursuant to the covenant described under "Certain
Covenants--SEC Reports," the most recent four consecutive fiscal quarters, with
such pro forma and other adjustments to each of Indebtedness and EBITDA as are
appropriate and consistent with the pro forma and other adjustment provisions
set forth in the definition of Consolidated Leverage Ratio.
"Consolidated Total Assets" means, as of any date of determinations, the
total assets shown on the consolidated balance sheet of the Company and its
Restricted Subsidiaries as of the most recent date for which such a balance
sheet is available, determined on a consolidated basis in accordance with GAAP
(and, in the case of any determination relating to any Incurrence of
Indebtedness or any Investment, on a pro forma basis including any property or
assets being acquired in connection therewith).
"Currency Agreement" means in any foreign exchange contract, currency swap
agreement or other similar agreement with respect to currency values.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
which by its terms (or by the terms of any security into which it is convertible
or for which it is exchangeable at the option of the holder) or upon the
happening of any event:
(1) matures or is mandatorily redeemable (other than redeemable only for
Capital Stock of such Person which is not itself Disqualified Stock)
pursuant to a sinking fund obligation or otherwise;
(2) is convertible or exchangeable at the option of the holder for
Indebtedness or Disqualified Stock; or
(3) is mandatorily redeemable or must be purchased upon the occurrence of
certain events or otherwise, in whole or in part;
in each case on or prior to the first anniversary of the Stated Maturity of the
Notes; provided, however, that any Capital Stock that would not constitute
Disqualified Stock but for provisions thereof giving holders thereof the right
to require such Person to purchase or redeem such Capital Stock upon the
occurrence of an "asset sale" or "change of control" occurring prior to the
first anniversary of the Stated Maturity of the Notes shall not constitute
Disqualified Stock if:
(4) the "asset sale" or "change of control" provisions applicable to such
Capital Stock are not more favorable to the holders of such Capital
Stock than the terms applicable to the Notes and described under
"--Certain Covenants--Limitation on Sales of Assets and Subsidiary
Stock" and "--Certain Covenants--Change of Control"; and
(5) any such requirement only becomes operative after compliance with such
terms applicable to the Notes, including the purchase of any Notes
tendered pursuant thereto.
The amount of any Disqualified Stock that does not have a fixed redemption,
repayment or repurchase price will be calculated in accordance with the terms of
such Disqualified Stock as if such Disqualified Stock were redeemed, repaid or
repurchased on any date on which the amount of such Disqualified Stock is to be
determined pursuant to the Indenture; provided, however, that if such
Disqualified Stock could not be required to be redeemed, repaid or
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repurchased at the time of such determination, the redemption, repayment or
repurchase price will be the book value of such Disqualified Stock as reflected
in the most recent financial statements of such Person.
"EBITDA" for any period means the sum of Consolidated Net Income, plus the
following to the extent deducted in calculating such Consolidated Net Income:
(1) all expense for income tax or asset tax of the Company and its
consolidated Restricted Subsidiaries;
(2) Consolidated Interest Expense;
(3) depreciation and amortization expense of the Company and its
consolidated Restricted Subsidiaries (excluding amortization expense
attributable to a prepaid operating activity item that was paid in
cash in a prior period); and
(4) all other non-cash charges of the Company and its consolidated
Restricted Subsidiaries (excluding any such non-cash charge to the
extent that it represents an accrual of or reserve for cash
expenditures in any future period);
in each case for such period. Notwithstanding the foregoing, the provision for
taxes based on the income or profits of, and the depreciation and amortization
and non-cash charges of, a Restricted Subsidiary shall be added to Consolidated
Net Income to compute EBITDA only to the extent (and in the same proportion,
including by reason of minority interests) that the net income or loss of such
Restricted Subsidiary was included in calculating Consolidated Net Income and
only if a corresponding amount would be permitted at the date of determination
to be dividended to the Company by such Restricted Subsidiary without prior
approval (that has not been obtained), pursuant to the terms of its charter and
all agreements, instruments, judgments, decrees, orders, statutes, rules and
governmental regulations applicable to such Restricted Subsidiary or its
stockholders.
"Eight Quarter Average Capital Expenditures" means, at any date of
determination, the quotient obtained by dividing (A) the sum of capital
expenditures made by the Company and its Restricted Subsidiaries for the eight
fiscal quarters preceding such date through and including the end of the most
recent fiscal quarter ending at least 45 days prior to the date of determination
by (B) eight.
"Equity Offering" means any sale of Capital Stock (other than Disqualified
Stock).
"Exchange Act" means the US Securities Exchange Act of 1934, as amended.
"Exchange Notes" means the debt securities of the Company issued pursuant
to the Indenture in exchange for, and in an aggregate principal amount equal to,
the 2005 notes, in compliance with the terms of the Registration Rights
Agreement.
"GAAP" means generally accepted accounting principles in Mexico as in
effect on the Issue Date.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any Person and any
obligation, direct or indirect, contingent or otherwise, of such Person:
(1) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Indebtedness of such Person (whether arising by
virtue of partnership arrangements, or by agreements to keep-well, to
purchase assets, goods, securities or services, to take-or-pay or to
maintain financial statement conditions or otherwise); or
(2) entered into for the purpose of assuring in any other manner the
obligee of such Indebtedness of the payment thereof or to protect such
obligee against loss in respect thereof (in whole or in part);
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provided, however, that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning.
"Guaranty Agreement" means a supplemental indenture, in a form satisfactory
to the Trustee, pursuant to which a Subsidiary Guarantor guarantees the
Company's obligations with respect to the Notes on the terms provided for in the
Indenture.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement or Currency Agreement.
"Holder" or "Noteholder" means the Person in whose name a Note is
registered on the Registrar's books.
"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; provided, however, that any Indebtedness of a Person existing at the time
such Person becomes a Restricted Subsidiary (whether by merger, consolidation,
acquisition or otherwise) shall be deemed to be Incurred by such Person at the
time it becomes a Restricted Subsidiary. The term "Incurrence" when used as a
noun shall have a correlative meaning. Solely for purposes of determining
compliance with "--Certain Covenants--Limitation on Indebtedness":
(1) amortization of debt discount or the accretion of principal with
respect to a non-interest bearing or other discount security;
(2) the payment of regularly scheduled interest in the form of additional
Indebtedness of the same instrument or the payment of regularly
scheduled dividends on Capital Stock in the form of additional Capital
Stock of the same class and with the same terms; and
(3) the obligation to pay a premium in respect of Indebtedness arising in
connection with the issuance of a notice of redemption or making of a
mandatory offer to purchase such Indebtedness
will not be deemed to be the Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication):
(1) the principal in respect of (A) indebtedness of such Person for money
borrowed and (B) indebtedness evidenced by notes, debentures, bonds or
other similar instruments for the payment of which such Person is
responsible or liable, including, in each case, any premium on such
indebtedness to the extent such premium has become due and payable;
(2) all Capital Lease Obligations of such Person and all Attributable Debt
in respect of Sale/Leaseback Transactions entered into by such Person;
(3) all obligations of such Person issued or assumed as the deferred
purchase price of property, all conditional sale obligations of such
Person and all obligations of such Person under any title retention
agreement (but excluding trade accounts payable arising in the
ordinary course of business);
(4) all obligations of such Person for the reimbursement of any obligor on
any letter of credit, bankers' acceptance or similar credit
transaction (other than obligations with respect to letters of credit
securing obligations (other than obligations described in clauses (1)
through (3) above) entered into in the ordinary course of business of
such Person to the extent such letters of credit are not drawn upon
or, if and to the extent drawn upon, such drawing is reimbursed no
later than the tenth Business Day following payment on the letter of
credit);
(5) the amount of all obligations of such Person with respect to the
redemption, repayment or other repurchase of any Capital Stock of such
Person or any Subsidiary of such Person or that are determined by the
value of such Capital Stock, the principal amount of such Capital
Stock to be determined in accordance with the Indenture;
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(6) all obligations of the type referred to in clauses (1) through (5) of
other Persons and all dividends of other Persons for the payment of
which, in either case, such Person is responsible or liable, directly
or indirectly, as obligor, guarantor or otherwise, including by means
of any Guarantee;
(7) all obligations of the type referred to in clauses (1) through (6) of
other Persons secured by any Lien on any property or asset of such
Person (whether or not such obligation is assumed by such Person), the
amount of such obligation being deemed to be the lesser of the value
of such property or assets and the amount of the obligation so
secured; and
(8) to the extent not otherwise included in this definition, Hedging
Obligations of such Person.
Notwithstanding the foregoing, in connection with the purchase by the
Company or any Restricted Subsidiary of any business, the term "Indebtedness"
will exclude post-closing payment adjustments to which the seller may become
entitled to the extent such payment is determined by a final closing balance
sheet or such payment depends on the performance of such business after the
closing; provided, however, that, at the time of closing, the amount of any such
payment is not determinable and, to the extent such payment thereafter becomes
fixed and determined, the amount is paid within 30 days thereafter.
The amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date of all obligations as described above;
provided, however, that in the case of Indebtedness sold at a discount, the
amount of such Indebtedness at any time will be the accreted value thereof at
such time.
"Independent Qualified Party" means an investment banking firm, accounting
firm or appraisal firm of national standing; provided, however, that such firm
is not an Affiliate of the Company.
"Interest Rate Agreement" means any interest rate swap agreement, interest
rate cap agreement or other financial agreement or arrangement with respect to
exposure to interest rates.
"Investment" in any Person means any direct or indirect advance, loan
(other than advances to customers in the ordinary course of business that are
recorded as accounts receivable on the balance sheet of the lender) or other
extensions of credit (including by way of Guarantee or similar arrangement) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition of Capital Stock, Indebtedness or other
similar instruments issued by such Person. Except as otherwise provided for
herein, the amount of an Investment shall be its fair value at the time the
Investment is made and without giving effect to subsequent changes in value.
For purposes of the definition of "Unrestricted Subsidiary," the definition
of "Restricted Payment" and the covenant described under "--Certain
Covenants--Limitation on Restricted Payments":
(1) "Investment" shall include the portion (proportionate to the Company's
equity interest in such Subsidiary) of the fair market value of the
net assets of any Subsidiary of the Company at the time that such
Subsidiary is designated an Unrestricted Subsidiary; provided,
however, that upon a redesignation of such Subsidiary as a Restricted
Subsidiary, the Company shall be deemed to continue to have a
permanent "Investment" in an Unrestricted Subsidiary equal to an
amount (if positive) equal to (A) the Company's "Investment" in such
Subsidiary at the time of such redesignation less (B) the portion
(proportionate to the Company's equity interest in such Subsidiary) of
the fair market value of the net assets of such Subsidiary at the time
of such redesignation; and
(2) any property transferred to or from an Unrestricted Subsidiary shall
be valued at its fair market value at the time of such transfer, in
each case as determined in good faith by the Board of Directors.
"Issue Date" means December 16, 2003.
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"Legal Holiday" means a Saturday, a Sunday or a day on which banking
institutions are not required to be open in the State of New York or the United
Mexican States.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Moody's" means Moody's Investors Service, Inc. and any successor to its
rating agency business.
"Net Available Cash" from an Asset Disposition means cash payments received
therefrom (including any cash payments received by way of deferred payment of
principal pursuant to a note or installment receivable or otherwise and proceeds
from the sale or other disposition of any securities received as consideration,
but only as and when received, but excluding any other consideration received in
the form of assumption by the acquiring Person of Indebtedness or other
obligations relating to such properties or assets or received in any other
non-cash form), in each case net of:
(1) all legal, title and recording tax expenses, commissions and other
fees and expenses incurred, and all Federal, state, provincial,
foreign and local taxes required to be accrued as a liability under
GAAP, as a consequence of such Asset Disposition;
(2) all payments made on any Indebtedness which is secured by any assets
subject to such Asset Disposition, in accordance with the terms of any
Lien upon or other security agreement of any kind with respect to such
assets, or which must by its terms, or in order to obtain a necessary
consent to such Asset Disposition, or by applicable law, be repaid out
of the proceeds from such Asset Disposition;
(3) all distributions and other payments required to be made to minority
interest holders in Restricted Subsidiaries as a result of such Asset
Disposition;
(4) the deduction of appropriate amounts provided by the seller as a
reserve, in accordance with GAAP, against any liabilities associated
with the property or other assets disposed in such Asset Disposition
and retained by the Company or any Restricted Subsidiary after such
Asset Disposition; and
(5) any portion of the purchase price from an Asset Disposition placed in
escrow, whether as a reserve for adjustment of the purchase price, for
satisfaction of indemnities in respect of such Asset Disposition or
otherwise in connection with that Asset Disposition; provided,
however, that upon the termination of that escrow, Net Available Cash
will be increased by any portion of funds in the escrow that are
released to the Company or any Restricted Subsidiary.
"Net Cash Proceeds," with respect to any issuance or sale of Capital Stock
or Indebtedness, means the cash proceeds of such issuance or sale net of
attorneys' fees, accountants' fees, underwriters' or placement agents' fees,
discounts or commissions and brokerage, consultant and other fees actually
incurred in connection with such issuance or sale and net of taxes paid or
payable as a result thereof.
"Number of Test Quarters" means, at any date of determination, the number
of completed fiscal quarters after September 30, 2003 ending at least 45 days
prior to the date of determination; provided, however, that such Number of Test
Quarters shall be at least one.
"Obligations" means, with respect to any Indebtedness, all obligations for
principal, premium, interest, penalties, fees, indemnifications, reimbursements,
and other amounts payable pursuant to the documentation governing such
Indebtedness.
"Officer" means the Chairman of the Board, the Chief Executive Officer, any
Vice President, the Chief Financial Officer or the Secretary of the Company.
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"Officers' Certificate" means a certificate signed by two Officers.
"Opinion of Counsel" means a written opinion from legal counsel who is
acceptable to the Trustee. The counsel may be an employee of or counsel to the
Company or the Trustee.
"Permitted Asset Swap" means the disposition by the Company or its
Restricted Subsidiaries of Telecommunication Assets to another Person or Persons
in exchange for which the Company and the Restricted Subsidiaries receive
Telecommunications Assets having, in the reasonable judgment of the
disinterested members of the Board of Directors, a fair market value
substantially equivalent to or greater than the fair market value of the
Telecommunications Assets so disposed; provided, however, that no such
disposition or series of related dispositions shall constitute Permitted Asset
Swaps to the extent that the aggregate fair market value of the
Telecommunications Assets so disposed, when combined with the fair market value
of all other Telecommunications Assets disposed of in one or more Permitted
Asset Swaps (x) in the twelve calendar months preceding such disposition exceeds
US $15 million or (y) since the Issue Date exceeds US $60 million; provided
further, however, that if the book value of the Telecommunications Assets to be
disposed in a Permitted Asset Swap (or in a series of related Permitted Asset
Swaps) exceeds US $7.5 million, such disposition shall not constitute a
Permitted Asset Swap unless an Independent Qualified Party shall have determined
in writing that the fair market value of the Telecommunications Assets to be
received by the Company and its Restricted Subsidiaries is substantially
equivalent to or greater than the fair market value of the Telecommunications
Assets to be disposed.
"Permitted Holders" means each of the direct shareholders of record of the
Company as of the Issue Date (as identified in the indenture), and any Affiliate
thereof and the shareholders of Telinor Telefonia, S. de R.L. de C.V.
"Permitted Investment" means an Investment by the Company or any Restricted
Subsidiary in:
(1) the Company, a Restricted Subsidiary or a Person that will, upon the
making of such Investment, become a Restricted Subsidiary; provided,
however, that the primary business of such Restricted Subsidiary is a
Related Business;
(2) another Person if, as a result of such Investment, such other Person
is merged or consolidated with or into, or transfers or conveys all or
substantially all its assets to, the Company or a Restricted
Subsidiary; provided, however, that such Person's primary business is
a Related Business;
(3) cash and Temporary Cash Investments;
(4) receivables owing to the Company or any Restricted Subsidiary if
created or acquired in the ordinary course of business and payable or
dischargeable in accordance with customary trade terms; provided,
however, that such trade terms may include such concessionary trade
terms as the Company or any such Restricted Subsidiary deems
reasonable under the circumstances;
(5) payroll, travel and similar advances to cover matters that are
expected at the time of such advances ultimately to be treated as
expenses for accounting purposes and that are made in the ordinary
course of business;
(6) loans or advances to employees made in the ordinary course of business
consistent with past practices of the Company or such Restricted
Subsidiary;
(7) stock, obligations or securities received in settlement of debts
created in the ordinary course of business and owing to the Company or
any Restricted Subsidiary or in satisfaction of judgments;
(8) any Person to the extent such Investment represents the non-cash
portion of the consideration received for (A) an Asset Disposition as
permitted pursuant to the covenant described under "--Certain
Covenants--Limitation on Sales of Assets and Subsidiary Stock" or (B)
a disposition of assets not constituting an Asset Disposition;
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(9) any Person where such Investment was acquired by the Company or any of
its Restricted Subsidiaries (A) in exchange for any other Investment
or accounts receivable held by the Company or any such Restricted
Subsidiary in connection with or as a result of a bankruptcy, workout,
reorganization or recapitalization of the issuer of such other
Investment or accounts receivable or (B) as a result of a foreclosure
by the Company or any of its Restricted Subsidiaries with respect to
any secured Investment or other transfer of title with respect to any
secured Investment in default;
(10) any Person to the extent such Investments consist of prepaid expenses,
negotiable instruments held for collection and lease, utility and
workers' compensation, performance and other similar deposits made in
the ordinary course of business by the Company or any Restricted
Subsidiary;
(11) any Person to the extent such Investments consist of Hedging
Obligations otherwise permitted under the covenant described under
"--Certain Covenants--Limitation on Indebtedness";
(12) any Person to the extent such Investment exists on the Issue Date, and
any extension, modification or renewal of any such Investments
existing on the Issue Date, but only to the extent not involving
additional advances, contributions or other Investments of cash or
other assets or other increases thereof (other than as a result of the
accrual or accretion of interest or original issue discount or the
issuance of pay-in-kind securities), in each case, pursuant to the
terms of such Investment as in effect on the Issue Date; and
(13) Persons to the extent such Investments, when taken together with all
other Investments made pursuant to this clause (13) outstanding on the
date such Investment is made, do not exceed $10 million.
"Permitted Liens" means, with respect to any Person:
(1) pledges or deposits by such Person under workers' compensation laws,
unemployment insurance laws or similar legislation, or good faith
deposits in connection with bids, tenders, contracts (other than for
the payment of Indebtedness) or leases to which such Person is a
party, or deposits to secure public or statutory obligations of such
Person or deposits of cash or United States government bonds to secure
surety or appeal bonds to which such Person is a party, or deposits as
security for contested taxes or import duties or for the payment of
rent, in each case Incurred in the ordinary course of business;
(2) Liens imposed by law, such as carriers', warehousemen's and mechanics'
Liens, in each case for sums not yet due or being contested in good
faith by appropriate proceedings or other Liens arising out of
judgments or awards against such Person with respect to which such
Person shall then be proceeding with an appeal or other proceedings
for review and Liens arising solely by virtue of any statutory or
common law provision relating to banker's Liens, rights of set-off or
similar rights and remedies as to deposit accounts or other funds
maintained with a creditor depository institution; provided, however,
that (A) such deposit account is not a dedicated cash collateral
account and is not subject to restrictions against access by the
Company in excess of those set forth by regulations promulgated by the
Federal Reserve Board and (B) such deposit account is not intended by
the Company or any Restricted Subsidiary to provide collateral to the
depository institution;
(3) Liens for property taxes not yet subject to penalties for non-payment
or which are being contested in good faith by appropriate proceedings;
(4) Liens in favor of issuers of surety bonds or letters of credit issued
pursuant to the request of and for the account of such Person in the
ordinary course of its business; provided, however, that such letters
of credit do not constitute Indebtedness;
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(5) minor survey exceptions, minor encumbrances, easements or reservations
of, or rights of others for, licenses, rights-of-way, sewers, electric
lines, telegraph and telephone lines and other similar purposes, or
zoning or other restrictions as to the use of real property or Liens
incidental to the conduct of the business of such Person or to the
ownership of its properties which were not Incurred in connection with
Indebtedness and which do not in the aggregate materially adversely
affect the value of said properties or materially impair their use in
the operation of the business of such Person;
(6) Liens securing Indebtedness Incurred to finance the construction,
purchase or lease of, or repairs, improvements or additions to,
property, plant or equipment of such Person; provided, however, that
the Lien may not extend to any other property owned by such Person or
any of its Restricted Subsidiaries at the time the Lien is Incurred
(other than assets and property affixed or appurtenant thereto), and
the Indebtedness (other than any interest thereon) secured by the Lien
may not be Incurred more than 180 days after the later of the
acquisition, completion of construction, repair, improvement, addition
or commencement of full operation of the property subject to the Lien;
(7) Liens existing on the Issue Date;
(8) Liens on property or shares of Capital Stock of another Person at the
time such other Person becomes a Subsidiary of such Person; provided,
however, that the Liens may not extend to any other property owned by
such Person or any of its Restricted Subsidiaries (other than assets
and property affixed or appurtenant thereto);
(9) Liens on property at the time such Person or any of its Subsidiaries
acquires the property, including any acquisition by means of a merger
or consolidation with or into such Person or a Subsidiary of such
Person; provided, however, that the Liens may not extend to any other
property owned by such Person or any of its Restricted Subsidiaries
(other than assets and property affixed or appurtenant thereto);
(10) Liens securing Indebtedness or other obligations of a Subsidiary of
such Person owing to such Person or a Wholly Owned Subsidiary of such
Person;
(11) Liens securing Hedging Obligations so long as such Hedging Obligations
relate to Indebtedness that is, and is permitted to be under the
Indenture, secured by a Lien on the same property securing such
Hedging Obligations;
(12) Liens securing directly or indirectly obligations in respect of term
loans or revolving loans or other Indebtedness (including principal,
premium, interest, penalties, fees, indemnifications, reimbursements
and other amounts relating thereto) permitted to be Incurred under the
Indenture; provided, however, that, at the time of Incurrence of the
Indebtedness so secured and after giving effect thereto, the
Consolidated Secured Leverage Ratio would be no greater than 2 to 1;
(13) Liens to secure any Refinancing (or successive Refinancings) as a
whole, or in part, of any Indebtedness secured by any Lien referred to
in the foregoing clause (6), (7), (8), (9) and (14) below; provided,
however, that:
(A) such new Lien shall be limited to all or part of the same
property and assets that secured or, under the written agreements
pursuant to which the original Lien arose, could secure the
original Lien (plus improvements and accessions to, such property
or proceeds or distributions thereof); and
(B) the Indebtedness secured by such Lien at such time is not
increased to any amount greater than the sum of (i) the
outstanding principal amount or, if greater, committed amount of
the Indebtedness described under clause (6), (7), (8), (9) or
(14) at the time the original Lien became a Permitted Lien and
(ii) an amount necessary to pay any fees and expenses,
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including premiums, related to such refinancing, refunding,
extension, renewal or replacement; and
(14) Liens securing Purchase Money Obligations or Capital Lease Obligations
Incurred in compliance with the covenant described under "--Certain
Covenants--Limitation on Indebtedness."
Notwithstanding the foregoing, "Permitted Liens" will not include any Lien
described in clause (6), (8), (9) or (14) above to the extent such Lien applies
to any Additional Assets acquired directly or indirectly from Net Available Cash
pursuant to the covenant described under "--Certain Covenants--Limitation on
Sale of Assets and Subsidiary Stock." For purposes of this definition, the term
"Indebtedness" shall be deemed to include interest on such Indebtedness.
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.
"Pesos" means the legal currency of the United Mexican States.
"Preferred Stock," as applied to the Capital Stock of any Person, means
Capital Stock of any class or classes (however designated) which is preferred as
to the payment of dividends or distributions, or as to the distribution of
assets upon any voluntary or involuntary liquidation or dissolution of such
Person, over shares of Capital Stock of any other class of such Person.
"principal" of a Note means the principal of the Note plus the premium, if
any, payable on the Note which is due or overdue or is to become due at the
relevant time.
"Purchase Money Obligations" means any Indebtedness Incurred to finance or
refinance the acquisition, leasing, construction or improvement of property
(real or personal) or assets, and whether acquired through the direct
acquisition of such property or assets or the Capital Stock of any Person owning
such property or assets, or otherwise.
"Refinance" means, in respect of any Indebtedness, to refinance, extend,
renew, refund, repay, prepay, purchase, redeem, defease or retire, or to issue
other Indebtedness in exchange or replacement for, such Indebtedness.
"Refinanced" and "Refinancing" shall have correlative meanings.
"Refinancing Indebtedness" means Indebtedness that Refinances any
Indebtedness of the Company or any Restricted Subsidiary existing on the Issue
Date or Incurred in compliance with the Indenture, including Indebtedness that
Refinances Refinancing Indebtedness; provided, however, that:
(1) such Refinancing Indebtedness has a Stated Maturity no earlier than
the Stated Maturity of the Indebtedness being Refinanced;
(2) such Refinancing Indebtedness has an Average Life at the time such
Refinancing Indebtedness is Incurred that is equal to or greater than
the Average Life of the Indebtedness being Refinanced;
(3) such Refinancing Indebtedness has an aggregate principal amount (or if
Incurred with original issue discount, an aggregate issue price) that
is equal to or less than the aggregate principal amount (or if
Incurred with original issue discount, the aggregate accreted value)
then outstanding or committed (plus fees and expenses, including any
premium and defeasance costs) under the Indebtedness being Refinanced;
and
(4) if the Indebtedness being Refinanced is subordinated in right of
payment to the Notes, such Refinancing Indebtedness is subordinated in
right of payment to the Notes at least to the same extent as the
Indebtedness being Refinanced;
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provided, further, however, that Refinancing Indebtedness shall not include (A)
Indebtedness of a Subsidiary that Refinances Indebtedness of the Company or (B)
Indebtedness of the Company or a Restricted Subsidiary that Refinances
Indebtedness of an Unrestricted Subsidiary.
"Registration Rights Agreement" means the Registration Rights Agreement
dated January 13, 2005, among the Company, the Subsidiary Guarantors and Credit
Suisse First Boston LLC.
"Related Business" means any business in which the Company or any of the
Restricted Subsidiaries was engaged on the Issue Date and any business related,
ancillary or complementary to such business.
"Restricted Payment" with respect to any Person means:
(1) the declaration or payment of any dividends or any other distributions
of any sort in respect of its Capital Stock (including any payment in
connection with any merger or consolidation involving such Person) or
similar payment to the direct or indirect holders of its Capital Stock
(other than (A) dividends or distributions payable solely in its
Capital Stock (other than Disqualified Stock), (B) dividends or
distributions payable solely to the Company or a Restricted Subsidiary
and (C) pro rata dividends or other distributions made by a Subsidiary
that is not a Wholly Owned Subsidiary to minority stockholders (or
owners of an equivalent interest in the case of a Subsidiary that is
an entity other than a corporation));
(2) the purchase, redemption or other acquisition or retirement for value
of any Capital Stock of the Company held by any Person (other than by
a Restricted Subsidiary) or of any Capital Stock of a Restricted
Subsidiary held by any Affiliate of the Company (other than by a
Restricted Subsidiary), including in connection with any merger or
consolidation and including the exercise of any option to exchange any
Capital Stock (other than into Capital Stock of the Company that is
not Disqualified Stock);
(3) the purchase, repurchase, redemption, defeasance or other acquisition
or retirement for value, prior to scheduled maturity, scheduled
repayment or scheduled sinking fund payment of any Subordinated
Obligations of the Company or any Subsidiary Guarantor (other than (A)
from the Company or a Restricted Subsidiary or (B) the purchase,
repurchase, redemption, defeasance or other acquisition of
Subordinated Obligations purchased in anticipation of satisfying a
sinking fund obligation, principal installment or final maturity, in
each case due within one year of the date of such purchase,
repurchase, redemption, defeasance or other acquisition); or
(4) the making of any Investment (other than a Permitted Investment) in
any Person.
"Restricted Subsidiary" means any Subsidiary of the Company that is not an
Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to property
owned by the Company or a Restricted Subsidiary on the Issue Date or thereafter
acquired by the Company or a Restricted Subsidiary whereby the Company or a
Restricted Subsidiary transfers such property to a Person and the Company or a
Restricted Subsidiary leases it from such Person.
"SEC" means the US Securities and Exchange Commission.
"Securities Act" means the US Securities Act of 1933, as amended.
"Senior Indebtedness" means with respect to any Person:
(1) Indebtedness of such Person, whether outstanding on the Issue Date or
thereafter Incurred; and
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(2) all other Obligations of such Person (including interest accruing on
or after the filing of any petition in bankruptcy or for
reorganization relating to such Person whether or not post-filing
interest is allowed in such proceeding) in respect of Indebtedness
described in clause (1) above
unless, in the case of clauses (1) and (2), in the instrument creating or
evidencing the same or pursuant to which the same is outstanding, it is provided
that such Indebtedness or other obligations are subordinate in right of payment
to the Notes or the Subsidiary Guaranty of such Person, as the case may be;
provided, however, that Senior Indebtedness shall not include:
(1) any obligation of such Person to the Company or any Subsidiary;
(2) any liability for any national, state, local or other taxes owed or
owing by such Person;
(3) any accounts payable or other liability to trade creditors arising in
the ordinary course of business (including guarantees thereof or
instruments evidencing such liabilities);
(4) any Indebtedness or other Obligation (and any accrued or unpaid
interest in respect thereof) of such Person which is subordinate or
junior in any respect to any other Indebtedness or other Obligation of
such Person; or
(5) that portion of any Indebtedness which at the time of Incurrence is
Incurred in violation of the Indenture.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"Standard & Poor's" means Standard & Poor's, a division of The McGraw-Hill
Companies, Inc., and any successor to its rating agency business.
"Stated Maturity" means, with respect to any security, the date specified
in such security as the fixed date on which the final payment of principal of
such security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency unless such contingency has occurred).
"Subordinated Obligation" means, with respect to a Person, any Indebtedness
of such Person (whether outstanding on the Issue Date or thereafter Incurred)
which is subordinate or junior in right of payment to the Notes or a Subsidiary
Guaranty of such Person, as the case may be, pursuant to a written agreement to
that effect.
"Subsidiary" means, with respect to any Person, any corporation,
association, partnership or other business entity of which more than 50% of the
total voting power of shares of Voting Stock is at the time owned or controlled,
directly or indirectly, by:
(1) such Person;
(2) such Person and one or more Subsidiaries of such Person; or
(3) one or more Subsidiaries of such Person.
"Subsidiary Guarantor" means Instalaciones y Contrataciones, S.A. de C.V.,
Servicios Axtel, S.A. de C.V. and Impulsora e Inmobiliaria Regional, S.A. de
C.V. and each other Subsidiary of the Company that executes the Indenture as a
guarantor on the Issue Date and each other Subsidiary of the Company that
thereafter guarantees the Notes pursuant to the terms of the Indenture, in each
case unless and until such Subsidiary is released from its obligation under its
Subsidiary Guaranty pursuant to the terms of the Indebtedness.
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"Subsidiary Guaranty" means a Guarantee by a Subsidiary Guarantor of the
Company's obligations with respect to the Notes.
"Telecommunications Assets" means any property, including licenses and
applications, bids and agreements to acquire licenses, or other authority to
provide telecommunications services, used or intended for use primarily in
connection with a Related Business.
"Temporary Cash Investments" means any of the following:
(1) any investment in direct obligations of the United States of America
or any agency thereof or obligations guaranteed by the United States
of America or any agency thereof;
(2) investments in demand and time deposit accounts, certificates of
deposit and money market deposits maturing within 180 days of the date
of acquisition thereof issued by a bank or trust company which is
organized under the laws of the United States of America, any State
thereof or any foreign country recognized by the United States of
America, and which bank or trust company has capital, surplus and
undivided profits aggregating in excess of $50 million (or the foreign
currency equivalent thereof) and has outstanding debt which is rated
"A" (or such similar equivalent rating) or higher by at least one
nationally recognized statistical rating organization (as defined in
Rule 436 under the Securities Act) or any money-market fund sponsored
by a registered broker dealer or mutual fund distributor;
(3) repurchase obligations with a term of not more than 30 days for
underlying securities of the types described in clause (1) above
entered into with a bank meeting the qualifications described in
clause (2) above;
(4) investments in commercial paper, maturing not more than 90 days after
the date of acquisition, issued by a corporation (other than an
Affiliate of the Company) organized and in existence under the laws of
the United States of America or any foreign country recognized by the
United States of America with a rating at the time as of which any
investment therein is made of "P-1" (or higher) according to Moody's
or "A-1" (or higher) according to Standard and Poor's;
(5) investments in securities with maturities of six months or less from
the date of acquisition issued or fully guaranteed by any state,
commonwealth or territory of the United States of America, or by any
political subdivision or taxing authority thereof, and rated at least
"A" by Standard & Poor's or "A" by Moody's;
(6) "Certificados de la Tesoreria de la Federacion (Cetes), Bonos de
Desarrollo del Gobierno Federal (Bondes) or Bonos Ajustables del
Gobierno Federal (Ajustabonos)," in each case, issued by the
government of the United Mexican States;
(7) any other instruments issued or guaranteed by the government of the
United Mexican States and denominated and payable in pesos;
(8) investments in money market funds that invest substantially all their
assets in securities of the types described in clauses (1) through (7)
above; or
(9) demand deposits, certificates of deposit, time deposits and bankers'
acceptances maturing not more than 180 days (or 365 days in the case
of clause (A)(I) or (B)(I)) after the acquisition thereof (A)
denominated in pesos and issued by (I) any of the five top-rated banks
(as evaluated by any internationally recognized rating agency)
organized under the laws of the United Mexican States or any other
state thereof, or (II) any such bank which at the date of acquisition
is a lender to or has made available a line of credit to (in each case
in an amount equal to or greater than the amount of the proposed
acquisition), the Company or any of its Restricted Subsidiaries; (B)
in any jurisdiction other than the United Mexican States where the
Company or any of its Restricted Subsidiaries
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conducts business and (I) issued by one of the three largest banks
doing business in such jurisdiction, or (II) any such bank in such
jurisdiction which at the date of acquisition is a lender to or has
made available a line of credit to (in each case in an amount equal to
or greater than the amount of the proposed acquisition), the Company
or any of its Restricted Subsidiaries; (C) issued by any bank which at
the date of acquisition is a lender to or has made available a line of
credit to the Company or any of its Restricted Subsidiaries and which
is not under intervention, receivership or any similar arrangement at
the time of acquisition; provided that the aggregate amount of all
such demand deposits, certificates of deposit, time deposits and
bankers' acceptances acquired in accordance with this clause (C) does
not exceed $50 million at any one time; or (D) issued by any bank
which at the date of acquisition has an outstanding loan to the
Company or any of its Restricted Subsidiaries in an aggregate
principal amount at least equal to the aggregate principal amount of
such demand deposit, certificate of deposit, time deposit or banker's
acceptance.
"Trust Indenture Act" means the Trust Indenture Act of 1939 (15 USC.
Section Section 77aaa-77bbbb) as in effect on the Issue Date.
"Trust Officer" means the Chairman of the Board, the President or any other
officer or assistant officer of the Trustee assigned by the Trustee to
administer its corporate trust matters.
"Trustee" means The Bank of New York until a successor replaces it and,
thereafter, means the successor.
"Unrestricted Subsidiary" means:
(1) any Subsidiary of the Company that at the time of determination shall
be designated an Unrestricted Subsidiary by the Board of Directors in
the manner provided below; and
(2) any Subsidiary of an Unrestricted Subsidiary.
The Board of Directors may designate any Subsidiary of the Company
(including any newly acquired or newly formed Subsidiary) to be an Unrestricted
Subsidiary unless such Subsidiary or any of its Subsidiaries owns any Capital
Stock or Indebtedness of, or holds any Lien on any property of, the Company or
any other Subsidiary of the Company that is not a Subsidiary of the Subsidiary
to be so designated; provided, however, that either (A) the Subsidiary to be so
designated has total assets of $1,000 or less or (B) if such Subsidiary has
assets greater than $1,000, such designation would be permitted under the
covenant described under "--Certain Covenants--Limitation on Restricted
Payments."
The Board of Directors may designate any Unrestricted Subsidiary to be a
Restricted Subsidiary; provided, however, that immediately after giving effect
to such designation (A) the Company could Incur $1.00 of additional Indebtedness
under paragraph (a) of the covenant described under "--Certain
Covenants--Limitation on Indebtedness" and (B) no Default shall have occurred
and be continuing. Any such designation by the Board of Directors shall be
evidenced to the Trustee by promptly filing with the Trustee a copy of the
resolution of the Board of Directors giving effect to such designation and an
Officers' Certificate certifying that such designation complied with the
foregoing provisions.
"US Dollar Equivalent" means with respect to any monetary amount in a
currency other than US dollars, at any time for determination thereof, the
amount of US dollars obtained by converting such foreign currency involved in
such computation into US dollars at the spot rate for the purchase of US dollars
with the applicable foreign currency as published in The Wall Street Journal in
the "Exchange Rates" column under the heading "Currency Trading" on the date two
Business Days prior to such determination.
Except as described under "--Certain Covenants--Limitation on
Indebtedness," whenever it is necessary to determine whether the Company has
complied with any covenant in the Indenture or a Default has occurred and an
amount is expressed in a currency other than US dollars, such amount will be
treated as the US Dollar Equivalent determined as of the date such amount is
initially determined in such currency.
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"US Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable at the issuer's option.
"Voting Stock" of a Person means all classes of Capital Stock of such
Person then outstanding and normally entitled (without regard to the occurrence
of any contingency) to vote in the election of directors, managers or trustees
thereof.
"Wholly Owned Subsidiary" means a Restricted Subsidiary all the Capital
Stock of which (other than directors' qualifying shares) is owned, directly or
indirectly, by the Company or one or more other Wholly Owned Subsidiaries.
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MATERIAL US FEDERAL INCOME TAX CONSEQUENCES
The following is a general summary of the principal US federal income tax
consequences associated with the exchange of 2005 notes for exchange notes and
the beneficial ownership and disposition of the exchange notes by US holders (as
defined below). This summary is based on the US Internal Revenue Code of 1986,
as amended (the "Code"), Treasury regulations promulgated thereunder, rulings,
official pronouncements and judicial decisions, all as in effect on the date of
this prospectus and all of which are subject to change, possibly with
retroactive effect, or different interpretations. This summary only addresses
tax considerations for holders of the notes that hold the notes as "capital
assets" (generally, property held for investment). Moreover, this summary does
not address all of the tax consequences that may be relevant to specific
investors in light of their particular circumstances or to investors subject to
special treatment under US federal income tax laws (such as non US holders (as
defined below), banks, insurance companies, tax-exempt entities, retirement
plans, dealers in securities, brokers, expatriates, partnerships, other
pass-through entities or investors in such entities, persons who hold their
notes as part of a straddle, hedge, conversion transaction or other integrated
investment, persons whose functional currency is not the US dollar, persons
subject to the alternative minimum tax or persons deemed to sell the notes under
the constructive sale provisions of the Code), all of whom may be subject to tax
rules that differ significantly from those summarized below. The discussion
below does not address US federal estate and gift tax considerations or the
effect of any US state or local tax law.
THIS DISCUSSION IS FOR GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE.
HOLDERS OF NOTES ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE
PARTICULAR TAX CONSIDERATIONS FOR THEM RELATING TO THE EXCHANGE OF THE 2005
NOTES FOR EXCHANGE NOTES AND THE OWNERSHIP AND DISPOSITION OF THE NOTES,
INCLUDING THE APPLICABILITY OF US FEDERAL, STATE OR LOCAL TAX LAWS OR NON-US TAX
LAWS, ANY CHANGES IN APPLICABLE TAX LAWS AND ANY PENDING OR PROPOSED LEGISLATION
OR REGULATIONS.
For purposes of this summary, a "US holder" is a beneficial holder of a
note that is, for US federal income tax purposes:
o an individual who is a citizen or resident of the United States;
o a corporation or other entity treated as a corporation created or
organized in or under the laws of the United States, or any political
subdivision thereof;
o an estate the income of which is subject to US federal income tax
regardless of the source thereof; or
o a trust (1) if a court within the United States is able to exercise
primary supervision over its administration and one or more US persons
have the authority to control all of its substantial decisions, or (2)
that validly elects to be treated as a United States person for US
federal income tax purposes.
If a partnership is a beneficial owner of a note, the treatment of a
partner in the partnership generally will depend upon the status of the partner
and the activities of the partnership.
The term "non-US holder" means a beneficial owner of notes that is for U.S.
federal income tax purposes, a nonresident alien individual or a corporation,
trust or estate that is not a US holder.
Exchange of Notes
The exchange of 2005 notes for exchange notes pursuant to this exchange
offer will not constitute a taxable event for U.S. federal income tax purposes.
Consequently, no gain or loss will be recognized by a holder of the 2005 notes
upon receipt of an exchange note. A holder's adjusted tax basis of the exchange
note will be the same as the adjusted tax basis of the 2005 note exchanged
therefor. A holder's holding period of the exchange note will include the
holding period of the 2005 note exchanged therefor.
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Payment of Interest
Subject to the discussion below regarding pre-issuance accrued interest, a
US holder must include in the US holder's gross income all payments of stated
interest in respect of the exchange notes, and additional amounts, if any, on
account of Mexican withholding taxes, at the time accrued or paid, in accordance
with the US holder's usual method of tax accounting for US federal income tax
purposes. Interest on the exchange notes generally will be treated as foreign
source income for US federal income tax purposes.
A US holder's stated interest income will not be reduced by the Mexican
taxes withheld. Therefore, a US holder generally will be required to include
more interest in the US holder's gross income than the US holder actually
receives in cash interest. A US holder may, subject to some limitations, be
eligible to claim either a US federal income tax deduction or a credit for
Mexican taxes withheld from stated interest paid on exchange notes. The rules
relating to foreign tax credits are extremely complex and US holders should
consult with their own tax advisors regarding the availability of a foreign tax
credit and the application of the foreign tax credit limitations to their
particular situations.
Market Discount
Under the market discount rules of the Code, a US holder who purchased a
2005 note at a market discount will be treated as if such US holder purchased
the corresponding exchange note at a market discount, and thus, will generally
be required to treat any gain recognized on the sale, exchange, retirement or
other taxable disposition of the exchange note as ordinary income to the extent
of the accrued market discount during the US holder's holding period that has
not been previously included in income. Market discount is generally defined as
the amount by which a US holder's purchase price for a 2005 note is less than
the 2005 note's stated redemption price at maturity (generally, the exchange
note's principal amount) of the exchange note on the date of purchase, subject
to a statutory de minimis exception. In general, market discount accrues on a
ratable basis over the remaining term of the exchange note unless a US holder
makes an irrevocable election to accrue market discount on a constant yield to
maturity basis.
A US holder who is deemed to have acquired an exchange note at a market
discount may be required to defer a portion of any interest expense that
otherwise may be deductible on any indebtedness deemed to have been incurred or
continued to purchase or carry such exchange note until the US holder disposes
of the exchange note in a taxable transaction. A US holder who has elected under
applicable Code provision to include market discount in income annually as such
discount accrues will not, however, be required to treat any gain recognized as
ordinary income or to defer any deductions for interest expense under these
rules. This election to include market discount in income currently, once made,
applies to all market discount obligations acquired on or after the first day of
the taxable year to which the election applies and may not be revoked without
the consent of the Internal Revenue Service (the "IRS").
Amortizable Bond Premium
In general, if a US Holder purchased a 2005 note for an amount (excluding
any amount attributable to pre-issuance accrued interest described below) in
excess of its stated principal amount, such excess will constitute bond premium,
which, to the extent not previously amortized, will carry over to the exchange
note. You generally may elect to amortize the premium over the term of the
exchange note (including the term of the 2005 notes exchanged therefor) on a
constant yield method as an offset to interest when includible in income under
your regular accounting method. If you do not elect to amortize bond premium
that premium will decrease the gain or increase the loss you would otherwise
recognize on disposition of the exchange note. Your election to amortize premium
on a constant yield method will also apply to all debt obligations held or
subsequently acquired by you on or after the first day of the first taxable year
to which the election applies. You may not revoke the election without the
consent of the Internal Revenue Service. You should consult your own tax advisor
before making this election.
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Pre-Issuance Accrued Interest
A portion of the purchase price of the 2005 notes (and therefore the
exchange notes) is attributable to the amount of interest accrued prior to the
date the 2005 notes were issued. We intend to take the position that, on the
first interest payment date, a portion of the interest received (in an amount
equal to such pre-issuance accrued interest) is not income and is not taxable
interest to US Holders. Pre-issuance accrued interest will reduce the basis of
the exchange notes owned by a US Holder.
Sale, Exchange, Retirement or Other Dispositions
A US holder generally will recognize gain or loss for US federal income tax
purposes upon the sale, exchange, retirement or other disposition of the
exchange notes in an amount equal to the difference between the amount realized
and the US holder's adjusted tax basis in the exchange notes. For this purpose,
the amount realized does not include any amount attributable to accrued interest
on the exchange notes (which will be taxable as ordinary income as described
above) other than pre-issuance accrued interest. A US holder's tax basis in the
exchange notes generally will equal the cost of the 2005 notes to such holder
increased by any market discount that a US holder has elected to include
currently in income and reduced by any previously amortized bond premium.
Subject to the discussion of market discount above, the gain or loss upon
the sale, exchange, retirement or other disposition of the exchange notes
generally will be capital gain or loss. If, at the time of such disposition, the
exchange notes have been held for more than one year, the gain or loss will be a
long-term capital gain or loss. Under current law, long-term capital gains
recognized by an individual or other non-corporate US holder are generally
subject to a reduced US federal income tax rate. Capital losses are subject to
limits on deductibility. Any gain or loss recognized by a US holder generally
will be treated as from sources within the United States for US federal income
tax purposes. Therefore, if any such gain is subject to Mexican tax, a US holder
may not be able to credit the Mexican tax paid against its US federal income tax
liability.
Backup Withholding and Information Reporting
US backup withholding (at a current rate of 28%) may apply to some payments
to a US holder of interest on the exchange notes and/or proceeds from the sale
(including a redemption) or retirement of the exchange notes if the US holder
fails to furnish to the paying agent the US holder's taxpayer identification
number, that is, the US holder's social security number or employer
identification number, or fails to otherwise comply with the applicable
requirements of the backup withholding rules. Some US holders, including
corporations, are not subject to backup withholding. In addition, such payments
of interest on the exchange notes and/or proceeds from the sale (including a
redemption) or retirement of the exchange notes will generally be subject to
information reporting requirements.
Any amounts withheld under the backup withholding rules from a payment to a
US holder with respect to the exchange notes will be allowed as a refund or
credit against such US holder's US federal income tax liability; provided,
however, that the US holder timely furnishes the required information to the US
Internal Revenue Service.
MATERIAL MEXICAN TAX CONSEQUENCES
The following is a general summary of the principal Mexican federal income
tax consequences of the acquisition, ownership and disposition of the notes by
holders that are not residents of Mexico for Mexican federal tax purposes and
that do not have a permanent establishment in Mexico (a "foreign holder"), in
the case of Mexican federal income tax consequences. This summary is based on
the Mexican federal income tax law ("Ley del Impuesto sobre la Renta") and
regulations as in effect on the date of this prospectus, all of which are
subject to change, possibly with retroactive effect, or different
interpretations. This summary does not address all of the tax consequences that
may be applicable to specific holders of the notes and does not purport to be a
comprehensive description of all the tax considerations that may be relevant to
a decision to purchase, own or dispose of the notes.
Potential investors are urged to consult with their own tax advisor
regarding the particular consequences to them of an investment (including the
purchase, ownership or disposition) in the notes under the federal laws of
Mexico or any other jurisdiction in which they may be subject to tax.
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For purposes of Mexican taxation, an individual or corporation that does
not satisfy the requirements to be considered a resident of Mexico for tax
purposes, specified below, is deemed a non-resident of Mexico for tax purposes.
An individual is a resident of Mexico if he/she established his/her home in
Mexico. When the individuals in question also have a home in another country,
they will be deemed residents in Mexico if their center of vital interests is
located in Mexican territory and, among other cases, when: i) more than 50% of
the aggregate income realized by said individuals in the calendar year is from a
Mexican source of wealth or ii) the principal centre of their professional
activities is located in Mexico. The individuals with Mexican nationality who
are State officials or employees thereof, even when their center of vital
interests is located abroad, are deemed to be Mexican residents. A legal entity
is a resident of Mexico if it has been incorporated pursuant to Mexican law or
if it maintains the principal administration of its business or the effective
location of its management in Mexico. A Mexican citizen is presumed to be
resident of Mexico unless such person can demonstrate otherwise. If a legal
entity or an individual is deemed to have a permanent establishment in Mexico
for Mexican tax purposes, all income attributable to that permanent
establishment will be subject to Mexican taxes, in accordance with applicable
tax laws.
The summary description of the Mexican federal income tax laws set forth
below is based on the laws in force as of the date of this prospectus and is
subject to any changes in applicable Mexican tax laws. The governments of the
United States and Mexico ratified an income tax treaty and protocol which came
into effect on January 1, 1994 (the US-Mexico Tax Treaty). The United States and
Mexico have also entered into an agreement that covers the exchange of
information with respect to tax matters.
Mexico has also entered into and is negotiating tax treaties for the
avoidance of double taxation with several other countries.
Each prospective holder of a note should consult such holder's tax advisors
with respect to the tax treatment applicable to that holder.
This summary of some Mexican income tax considerations deals only with
holders of notes that are foreign holders.
Payment of Interest
Pursuant to Article 195, Section II, paragraph (a) of the Mexican Income
Tax Law, payments of interest to foreign holders will be subject to Mexican
withholding tax at a rate of 4.9%, if, as expected, the following requirements
are met:
o The notes are registered with the Special Section of the National
Securities Registry (Registro Nacional de Valores e Intermediarios -
RNV); and the information requirements established in the general
rules issued by the Tax Administration Service (Servicio de
Administration Tributaria - SAT) for those purposes are duly complied;
and
o The notes are placed outside of Mexico through banks or brokerage
houses in a country with which Mexico has in force a treaty for
avoidance of double taxation (which currently includes the United
States of America).
If any of the above-mentioned requirements is not met, the Mexican
withholding tax will be 10.0%.
Neither the 4.9% rate nor the 10.0% rate will apply and, therefore, higher
withholding tax rates will apply if the effective beneficiaries, directly or
indirectly, individually or jointly with related parties, receive more than 5.0%
of the interest paid on the notes and (1) own directly or indirectly,
individually or jointly with related parties, more than 10.0% of our voting
stock or (2) are entities 20.0% or more of whose stock is owned directly or
indirectly, individually or jointly, by parties related to us. In this case, the
Mexican withholding tax rate will be 30% in 2005. In 2006 and 2007 the
applicable rate will be 29% and 28%, respectively.
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As of the date of this prospectus, the US-Mexico Tax Treaty is not expected
to have any material effect on the Mexican tax consequences described herein,
because, as described above, under Mexico's income tax law, we will be entitled
to withhold taxes in connection with interest payments under the notes at a 4.9%
rate.
Payments of interest on the notes to non-Mexican pension and retirement
funds will be exempt from Mexican withholding tax provided that:
o Such fund is duly incorporated pursuant to the laws of its country of
residence and is the effective beneficiary of the interest payment;
o Such income is exempt from taxes in its country of residence; and,
o Such fund is registered in the Registry of Foreign Banks, Financial
Entities, Pension and Retirement Funds and Investment Funds, in
accordance with certain rules for these purposes.
We have agreed, subject to certain exceptions, to pay additional amounts in
respect of the above-mentioned Mexican withholding taxes. See "Description of
the Exchange Notes--Additional Amounts."
Payment of Principal
Under Mexican Income Tax Law, principal paid to a foreign holder of the
notes by us is not subject to Mexican withholding tax.
Taxation of Capital Gains
Capital gains resulting from the sale or other disposition of our notes by
a foreign holder will not be subject to Mexican income or withholding taxes in
Mexico.
However, the Mexican Income Tax Law imposes a tax upon the sale at discount
of a note by a Mexican resident or by a non-resident to a purchaser that is also
a non-resident, if the non-resident seller has a permanent establishment in
Mexico. In such case, the tax should be withheld by the seller, considering as
interest the difference between the sales price over the sum of the face value
and the accrued interest, by applying the corresponding withholding tax rates
mentioned above; otherwise, no Mexican taxation nor withholding taxes would
apply.
Additionally, the Mexican Income Tax Law, as amended on January 1, 2005,
will treat the capital gains derived as a consequence of the sale of the Notes
to a Mexican resident or to a non-resident with a permanent establishment in
Mexico as interest income. With respect to the non-resident holder of the Notes,
the tax will be imposed on the sale proceeds less the actual amount received by
the original debtor of the Note, applying the income tax withholding rates
applicable to the beneficial owner of the capital gains.
Other Mexican Taxes
There are no Mexican estate, inheritance, succession or gift taxes
generally applicable to the acquisition, ownership or disposition of the notes
by foreign holders. There are no Mexican stamp, issuer registration or similar
taxes or duties payable by foreign holders of the notes.
.
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PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Securities for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Securities. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of Exchange Securities received in
exchange for Initial Securities where such Initial Securities were acquired as a
result of market-making activities or other trading activities. The Company has
agreed that, for a period of 180 days after the Expiration Date, it will make
this prospectus, as amended or supplemented, available to any broker-dealer for
use in connection with any such resale. In addition, until , 2005, all dealers
effecting transactions in the Exchange Securities may be required to deliver a
prospectus.
The Company will not receive any proceeds from any sale of Exchange
Securities by broker-dealers. Exchange Securities received by broker-dealers for
their own account pursuant to the Exchange Offer may be sold from time to time
in one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the Exchange Securities or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer or the purchasers of any such Exchange
Securities. Any broker-dealer that resells Exchange Securities that were
received by it for its own account pursuant to the Exchange Offer and any broker
or dealer that participates in a distribution of such Exchange Securities may be
deemed to be an "underwriter" within the meaning of the Securities Act and any
profit on any such resale of Exchange Securities and any commission or
concessions received by any such persons may be deemed to be underwriting
compensation under the Securities Act. The Letter of Transmittal states that, by
acknowledging that it will deliver and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
For a period of 180 days after the Expiration Date the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The Company has agreed to pay all expenses
incident to the Exchange Offer (including the expenses of one counsel for the
Holders of the Securities) other than commissions or concessions of any brokers
or dealers and will indemnify the Holders of the Securities (including any
broker-dealers) against certain liabilities, including liabilities under the
Securities Act.
The exchange notes will constitute a new issue of securities with no
established trading market. We do not intend to list the exchange notes on any
national securities exchange or to seek approval for quotation through any
automated quotation system. The initial purchasers informed us that, following
the completion of the initial distribution of the 2005 notes, they intended to
make a market in the 2005 notes. However, any such market making may be
discontinued at any time. Accordingly, we cannot guarantee the development or
liquidity of any trading market for the exchange notes. If a trading market does
not develop or is not maintained, holders of the exchange notes may experience
difficulty in reselling the exchange notes or may be unable to sell them at all.
If a market for the exchange notes develops, any such market may cease to
continue at any time. in addition, if a market for the exchange notes develops,
the market prices of the exchange notes may be volatile. Factors such as
fluctuations in our earnings and cash flow, the difference between our actual
results and results expected by investors and analysts and Mexican and U.S.
currency and economic developments could cause the market prices of the exchange
notes to fluctuate substantially.
WHERE YOU CAN FIND MORE INFORMATION
We file reports and other information with the SEC. You may read and, for a
fee, copy any document that we file with the SEC at the public reference
facility maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C.
20549. Copies of these documents may also be obtained at prescribed rates from
the Public Reference Section of the SEC at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for
further information on the operation of the Public Reference Room. You may also
obtain the documents that we file electronically from the SEC's website at
http://www.sec.gov, which contains reports and other information regarding
registrants that file electronically with the SEC. Our reports and other
information that
-128-
we have filed, or may in the future file, with the SEC are not incorporated in
and do not constitute part of this prospectus.
While any notes remain outstanding, we will make available, upon request,
to any beneficial owner and any prospective purchaser of notes the information
required pursuant to Rule 144A(d)(4) under the Securities Act during any period
in which we are not subject to Section 13 or 15(d) of the Securities Exchange
Act of 1934. Any such request should be directed to Axtel, S.A. de C.V.,
Attention Rafael Salinas, Blvd. Gustavo Diaz Ordaz km. 3.33 No. L-1, Col. Unidad
San Pedro, San Pedro Garza Garcia, N.L. Mexico, CP 66215.
LEGAL MATTERS
Cahill Gordon & Reindel LLP will pass upon certain United States legal
matters for us in connection with the exchange notes offered hereby. D & A
Morales y Asociados, S.C., Monterrey, Mexico, will pass upon certain Mexican
legal matters for us in connection with the exchange notes offered hereby.
INDEPENDENT AUDITORS
The consolidated financial statements of Axtel, S.A. de C.V. as of December
31, 2004 and 2003, and for the three years ended December 31, 2004, appearing in
this prospectus have been audited by KPMG Cardenas Dosal S.C., independent
auditors, as stated in their report appearing or incorporated by reference
herein.
-129-
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Audited Consolidated Financial Statements
Independent Auditors' Report............................................... F-1
Consolidated Balance Sheets as of December 31, 2004 and 2003............... F-2
Consolidated Statements of Operations for the fiscal years
ended December 31, 2004, 2003 and 2002................................... F-3
Consolidated Statements of Changes in Financial Position for the
fiscal years ended December 31, 2004, 2003 and 2002 ..................... F-4
Consolidated Statements of Changes in Stockholders' Equity for the
fiscal years ended December 31, 2004, 2003, 2002 and 2001 ............... F-5
Notes to the Consolidated Financial Statements............................. F-6
-130-
Report of Independent Registered
Public Accounting Firm
The Board of Directors and Stockholders
Axtel, S.A. de C.V.:
We have audited the accompanying consolidated balance sheets of Axtel, S.A. de
C.V. and subsidiaries (the Company) as of December 31, 2004 and 2003, 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, 2004. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States) and auditing standards generally
accepted in 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, 2004 and 2003, 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, 2004, 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, 2004, and the stockholders' equity as
of December 31, 2004 and 2003 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 25, 2005
F-1
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Consolidated Balance Sheets
(Thousands pesos of constant purchasing power as of December 31, 2004)
December 31
-----------------------------------
Assets 2004 2003
----------------- ----------------
Current assets:
Cash and cash equivalents (including $4,743 of restricted cash as of
December 31, 2003) $ 554,401 1,068,383
Accounts receivable, net (note 5) 507,587 423,837
Refundable taxes and other accounts receivable 82,491 20,495
Prepaid expenses (note 7) 131,875 193,944
Inventories (note 8) 58,250 22,731
Derivative financial instruments (notes 3 and 6) - 591
----------------- ----------------
Total current assets 1,334,604 1,729,981
Long-term accounts receivable 19,768 21,079
Property, systems and equipment, net (notes 9 and 13) 6,112,273 5,476,378
Telephone concession rights, net of accumulated amortization of $258,652
and $207,635 in 2004 and 2003, respectively 703,563 754,580
Pre-operating expenses, net (note 10) 202,623 211,075
Deferred income taxes (note 16) 124,083 265,769
Other assets, net (note 11) 141,020 115,226
----------------- ----------------
Total assets $ 8,637,934 8,574,088
================= ================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 596,070 327,159
Accrued interest 10,879 70,646
Taxes payable 40,748 73,038
Short-term debt (note 12) 108,427 25,313
Current maturities of long-term debt (note 13) 48,990 57,384
Other accounts payable (note 14) 200,659 204,945
Derivative financial instruments (notes 3 and 6) 935 -
----------------- ----------------
Total current liabilities 1,006,708 758,485
Long-term debt, excluding current maturities (note 13) 2,026,214 2,134,697
Other long-term accounts payable 3,543 2,291
Seniority premiums (note 15) 2,394 2,109
----------------- ----------------
Total liabilities 3,038,859 2,897,582
----------------- ----------------
Stockholders' equity (note 17):
Common stock 7,106,718 7,106,718
Additional paid-in capital 140,616 140,616
Deficit (1,766,467) (1,689,335)
Cumulative deferred income tax effect 118,507 118,507
Change in the fair value of derivative instruments (note 6) (299) -
----------------- ----------------
Total stockholders' equity 5,599,075 5,676,506
Commitments and contingencies (note 21)
Subsequent events (note 22)
----------------- ----------------
Total liabilities and stockholders' equity $ 8,637,934 8,574,088
================= ================
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
(Thousands pesos of constant purchasing power as of December 31, 2004)
Years ended December 31,
-----------------------------------------------------
2004 2003 2002
-----------------------------------------------------
Rental, installation, service and other revenues
(note 18) $ 3,861,313 3,079,210 2,586,557
---------------- ----------------- ----------------
Operating costs and expenses:
Cost of sales and services (1,229,500) (852,647) (645,699)
Selling and administrative expenses (1,378,305) (1,200,359) (1,331,500)
Depreciation and amortization (1,001,165) (907,647) (854,880)
---------------- ----------------- ----------------
(3,608,970) (2,960,653) (2,832,079)
---------------- ----------------- ----------------
Operating income (loss) 252,343 118,557 (245,522)
---------------- ----------------- ----------------
Comprehensive financing result:
Interest expense (274,079) (230,246) (455,804)
Interest income 16,644 20,417 10,733
Foreign exchange loss, net (7,321) (336,916) (652,043)
Monetary position gain 64,752 97,886 295,859
---------------- ----------------- ----------------
Comprehensive financing result, net (200,004) (448,859) (801,255)
---------------- ----------------- ----------------
Other income (expenses), net (notes 13 and 20) 21,004 1,808,234 (29,100)
---------------- ----------------- ----------------
Special item (note 19) - (10,987) (34,194)
---------------- ----------------- ----------------
Income (loss) before income taxes and tax on
assets 73,343 1,466,945 (1,110,071)
---------------- ----------------- ----------------
Deferred income tax (note 16) (150,475) (520,442) 254,939
---------------- ----------------- ----------------
Net (loss) income $ (77,132) 946,503 (855,132)
================ ================= ================
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
(Thousands pesos of constant purchasing power as of December 31, 2004)
Years ended December 31,
--------------------------------------------------------
2004 2003 2002
--------------------------------------------------------
Operating activities:
Net (loss) income $ (77,132) 946,503 (855,132)
Add charges (deduct credits) to operations not requiring
(providing) resources:
Depreciation 896,743 814,820 763,367
Amortization 104,422 92,827 91,513
Accrual for seniority premiums 727 718 243
Deferred income tax and employee statutory
profit sharing 150,475 520,442 (254,939)
Gain on extinguishment of debt - (1,960,118) -
----------------- ----------------- ------------------
Resources provided by (used in) operations 1,075,235 415,192 (254,948)
Net financing from (investment in) operations 107,728 (246,795) 242,771
----------------- ----------------- ------------------
Resources provided by (used in) operating activities 1,182,963 168,397 (12,177)
----------------- ----------------- ------------------
Financing activities:
Increase in common stock - 2,809,463 54,783
Additional paid-in capital - (15,625) (2,155)
(Payments) proceeds from loans, net (93,530) (1,591,004) 665,049
Deferred financing costs - (19,461) 28,498
Other accounts payable (31) (41,110) 67,329
----------------- ----------------- ------------------
Resources (used in) provided by financing activities (93,561) 1,142,263 813,504
----------------- ----------------- -----------------
Investing activities:
Acquisition and construction of property, systems
and equipment, net (1,532,638) (485,292) (596,293)
Pre-operating expenses (28,876) - -
Other assets (41,870) (101,860) (1,495)
----------------- ----------------- -----------------
-----------------
Resources used in investing activities (1,603,384) (587,152) (597,788)
----------------- ----------------- -----------------
(Decrease) increase in cash and cash equivalents (513,982) 723,508 203,539
Cash and cash equivalents at beginning of year 1,068,383 344,875 141,336
----------------- ----------------- -----------------
-----------------
Cash and cash equivalents at end of year $ 554,401 1,068,383 344,875
================= ================= =================
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
(Thousands pesos of constant purchasing power as of December 31, 2004)
Change in
Cumulative the fair Total
Additional deferred value of stock-
Common paid-in income derivative holders'
stock capital Deficit tax effect instruments equity
------------- -------------- ------------ -------------- ------------- ----------
Balances as of December 31, 2001 $ 4,242,472 158,396 (1,779,279) 118,507 - 2,740,096
Common stock contribution
(note 17a) 54,783 (2,155) - - - 52,628
Comprehensive loss (855,132) - - (855,132)
------------- -------------- ------------- -------------- ------------ ------------
Balances as of December 31, 2002 4,297,255 156,241 (2,634,411) 118,507 1,937,592
Common stock contribution
(note 17a) 2,809,463 (15,625) - - - 2,793,838
Cumulative effect of vacations
accrual - - (1,427) - - (1,427)
Comprehensive income - - 946,503 - - 946,503
------------- -------------- ------------- -------------- ------------ ------------
Balances as of December 31, 2003 7,106,718 140,616 (1,689,335) 118,507 - 5,676,506
Comprehensive income
(notes 3 and 6) - - (77,132) - (299) (77,431)
------------- -------------- ------------- -------------- ------------ ------------
Balances as of December 31, 2004 $ 7,106,718 140,616 (1,766,467) 118,507 (299) 5,599,075
============= ============== ============= ============== ============ ============
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, 2004 and 2003
(Thousands pesos of constant purchasing power as of December 31, 2004)
(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 21e). 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
59.5% of shares with voting rights owned by Telinor Telefonia, S. de R.L.
de C.V. The remaining 40.5% is distributed among other entities.
AXTEL offers different access technologies, including fixed wireless
access, point-to-point, point-to-multipoint, 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 $144,298 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
$72,772 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 $745,145 for a period
of twenty years with an extension option.
The Company has commercial services in Monterrey, Mexico City, Guadalajara,
Puebla, Toluca, Leon, Tijuana, Cd. Juarez, Saltillo, Aguascalientes,
Queretaro and San Luis Potosi.
F-6
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousands pesos of constant purchasing power as of December 31, 2004)
(2) Summary of significant accounting policies
The accounting policies and practices followed by the Company in the
preparation of the consolidated financial statements are described below:
(a) Financial statement presentation
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in Mexico (Mexican
GAAP), which include the recognition of the effects of inflation on the
financial information, and are expressed in Mexican pesos of constant
purchasing power as of December 31, 2004 based on the National Consumer
Price Index (NCPI) published by Banco de Mexico.
The following national consumer price indexes (NCPI) were used to recognize
the effects of inflation:
Inflation
NCPI %
-------------- --------------
December 2004 411.648 5.47
December 2003 390.299 3.99
December 2002 375.324 5.70
December 2001 355.084 5.00
For purposes of disclosure in the notes to the financial statements,
references to pesos or "$", are to Mexican pesos; likewise, references to
dollars, are to dollars of the United States of America.
(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%
F-7
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousands pesos of constant purchasing power as of December 31, 2004)
(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.
(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 up to June 1999 during
construction or installation periods was capitalized as part of the cost of
the assets that were incurred during the pre-operating stage. Since that
date, comprehensive financing results have been recognized as part of the
results of year in which they are incurred.
Depreciation of property, systems and equipment is calculated using the
straight-line method, based on useful lives estimated by management. Useful
lives are described in note 9.
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) 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).
F-8
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousands pesos of constant purchasing power as of December 31, 2004)
(g) Pre-operating expenses
Pre-operating expenses include administrative services, technological
advice and comprehensive financing results incurred through June 1999 and
also the expenses incurred during 2000 and 2004 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 10).
(h) Other assets
Other assets mainly include costs from Telmex/Telnor infrastructure special
projects, guarantee deposits, and notes issuance costs (see note 11).
(i) Seniority premiums
The accumulated seniority premium benefits to which employees 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, are recognized as an expense in the year in which they are paid
(see note 23b).
(j) Derivative financial instruments
To reduce the risks resulting from foreign exchange rate fluctuations of
the peso with respect to the dollar, the Company enters into a Cross
Currency Swap agreement (CCS) that meet the characteristics of derivative
financial instruments. The CCS involve the exchange of cash flows
originated by the exchange of interest rates and currencies fluctuations.
Net amounts paid or received are reflected as adjustments to interest
expense.
Changes in the fair value of hedging derivative financial instruments are
recognized within the comprehensive result account in stockholders' equity,
before being offset to assets or liabilities whose risks will be hedged
and/or offset. The non-effective portions (portions not hedging or that
stop hedging the designated risks) are recognized in results of the period
(see notes 3 and 6).
F-9
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousands pesos of constant purchasing power as of December 31, 2004)
(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 income (loss)
The comprehensive income (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.
F-10
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousands pesos of constant purchasing power as of December 31, 2004)
(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 and
preoperating expenses.
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 and the customer takes ownership and
assumes risk of loss.
(q) Business and risk concentration
The Company rendered services to one client that represents approximately
17%, 18% and 16% of total net revenues during 2004, 2003 and 2002,
respectively. This client's accounts receivable balances as of December 31,
2004 and 2003 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.
F-11
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousands pesos of constant purchasing power as of December 31, 2004)
(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.
(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 of the Company
to make a number of estimates and assumptions relating to the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Significant
items subject to such estimates and assumptions include the carrying amount
of property, plant and equipment valuation allowances for receivables,
inventories and deferred income tax assets; valuation of financial
instruments; and assets and obligations related to employee benefits.
Actual results could differ from these estimates and assumptions.
(3) Accounting changes
Derivative financial instruments
The Mexican Institute of Public Accountant (IMCP) issued Bulletin C-10
"Derivative financial instruments and hedging operations", effective
January 1, 2005, with an early adoption encouragement. One of the main
provision of this new standard is the classification of hedging through
derivative financial instruments according to the exposure to be hedged, in
three accounting models: on fair values, on cash flows and on net
investments of subsidiaries located abroad. This Bulletin C-10 requires
that all derivative instruments be recorded on the balance sheet at their
respective fair value.
F-12
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousands pesos of constant purchasing power as of December 31, 2004)
For all hedging relationships the Company formally documents the hedging
relationship and its risk-management objective and strategy for undertaking
the hedge, the hedging instrument, the item, the nature of the risk being
hedged, how the hedging instrument's effectiveness in offsetting the hedged
risk will be assessed, and a description of the method of measuring
ineffectiveness. This process includes linking all derivatives that are
designated as fair-value or cash-flow hedges to specific assets and
liabilities on the balance sheet or to specific firm commitments or
forecasted transactions. The Company does also formally assesses when
appropriate, both at the hedge's inception and on an ongoing basis, whether
the derivatives that are used in hedging transactions are highly effective
in offsetting changes in fair values or cash flows of hedged items. Changes
in the fair value of a derivative that is highly effective and that is
designated and qualifies as a fair-value hedge, along with the loss or gain
on the hedged asset or liability or unrecognized firm commitment of the
hedged item that is attributable to the hedged risk, are recorded in
earnings. Changes in the fair value of a derivative that is highly
effective and that is designated and qualifies as a cash-flow hedge are
recorded in other comprehensive income to the extent that the derivative is
effective as a hedge, until earnings are affected by the variability in
cash flows of the designated hedged item. The ineffective portion of the
change in fair value of a derivative instrument that qualifies as cash-flow
hedge is reported in earnings.
The Company discontinues hedge accounting prospectively when it is
determined that the derivative is no longer effective in offsetting changes
cash flows of the hedged item, the derivative expires or is sold,
terminated, or exercised, the derivative is designated as a hedging
instrument, because it is unlikely that a forecasted transaction will
occur, a hedged firm commitment no longer meets the definition of a firm
commitment, or management determines that designation of the derivative as
a hedging instrument is no longer appropriate. When hedge accounting is
discontinued because it is probable that a forecasted transaction will not
occur, the Company continues to carry the derivative on the balance sheet
at its fair value with subsequent changes in fair value included in
earnings, and gains and losses that were accumulated in other comprehensive
income are recognized immediately in earnings. In all other situations in
which hedge accounting is discontinued, the Company continues to carry the
derivative at its fair value on the balance sheet and recognizes any
subsequent changes in its fair value in earnings.
The Company decided on the early adoption of Bulletin C-10 for 2004. As a
result of this early adoption, the Company recognized a loss from effective
hedging amounts for cross currency swaps derivative financial instruments
as a decrease to stockholders' equity accounts, for $299, which corresponds
to the unrealized loss on these derivative financial instruments (see note
6).
F-13
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousands pesos of constant purchasing power as of December 31, 2004)
(4) Foreign currency exposure
Monetary assets and liabilities denominated in dollars as of December 31,
2004 and 2003 are as follows:
(Thousands of dollars)
-------------------------------
2004 2003
---- ----
Current assets 62,351 85,048
Current liabilities (73,384) (36,146)
Long-term liabilities (180,121) (180,266)
------------- ---------------
Foreign currency liability position, net (191,154) (131,364)
============= ===============
The U.S. dollar exchange rates as of December 31, 2004 and 2003 were
$11.2648 and $11.2360 respectively. As of February 25, 2004, the exchange
rate was $11.0807.
As of December 31, 2004, the Company had foreign exchange derivative
instruments (see note 6).
As of December 31, 2004 and 2003, 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)
----------------------------------
2004 2003
---- ----
Inventories 2,798 1,029
Systems and equipment, gross 732,181 663,225
--------------- ---------------
734,979 664,254
=============== ===============
Following is a summary for the years ended December 31, 2004, 2003 and
2002, of transactions carried out with foreign entities, excluding imports
and exports of systems and equipment:
(Thousands of dollars)
------------------------------------------------
2004 2003 2002
---- ---- ----
Interest expense 21,429 14,926 38,475
Commissions 471 11,174 1,978
Administrative and technical
advisory services 1,004 243 3,325
------------- ------------- --------------
22,904 26,343 43,778
============= ============= ==============
F-14
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousands pesos of constant purchasing power as of December 31, 2004)
(5) Accounts receivable
Accounts receivable consist of the following:
2004 2003
---- ----
Trade $ 607,806 494,205
Less allowance for doubtful accounts 100,219 70,368
--------------- ---------------
Accounts receivable, net $ 507,587 423,837
=============== ===============
The activity in the allowance for doubtful accounts for the years ended
December 31, 2004, 2003 and 2002 was as follows:
2004 2003 2002
---- ---- ----
Balances at beginning of year $ 66,719 232,316 73,461
Bad debt expense 33,500 57,658 158,855
Write-offs - (223,255) -
------------- -------------- ---------------
Balances at end of year not adjusted for inflation 100,219 66,719 232,316
Effects of inflation - 3,649 22,483
------------- -------------- ---------------
Balances at year end at constant pesos $ 100,219 70,368 254,799
============= ============== ===============
(6) Hedging
On March 29, 2004, the Company entered into a derivative Cross Currency
Swaps (CCS) transactions denominated "Coupon Swap" agreements to hedge 65%
of their US dollar foreign exchange exposure resulting from the issuance of
the U.S. $175 million 11% senior notes which mature in 2013. Under the CCS
transactions, Axtel will receive semiannual payments calculated based on
the aggregate notional amount of U.S.$ 113.75 million at an annual U.S.
rate of 11%, and the Company will make semiannual payments calculated based
on the aggregate of $1,270,019 (nominal value) at annual Mexican rate of
12.30%. The CCS will expire in December 2008. During the life of the
contracts, the cash flows originated by the exchange of interest rates
under the CCS match in interest payment dates and conditions those of the
underlying debt. The Company does not enter into derivative instruments for
any purpose other than cash-flow-hedging purposes. That is, the Company
does not speculate using derivative instruments.
F-15
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousands pesos of constant purchasing power as of December 31, 2004)
By using derivative financial instruments to hedge exposures to changes in
currency exchange rates fluctuations, the Company exposes itself to credit
risk and market risk. Credit risk is the failure of the counterparty to
perform under the terms of the derivative contract. When the fair value of
a derivative contract is positive, the counterparty owes the Company, which
creates credit risk for the Company. When the fair value of a derivative
contract is negative, the Company owes the counterparty and, therefore, it
does not possess credit risk. The Company minimizes the credit risk in
derivative instruments by entering into transactions with high-quality
foreign financial counterparties
The CCS information is as follows:
(Amounts in charts are expressed in millions, except exchange rates which
are expressed in pesos)
Currencies Interest Rates
------------------------------- -----------------------------------------
Notional
amount
(nominal Axtel Axtel Estimated
Maturity date Notional amount value) receives pays fair value
- -------------------------------- --------------- --------------- ------------- ---------- -- -------------
December 15, 2008 U.S.$ 113.75 $ 1,270 11.00% 12.30% U.S.$(0.1)
For the year ended December 31, 2004, the change in net unrealized losses
"mark to market" for derivatives designated as cash flow hedges was US
$(0.1) million. No hedge ineffectiveness on cash flow hedges was recognized
during 2004.
As of December 31, 2003, the Company had an European-Style-type option
contract, (option) which established a floor and a ceiling exchange rate
between the peso and the U.S. dollar at specified dates on specified
notional amounts. In the first quarter of 2004 this derivative instruments
was settled and thus the Company recognized a loss of $551 from this
transaction. As of December 31, 2003, the position of the option was as
follows:
Notional Notional Changes in the fair
Inception and amount/exchange rate - amount/exchange rate - value recorded within
expiration dates floor ceiling the CFR earnings item
--------------------------------- ------------------------ ------------------------ -------------------------
Sept 23, 2003/March 17,
2004 $ 55.4/11.08 $ 56.5/11.30 $ 0.6
F-16
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousands pesos of constant purchasing power as of December 31, 2004)
The estimated fair values of derivative instruments used for the exchange
of interest rates and/or currencies fluctuate over time and will be
determined by future interest rates and currency prices. These values
should be viewed in relation to the fair values of the underlying
transactions and as part of the overall Company's exposure to fluctuations
in interest rates and foreign exchange rates.
(7) Prepaid expenses
Prepaid expenses consist of the following:
2004 2003
---- ----
Airspan Communications Limited $ 92,826 -
Nortel Networks de Mexico 3,467 3,262
Nortel Networks Limited 2,112 166,706
Maxcom Telecomunicaciones 290 8,756
Other 33,180 15,220
--------------- ---------------
Total prepaid expenses $ 131,875 193,944
=============== ===============
In accordance with the debt-restructuring agreement (See note 13b) all new
purchases from Nortel should be either secured through the issuance of a
letter of credit or prepaid.
The payment terms for Airspan requires a 50% downpayment with the remaining
balance payable upon shipments of goods (see note 21i).
(8) Inventories
Inventories consist of the following:
2004 2003
---- ----
Telephones and caller identification devices $ 17,304 4,319
Installation material 7,622 4,389
Tools 2,937 1,384
Network spare parts 16,353 8,251
Other 14,034 4,388
------------ ------------
Total inventories $ 58,250 22,731
============ ============
F-17
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousands pesos of constant purchasing power as of December 31, 2004)
(9) Property, systems and equipment
Property, systems and equipment are analyzed as follows:
Useful
2004 2003 lives
---- ---- -----
Land $ 38,020 37,810
Building 123,959 122,927 25 years
Computer and electronic equipment 1,049,672 893,766 3 years
Transportation equipment 18,920 15,229 4 years
Furniture and fixtures 99,763 93,281 10 years
Network equipment 6,661,326 6,082,434 6 to 28 years
Leasehold improvements 151,072 139,066
Construction in progress 1,185,141 435,989
-------------- --------------
9,327,873 7,820,502
Less accumulated depreciation 3,215,600 2,344,124
-------------- --------------
Property, systems and equipment, net $ 6,112,273 5,476,378
============== ==============
As of December 31, 2004 the Company has capitalized CFR as a component of
the acquisition cost of property, systems and equipment aggregating $2,290.
(10) Pre-operating expenses, net
The capitalized pre-operating expenses incurred up to June 1999 and
expenses incurred during 2000 and 2004 in opening operations in new cities
are as follows:
2004 2003
---- ----
Salaries $ 196,709 185,631
Legal and financial advisory 106,017 106,017
Operating expenses 75,485 57,687
Depreciation 9,213 9,213
Comprehensive financing result (23,250) (23,250)
Service and other revenues (13,142) (13,142)
Other 36,640 36,640
----------------- ---------------
387,672 358,796
Less accumulated amortization 185,049 147,721
----------------- ---------------
202,623 211,075
Pre-operating expenses, net $
================= ===============
F-18
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousands pesos of constant purchasing power as of December 31, 2004)
(11) Other assets
Other assets consist of the following:
2004 2003
---- ----
Notes issuance costs $ 70,677 63,123
Telmex / Telnor infrastructure costs 55,906 35,317
Guarantee deposits 18,872 14,905
Other 12,508 2,747
---------------- ----------------
157,963 116,092
Less accumulated amortization 16,943 866
---------------- ----------------
Other assets, net $ 141,020 115,226
================ ================
Notes issuance costs
Notes issuance costs 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 are amortized over the life of the related debt.
Telmex / Telnor infrastructure costs
As part of the opening of the telecommunications market in Mexico, new
telecommunications companies must have interconnection with Telefonos de
Mexico (Telmex) and Telefonos del Noroeste (Telnor). These two companies
made agreements with the new entrants by which they must compensate the
investment in infrastructure that Telmex / Telnor were forced to make in
order to provide interconnection for the new entrants.
In the case of Axtel, the agreement signed with Telmex / Telnor indicated,
that the Company is obligated to make such compensation as follows which
ever comes first:
a) December 31, 2003 or 2004 depending the invested infrastructure or b)
Certain amount minutes of calls terminated by Telmex / Telnor.
After one of these events is met, the Company is not longer obligated to
make further compensations in this regard. These costs will be amortized
under the straight line method over a period of fifteen years.
F-19
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousands pesos of constant purchasing power as of December 31, 2004)
(12) Short-term debt
Short-term debt as of December 31, 2004 and 2003 and their main
characteristics are as follows:
2004 2003
---- ----
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
$ - 4,400
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 84,810 14,869
Revolving lines of credit with different institutions used for letters of credit
denominated in U.S. dollars up to 360 days 23,617 6,044
-------------- --------------
Total short-term notes payable $ 108,427 25,313
============== ==============
(13) Long-term debt
Long-term debt as of December 31, 2004 and 2003 and its main
characteristics is as follows:
2004 2003
---- ----
U.S. $175,000,000 in aggregate principal amount of 11% Senior Notes due
2013. Interest is payable semi-annually in arrears on June 15, and
December 15 of each
year which began on June 15, 2004. $ 1,971,340 2,073,855
Hewlett Packard de Mexico, S. de R. L. de C.V. denominated in U.S. dollars, payable
in 36 monthly installments with a six- month grace period maturing in 2005. The
interest rate was 9.8%. This debt was pre-paid in full during 2004. - 4,708
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
December 2007. The interest rate is 7.0% 53,542 22,749
Line of credit with Siemens Financial Services Inc. denominated in U.S. dollars.
The payments were made in six semiannual installments through 2005. The interest
rate was LIBOR plus 5.5 percentage points. Interest was payable semiannually. This
debt was pre-paid in full during 2004 - 54,343
Other long-term financing with several credit institutions with interest
rates fluctuating between 6% and 9% for those denominated in dollars and
TIIE (Mexican
average interbank rate) plus six percentage points for those denominated in pesos 50,322 36,426
-------------- ---------------
Total long-term debt 2,075,204 2,192,081
Less current maturities 48,990 57,384
-------------- ---------------
Long-term debt, excluding current maturities $ 2,026,214 2,134,697
============== ===============
F-20
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousands pesos of constant purchasing power as of December 31, 2004)
Annual installments of long-term debt are as follows:
Year Amount
---- ------
2006 $ 34,796
2007 20,078
2008 -
2009 and thereafter 1,971,340
----------------
$ 2,026,214
================
The following are the most important changes in the Company long-term debt
during 2004 and 2003:
a) On March 18, 2003, the Company obtained a loan for U.S.$ 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 U.S.$
4.5 million and one last installment of U.S.$ 57 million, beginning 24
months after the credit disposition date, which was March 20, 2003. On
December 17, 2003 this loan was paid in full (see note 13d).
b) On March 20, 2003, the Company entered into a debt-restructuring agreement
with Nortel Networks Limited and Nortel Networks de Mexico (Nortel), which
resulted as follows: payment in cash of U.S.$ 125.2 million dollars,
issuance by the Company of a promissory note for U.S.$ 24.2 million dollars
and the capitalization of debt of U.S.$ 178.5 million dollars in exchange
for 250,836,980 Series "N" shares of common stock (see note 17). As a
result of this transaction, Axtel recognized a gain on extinguishment of
debt of approximately $1,960,000 pesos (see note 20). The promissory note
for U.S$ 24.2 million dollars was paid in December 2003 (see note 13d).
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 7).
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 second 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 U.S.$ 15.6 million, which was included in other income (expense) line
item; originally payable as follows: U.S.$ 2.7 million at closing of the
agreement, U.S.$ 1.1 million in June 2003, U.S.$ 1.1 million in September
2003, U.S.$ 1.1 million in December 2003 and U.S.$ 9.3 million, maturing
thirty seven (37) months after closing payable without interest and in a
single installment. On December 17, 2003 this debt was paid in full (see
note 13d).
F-21
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousands pesos of constant purchasing power as of December 31, 2004)
d) On December 16, 2003, the Company completed an offering of senior unsecured
notes, for a value of U.S. $175 million ($2,074 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, as of December 31, 2004, the Company was in compliance with all
covenants.
With the proceeds of the offering the Company prepaid in full the Banorte
facility, the Nortel promissory note and the BCI Indebtedness.
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.
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. As of
December 31, 2004, the Company was in compliance in all its covenants and
obligations.
(14) Other Accounts Payable
As of December 31, 2004 and 2003 the other accounts payable consist of the
following: 2004 2003
Guarantee deposits (note 21a) $ 146,442 154,058
Interest payable (note 21a) 31,927 25,594
Other 22,290 25,293
---------------- ----------------
$ 200,659 204,945
================ ================
(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, 2004 and 2003.
F-22
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousands pesos of constant purchasing power as of December 31, 2004)
The components of the net periodic cost for the years ended December 31,
2004, 2003 and 2002 are the following:
2004 2003 2002
---- ---- ----
Net periodic cost
Labor cost $ 611 608 185
Financial cost 78 65 43
Amortization of transition obligation 1 1 1
Variances in assumptions and experience adjustments 9 17 0
Inflationary effect 28 27 14
---------- --------- ----------
Net periodic cost $ 727 718 243
========== ========= ==========
The actuarial present value of plan benefit obligations is as follows:
2004 2003
---- ----
Present benefit obligation $ 2,395 2,177
----------- -----------
Present value of benefits attributable to future salary increases 134
183
----------- -----------
Projected benefit obligation (PBO) 2,578 2,311
Items pending amortization:
Variances in assumptions and experience adjustments (372) (430)
Transition liability (7) (8)
Minimum additional liability 195 236
----------- -----------
Net projected liability recognized on the consolidated balance 2,109
sheets $ 2,394
=========== ===========
The most significant assumptions used in the determination of the net
periodic cost of plan are the following:
2004 2003
---- ----
Discount rate 4.00% 4.00%
============ ===========
Rate of increase in future salary levels 1.00% 1.00%
============ ===========
Estimated inflation for the period 4.00% 4.00%
============ ===========
Amortization period of the transition liability 17 years 11 years
============ ===========
During 2004 the amortization period of the transition liability was
increase for additional six years as the variable of probability for
payments of pension (when personnel reach 65 years old) was incorporated in
the new actuarial calculations. The effect of this change was not material.
F-23
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousands pesos of constant purchasing power as of December 31, 2004)
(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.
In December 2004, the Mexican Congress approved changes to the Income Tax
Law, previously on January 1, 2002 a new Income Tax Law had been enacted,
this law provided for a 1% annual reduction in the income tax rate
beginning in 2003, so that the income tax rate would have been 32% in 2005,
nevertheless the main change included in December 2004 and its impact on
the Company's financial statements was related to a reduction in the income
tax rates from previously approved tax rate of 32% in 2005 to a new tax
rate of 30%. Also, for years 2006 and 2007 the tax rates will decrease to
29% and 28%, respectively. Consequently, the deferred income taxes, were
calculated assuming a 30% tax rate for current assets and current
liabilities; 29% and 28%, for assets and liabilities whose tax effects will
be reversed after 2005. The effect of the reduction in the deferred income
tax assets calculation for 2004 was $50,924.
The tax (expense) benefit attributable to the income (loss) before IT
differed from the amount computed by applying the tax rate of 33% in 2004,
34% in 2003 and 35% in 2002 to pretax income (loss), as a result of the
items mentioned below:
2004 2003 2002
---- ---- ----
Computed "expected" income tax
(expense) benefit $ (24,203) (498,761) 388,525
Increase (decrease) resulting from:
Effects of inflation, net (16,158) 3,994 (27,433)
Change in valuation allowance (7,284) (9,095) (1,137)
Adjustments to deferred tax assets and liabilities for
enacted changes in tax rates (50,924) (20,377) 16,456
Amendment to 2003 income tax return (30,084) - -
Non-deductible expenses (13,750) (1,688) (43,521)
Other (8,072) 5,485 (77,951)
-------------- -------------- ---------------
Deferred income tax (expense) benefit $ (150,475) (520,442) 254,939
============== ============== ===============
F-24
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousands pesos of constant purchasing power as of December 31, 2004)
In June 2004 the Company filed before the Mexican tax authority its
Statutory Tax Report and also filed an amended Income Tax Return for the
year ended December 31, 2003. In that filing, the net tax operating loss
carryforwards were decreased by approximately $90,000 as a result of
certain expenses originally reported as deductible expenses and in the
amended return reported as non-deductible expenses. As a consequence, the
tax assets associated with these carryforwards were reduced resulting in an
increase in the deferred tax expense for 2004 of approximately $30,000.
This decrease and the enacted changes in tax rates are the main factors as
to why the effective rate for the year ended December 31, 2004 is
approximately 200% as compare to the 34.2% effective rate for the same
period in 2003. Other factors contributing to the large effective tax rate
mainly include non-deductible expenses and certain inflationary effects.
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, 2004 and 2003 are presented below:
2004 2003
---- ----
Deferred tax assets:
Net operating loss carryforwards $ 515,009 526,821
Accounts receivable 28,061 182,915
Accrued liabilities 4,039 23,401
Tax on assets 17,303 9,067
Accrued vacations 2,022 2,590
-------------- -------------
Total gross deferred
tax assets 566,434 744,794
Less valuation allowance 18,941 11,657
-------------- -------------
Net deferred tax assets 547,493 733,137
-------------- -------------
Deferred tax liabilities:
Property, systems and equipment 178,025 227,703
Telephone concession rights 165,168 161,396
Pre-operating expenses 57,726 68,589
Other assets 5,016 1,951
Inventories 17,475 7,729
-------------- -------------
Total deferred tax
liabilities 423,410 467,368
-------------- -------------
Deferred tax assets, net $ 124,083 265,769
============== =============
F-25
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousands pesos of constant purchasing power as of December 31, 2004)
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 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, 2004 and 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, 2004, the tax loss carryforwards expire as
follows:
Year Inflation-adjusted tax Recoverable TA
loss carryforwards
- -------------------------- ----------------------- --------------------
2009 $ 593 -
2010 1,174,980 -
2011 223,375 -
2012 439,849 -
2013 521 8,595
2014 - 8,708
----------------------- --------------------
$ 1,839,318 17,303
======================= ====================
Effective January 1, 2002, Axtel transferred all of its personnel to a
subsidiary Company, which eliminated any deferred ESPS liability.
F-26
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousands pesos of constant purchasing power as of December 31, 2004)
(17) Stockholders' equity
The main characteristics of stockholders' equity are described below:
(a) Common stock structure
The main characteristics and issuances of common stock for 2004, 2003 and
2002 are described below:
Additional
paid-in
Amount Amount Amount capital
(thousand (nominal (constant (constant
Date dollars) pesos) pesos) pesos)
---- -------- ------ ------ ------
February 28, 2002 5,000 $ 47,690 54,783 (2,155)
---------------- ---------------- ---------------- ----------------
Total 2002 5,000 $ 47,690 54,783 (2,155)
---------------- ---------------- ---------------- ----------------
February 28, 2003 35,336 $ 389,854 422,611 (8,358)
October 7, 2003 203,164 2,202,544 2,386,852 (7,267)
---------------- ---------------- ---------------- ----------------
Total 2003 238,500 $ 2,592,398 2,809,463 (15,625)
================ ================ ================ ================
At the General Stockholders' Meeting, held on February 28, 2003 the
stockholders approved the following:
1. Cancellation of the stockholders' outstanding contribution of U.S.$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
U.S.$10 million-dollar decrease was approved of the variable portion of
common stock of the Company.
2. Additional contribution to the variable portion of common stock for an
amount equivalent in Mexican pesos of U.S.$60 million dollars payable in
cash. Consequently, it was approved to issue 2,156,184,303 shares, which
was 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.
F-27
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousands pesos of constant purchasing power as of December 31, 2004)
3. Additional contribution to the variable portion of common stock of the
Company for up to the amount equivalent in Mexican pesos of U.S.$200
million dollars through the capitalization of liabilities payable to Nortel
(See note 13). 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, on March 20, 2003 the Company entered in a subscription
agreement with Nortel Networks Limited (Nortel), where Nortel agreed to
subscribe for 250,836,980 nominative, non par value and non-voting Series
"N" Shares for a total subscription price of $2,093,537 (U.S.$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 13). 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, during 2003 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 million.
In the Extraordinary Shareholders Meeting held on September 8, 2004 the
shareholders approved a proposal to increase the variable portion of the
capital stock of the Company in the amount in Mexican pesos equal to $3,066
through the issuance of 124,957,212 non-voting Series "N" shares which will
represent 4.7% of the total issued capital stock of the Company. These
series "N" stocks have not been issued.
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
$7,170,569 may be refunded to stockholders tax-free.
No dividends may be paid while the Company has a deficit. Some of the debt
agreements mentioned in note 13 establish limitations on dividend payment.
F-28
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousands pesos of constant purchasing power as of December 31, 2004)
(18) Rental, installation, service and other revenues
Revenues consist of the following:
2004 2003 2002
---- ---- ----
Local calling services $ 2,722,077 2,300,041 1,932,563
Long distance services 381,854 312,255 305,617
Other services 757,382 466,914 348,377
--------------- --------------- ---------------
$ 3,861,313 3,079,210 2,586,557
=============== =============== ===============
(19) 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 and 2002. The costs of restructuring, comprising
compensation and benefits to personnel, were $10,987 and $34,194,
respectively, and are presented as a special item in the statements of
operations for the years ended December 31, 2003 and 2002.
(20) Other income (expenses), net
Other income (expenses) consist of the following:
2004 2003 2002
---- ---- ----
Gain on extinguishment $ - 1,960,118 -
Nortel prepayment - 32,297 -
Nortel withholding cancellation - 31,406 -
Banorte prepayment - (83,436) -
BCI termination agreement - (126,790) -
Other 21,004 (5,361) (29,100)
----------------- --------------- ------------------
Other income (expenses), net $ 21,004 1,808,234 (29,100)
================= =============== ==================
F-29
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousands pesos of constant purchasing power as of December 31, 2004)
(21) Commitments and contingencies
As of December 31, 2004, 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. The Company has recognized a
liability to cover such interest for $31,927, presenting it as other
accounts payable in the balance sheet as of December 31, 2004.
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, 2004, the
trial is at a stage where evidence is being shown, and thus it not possible
to determine whether there is a contingency for the Company.
(b) On October 2002, Metronet, S.A. de C.V. ("Metronet") filed an action
against the Company in the Fourth Civil Court in Monterrey (Mexico).
Metronet claims that the Company wrongfully terminated a letter of intent
and is seeking payment for services and direct damages of approximately
U.S.$3.8 million, plus other expenses and attorneys' fees. The trial court
ruled against the Company in first instance. The Company appealed such
judgment before the Appeal Court and the Appeal Court on October 22, 2004
ruled in favor of the Company, discharging Axtel of any liability, damages
or payment in favor of Metronet. Metronet has a last resource before the
Mexican Federal Courts to change the Appeal Court judgment.
(c) 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.
(d) 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 $31,736 and to other
service providers for $48,402.
F-30
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousands pesos of constant purchasing power as of December 31, 2004)
(e) 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.
(f) The Company leases some equipment and facilities under operating leases.
Some of these leases have renewal clauses. Lease expense for 2004, 2003 and
2002 was $287,561, $205,706 and $222,177, respectively.
The annual payments under these leases as of December 31, 2004 are as follows:
Contracts in:
-----------------------------------------------------------------
Dollars UDIS
Pesos (thousands) (Investment units)
---------------- --------------- ---------------------------
2005 $ 59,286 6,716 54,833
2006 45,131 5,551 54,833
2007 39,179 4,588 54,833
2008 33,475 2,819 54,833
2009 27,834 2,727 45,694
Thereafter 106,903 11,461 -
--------------
---------------- ---------------
$ 311,808 33,862 265,026
================ =============== ==============
(g) As of December 31, 2004, the Company has placed purchase orders which are
pending delivery from suppliers for approximately $765,748.
(h) On April 20, 2004 Axtel and Airspan entered into Amendment Agreement No. 2
to the Purchase and License Agreement of Fixed Wireless Access Equipment
and the Technical Assistance Support Services Agreement, both dated March
20, 2004, by virtue of which the parties agreed to: (i) reduce the prices
of (a) the Fixed Wireless Access Equipment (RSS customer premise equipment
and the radio base station equipment) and (b) the Technical and Support
Services for years 2004 and 2005; (ii) eliminate Axtel's obligation to
provide a payment guarantee and modify its payments terms under such
Agreements, (iii) improve the delivery times of the equipments; (iv) create
a single unit of RSS (customer premise equipment) which will be sold at a
lower price in comparison of the current RSS customer premise equipment;
and (v) cancel Axtel's purchase commitments of years 2005, 2006 and 2007
established under sold Agreements and to replace such commitments with two
new commitments, one for U.S.$ 55.0 million to purchase Fixed Wireless
Access Equipment commencing April 20, 2004 and ending on December 31st,
2005 and the second commitment for the amount of U.S.$ 10.0 million to
purchase any Airspan product, commencing January 1st, 2006 and ending on
May 1st, 2006.
F-31
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousands pesos of constant purchasing power as of December 31, 2004)
(i) On December 2004, the Company entered into a Purchase and License Agreement
for FWA Equipment, by virtue of which the Company acquires the commitment
of purchasing equipment manufactured by Airspan for the amount of U.S.
$38.7 millions, from December 2004 through December 2006.
As of December 31, 2004 the Company has placed purchase orders for the
amount of U.S. $28.7 millions.
(j) On July 20, 2004 Axtel, Nortel Networks Limited and Nortel Networks de
Mexico, S.A. de C.V., entered into a Purchase and License Agreement for the
supply of next generation soft switch equipment and related services (the
"NGN PLA"). This NGN PLA contains standard commercial and legal terms. In
this NGN PLA, Axtel has a purchase commitment to acquire from Nortel
Networks the equipment and the software licenses required to have 100,000
lines in services by the end of the five (5) year term of such agreement.
(k) Those arising from labor obligations mentioned in note 2(i).
(22) Subsequent events
During January 2005, the Company re-opened its bond issuance program,
issuing U.S. $75,000,000 under the current indenture. This issuance matures
on December 2013. The bonds were issued at a price of 106.75% over face
value having a yield to maturity of 9.84%.
(23) New accounting pronouncements
a) Business combinations
In March, 2004, the Mexican Institute of Public Accountants issued the
new Bulletin B-7 Business Combinations, which is mandatory beginning
on January 1, 2005, although it allows his early application. The
Bulletin B-7 provides for certain rules to the accounting treatment of
business acquisitions and investments in associate entities. The most
relevant aspects included in the Bulletin B-7 among others are: the
adoption of the purchase method as a unique rule of valuation. In
consequence, the use of the International Accounting Standard IAS-22,
Business Combinations was eliminated; modification of the accounting
treatment of the goodwill, eliminating his amortization and
establishing certain rules of impairment; it provides for specific
rules in the acquisition of the minority interest, transferences of
assets or exchange of stocks among entities under common control, and
the accounting treatment of the intangible assets recognized in a
business combinations.
The Company estimates that the adoption of this Bulletin will not have
any important impact in its financial position or operation results.
F-32
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousands pesos of constant purchasing power as of December 31, 2004)
b) Labor obligations.
The new Bulletin D-3, issued in January 2004, substitutes and
supersedes former Bulletin D-3, published in January 1993 and revised
in 1998. The provisions of this Bulletin are effective immediately,
except for those relating to payments upon termination of labor
relationships, which are effective January 1, 2005.
This Bulletin adds the issue of post-retirement benefit payments, to
supersede Circular 50, "Interest Rates to be Used for Valuing Labor
Obligations and Supplementary Application of Accounting Principles,
Relating to Labor Obligations." Also, this Bulletin eliminates the
issue of unforseen payments, and replaces it with the one relating to
"Payments Upon Termination of the Labor Relationship," defining them
as those payable to workers upon termination of the labor relationship
before retirement age. These payments are of two types: (i) for
restructuring reasons, for which the provisions of Bulletin C-9,
"Liabilities, Accruals, Contingent Assets and Liabilities, and
Commitments," should be applied, and (ii) for reasons other than
restructuring, which valuation and disclosure requirements are the
same as those for pension and seniority premium payments, permitting
that, upon adoption of the Bulletin, the transition asset or liability
be immediately recognized in the results of operations, or else, that
it be amortized over the average remaining service life of employees.
F-33
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousands pesos of constant purchasing power as of December 31, 2004)
(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 of America (U.S. 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 of America.
The main differences between Mexican GAAP and U.S. GAAP and their effect on
consolidated net (loss) income and stockholders' equity as of December 31,
2004, 2003 and 2002 is presented below, with an explanation of the
adjustments.
Year ended December 31,
-----------------------------------------------------
2004 2003 2002
--------------- -- ---------------- -- --------------
Net (loss) income reported under Mexican GAAP .............. $ (77,132) 946,503 (855,132)
--------------- ---------------- --------------
Approximated US GAAP adjustments
1. Deferred income taxes (see 25a).......................... 141,686 511,375 (254,939)
2. Amortization of start-up cost (see 25c).................. 37,328 37,322 37,728
3. Start-up costs of the year (see 25c)..................... (28,876) - -
4. Allowance for post retirement benefits (see 25d)......... 7,712 198 11,648
5. Revenue recognition (see 25b)............................ (6,087) 30,493 64,365
6. Deferred financing cost amortization (see 25f)........... - 14,013 (2,325)
7. Accrued vacations (see 25d).............................. - - 1,287
8. Capitalized interest (see 25e)........................... (1,354) (1,042) -
9. Gain on the forgiveness of debt (see 25g).............. - 1,350,728 -
--------------- ---------------- --------------
Total approximate US GAAP adjustments....................... 150,409 1,943,087 (142,236)
--------------- ---------------- --------------
Approximate net income (loss) under US GAAP................. $ 73,277 2,889,590 (997,368)
=============== ================ ==============
F-34
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousands pesos of constant purchasing power as of December 31, 2004)
Year ended December 31,
-----------------------------------
2004 2003
--------------- -- ----------------
Total stockholders' equity reported under Mexican GAAP...... $ 5,599,075 5,676,506
--------------- ----------------
Approximate US GAAP adjustments
1. Deferred income taxes (see 25a).......................... (124,083) (265,769)
2. Start up costs (see 25c)................................c (202,623) (211,075)
3. Revenue recognition (see 25b)............................ (83,469) (77,382)
4. Allowance for post retirement benefits (see 25d)......... (20,959) (28,671)
5. Capitalized interest (see 25e)........................... 24,753 26,107
--------------- ----------------
Total approximate US GAAP adjustments....................... (406,381) (556,790)
--------------- ----------------
Total approximate stockholders' equity under US GAAP........ $ 5,192,694 5,119,716
=============== ================
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")
For Mexican GAAP 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.
For Mexican GAAP Deferred ESPS is recognized only for timing differences
arising from the reconciliation of book income (loss) to income (loss) for
ESPS purposes, which can be reasonably presumed to result in a future
liability or benefit, with indication that the liabilities or benefits will
materialize.
For U.S. GAAP purposes, the Company accounts for IT and ESPS 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 U.S. 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-35
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousands pesos of constant purchasing power as of December 31, 2004)
The tax (expense) benefit attributable to the income (loss) before IT
differed from the amount computed by applying the tax rate of 33% in 2004,
34% in 2003 and 35% in 2002 to pretax loss, as a result of the items
mentioned below:
2004 2003 2002
---- ---- ----
Computed "expected" income tax
(expense) benefit $ (24,181) (985,544) 349,079
Increase (decrease) resulting from:
Effects of inflation, net (16,158) 3,994 (27,433)
Change in valuation allowance 138,880 528,415 (199,239)
Gain on the forgiveness of debt - 459,248 -
Adjustments to deferred tax assets and
liabilities for enacted changes in tax rates (50,924) (20,377) 16,456
Amendment to 2003 Income Tax Return (see note 16)
(30,084) -- -
Non-deductible expenses (13,750) (1,688) (43,521)
Other (3,783) 15,952 (95,342)
-------------- -------------- ---------------
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, 2004 and
2003 for U.S. GAAP are presented below:
2004 2003
---- ----
Deferred tax assets:
Net operating loss carryforwards.......................................... $ 515,009 526,821
Accounts receivable....................................................... 28,061 182,915
Deferred revenues......................................................... 23,372 26,309
Seniority premium and allowance for
post retirement benefits............................................... 6,538 9,174
Accrued vacations......................................................... 2,022 2,590
Accrued liabilities....................................................... 4,039 23,401
Tax on assets............................................................. 17,303 9,067
---------------- --------------
Total gross deferred tax assets................................... 596,344 780,277
Less valuation allowance................................................ (227,508) (375,096)
---------------- --------------
Net deferred tax assets........................................... 368,836 405,181
---------------- --------------
F-36
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousands pesos of constant purchasing power as of December 31, 2004)
Deferred tax liabilities:
Property, systems and equipment .......................................... 186,193 236,056
Telephone concession rights............................................... 165,168 161,396
Inventories............................................................... 17,475 7,729
---------------- --------------
Total deferred tax liabilities.................................... 368,836 405,181
---------------- --------------
Net deferred tax liabilities under US GAAP - -
Less net deferred tax assets recognized
under Mexican GAAP................................................... 124,083 265,769
---------------- --------------
US GAAP adjustment to stockholders' equity................................ $ 124,083 265,769
================ ==============
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 had not generated taxable income prior 2002 a
deferred tax asset valuation allowance of $227,508, $ 375,096 and $903,513
as of December 31, 2004, 2003 and 2002, respectively, was recorded for U.S.
GAAP. This represents a (decrease) and increase in the valuation allowance
of $(147,588), $(528,415) and $206,006 for the years ended December 31,
2004, 2003 and 2002, respectively.
(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 U.S. 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.
F-37
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousands pesos of constant purchasing power as of December 31, 2004)
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
U.S. 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 U.S. 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 costs were recognized when
incurred as a deferred asset and amortized over a period of 10 years. The
Company has reversed the amortization of $37,328, $37,322 and $37,728 in
2004, 2003 and 2002, as shown in the U.S. GAAP reconciliation, and has
reduced stockholders' equity by $202,623 and $211,075 to write off the
unamortized balance at each year end. For US GAAP purposes during 2004 the
Company reversed $28,876 of capitalized amortization costs.
(d) Other employee benefits
Vacation
For the 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, the Company
recorded an increase in net income of $1,287 for the year ended December
31, 2002. Starting on January 2003, Mexican GAAP requires the recognition
of vacation expense when earned.
F-38
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousands pesos of constant purchasing power as of December 31, 2004)
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 U.S. 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, 2004, 2003 and
2002 the Company recorded an increase in net income of $7,712, $198 and
$11,648, respectively, and recognized an accrual amounting to $20,959 and
$28,671 as of December 31, 2004 and 2003, 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 U.S. GAAP, only
interest is considered an additional cost of constructed assets to be
capitalized and depreciated over the lives of the related assets.
The U.S. 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 U.S. GAAP, this
cost is amortized on the interest method over the life of the related debt.
(g) Gain on extinguishment
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.
F-39
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousands pesos of constant purchasing power as of December 31, 2004)
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 extinguishment of the debt of approximately $3,310,846.
(h) Supplemental cash flow information under U.S. 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 U.S. 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 U.S. 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 U.S. 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 U.S. 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,
------------------------------------------------
2004 2003 2002
---------------- -------------------------------
Net cash provided by (used in) operating activities........... 1,118,390 (11,160) 668,419
Net cash provided by (used in) financing activities........... (193,983) 1,038,913 (210,035)
Net cash used in investing activities......................... (1,382,981) (329,221) (265,855)
---------------- -------------------------------
Net cash flows from operating activities reflect cash payments for interest
and income taxes as follows:
Years Ended December31,
--------------------------------------------
2004 2003 2002
---------------- ---------------------------
Interest paid.......... 278,528 463,711 103,958
Income taxes paid...... 8,789 8,597 -
---------------- ---------------------------
F-40
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousands pesos of constant purchasing power as of December 31, 2004)
During the years ended December 31, 2004, 2003 and 2002, the Company
acquired property, systems and equipment through notes payable financing
amounting to approximately $203,810, $119,655 and $243,523, respectively.
(i) Condensed financial information under U.S. GAAP
The following table presents consolidated condensed statements of
operations for the years ended December 31, 2004, 2003 and 2002, 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 2004 2003 2002
----------------------------------------------
Revenues............................. 3,851,213 3,105,565 2,650,922
Operating income (loss).............. 255,566 180,283 (130,494)
Comprehensive financing result....... (194,504) (429,601) (803,580)
Other income (expenses), net......... 21,004 3,147,975 (63,294)
Tax on assets........................ (8,789) (9,067) -
----------------------------------------------
Consolidated net income (loss)....... 73,277 2,889,590 (997,368)
==============================================
The following table presents consolidated condensed balance sheets at
December 31, 2004 and 2003, prepared under US GAAP, including all
differences and reclassifications as compared to Mexican GAAP described in
this note 24:
At December 31,
--------------------------------------
Balance sheets 2004 2003
----------------- ------------------
Current assets.............................................. 1,334,604 1,729,981
Property, systems and equipment............................. 6,137,026 5,502,485
Deferred charges............................................ 864,351 890,885
----------------- ------------------
Total assets......................................... 8,335,981 8,123,351
----------------- ------------------
Current liabilities 1,006,708 758,485
Long-term debt.............................................. 2,026,214 2,134,697
Other non-current liabilities............................... 110,365 110,453
----------------- ------------------
Total liabilities.................................... 3,143,287 3,003,635
----------------- ------------------
Stockholders' equity................................. 5,192,694 5,119,716
----------------- ------------------
Total liabilities and stockholders' equity........... 8,335,981 8,123,351
----------------- ------------------
(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.
F-41
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousands pesos of constant purchasing power as of December 31, 2004)
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 66,757
---------------------------------------------
(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 2004, the FASB issued FASB Statement No. 123 (revised 2004),
Share-Based Payment, which addresses the accounting for transactions in
which an entity exchanges its equity instruments for goods or services,
with a primary focus on transactions in which an entity obtains employee
services in share-based payment transactions. This Statement is a revision
to Statement 123 and supersedes APB Opinion No. 25, Accounting for Stock
Issued to Employees, and its related implementation guidance. For nonpublic
companies, this Statement will require measurement of the cost of employee
services received in exchange for stock compensation based on the
grant-date fair value of the employee stock options. Incremental
compensation costs arising from subsequent modifications of awards after
the grant date must be recognized. This Statement will be effective for the
Company as of January 1, 2006.
In December 2004, the FASB issued FASB Statement No. 153, Exchanges of
Nonmonetary Assets, which eliminates an exception in APB 29 for nonmonetary
exchanges of similar productive assets and replaces it with a general
exception for exchanges of nonmonetary assets that do not have commercial
substance. This Statement will be effective for the Company for nonmonetary
asset exchanges occurring on or after January 1, 2006.
The Company estimates that the adoption of the above bulletins will not
have a material effect on its financial position or results of operations.
F-42
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousands pesos of constant purchasing power as of December 31, 2004)
(m) Guaranteed debt
On December 16, 2003, the Company completed an offering of senior unsecured
notes, for a value of U.S.$175 million ($2,074 million pesos) maturing on
December 15, 2013. Interest on the notes are payable semiannually at annual
rate of 11%, beginning on June 15, 2004.
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. Each of the subsidiary guarantors is 99.99% owned by Axtel,
S.A. de C.V. All guarantees are full and unconditional and are joint and
several.
Axtel is eligible, under Adopting Release (nos. 33-7878 and 34-43124) and a
no-action request letter, for presenting the condensed consolidating
financial information of Impulsora, Instalaciones and Servicios in this
note in accordance with Rule 3-10 (f) of Regulation S-X. Each of Impulsora,
Instalaciones and Servicios have total capital stock outstanding of 50,000
common shares. Axtel directly owns all but one share of each of Impulsora,
Instalaciones and Servicios. The ownership of the remaining share by
someone other than Axtel is a requirement of Mexican law.
For the purpose of the accompanying condensed consolidating balance sheets,
income statements and changes in financial position under Mexican GAAP, the
first column "Axtel" corresponds to the parent company issuer. The second
column, "Combined Guarantors", represents the combined amounts of
Instalaciones, Impulsora and Servicios, after adjustments and eliminations
relating to their combination. The third column, "Adjustments and
Eliminations", includes all amounts resulting from the consolidation of
Axtel, and the guarantors. The fourth column, "Axtel Consolidated",
represents the Company's consolidated amounts as reported in the audited
consolidated financial statements. Additionally, all amounts presented
under the line item "Investments in subsidiaries" for both the balance
sheet and the income statement are accounted for by the equity method.
F-43
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousands pesos of constant purchasing power as of December 31, 2004)
The condensed consolidating financial information is as follows:
Condensed consolidating balance sheets:
Adjustments
Combined and Axtel
As of December 31, 2004 Axtel Guarantors Eliminations Consolidated
------------------------------------------------------ ---------------------------------------------------------------------
Current assets $ 1,349,862 110,732 (125,990) 1,334,604
Property, systems and equipment, net 6,104,165 9,417 (1,309) 6,112,273
Deferred charges 1,024,432 5,837 - 1,030,269
Investment in subsidiaries 24,206 - (24,206) -
Other-non current assets 156,818 3,970 - 160,788
--------------- ------------------ ---------------- ----------------
Total assets $ 8,659,483 129,956 (151,505) 8,637,934
--------------- ------------------ ---------------- ----------------
Current liabilities $ 1,030,651 102,047 (125,990) 1,006,708
Long-term debt 2,026,214 - - 2,026,214
Other non-current liabilities 3,543 2,394 - 5,937
--------------- ------------------ ---------------- ----------------
Total liabilities 3,060,408 104,441 (125,990) 3,038,859
--------------- ------------------ ---------------- ----------------
Total stockholders equity 5,599,075 25,515 (25,515) 5,599,075
--------------- ------------------ ---------------- ----------------
Total liabilities and stockholders equity $ 8,659,483 129,956 (151,505) 8,637,934
--------------- ------------------ ---------------- ----------------
As of December 31, 2003
------------------------------------------------------
Current assets $ 1,727,339 98,437 (95,795) 1,729,981
Property, systems and equipment, net 5,467,837 10,376 (1,835) 5,476,378
Deferred charges 1,224,844 6,580 - 1,231,424
Investment in subsidiaries 22,002 - (22,002) -
Other non-current assets 136,131 174 - 136,305
--------------- ------------------ ----------------- ---------------
Total assets $ 8,578,153 115,567 (119,632) 8,574,088
--------------- ------------------ ----------------- ---------------
Current liabilities $ 764,659 89,621 (95,795) 758,485
Long-term debt 2,134,697 - - 2,134,697
Other non-current liabilities 2,291 2,109 - 4,400
--------------- ------------------ ----------------- ---------------
Total liabilities 2,901,647 91,730 (95,795) 2,897,582
--------------- ------------------ ----------------- ---------------
Total stockholders equity 5,676,506 23,837 (23,837) 5,676,506
--------------- ------------------ ----------------- ---------------
Total liabilities and stockholders equity $ 8,578,153 115,567 (119,632) 8,574,088
--------------- ------------------ ----------------- ---------------
F-44
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousands pesos of constant purchasing power as of December 31, 2004)
Condensed consolidating income statements:
Adjustments
Combined and Axtel
For the year ended December 31, 2004 Axtel Guarantors Eliminations Consolidated
---------------------------------------- ------------------ ----------------- ------------------ ------------------
Rental, installation, service and
other revenues $ 3,861,313 920,902 (920,902) 3,861,313
Cost of sales and services (1,229,500) - - (1,229,500)
Selling and administrative expenses (1,369,936) (929,271) 920,902 (1,378,305)
Depreciation and amortization (1,000,260) (905) - (1,001,165)
Operating income 261,617 (9,274) - 252,343
Comprehensive financing result, net (199,131) (2,123) 1,250 (200,004)
Other income (expenses), net 20,530 1,724 (1,250) 21,004
Income tax (149,652) (823) - (150,475)
Investment in subsidiaries (10,496) - 10,496 -
------------------ ----------------- ------------------ ------------------
Net (loss) income $ (77,132) (10,496) 10,496 (77,132)
------------------ ----------------- ------------------ ------------------
For the year ended December 31, 2003
----------------------------------------
Rental, installation, service and
other revenues $ 3,079,143 809,140 (809,073) 3,079,210
Cost of sales and services (852,647) - - (852,647)
Selling and administrative expenses (1,208,924) (800,508) 809,073 (1,200,359)
Depreciation and amortization (907,226) (421) - (907,647)
Operating (loss) income 110,346 8,211 - 118,557
Comprehensive financing result, net (448,204) (1,926) 1,271 (448,859)
Other expenses, net 1,806,964 (8,446) (1,271) 1,797,247
Income tax (518,983) (1,459) - (520,442)
Investment in subsidiaries (3,620) - 3,620 -
------------------ ----------------- ------------------ ------------------
Net income (loss) $ 946,503 (3,620) 3,620 946,503
------------------ ----------------- ------------------ ------------------
F-45
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousands pesos of constant purchasing power as of December 31, 2004)
Adjustments
Combined and Axtel
For the year ended December 31, 2002 Axtel Guarantors Eliminations Consolidated
---------------------------------------- ------------------ ----------------- ------------------ ------------------
Rental, installation, service and
other revenues $ 2,586,557 855,752 (855,752) 2,586,557
Cost of sales and services (645.699) - - (645,699)
Selling and administrative expenses (1,339,143) (848,109) 855,752 (1,331,500)
Depreciation and amortization (853,925) (955) - (854,880)
Operating (loss) income (252,210) 6,688 (245,522)
Comprehensive financing result, net (801,245) (1,549) 1,539 (801,255)
Other expenses, net (26,805) (34,950) (1,539) (63,294)
Income tax 246,789 8,150 - 254,939
Investment in subsidiaries (21,661) - 21,661 -
------------------ ----------------- ------------------ ------------------
Net (loss) income $ (855,132) (21,661) 21,661 (855,132)
------------------ ----------------- ------------------ ------------------
F-46
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousands pesos of constant purchasing power as of December 31, 2004)
Condensed consolidating statements of changes in financial position:
Adjustments
Combined and Axtel
For the year ended December 31, 2004 Axtel Guarantors Eliminations Consolidated
---------------------------------------------------------- -------------- -------------- ---------------- -----------------
Operating activities:
Net (loss) income $ (77,132) (10,496) 10,496 (77,132)
Non-cash items 1,160,408 2,455 (10,496) 1,152,367
-------------- -------------- ---------------- -----------------
Resources provided by (used in) operations 1,083,276 (8,041) - 1,075,235
Net (investment in) financing from operations 106,588 1,369 (229) 107,728
-------------- -------------- ---------------- -----------------
Resources provided by (used in) operations, net 1,189,864 (6,672) (229) 1,182,963
-------------- -------------- ---------------- -----------------
Financing activities:
Increase in common stock - 12,700 (12,700) -
Additional paid-in capital - - - -
Loans payments, net (93,530) (229) 229 (93,530)
Others (31) - - (31)
-------------- -------------- ---------------- -----------------
Resources provided by financing activities (93,561) 12,471 (12,471) (93,561)
-------------- -------------- ---------------- -----------------
Investing activities:
Acquisition and construction of property, systems and
equipment, net (1,532,165) (473) - (1,532,638)
Investment in subsidiaries (12,700) - 12,700 -
Other assets (66,950) (3,796) - (70,746)
-------------- -------------- ---------------- -----------------
Resources used in investing activities (1,611,815) (4,269) 12,700 (1,603,384)
-------------- -------------- ---------------- -----------------
Increase (decrease) in cash and equivalents (515,512) 1,530 - (513,982)
Cash and equivalents at the beginning of the year 1,067,902 481 - 1,068,383
-------------- -------------- ---------------- -----------------
Cash and equivalents at the end of the year $ 552,390 2,011 - 554,401
-------------- -------------- ---------------- -----------------
F-47
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousands pesos of constant purchasing power as of December 31, 2004)
Adjustments
Combined and Axtel
For the year ended December 31, 2003 Axtel Guarantors Eliminations Consolidated
---------------------------------------------------------- -------------- -------------- ---------------- -----------------
Operating activities:
Net (loss) income $ 946,503 (3,620) 3,620 946,503
Non-cash items (530,289) 2,598 (3,620) (531,311)
-------------- -------------- ---------------- -----------------
Resources used in operations 416,214 (1,022) - 415,192
Net financing from (investment in) operations (244,548) 15 (2,262) (246,795)
-------------- -------------- ---------------- -----------------
Resources provided by (used in) operations, net 171,666 (1,007) (2,262) 168,397
-------------- -------------- ---------------- -----------------
Financing activities:
Increase in common stock 2,809,462 2,389 (2,388) 2,809,463
Additional paid-in capital (15,625) - - (15,625)
Proceeds from (loans payments), net (1,591,004) (2,262) 2,262 (1,591,004)
Others (60,571) - - (60,571)
-------------- -------------- ---------------- -----------------
Resources provided by financing activities 1,142,262 127 (126) 1,142,263
Investing activities:
Acquisition and construction of property, systems and
equipment, net (485,292) - - (485,292)
Investment in subsidiaries (2,388) - 2,388 -
Other assets (101,686) (174) - (101,860)
-------------- -------------- ---------------- -----------------
Resources used in investing activities (589,366) (174) 2,388 (587,152)
-------------- -------------- ---------------- -----------------
Increase in cash and equivalents 724,562 (1,054) - 723,508
Cash and equivalents at the beginning of the year 343,340 1,535 - 344,875
-------------- -------------- ---------------- -----------------
Cash and equivalents at the end of the year $ 1,067,902 481 - 1,068,383
-------------- -------------- ---------------- -----------------
F-48
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousands pesos of constant purchasing power as of December 31, 2004)
Adjustments
Combined and Axtel
For the year ended December 31, 2002 Axtel Guarantors Eliminations Consolidated
---------------------------------------------------------- -------------- -------------- ---------------- -----------------
Operating activities:
Net (loss) income $ (855,132) (21,661) 21,661 (855,132)
Non-cash items 628,797 (6,952) (21,661) 600,184
-------------- -------------- ---------------- -----------------
Resources used in operations (226,335) (28,613) - (254,948)
Net investment in operations 258,711 (14,565) (1,375) 242,771
-------------- -------------- ---------------- -----------------
Resources used in operations, net 32,376 (43,178) (1,375) (12,177)
-------------- -------------- ---------------- -----------------
Financing activities:
Increase in common stock 54,783 45,715 (45,715) 54,783
Additional paid-in capital (2,155) - - (2,155)
Proceeds from (loans payments), net 665,049 (1,375) 1,375 665,049
Others 95,827 - - 95,827
-------------- -------------- ---------------- -----------------
Resources provided by financing activities 813,504 44,340 (44,340) 813,504
-------------- -------------- ---------------- -----------------
Investing activities:
Acquisition and construction of property, systems and
equipment, net (596,293) - - (596,293)
Investment in subsidiaries (45,715) - 45,715 -
Other assets (1,533) 38 - (1,495)
-------------- -------------- ---------------- -----------------
Resources used in investing activities (643,541) 38 45,715 (597,788)
-------------- -------------- ---------------- -----------------
Decrease in cash and equivalents 202,339 1,200 - 203,539
Cash and equivalents at the beginning of the year 141,001 335 - 141,336
-------------- -------------- ---------------- -----------------
Cash and equivalents at the end of the year $ 343,340 1,535 - 344,875
-------------- -------------- ---------------- -----------------
F-49
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousands pesos of constant purchasing power as of December 31, 2004)
The tables below present combined balance sheets as of December 31, 2003
and 2002, and income statements and statements of changes in financial
position for each of the three-year periods ended December 31, 2003 for the
Guarantors. Such information presents in separate columns each individual
Guarantor, consolidation adjustments and eliminations, and the combined
guarantors. All significant related parties balances and transactions
between the Guarantors have been eliminated in the "Combined Guarantors"
column.
The amounts presented in the column "Combined Guarantors" are readily
comparable with the information of the Guarantors included in the condensed
consolidated financial information.
Guarantors' Combined Balance Sheets:
As of December 31, 2004
------------------------------------
Adjustments
Servicios and Combined
Assets Icosa Inmobiliaria Axtel Eliminations Guarantors
------------ ------------------- -------------- -------------- -----------------
Cash and cash equivalents $ 589 12 1,410 - 2,011
Related parties receivables 7,343 - 88,102 (4) 95,441
Refundable taxes and other
accounts receivable 1,326 1,193 10,761 - 13,280
------------ ------------------- -------------- -------------- -----------------
Total current assets 9,258 1,205 100,273 (4) 110,732
------------ ------------------- -------------- -------------- -----------------
Property, systems and equipment,
net - 9,417 - - 9,417
Deferred income taxes 9 - 6,060 (232) 5,837
Other 803 - 3,167 - 3,970
------------ ------------------- -------------- -------------- -----------------
Total non current assets 812 9,417 9,227 (232) 19,224
------------ ------------------- -------------- -------------- -----------------
Total assets $ 10,070 10,622 109,500 (236) 129,956
------------ ------------------- -------------- -------------- -----------------
Liabilities and Stockholders Equity
Account payable and accrued
liabilities $ 162 - 18,180 - 18,342
Taxes payable 4,724 - 50,727 - 55,451
Related parties payables 4 8,592 - (4) 8,592
Other accounts payable 1,067 - 18,595 - 19,662
------------ ------------------- -------------- -------------- -----------------
Total current liabilities 5,957 8,592 87,502 (4) 102,047
------------ ------------------- -------------- -------------- -----------------
Deferred income taxes - 232 - (232) -
Others 402 - 1,992 - 2,394
------------ ------------------- -------------- -------------- -----------------
Total liabilities 6,359 8,824 89,494 (236) 104,441
------------ ------------------- -------------- -------------- -----------------
Stockholders' equity 4,895 1,390 29,726 - 36,011
Net (loss) income (1,184) 408 (9,720) - (10,496)
------------ ------------------- -------------- -------------- -----------------
Total stockholders equity 3,711 1,798 20,006 - 25,515
------------ ------------------- -------------- -------------- -----------------
Total liabilities and stockholders
equity $ 10,070 10,622 109,500 (236) 129,956
------------ ------------------- -------------- -------------- -----------------
F-50
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousands pesos of constant purchasing power as of December 31, 2004)
As of December 31, 2003
------------------------------------
Adjustments
Servicios and Combined
Assets Icosa Inmobiliaria Axtel Eliminations Guarantors
------------ ------------------- -------------- --------------- ----------------
Cash and cash equivalents $ 168 15 298 - 481
Accounts receivable 35 - 101 - 136
Related parties receivables 5,603 - 80,571 (606) 85,568
Refundable taxes and other
accounts receivable 1,036 1,405 9,811 - 12,252
------------ ------------------- -------------- --------------- ----------------
Total current assets 6,842 1,420 90,781 (606) 98,437
------------ ------------------- -------------- --------------- ----------------
Property, systems and equipment,
net - 10,376 - - 10,376
Deferred income taxes 3 - 7,029 (452) 6,580
Other 174 - - - 174
------------ ------------------- -------------- --------------- ----------------
Total non current assets 177 10,376 7,029 (452) 17,130
------------ ------------------- -------------- --------------- ----------------
Total assets $ 7,019 11,796 97,810 (1,058) 115,567
------------ ------------------- -------------- --------------- ----------------
Liabilities and stockholders'
equity
Account payable and accrued
liabilities $ 171 - 8,911 - 9,082
Taxes payable 2,895 - 50,287 - 53,182
Related parties payables - 9,427 - (606) 8,821
Other accounts payable 465 - 18,071 - 18,536
------------ ------------------- -------------- --------------- ----------------
Total current liabilities 3,531 9,427 77,269 (606) 89,621
------------ ------------------- -------------- --------------- ----------------
Deferred income taxes - 452 - (452) -
Others 292 - 1,817 - 2,109
------------ ------------------- -------------- --------------- ----------------
Total liabilities 3,823 9,879 79,086 (1,058) 91,730
------------ ------------------- -------------- --------------- ----------------
Stockholders' equity 3,970 1,570 21,917 - 27,457
Net (loss) income (774) 347 (3,193) - (3,620)
------------ ------------------- -------------- --------------- ----------------
Total stockholders equity 3,196 1,917 18,724 - 23,837
------------ ------------------- -------------- --------------- ----------------
Total liabilities and stockholders
equity $ 7,019 11,796 97,810 (1,058) 115,567
------------ ------------------- -------------- --------------- ----------------
F-51
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousands pesos of constant purchasing power as of December 31, 2004)
Guarantors' Combined Income Statements:
Adjustments
Servicios and Combined
For the year ended December 31, 2004 Icosa Inmobiliaria Axtel Eliminations Guarantors
-------------------------------------- ------------ ------------------ ----------------- -------------- --------------
Rental and service revenues $ 79,312 1,975 839,615 - 920,902
Administrative expenses (80,154) (500) (849,117) 500 (929,271)
Depreciation and amortization - (432) (473) - (905)
Operating (loss) income (842) 1,043 (9,975) 500 (9,274)
------------ ------------------ ----------------- -------------- --------------
Comprehensive financing result, net (272) (856) (995) - (2,123)
------------ ------------------ ----------------- -------------- --------------
Other income (expenses), net 6 - 2,218 (500) 1,724
------------ ------------------ ----------------- -------------- --------------
(Loss) income before income taxes and
employee statutory profit
sharing (1,108) 187 (8,752) - (9,673)
------------ ------------------ ----------------- -------------- --------------
Total income (tax) and employee
statutory profit sharing
benefit (76) 221 (968) - (823)
------------ ------------------ ----------------- -------------- --------------
Net (loss) income $ (1,184) 408 (9,720) - (10,496)
------------ ------------------ ----------------- -------------- --------------
For the year ended December 31, 2003
--------------------------------------
Rental and service revenues $ 47,063 2,067 760,010 - 809,140
Administrative expenses (47,453) (527) (753,055) 527 (800,508)
Depreciation and amortization - (421) - - (421)
Operating income (loss) (390) 1,119 6,955 527 8,211
------------ ------------------ ----------------- -------------- --------------
Comprehensive financing result, net (146) (898) (882) - (1,926)
------------ ------------------ ----------------- -------------- --------------
Other expenses, net 26 6 (7,951) (527) (8,446)
------------ ------------------ ----------------- -------------- --------------
(Loss) income before income taxes and
employee statutory profit
sharing (510) 227 (1,878) - (2,161)
------------ ------------------ ----------------- -------------- --------------
Total income tax and employee
statutory profit sharing (264) 120 (1,315) - (1,459)
------------ ------------------ ----------------- -------------- --------------
Net (loss) income $ (774) 347 (3,193) - (3,620)
------------ ------------------ ----------------- -------------- --------------
F-52
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousands pesos of constant purchasing power as of December 31, 2004)
Adjustments
Servicios and Combined
For the year ended December 31, 2002 Icosa Inmobiliaria Axtel Eliminations Guarantors
-------------------------------------- ------------ ------------------ ----------------- -------------- --------------
Rental and service revenues $ 38,041 2,164 815,547 - 855,752
Administrative expenses (37,459) (548) (810,650) 548 (848,109)
Depreciation and amortization (481) (474) - - (955)
Operating income 101 1,142 4,897 548 6,688
------------ ------------------ ----------------- -------------- --------------
Comprehensive financing result, net (201) (903) (445) - (1,549)
------------ ------------------ ----------------- -------------- --------------
Other expenses, net (1,758) - (32,644) (548) (34,950)
------------ ------------------ ----------------- -------------- --------------
Loss before income taxes and
employee statutory profit
sharing (1,858) 239 (28,192) - (29,811)
------------ ------------------ ----------------- -------------- --------------
Total income tax and employee
statutory profit sharing 355 186 7,609 - 8,150
------------ ------------------ ----------------- -------------- --------------
Net (loss) income $ (1,503) 425 (20,583) - (21,661)
------------ ------------------ ----------------- -------------- --------------
F-53
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousands pesos of constant purchasing power as of December 31, 2004)
Guarantors' Combined Statements of Changes in Financial Position:
Adjustments
Servicios and Combined
For the year ended December 31, 2004 Icosa Inmobiliaria Axtel Eliminations Guarantors
-------------------------------------- ------------ ------------------ ----------------- -------------- --------------
Operating activities:
Net (loss) income $ (1,184) 408 (9,720) - (10,496)
Non-cash items 214 211 2,030 - 2,455
------------ ------------------ ----------------- -------------- --------------
Resources (used in) provided
by operations (970) 619 (7,690) - (8,041)
Net (investment in) financing
from operations 320 (393) 1,442 - 1,369
------------ ------------------ ----------------- -------------- --------------
Resources (used in) provided
by operations, net (650) 226 (6,248) - (6,672)
------------ ------------------ ----------------- -------------- --------------
Financing activities:
Increase in common stock 1,700 - 11,000 - 12,700
Loans payment, net - (229) - - (229)
------------ ------------------ ----------------- -------------- --------------
Resources provided by (used in)
financing activities 1,700 (229) 11,000 - 12,471
------------ ------------------ ----------------- -------------- --------------
Investing activities:
Property. System and Equipment,
net - - (473) - (473)
Other assets (629) - (3,167) - (3,796)
------------ ------------------ ----------------- -------------- --------------
Resources used in investing
activities (629) - (3,640) - (4,269)
------------ ------------------ ----------------- -------------- --------------
Increase (decrease) in cash and
equivalents 421 (3) 1,112 - 1,530
Cash and equivalents at the
beginning of the year 168 15 298 - 481
------------ ------------------ ----------------- -------------- --------------
Cash and equivalents at the end of
the year $ 589 12 1,410 - 2,011
------------ ------------------ ----------------- -------------- --------------
F-54
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousands pesos of constant purchasing power as of December 31, 2004)
Adjustments
Servicios and Combined
For the year ended December 31, 2003 Icosa Inmobiliaria Axtel Eliminations Guarantors
-------------------------------------- ------------ ------------------ ----------------- -------------- --------------
Operating activities:
Net income (loss) $ (774) 347 (3,193) - (3,620)
Non-cash items 369 301 1,928 - 2,598
------------ ------------------ ----------------- -------------- --------------
Resources (used in) provided by
operations (405) 648 (1,265) - (1,022)
(Investment in) financing from
operations, net (194) 46 163 - 15
------------ ------------------ ----------------- -------------- --------------
Resources (used in) provided by
operations, net (599) 694 (1,102) - (1,007)
------------ ------------------ ----------------- -------------- --------------
Financing activities:
Increase in common stock 860 1,529 - - 2,389
Loans payments, net - (2,262) - - (2,262)
------------ ------------------ ----------------- -------------- --------------
Resources provided by (used in)
financing activities 860 (733) - - 127
------------ ------------------ ----------------- -------------- --------------
Investing activities:
Other assets (174) - - - (174)
------------ ------------------ ----------------- -------------- --------------
Resources used in investing
activities (174) - - - (174)
------------ ------------------ ----------------- -------------- --------------
(Decrease) increase in cash and
equivalents 87 (39) (1,102) - (1,054)
Cash and equivalents at the
beginning of the year 81 54 1,400 - 1,535
------------ ------------------ ----------------- -------------- --------------
Cash and equivalents at the end of
the year $ 168 15 298 - 481
------------ ------------------ ----------------- -------------- --------------
F-55
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousands pesos of constant purchasing power as of December 31, 2004)
Adjustments
Servicios and Combined
For the year ended December 31, 2002 Icosa Inmobiliaria Axtel Eliminations Guarantors
-------------------------------------- ------------ ------------------ ----------------- -------------- --------------
Operating activities:
Net (loss) income $ (1,503) 425 (20,583) - (21,661)
Non-cash items 178 288 (7,418) - (6,952)
------------ ------------------ ----------------- -------------- --------------
Resources (used in) provided by
operations (1,325) 713 (28,001) - (28,613)
Investment in operations, net (695) 658 (14,528) - (14,565)
------------ ------------------ ----------------- -------------- --------------
Resources (used in) provided by
operations, net (2,020) 1,371 (42,529) - (43,178)
------------ ------------------ ----------------- -------------- --------------
Financing activities:
Increase in common stock 1,844 - 43,871 - 45,715
Loans payment - (1,375) - - (1,375)
------------ ------------------ ----------------- -------------- --------------
Resources provided by (used in)
financing activities 1,844 (1,375) 43,871 - 44,340
------------ ------------------ ----------------- -------------- --------------
Investing activities:
Other assets 38 - - - 38
------------ ------------------ ----------------- -------------- --------------
Resources used in investing
activities 38 - - - 38
------------ ------------------ ----------------- -------------- --------------
(Decrease) increase in cash and
equivalents (138) (4) 1,342 - 1,200
Cash and equivalents at the
beginning of the year 219 58 58 - 335
------------ ------------------ ----------------- -------------- --------------
Cash and equivalents at the end of
the year $ 81 54 1,400 - 1,535
------------ ------------------ ----------------- -------------- --------------
F-56
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2004)
Guarantors - U.S. GAAP reconciliation of net income and stockholders'
equity:
As discussed at the beginning of this note 25, the following reconciliation
to U.S. GAAP 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.
The main differences between Mexican GAAP and US GAAP and their effect on
consolidated net loss and stockholders' equity as of December 31, 2004,
2003 and 2002 is presented below, with an explanation of the adjustments.
Year ended December 31,
-----------------------------------------------------
2004 2003 2002
--------------- -- ---------------- -- --------------
Net loss reported under Mexican GAAP ....................... $ (10,496) (3,620) (21,661)
--------------- ---------------- --------------
Approximated US GAAP adjustments
1. Deferred income taxes (A)................................ 741 1,382 (8,150)
2. Amortization of start-up cost (B)........................ - - 480
3. Allowance for post retirement benefits (C)............... 7,712 198 (26,904)
4. Accrued vacations (C).................................... - - (2,162)
--------------- ---------------- --------------
Total approximate US GAAP adjustments....................... 8,453 1,580 (36,736)
--------------- ---------------- --------------
Approximate net loss under US GAAP.......................... $ (2,043) (2,040) (58,397)
=============== ================ ==============
F-57
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of September 30, 2004)
Year ended December 31,
-----------------------------------
2004 2003
--------------- -- ----------------
Total stockholders' equity reported under Mexican GAAP...... $ 25,515 23,837
--------------- ----------------
Approximate US GAAP adjustments
1. Deferred income taxes (A)................................ (5,837) (6,580)
2. Preoperating result...................................... - -
3. Allowance for post retirement benefits (C)............... (20,959) (28,671)
--------------- ----------------
Total approximate US GAAP adjustments....................... (26,796) (35,251)
--------------- ----------------
Total approximate stockholders' equity under US GAAP........ $ (1,281) (11,414)
=============== ================
Guarantors-Notes to the U.S. GAAP reconciliation
A. Deferred income taxes
Deferred income taxes adjustment in the stockholders' equity reconciliation
to U.S. GAAP, at December 31, 2004 and 2003, represented decreases of $
5,837 and $ 6,580, respectively.
B. Start-up costs
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on
the Costs 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 $ 480 in
2002, as shown in the US GAAP reconciliation.
C. 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 year
ended December 31, 2002, the Company recorded a decrease in net income of $
2,162. Starting on January 2003, Mexican GAAP requires the recognition of
vacation expense when earn.
F-58
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of September 30, 2004)
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 U.S. 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, 2004, 2003 and
2002 the Company recorded an increase or (decrease) in net income of
$7,712, $198 and $ (26,904), respectively, and recognized an accrual
amounting to $20,959 and $28,671 as of December 31, 2004 and 2003,
respectively.
F-59
$75,000,000
AXTEL, S.A. DE C.V.
11% SENIOR NOTES DUE 2013
[GRAPHIC OMITTED][GRAPHIC OMITTED]
_____________
PROSPECTUS
, 2005
______________
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Mexican law, when an officer or director of a corporation acts within
the scope of his authority, the corporation will answer for any resulting
liabilities or expenses. In addition, we have purchased directors' and officers'
liability insurance for our directors and executive officers.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The exhibits and financial statement schedules filed as a part of this
Registration Statement are as follows:
List of Exhibits:
Exhibit Number Exhibit
-------------- -------
3.1 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).
4.1 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 $75,000,000 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).
4.2 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).
4.3 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).
* 4.4 Registration Rights Agreement, dated as of January 13, 2005
among Axtel, the Subsidiary Guarantors named therein and Credit
Suisse First Boston LLC.
* 5.1 Opinion of Cahill Gordon & Reindel LLP as to the validity of
the exchange notes under New York law.
* 5.2 Opinion of D&A Morales y Asociados, S.C. as to the validity
of the exchange notes under Mexican law.
9.1 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).
9.2 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).
10.1 Concession title granted by the Mexican Ministry of
Communications and Transportation (the "Ministry") in favor of
Axtel, dated June 17, 1996, together with an English translation
II-1
Exhibit Number Exhibit
-------------- -------
of such concession title (incorporated herein by reference to
Exhibit 10.1 of our Registration Statement on Form F-4, File No.
333-114196).
10.2 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
herein by reference to Exhibit 10.2 of our Registration Statement
on Form F-4, File No. 333-114196).
10.3 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).
10.4 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).
10.5 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).
10.6 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).
10.7 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).
10.8 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).
10.9 Technical Assistance Support Services Agreement for FWA
Equipment, dated as of March 20, 2003, among Nortel Networks UK
Limited and Axtel (incorporated herein by reference to Exhibit
10.11 of our Registration Statement on Form F-4, File No.
333-114196).
10.10 FWA Technology License Agreement, dated as of March 20, 2003,
among Nortel Networks Limited and Axtel (incorporated herein by
reference to Exhibit 10.12 of our Registration Statement on Form
F-4, File No. 333-114196).
10.11 FWA Special Agreement, dated as of September 30, 2003, among
Nortel Networks UK Limited and Axtel (incorporated herein by
reference to Exhibit 10.13 of our Registration Statement on Form
F-4, File No. 333-114196).
*10.12 Purchase and License Agreement for FWA Equipment and the
Technical Assistance Support Services Agreement for FWA
Equipment, dated as of December 28, 2004, between Airspan
Communications Limited and Axtel (certain portions of this
Exhibit 10.12 have been omitted pursuant to a request for
confidential treatment.
II-2
Exhibit Number Exhibit
-------------- -------
*10.13 Amendment No. 3 to the Technical Assistance Support Services
Agreement for FWA Equipment, dated as of December 28, 2004,
between Airspan Communications Limited and Axtel (certain
portions of this Exhibit 10.13 have been omitted pusuant to a
request for confidential treatment).
*12.1 Statement regarding computation of ratio of earnings to
fixed charges (according to Mexican GAAP).
*12.2 Statement regarding computation of ratio of earnings to
fixed charges (according to U.S. GAAP).
21.1 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).
*23.1 Consent of Cahill Gordon & Reindel LLP (contained in Exhibit
5.1).
*23.2 Consent of D&A Morales y Asociados, S.C. (contained in
Exhibit 5.2).
*23.3 Consent of KPMG Cardenas Dosal, S.C., relating to the
audited financial statements of Axtel.
*24.1 Signed copies of the powers of attorney (included on the
signature pages of this Registration Statement).
*25.1 Form T-1 Statement of Eligibility and Qualification of The
Bank of New York with respect to the exchange notes.
*99.1 Form of Letter of Transmittal.
*99.2 Form of Notice of Guaranteed Delivery.
*99.3 Form of Instructions to Registered Holder and/or Book-Entry
Transfer Facility Participant from Beneficial Owner of Senior
Notes due 2013.
*99.4 Form of Exchange Agent Agreement.
* Filed herewith.
There are no Financial Statement Schedules included with this filing.
ITEM 22. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) that, for purposes of determining any liability under the
Securities Act of 1933, each filing of the registrant's annual report
pursuant to section 13(a) or section 15(d) of the Securities Exchange Act
of 1934 (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof;
(2) insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provi-
II-3
sions, or otherwise, the registrant has been advised that in the opinion of
the SEC such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will governed by the final
adjudication of such issue;
(3) to respond to requests for information that is incorporated by
reference into this prospectus pursuant to Items 4, 10, 11 or 13 of this
Form F-4, within one business day of receipt of such request, and to send
the incorporated documents by first class mail or other equally prompt
means; and (ii) to arrange or provide for a facility in the U.S. for
purposes of responding to such requests. The undertaking in subparagraph
(i) above includes information contained in documents filed subsequent to
the effective date of the registration statement through the date of
responding to the request; and
(4) to supply by means of a post-effective amendment all information
concerning a transaction and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
II-4
SIGNATURES OF AXTEL, S.A. de C.V.
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement on Form F-4 to be signed on its
behalf by the undersigned, thereunto duly authorized in Monterrey, Mexico on
March 28, 2005.
Axtel, S.A. de C.V.
By: /s/ Patricio Jimenez Barrera
--------------------------------------
Name: Patricio Jimenez Barrera
Title: Chief Financial Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Tomas Milmo Santos and Patricio Jimenez Barrera,
his or her true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution for such person and in his or her name, place
and stead, in any and all capacities, to sign any and all amendments (including
post effective amendments) to this Registration Statement on Form F-4, and to
file the same with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent, full power and authority to do and perform each and
every act and thing requisite or necessary to be done in and about the premises,
as fully and to all intents and purposes as he or she might or could do in
person, hereby ratifying and confirming that said attorney-in-fact and agent, or
their substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement on Form F-4 has been signed by the following persons in
the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Tomas Milmo Santos Chairman, Series A Director and March 28, 2005
- -------------------------------- Chief Executive Officer
Tomas Milmo Santos
/s/ Patricio Jimenez Barrera Chief Financial Officer and March 28, 2005
- -------------------------------- Principal Accounting Officer
Patricio Jimenez Barrera
Series A Director March 28, 2005
- --------------------------------
Tomas Milmo Zambrano
/s/ Alberto Santos de Hoyos Series A Director March 28, 2005
- --------------------------------
Alberto Santos de Hoyos
_______________________ Series A Director March 28, 2005
Lorenzo Zambrano Trevino
Series A Director March 28, 2005
- --------------------------------
Alberto Garza Santos
/s/ Hector Medina Aguiar Series A Director March 28, 2005
- --------------------------------
Hector Medina Aguiar
_______________________ Series C Director March 28, 2005
Everett J. Santos
/s/ Bertrand Guillot Series C Director March 28, 2005
- --------------------------------
Bertrand Guillot
/s/ Iain Aitken Series C Director March 28, 2005
- --------------------------------
Iain Aitken
/s/ Lawrence H. Guffey Series C Director March 28, 2005
- --------------------------------
Lawrence H. Guffey
SIGNATURES OF IMPULSORA E INMOBILIARIA REGIONAL, S.A. de C.V.
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement on Form F-4 to be signed on its
behalf by the undersigned, thereunto duly authorized in Monterrey, Mexico on
March 28, 2005.
Impulsora e Inmobiliaria Regional, S.A. de C.V.
By: /s/ Patricio Jimenez Barrera
--------------------------------------
Name: Patricio Jimenez Barrera
Title: Chief Financial Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Tomas Milmo Santos and Patricio Jimenez Barrera,
his or her true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution for such person and in his or her name, place
and stead, in any and all capacities, to sign any and all amendments (including
post effective amendments) to this Registration Statement on Form F-4, and to
file the same with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent, full power and authority to do and perform each and
every act and thing requisite or necessary to be done in and about the premises,
as fully and to all intents and purposes as he or she might or could do in
person, hereby ratifying and confirming that said attorney-in-fact and agent, or
their substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement on Form F-4 has been signed by the following persons in
the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Tomas Milmo Santos Chief Executive Officer and Sole Director March 28, 2005
- ----------------------------------
Tomas Milmo Santos
/s/ Patricio Jimenez Barrera Chief Financial Officer March 28, 2005
- ----------------------------------
Patricio Jimenez Barrera
SIGNATURES OF INSTALACIONES Y CONTRATACIONES, S.A. de C.V.
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement on Form F-4 to be signed on its
behalf by the undersigned, thereunto duly authorized in Monterrey, Mexico on
March 28, 2005.
Instalaciones y Contrataciones, S.A. de C.V.
By: /s/ Patricio Jimenez Barrera
---------------------------------------
Name: Patricio Jimenez Barrera
Title: Chief Financial Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Tomas Milmo Santos and Patricio Jimenez Barrera,
his or her true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution for such person and in his or her name, place
and stead, in any and all capacities, to sign any and all amendments (including
post effective amendments) to this Registration Statement on Form F-4, and to
file the same with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent, full power and authority to do and perform each and
every act and thing requisite or necessary to be done in and about the premises,
as fully and to all intents and purposes as he or she might or could do in
person, hereby ratifying and confirming that said attorney-in-fact and agent, or
their substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement on Form F-4 has been signed by the following persons in
the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Tomas Milmo Santos Chief Executive Officer and Sole Director March 28, 2005
- ----------------------------------
Tomas Milmo Santos
/s/ Patricio Jimenez Barrera Chief Financial Officer March 28, 2005
- ----------------------------------
Patricio Jimenez Barrera
SIGNATURES OF SERVICIOS AXTEL, S.A. de C.V.
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement on Form F-4 to be signed on its
behalf by the undersigned, thereunto duly authorized in Monterrey, Mexico on
March 28, 2005.
Servicios Axtel, S.A. de C.V.
By: /s/ Patricio Jimenez Barrera
-------------------------------------
Name: Patricio Jimenez Barrera
Title: Chief Financial Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Tomas Milmo Santos and Patricio Jimenez Barrera,
his or her true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution for such person and in his or her name, place
and stead, in any and all capacities, to sign any and all amendments (including
post effective amendments) to this Registration Statement on Form F-4, and to
file the same with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent, full power and authority to do and perform each and
every act and thing requisite or necessary to be done in and about the premises,
as fully and to all intents and purposes as he or she might or could do in
person, hereby ratifying and confirming that said attorney-in-fact and agent, or
their substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement on Form F-4 has been signed by the following persons in
the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Tomas Milmo Santos Chief Executive Officer and Sole Director March 28, 2005
- ---------------------------------
Tomas Milmo Santos
/s/ Patricio Jimenez Barrera Chief Financial Officer March 28, 2005
- ---------------------------------
Patricio Jimenez Barrera
SIGNATURE OF AUTHORIZED REPRESENTATIVE
Pursuant to the requirements of the Securities Act of 1933, the
undersigned, the duly authorized representative in the United States of Axtel,
S.A. de C.V., has signed this Amendment to Registration Statement on Form F-4 in
the City of Newark, State of Delaware on March 28, 2005.
Signature Title
- --------- -----
/s/ Donald J. Puglisi Authorized Representative in the
- -------------------------
Donald J. Puglisi United States
Managing Director
Puglisi and Associates
EXHIBIT INDEX
DESCRIPTION
Exhibit Number Exhibit
-------------- -------
3.1 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).
4.1 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 $75,000,000 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).
4.2 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).
4.3 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).
* 4.4 Registration Rights Agreement, dated as of January 13, 2005
among Axtel, the Subsidiary Guarantors named therein and Credit
Suisse First Boston LLC.
* 5.1 Opinion of Cahill Gordon & Reindel LLP as to the validity of
the exchange notes under New York law.
* 5.2 Opinion of D&A Morales y Asociados, S.C. as to the validity
of the exchange notes under Mexican law.
9.1 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).
9.2 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).
10.1 Concession title granted by the Mexican Ministry of
Communications and Transportation (the "Ministry") in favor of
Axtel, 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).
10.2 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
herein by reference to Exhibit 10.2 of our Registration Statement
on Form F-4, File No. 333-114196).
10.3 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).
Exhibit Number Exhibit
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10.4 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).
10.5 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).
10.6 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).
10.7 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).
10.8 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).
10.9 Technical Assistance Support Services Agreement for FWA
Equipment, dated as of March 20, 2003, among Nortel Networks UK
Limited and Axtel (incorporated herein by reference to Exhibit
10.11 of our Registration Statement on Form F-4, File No.
333-114196).
10.10 FWA Technology License Agreement, dated as of March 20, 2003,
among Nortel Networks Limited and Axtel (incorporated herein by
reference to Exhibit 10.12 of our Registration Statement on Form
F-4, File No. 333-114196).
10.11 FWA Special Agreement, dated as of September 30, 2003, among
Nortel Networks UK Limited and Axtel (incorporated herein by
reference to Exhibit 10.13 of our Registration Statement on Form
F-4, File No. 333-114196).
*10.12 Purchase and License Agreement for FWA Equipment and the
Technical Assistance Support Services Agreement for FWA
Equipment, dated as of December 28, 2004, between Airspan
Communications Limited and Axtel (certain portions of this
Exhibit 10.12 have been omitted pursuant to a request for
confidential treatment.
Exhibit Number Exhibit
-------------- -------
*10.13 Amendment No. 3 to the Technical Assistance Support Services
Agreement for FWA Equipment, dated as of December 28, 2004,
between Airspan Communications Limited and Axtel (certain
portions of this Exhibit 10.13 have been omitted pusuant to a
request for confidential treatment).
*12.1 Statement regarding computation of ratio of earnings to
fixed charges (according to Mexican GAAP).
*12.2 Statement regarding computation of ratio of earnings to
fixed charges (according to U.S. GAAP).
21.1 List of Subsidiaries of Axtel (incorporated herein by reference
to Exhibit 21.1 of our Reg-
Exhibit Number Exhibit
-------------- -------
istration Statement on Form F-4, File No. 333-114196).
*23.1 Consent of Cahill Gordon & Reindel LLP (contained in Exhibit
5.1).
*23.2 Consent of D&A Morales y Asociados, S.C. (contained in
Exhibit 5.2).
*23.3 Consent of KPMG Cardenas Dosal, S.C., relating to the
audited financial statements of Axtel.
*24.1 Signed copies of the powers of attorney (included on the
signature pages of this Registration Statement).
*25.1 Form T-1 Statement of Eligibility and Qualification of The
Bank of New York with respect to the exchange notes.
*99.1 Form of Letter of Transmittal.
*99.2 Form of Notice of Guaranteed Delivery.
*99.3 Form of Instructions to Registered Holder and/or Book-Entry
Transfer Facility Participant from Beneficial Owner of Senior
Notes due 2013.
*99.4 Form of Exchange Agent Agreement.
* Filed herewith.