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United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark One)
/ / REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF
THE SECURITIES EXCHANGE ACT OF 1934
OR
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2004
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______.
Commission file number: 333-114196
Axtel, S.A. de C.V.
(Exact name of Registrant as specified in its charter)
Axtel
(Translation of Registrant's Name into English)
United Mexican States
(Jurisdiction of incorporation or organization)
Blvd. Gustavo Diaz Ordaz 3.33 No. L-1
Col. Unidad San Pedro
San Pedro Garza Garcia, N.L.
Mexico, CP 66215
(Address of principal executive offices)
_____________________________
Securities registered or to be registered pursuant to
Section 12(b) of the Act:
Title of each class Name of each exchange on which
registered
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None........................................ Not applicable
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Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
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(Title of Class)
Securities for which there is a reporting obligation pursuant
to Section 15(d) of the Act:
11% senior notes due 2013
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(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report: 2,533,706,866
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
Yes: [X] No: ____
Indicate by check mark which financial statement item the registrant has elected
to follow:
Item 17: ____ Item 18: [X]
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In this annual report, references to "$," "$US" or "Dollars" are to United
States Dollars and references to "Ps." or "Pesos" are to Mexican Pesos. This
annual report contains translations of certain Peso amounts into Dollars at
specified rates solely for the convenience of the reader. These translations
should not be construed as representations that the Peso amounts actually
represent such Dollar amounts or could be converted into Dollars at the rates
indicated or at any other rate.
Forward Looking Statements
This report on Form 20-F contains certain forward-looking statements within
the meaning of Section 27A of the United States Securities Act of 1933, as
amended, (the "Securities Act") and Section 21E of the United States Securities
Exchange Act of 1934, as amended (the "Exchange Act"). These forward-looking
statements reflect our views with respect to our financial performance and
future events. All forward-looking statements contained herein are inherently
uncertain. Actual results could differ materially from those projected in the
forward-looking statements as a result of factors discussed herein. Many of
these statements may be identified by the use of forward-looking words such as
"believe," "expect," "anticipate," "should," "planned," "estimated" and
"potential," among others. Readers are cautioned not to place reliance on these
forward-looking statements. The following factors, as well as other factors
described in this report, could cause actual results to differ materially from
such forward-looking statements:
o ability to attract subscribers;
o 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 Form 20-F.
Any forward-looking statements in this Form 20-F are based on certain
assumptions and analysis made by us in light of our experience and perception of
historical trends, current conditions, expected future developments and other
factors we believe are appropriate under the current circumstances.
Forward-looking statements are not a guarantee of future performance and actual
results or developments may differ materially from expectations. You
are therefore cautioned not to place undue reliance on such forward-looking
statements. While we continually review trends and uncertainties affecting our
results of operations and financial condition, we do not intend to update any
particular forward-looking statements contained in this document.
2
Part I
Item 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
Item 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
Item 3. KEY INFORMATION
A. Selected Financial Data
The following table provides our selected historical consolidated financial
data. The selected historical consolidated financial data for the years ended
December 31, 2002, 2003 and 2004 have been derived from our audited consolidated
financial statements included elsewhere in this Form 20-F.
The information presented below should be read in conjunction with "Item 5.
Operating and Financial Review and Prospects" and the consolidated financial
statements and related notes thereto included elsewhere in this Form 20-F.
Year Ended December 31,
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2000 2001 2002 2003 2004
------------ ----------- ----------- ------------ --------------
(Constant Ps. in millions as of December 31, 2004, except ratios
and margins)
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
Net income (loss) from operations per share... (7.1) (5.0) (7.0) 0.4 0.0
Net assets.................................... 4,761.2 6,116.6 5,713.8 5,532.8 6,055.0
Capital stock................................. 3,167.7 4,242.5 4,297.3 7,106.7 7,106.7
Shares outstanding............................ 110,057,790 122,610,235 122,610,235 2,533,706,866 2,533,706,866
Net income (loss) from operations............. (784.7) (616.7) (855.1) 946.5 (77.1)
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 (1,018.0) (785.7) (1,110.1) 1,466.9 73.3
employee profit.............................
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 period).... 3,252.3 1,669.3 596.3 485.3 1,532.6
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 N/A N/A N/A 10.4x 1.2x
GAAP(2).....................................
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
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3
As of
December 31,
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2000 2001 2002 2003 2004
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(Constant Ps. in millions as of December 31, 2004)
Balance Sheet Data:
Cash and cash equivalents...................... 154.4 141.3 344.9 1,068.4 554.4
Net working capital investment................. 69.7 143.6 (92.1) 56.5 (57.3)
Total assets................................... 7,436.1 8,508.6 8,526.7 8,574.1 8,637.9
Total debt..................................... 4,391.9 5,174.1 5,839.2 2,288.0 2,194.5
Total liabilities.............................. 5,120.7 5,768.5 6,589.1 2,897.6 3,038.9
Total shareholders' equity..................... 2,315.4 2,740.1 1,937.6 5,676.5 5,599.1
Data in Accordance with US GAAP(3):
Year Ended December 31,
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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
Income (loss) from continuing
operations ........................ (1,201.4) (643.9) (997.4) 2,889.6 73.3
Net income (loss).................... (1,201.4) (643.9) (997.4) 2,889.6 73.3
Net income (loss) from operations per (10.9) (5.3) (8.1) 1.1 0.0
share..............................
Net assets........................... 4,762.4 6,141.6 5,759.4 5,558.9 6,078.8
Capital stock........................ 3,167.7 4,242.5 4,297.3 5,756.0 5,756.0
Shares outstanding................... 110,057,790 122,610,235 122,610,235 2,533,706,866 2,533,706,866
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.
(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.
Exchange Rates
As of April 1, 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)
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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
4
The following table sets forth, for the periods indicated, 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
- ---------- ---------- -----------
October 2004......................... 11.54 11.24
November 2004........................ 11.53 11.24
December 2004........................ 11.33 11.11
January 2005......................... 11.41 11.17
February 2005........................ 11.21 11.04
March 2005........................... 11.33 10.98
____________________________
(1) Source: Federal Reserve Bank of New York
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
D. Risk Factors
Since we have a limited operating history you will not be able to fully evaluate
our historical performance.
We were founded in 1994. In June 1996, we were awarded by the Mexican
government a concession to install and operate a public telecommunications
network for the offering of local and long distance telephony services in
Mexico. We commenced commercial 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 have a history of substantial losses and expect to incur future losses.
Since our inception in 1994, we have incurred a cumulative net loss of Ps.
1,766.5 million. Except for 2003, when we restructured our Nortel debt, we have
incurred losses in each year since our inception. We incurred a net loss of
Ps.855.1 million during 2002, a net profit of Ps.946.5 million during 2003 and a
net loss of Ps.77.1 during 2004. We anticipate that we could incur net losses
for at least the next several quarters.
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.
5
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 the 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 Item 7. "Major Shareholders and
Related Party Transactions."
If we do not successfully maintain, upgrade and efficiently operate accounting,
billing, customer service and management information systems, we may not be able
to maintain and improve our operating efficiencies.
Sophisticated information and processing systems are vital to our
operations and growth and our ability to monitor costs, render monthly invoices
for services, process customer orders, provide customer service and achieve
operating efficiencies. We have installed the accounting, information and
processing systems that we deem necessary to provide services efficiently.
However, there can be no assurance that we will be able to successfully operate
and upgrade such systems or that they will continue to perform as expected. Any
failure 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
6
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;
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.
Under Mexican law, our concessions could be expropriated or temporarily seized.
In accordance with the Federal Telecommunications Law, public
telecommunications networks are considered part of the public domain. As
provided in such law, the holders of concessions to install, operate or develop
a public telecommunications network are subject to the terms and conditions
imposed by the Federal Telecommunications Law and those included in the
concession agreement itself. Among other limitations, the Federal
Telecommunications Law provides that:
o the rights and obligations granted by the concessions to install,
operate and develop a public telecommunications network can only be
assigned, in whole or in party, with the prior authorization of the
SCT;
o our concession, nor the rights granted therein or the assets related
thereto, cannot be assigned, encumbered, pledged, mortgaged, or sold
to a foreign country or government; and
o the Mexican government, through the SCT, may expropriate or
temporarily seize all assets related to any of our concessions in the
event of natural disaster, war, significant public disturbance or
threats to internal peace and for other reasons of economic or public
order.
Mexican law provides for compensation in connection with direct losses and
damages related to expropriation or temporary seizure, except in the case of
war. However, there can be no assurance that we will receive compensation
equivalent to the value of our investment in our concessions and related assets
in the event of such action
7
or whether such compensation will be received in a timely manner. Mexican law
does not prevent us from granting liens to creditors (other than foreign
countries or governments) relating to our concessions and their related assets
as long as we comply with certain procedural laws; however, in the event that
such liens are enforced, any applicable assignee must comply with the
requirements that the Federal Telecommunications Law establishes in relation to
assignees of concessions including, among others, the requirement to receive the
authorization of the SCT.
We operate in a highly competitive environment, which may negatively affect our
operating margins.
The telecommunications industry in Mexico is becoming more competitive.
Over the past two years, prices for local and long distance calls in Mexico
declined by approximately 13% and 20% in real terms, respectively. We expect the
Mexican telecommunications market to continue to experience rate pressure,
primarily as a result of:
o increased competition and focus by our competitors on increasing
market share;
o recent technological advances that permit substantial increases in the
transmission capacity of both new and existing fiber-optic networks,
resulting in long distance overcapacity and rate pressure; and
o the entrance of cable television operators into certain of our
markets.
As the telecommunications industry in Mexico becomes more competitive, we
will face significant competition from other operators primarily on the basis of
features, pricing and customer service. Some of these competitors include
Telmex, Avantel, Alestra, Maxcom and others, as well as established cable
television operators who may expand their services into certain of our markets,
such as long distance voice and data service. As they become licensed, resellers
of telephony services will also offer competition in many of our targeted
markets.
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 Federal
Telecommunications Law (Ley Federal de Telecomunicaciones) enacted in 1995,
referred to herein as the Mexican Telecommunications Law, and Telmex's
concessions, Telmex may subsidize its long distance services with revenues
obtained from its local services and as a result may be able to price its
services at rates that are not profitable for us. We will face significant
competition from Telmex in all the areas where we currently operate.
We depend on revenues from certain highly competitive segments.
High-volume business customers are one of the most attractive niches in the
market. This segment is being addressed by a number of carriers that offer
competitive telecommunications services solutions in order to gain these
accounts. Losing some of these customers could represent a significant loss of
income and lower operating income.
We may need additional financing.
We may require additional financing in the future to service our
indebtedness, including our 11% Senior Notes due 2013 ("2013 Senior Notes"), and
fund our operations. We cannot assure you that we will have sufficient resources
and that, if needed, any financing will be available in the future or on terms
acceptable to us. In addition, our ability to incur additional indebtedness will
be restricted by the terms of the 2013 Senior Notes or other covenants from
other financial agreements currently in place or into which we may enter in the
future.
The technology we use may be made obsolete by the technology used by our
competitors.
All companies in the global telecommunications industry must adapt to rapid
and significant changes in technology. While we have been installing since
inception what we believe to be a technologically advanced fixed wireless
system, as well as a fiber optic network, point-to-multipoint, point-to-point
and copper infrastructure, we cannot assure you that these technologies will not
be challenged by competition. We have relied heavily on the continued
performance of wireless technology. Technological changes or advances in
alternative technologies may
8
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. 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 2013 Senior
Notes and no action is required at the Board of Directors level. See Item 4.B.
"Business Overview --Legal Proceedings--Shareholdings Disputes."
We operate in a highly regulated industry.
As a provider of public services, we are subject to extensive regulation.
Although the basic regulatory framework governing telecommunications has been in
existence since 1995, it may undergo changes from time to time, which may
materially and adversely affect our business, operations, financial condition
and prospects.
If the Mexican government grants more concessions or amends existing
concessions, the value of our concessions could be severely impaired.
The Mexican government regulates the telecommunications industry. Our
concessions are not exclusive and the Mexican government has granted and may
grant additional concessions covering the same geographic regions. We cannot
assure you that additional concessions to provide services similar to those we
provide will not be granted and that the value of our concessions and
competition levels will not be adversely affected as a result.
9
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.
Economic developments in Mexico affect our business.
We are a Mexican company with all of our operations in Mexico. The economic
environment within Mexico can have a significant impact on our business and
financial condition and results of operations and our ability to meet our
obligations under the 2013 Senior Notes.
Beginning in December 1994 and continuing through 1995, Mexico experienced
an economic crisis characterized by a sharp devaluation of the peso, high
inflation, foreign currency exchange rate instability, high domestic interest
rates, a strong contraction in consumer demand for many products and services,
reduced availability of credit, high unemployment and diminished international
investor confidence in Mexico. Mexico's gross domestic product, which grew at a
real annual rate of 3.5% during 1994, declined by 6.2% in real terms during
1995.
In response to these developments, beginning in February 1995, the Mexican
government implemented a variety of economic programs designed to promote
economic recovery, stabilize foreign currency exchange rates and reduce
inflation. Economic conditions in Mexico improved moderately in 1996 and 1997.
However, a combination of factors led to a slowdown in Mexico's economic growth
in 1998. Notably, the decline in the international price of oil resulted in a
reduction of federal revenues, approximately one-third of which are derived from
petroleum taxes and duties. In addition, the economic crises in Asia and Russia,
as well as the financial turmoil in Brazil, Venezuela and elsewhere, produced
greater volatility in the international financial markets, which further slowed
Mexico's economic growth. In 1998, the inflation rate in Mexico was 18.6%,
interest rates on 28-day Certificados de la Tesoreria de la Federacion ("CETES")
averaged 24.8% and the peso lost 22.7% of its value (in nominal terms) relative
to the US dollar.
During 1999, conditions improved with inflation in Mexico at 12.3%,
interest rates on 28-day CETES averaging 21.4% and the peso appreciating 4.2% in
value (in nominal terms) relative to the US dollar. Throughout 2000, the
improvement shown in 1999 continued. In 2000, the inflation rate was 9.0%,
interest rates on 28-day CETES averaged 15.2% and the peso devalued 1.5% in
value (in nominal terms) relative to the US dollar. The Mexican government
estimated that Mexico's real gross domestic product grew by 5.0% in 1998, 3.6%
in 1999 and 6.6% in 2000.
Beginning in January 2001, however, and increasing in the fourth quarter of
2001, amid concerns of a global economic slowdown and a recession in the United
States, Mexico began to experience an economic slowdown marked by a decline in
gross domestic product. In 2001, Mexico's gross domestic product shrank by 0.2%
in real terms while the inflation rate was 4.4%, interest rates on 28-day CETES
averaged 11.3% and the peso appreciated 4.8% in value (in nominal terms)
relative to the US dollar. During 2002, as the United States and global economic
slowdown continued, the Mexican real gross domestic product growth rate was
0.7%, the inflation rate was
10
5.7%, interest rates on 28-day CETES averaged 7.1% 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.
High interest rates in Mexico could increase our financing costs.
Mexico historically has had high real and nominal interest rates. The
interest rates on 28-day Mexican government treasury securities, CETES, averaged
21.4%, 15.2% and 11.3% for 1999, 2000 and 2001, respectively. Although rates for
2002, 2003 and 2004 have lowered to 7.1%, 6.2% and 6.8%, respectively, we cannot
assure you that interest rates will remain at their current rates. Thus, we may
be forced to incur Mexican peso-denominated debt in the future at interest rates
higher than the current rates.
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
11
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-denominated
obligations, including the 2013 Senior Notes. In addition, any further
devaluation of the peso may negatively affect the value of Mexican securities
such as the 2013 Senior Notes.
Our financial statements do not give you the same information as financial
statements prepared under United States accounting principles.
We prepare our financial statements in accordance with Mexican GAAP. These
principles differ in significant respects from US GAAP, including the treatment
of the capitalization of pre-operating expenses, the capitalization of interest
and deferred income taxes and employees' profit sharing, and in the presentation
of cash flow information. In particular, all Mexican companies must incorporate
the effects of inflation directly in their accounting records and in published
financial statements. The effects of inflation accounting under Mexican GAAP are
not eliminated in the reconciliation of US GAAP. For this and other reasons, the
presentation of Mexican financial statements and reported earnings may differ
from that of companies in other countries. See Note 24 to the audited
consolidated financial statements.
Item 4. INFORMATION ON THE COMPANY
A. History and Development of the Company
Axtel, S.A. de C.V. was founded in 1994. We are a variable capital
corporation (sociedades anonimas de capital variable) organized under the laws
of Mexico. In June 1996, we were awarded by the Mexican government a concession
to install and operate a public telecommunications network for the offering of
local and long distance telephony services in Mexico. In 1998 and 1999, we won
several spectrum auctions, including for 60 MHz at 10.5 GHz for
point-to-multipoint access, for 112 MHz at 15 GHz for point-to-point backhaul
access, for 100 MHz at 23 GHz for point-to-point last mile access and for 50 MHz
at 3.4 GHz for fixed wireless access, which together allow us to service the
entire territory of Mexico. In June 1999, we launched commercial operations in
the city of Monterrey. Our network currently reaches 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. Due to our concentration of network facilities in business centers and
upper income residential areas, we estimate that our current network coverage
represents a significant portion of the total Mexican telephony and data
telecommunications revenue opportunity. For a description of our principal
capital expenditures, see Item 5. "Liquidity and Capital Resources."
Our corporate offices are located at Blvd. Gustavo Diaz Ordaz km. 3.33 No.
L-1, Col. Unidad San Pedro, San Pedro Garza Garcia, N.L., Mexico, CP 66215
(Telephone +52 (81) 8114-0000).
Our agent for service in the United States is CT Corporation System,
located at CT 111 Eighth Avenue, 13th Floor, New York, New York 10011.
B. Business Overview
Our Company
We believe we are a leading telecommunications services provider in Mexico,
offering a wide array of services, including local and long distance telephony,
data and internet to business and residential customers. We believe that we are
one of the largest and fastest growing integrated telecommunications companies
in Mexico, with 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 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 net-
12
work 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 fixed wireless
access sites, 88 point-to-multipoint sites (of which 83 are within fixed
wireless access 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 estimate that our total lines represent
approximately 9% of our total addressable market.
Competitive Strengths
Leading Market Position. By being one of the first competitive providers to
approach customers with bundled local, long distance voice and data services, we
believe we are able to meet pent-up demand for an alternative service provider,
as well as establishing brand awareness and customer relationships prior to
market entry by emerging competitors. We have benefited from our
first-competitor-to-market advantage by capturing 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.
Flexible, Technologically Advanced, Reliable Digital Network. Our hybrid
fixed wireless and wireline local access network structure allows us to enter
new markets quickly and cost-effectively. As a result, our return on our
investment in network infrastructure is increased. By utilizing the FWA
technology model, we are able to quickly cover a substantial geographic area
with minimal initial capital expenditures. We do not incur incremental capital
expenditures for last-mile connectivity until the customer subscribes to our
service. As of December 31, 2004, our network consisted of 12 digital switches,
265 fixed wireless access sites, 88 point-to-multipoint sites (of which 83 are
within fixed wireless access 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 over 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.
13
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.
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 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 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
14
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%
As of December 31, 2004 we offered the following products and services:
Products and Services
Voice Data
- ----- ----
o Business and Residential Line o Local and Domestic Private Lines
o Long Distance o High Speed Private Lines
o Digital Trunks o Co-location
o Voicemail o Virtual Private Network -- MPLS
o Centrex Line
o Customer Premise Equipment - Internet
o Telephone Sets, Key Systems and PBX o Dial Up Internet
o Call Waiting, Call Forwarding, Caller ID, o Dedicated Internet
Conference Call o Web Hosting
o Directory Assistance o Internet on Demand
o Operator Services o Internet FWA
o Automatic Dialing o Co-location
o Unique Number
o Prepaid Services Bundles
o Collect Calls o Axtel in a Box
o Virtual Line o Axtel NeXt
o Toll Free Services
15
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 Monterrey 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% 177,622 10.8% 453,519 9.1%
=========== =========== ========== ============ ======== ========
16
____________________________
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.
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 De-
17
cember 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 (2) 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
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) Uses Remote Switch.
(2) 83 of the Point-To-Multipoint Sites are within the Fixed Wireless Access
Sites.
In order to deliver superior network reliability, we have acquired advanced
network technology and initially contracted network construction on a turn-key
basis from proven 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
18
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.
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
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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 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.
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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.
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
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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,
Novcel, 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 through Telmex. As of December 31, 2004, the
interconnection fee we receive from long distance carriers was US$0.00975 per
minute.
In our long distance operation, we have established agreements with local
networks such as Maxcom, Telmex and Telnor. In addition to the interconnection
rate described above, we may pay extra charges for our local interconnection
with Telmex and Telnor.
International settlement
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
inter-
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net 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:
o convenience stores;
o banks;
o Axtel MAPs (Axtel's Sales and Collection 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.
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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 Item 3.D. "Risk Factors--We depend on
Telmex for interconnection and we may be forced to pay higher interconnection
fees in the futures, which could have a material adverse effect on our business
and results of operations."
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.
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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 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:
25
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 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
26
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.
Government Regulations
General
The telecommunications industry in Mexico is subject to the Federal
Telecommunications Law (Ley Federal de Telecomunicaciones), which was enacted in
1995, and its regulations. In addition, certain rules under the General Means of
Communications Law (Ley de 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;
27
o the required capital expenditure program;
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;
28
o resignation by the concession holder or the permit holder;
o revocation prior to the end of its term under certain circumstances,
such as:
o dissolution or bankruptcy of the concession holder or the
permitholder;
o failure to exercise the rights of the concession within 180 days of
its granting;
o failure to provide interconnection services with other holders of
telecommunications concessions and permits without just cause;
o loss of the concession or permit holder's Mexican nationality;
o unauthorized assignment, transfer or encumbrance of the concession or
permit;
o unauthorized interruption of service;
o taking any action that impairs the rights of other concessionaires or
permit holders;
o failure to comply with the obligations or conditions specified in the
concession or permit; and
o failure to pay the Mexican government its fee for the concession or,
where applicable, its participation in the revenues of the holder of
the concession.
The SCT may revoke a concession for violations in any of the circumstances
referred to in the first four instances above. Under the last four instances
above, the SCT would have to fine the concessionaire at least three times for
the same failure before moving to revoke a concession.
Expropriation
The Mexican government has the statutory right to permanently expropriate
any telecommunications concession and claim any related assets for reasons of
public interest. Under Mexican law, the Mexican government is obligated to
compensate the owner of such assets in the case of a statutory expropriation.
The amount of the compensation is to be determined by 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
29
basis. Interconnection rates also required SCT approval. Rates for private
dedicated circuit services through microwave networks and private networks
through satellites were not regulated before the Federal Telecommunications Law
was enacted.
Under the Federal Telecommunications Law, rates for telecommunications
services (including local, cellular and long distance telephony services) are
now freely determined by the providers of such services, except that such rates
may not be set below a service provider's long-term incremental cost.
In addition, COFETEL is authorized to impose specific rate, quality and
service requirements on those companies determined by the Federal Antitrust
Commission (Comision Federal de Competencia) to have substantial market power
pursuant to the provisions of Mexico's antitrust statute. All rates for
telecommunications services (other than value-added services) must be registered
with COFETEL prior to becoming effective. The Federal Telecommunications Law
prohibits telecommunications providers from cross-subsidizing among their
services and requires that they keep separate accounting for each of their
services.
The Mexican Antitrust Commission has found that Telmex has substantial
power in the following five markets: interconnection, local services, domestic
long distance services, international long distance services and long distance
resale, as defined under Mexico's antitrust statute. Based on this finding,
COFETEL issued a resolution in September 2000 regulating Telmex as a dominant
carrier and imposing special obligations regarding, among other things, quality
of services, tariffs and information disclosure. However, Telmex has obtained an
injunction against any potential action by COFETEL for the purpose of
implementing such resolution. As a result of this injunction, Telmex is not
currently subject to the specific obligations covered by COFETEL's resolution.
C. Organizational Structure
Our major investors are Telinor Telefonia, S. de R.L. de C.V. ("Telinor"),
a company formed in 1994 by a group of Monterrey businessmen including Tomas
Milmo Santos, Tomas Milmo Zambrano, Lorenzo Zambrano Trevino and Alberto Santos
de Hoyos; LAIF X sprl, an affiliate of AIG-GE Capital Latin American
Infrastructure Fund L.P.; and The Blackstone Group, a New York-based investment
group. Telinor holds 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 us. Some of our other direct investors include
Tapazeca sprl (an affiliate of The Soros Group), New Hampshire Insurance Company
(an affiliate of American International Group, or AIG) and Nortel Networks
Limited.
The following table sets forth our significant subsidiaries as of the date
of this annual report:
Jurisdiction of Percentage
Name of Company Incorporation Owned
--------------- --------------- ----------
Impulsora e Inmobiliaria Regional, S.A. de C.V. Mexico 99.998%
Instalaciones y Contrataciones, S.A. de C.V. Mexico 99.998%
Servicios Axtel, S.A. de C.V. Mexico 99.998%
D. Property, Plants and Equipment
All of our properties are located in Mexico. Our corporate headquarters are
located in Monterrey, Mexico. Our Monterrey office consists of 39,779 square
meters, and the lease on this property expires in 2015. We also own eight
buildings throughout the 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.
Item 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion should be read in conjunction with our financial
statements and the notes thereto included elsewhere in this Form 20-F. The
following discussion includes certain forward-looking statements. For a
discus-
30
sion of important factors, including the continuing development of our business,
actions of regulatory authorities and competitors and other factors which could
cause actual results to differ materially from the results referred to in the
forward-looking statements, see Item 3.D. "Risk Factors."
Overview
We provide bundled local and long distance voice services, as well as data
and internet services. Our integrated service offering enables us to maximize
the recurring revenue received from each customer, increasing the return
achieved on our investment in infrastructure, 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
------------------------------ -------------------------------- ---------------------------------
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 Expenses(1) (498.3)(505.0) (491.2) (482.6) (483.1) (511.4) (515.1) (543.4) (585.6) (610.5) (671.3) (740.4)
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 and Access Lines is unaudited.
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:
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%
============ =========== =========== =========== ======== ======== ======== ======
31
______________________
(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
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 initial issuance of the 2013 Senior
Notes.
As part of the Nortel debt repurchase transaction, we renegotiated our
supply arrangements with Nortel, and entered into five agreements: three
agreements relating to the provision of fixed wireless access equipment, and two
agreements relating to the provision of non-fixed wireless access equipment.
Under such agreements, we assumed certain purchase obligations, including: (i)
the obligation to purchase not less than 25,000 RSS units (customer premise
equipment) in year 2003; 20,000 customer premise equipment 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
32
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$1.2 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 initial issuance of the 2013 Senior Notes.
Finally, in connection with the foregoing transactions, on February 28,
2003 we issued a capital call to our existing shareholders for the subscription
and payment of shares representing additional capital of US$60.0 million.
Certain of our shareholders assigned their subscription rights with respect to
such shares to some of their shareholders or members. As a result, the number of
our shareholders increased from 3 to 11. However, each of our new shareholders
is an indirect shareholder of ours through their equity interest in the
respective holding companies of Telinor and Worldtel, that own our stock. As is
required under Mexican law, Mexican shareholders continue to own more than 51%
of our voting stock.
Year Over Year Comparisons
Year Ended December 31, 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, we expanded our coverage to six new cities as a
result of which, combined with new and innovative commercial offers, we were
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 in our
network, increase in international traffic through our international gateway and
more subscription of our value added services.
33
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 more stringent collection
policies.
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 us 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.
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-
34
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 2013 Senior 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. We will continue to focus on investments in fixed assets and
working capital management, including the collection of accounts receivable and
management of accounts payable. Net cash provided by operating activities was
Ps. 1,183.0 million, Ps. 168.4 million and Ps. (12.2) million for the years
ended December 31, 2004, 2003 and 2002, respectively.
35
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 network and
facilities.
Market risks
Our primary foreign currency exposure relates to our US dollar-denominated
debt. Most of our debt obligations at December 31, 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$6.2 million. This transaction will
cease in December 2008. In certain events we will have to transfer collateral to
the swap counterparty to protect it from exposure to us arising from the swap
transaction.
Prior to entering into foreign currency hedging contracts, we evaluate the
counterparties' credit ratings. Credit risk represents the accounting loss that
would be recognized at the reporting date if counterparties failed to perform as
contracted. We do not currently anticipate non-performance by such
counterparties.
The exchange rate of the peso to the US dollar is a freely floating rate
and the peso has experienced significant devaluations in previous years. Any
significant decrease in the value of the peso relative to the US dollar in the
near term may have a material adverse effect on our results of operations and
financial condition, including our ability to repay or repurchase the notes.
Capitalization of preoperating expenses
We commenced commercial operations in June 1999. As permitted under Mexican
GAAP, during our preoperating stage we were able to capitalize all of our
general and administrative expenses and our net comprehensive cost of financing.
Beginning in June 1999, we are required to amortize all previously
capitalized general and administrative expenses and to depreciate all previously
capitalized net comprehensive cost of financing. These capitalized preoperating
expenses are amortized on a straight-line basis for a period not exceeding ten
years.
Summary of contractual obligations
The following table discloses aggregate information about our contractual
obligations and the periods in which payments are due.
Less than More than 5
Total 1 year 1-3 years 3-5 years years
--------- ------------ --------- --------- -----------
pro forma, payments due by period
(US$ in millions)
Debt maturing within one year.......... 14.9 14.9 -- -- --
Long-term debt......................... 254.7 -- 4.7 -- 250.0
36
Less than More than 5
Total 1 year 1-3 years 3-5 years years
--------- ------------ --------- --------- -----------
pro forma, payments due by period
(US$ in millions)
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 21.7 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 Securities
and Exchange Commission does not require the restatement of financial statements
to reconcile the effects of the Mexican GAAP inflation accounting.
Preoperating expenses. Under Mexican GAAP, all expenses incurred while a
company is in the preoperating or development stages are deferred and considered
as a component of a company's assets. Such capitalized expenses are amortized on
a straight-line basis for a period not exceeding 10 years after the
corresponding asset commences operations. According to US GAAP, such
preoperating or development expenses are expensed and reported as a deficit to
shareholders' equity recorded during the developing stage.
Deferred income tax and employees statutory profit sharing. Under Mexican
GAAP deferred income tax is accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit (TA) carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. Deferred income tax and employees statutory profit sharing is
recognized only for timing differences arising from the reconciliation of book
income to income for profit sharing purposes, on which it may reasonably be
estimated that a future liability or benefit will arise and there is no
indication that the liabilities or benefits will not materialize. Under US GAAP,
deferred income tax and employees statutory profit sharing are determined under
the asset and liability method recognizing the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss carryforwards.
Statement of changes in financial position. In accordance with Mexican
GAAP, we present statements of changes in financial position in constant pesos.
This presentation 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 expenses when earned.
37
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 Item 3.D. "Risk Factors--We may lose money because of peso
devaluation."
38
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 us 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 us 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 Form 20-F, 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-
39
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 Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB
101). This bulletin summarizes the point of view of the Securities and Exchange
Commission in the recognition of revenues in the financial statements according
to US GAAP. The Securities and Exchange Commission concluded that only when all
the following conditions are met is revenue recognition appropriate:
(a) there is persuasive evidence of an agreement;
(b) the delivery was made or the services rendered;
(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
40
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 2004, 2003 and 2002 to Ps. 896.7 million, 814.8 million and
763.4 million., which amounts represent 25%, 28% and 27% or our operating costs
and expenses respectively.
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.
Item 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and Senior 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..................... 39 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).......................... 49 Series C Director
Lawrence H. Guffey(1).................. 36 Series C Director
Gabriel Montana(1)...................... 34 Series C Alternate Director(2)
Patricio D'Apice(1)..................... 34 Series C Alternate Director(2)
Benjamin Jenkins(1)..................... 33 Series C Alternate Director(2)
41
_________________________
(1) See Item 4.B. "Business Overview--Legal Proceedings--Shareholdings
Disputes."
(2) The role of the Alternative Director is to perform the role of the primary
Director if the primary Director is not in attendance.
Set forth below is a brief description of our directors and executive
officers:
Tomas Milmo Santos has held the position of Chief Executive Officer of
Axtel since 1994 and Series A Director since October 1997. Mr. Milmo was also
appointed Chairman of the Board of Directors in October 2003. Prior to joining
Axtel, Mr. Milmo worked at Carbonifera de San Patricio, S.A. de C.V., a
medium-sized mining company in Mexico. In 1988 he was named CEO of that same
company, holding this post until 1990, when he founded and became CEO of Milmar,
S.A. de C.V., a housing development company that developed and sold over 10,000
homes between 1990 and 1993. He is a member of the Board of Directors of Telinor
Telefonia, S. de R.L. de C.V., Cemex, S.A. de C.V. and Universidad de Monterrey.
Mr. Milmo holds a degree in Business Economics from Stanford University.
Patricio Jimenez Barrera has held the position of Chief Financial Officer
of Axtel since January 1998. Prior to joining Axtel, Mr. Jimenez held a variety
of finance-related positions, including an investment banker while at
Invermexico Casa de Bolsa, a corporate treasurer while at Grupo Cydsa, S.A. and
an investment banker, international treasurer, financing and correspondent
banker while at Banca Serfin, S.A. (Mexico's third largest bank). Immediately
prior to joining Axtel, Mr. Jimenez was responsible for the International
Division at Banca Serfin, S.A. He is a member of the board of Seguros Banorte
Generali and Pensiones Banorte Generali. Mr. Jimenez is a CPA and holds a degree
from the Instituto Tecnologico y de Estudios Superiores de Monterrey.
Andres Velazquez Romero has held the position of 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.
42
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 Museo de Arte Contemporaneo and the US-Mexico
Commission for Educational and Cultural Exchange. Mr. Zambrano holds a B.S.
degree in Mechanical Engineering from the Tecnologico de Monterrey and an M.B.A.
from Stanford University.
Alberto Garza Santos has been a Series A Director of Axtel since October
2003. Mr. Garza is the founder and Chairman of the Board of Promotora del
Viento, S.A de C.V., a company dedicated to wind power in Mexico. He is also
founder and Chairman of the Board of Promotora Ambiental, S.A. de C.V. (PASA), a
leading waste management company in Mexico. Mr. Garza has engineered PASA's
growth through multiple acquisitions, local unit start-ups, municipal
concessions and the development of world-class landfills, including Mexico's
first five privately owned landfills. In 2002, he positioned PASA as PEMEX's
waste services provider of choice, winning various large, multiyear contracts.
Mr. Garza is also a member of the Board of Maquinaria Diesel (MADISA),
Desarrollo Inmobiliario Delta and Gemini. He holds a degree in Business
Administration from the Instituto Tecnologico y de Estudios Superiores de
Monterrey and a B.A. degree in Political Science from Southern Methodist
University.
Hector Medina Aguiar has been a Series A Director of Axtel since October
2003. Mr. Medina is the Executive Vice-President of Planning and Finance of
Cemex, S.A. de C.V. and responsible for worldwide strategic planning and
finance. Mr. Medina is a graduate of the Instituto Tecnologico y de Estudios
Superior de Monterrey with a degree in Chemical Engineering. He also holds an
M.S.C. degree in Management from the University of Bradford Management Center in
England and an M.S. degree from the Escuela de Organizacion Industrial in Spain.
Everett J. Santos has been a Series C Director of Axtel since October 2003
and had previously held the position of Series C Director from October 1997 to
December 1998. Mr. Santos is the Chief Executive Officer of the Latin America
Group of Emerging Markets Partnership and principal advisor of the AIG-GE
Capital Latin American Infrastructure Fund. Mr. Santos is also the Co-Founder
and Chairman of the Latin American Venture Capital Association (LAVCA). From
1992 to 1995, Mr. Santos was director of infrastructure investments of the
International Finance Corporation (IFC) of the World Bank Group. While at the
World Bank, he was also a director for Latin America and the Caribbean for the
IFC. Prior to joining the World Bank Group, Mr. Santos was a capital markets
consultant with the US Agency for International Development in Brazil and with
the Venezuelan National Securities Commission, and he also has worked with the
Securities and Exchange Commission.
Bertrand F. Guillot has been a Series C Director of Axtel since October
2003. Mr. Guillot is the director of the Private Equity Latin America Group of
AIG Global Investment Corp. He is also co-founder of WestNord, an investment
bank boutique specializing in debt and equity raising for projects and mergers
and acquisitions. Previously, he was the Director, Media & Telecom Project
Finance Head, Senior Vice President and Relationship Management Head of ANZ
Investment Bank. He was also the vice-president of the Telecom Unit Head within
the Project Finance Group of Citibank N.A. He has been directly involved in
private equity and project finance in emerg-
43
ing 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 Advisors. Since joining Blackstone in
1991, Mr. Guffey has been involved in the execution of Blackstone's investments
in Axtel, Bresnan Communications, Centennial Communications Corp., Crowley
Wireless (Salmon PCS), CommNet Cellular, CTI Holdings, Encoda Systems (a
LiveWire Media company), iPCS, Iusacell, LiveWire, PaeTec, TWFanch-one,
TWFanch-two, Universo Online and US Radio. Before joining Blackstone, Mr. Guffey
worked in the Acquisitions Group at Trammell Crow Ventures, the principal
investment arm of Trammell Crow Company. He currently serves as a director of
Centennial Communications, Encoda Systems, Orcom and FiberNet. Mr. Guffey holds
a degree from Rice University.
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.
44
Tomas Milmo Zambrano is the father of Tomas Milmo Santos and cousin of
Lorenzo Zambrano. Alberto Santos is the uncle of Tomas Milmo Santos and of
Alberto Garza Santos.
B. Compensation
For the year ended December 31, 2004, the aggregate compensation, including
benefits, we paid to our directors, alternate directors and executive officers
for services in all capacities was approximately $2.8 million.
In 2004, we and our subsidiaries incurred no costs to provide pension,
retirement or similar benefits to our respective officers and directors pursuant
to retirement plans or pension plans.
C. Board Practices
See "Item 6A. Directors and Senior Management" above. None of the directors
of Axtel have any type of arrangement with Axtel whereby such director would
receive benefits upon termination of employment.
Audit Committee
We have established an audit committee and a remuneration committee. The
audit committee recommends the appointment of auditors, oversees accounting and
audit functions and other key financial matters of our company. Everett Santos,
Lawrence Guffey, Hector Medina and Alberto Garza are the members of the audit
committee. The remuneration committee recommends compensation for the executive
officers to board of directors. Lorenzo Zambrano, Alberto Garza, Alberto Santos,
Bertrand Guillot, Everett Santos and Lawrence Guffey are the members of the
remuneration committee.
D. Employees
For the years ended December 31, 2002, 2003 and 2004, we had 2,125, 2,119
and 2,566 employees, respectively. All of our employees, except our executive
officers and certain other managers, are members of one of two labor unions. We
believe we have good relationships with our employees and their respective
unions.
E. Share Ownership
Information on the ownership of our Share Ownership is given under "Item 7.
Major Shareholders and Related Party Transactions."
Item 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholders
Mexican law limits foreign ownership of those companies, like ours, owning
certain telecommunications concessions to 49% of the voting stock of such
companies. The following table sets forth each owner of 5% or more of our voting
stock:
45
Number of Number of
Series A Series C Total
Shares Shares Percent of Percent
Beneficially Beneficially Outstanding of Voting
Shareholders Owned Owned Shares(1) Shares
- --------------------------------------- ------------ ------------ ------------ ---------
(millions of shares) (%)
Telinor Telefonia, S. de R.L. de
C.V.(2)(3)....................... 1,253.2 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 Item 4.B. "Business Overview--Legal Proceedings--Shareholdings
Disputes."
(7) Also owns 4.5 million "N" shares. The business address for Tapazeca Sprl is
Avenue Louise 331-333 B-1050, Brussels, Belgium.
(8) Includes shares attributable to Telinor because of the directorships of
Tomas Milmo Santos, Alberto Santos de Hoyos, Tomas Milmo Zambrano and
Lorenzo Zambrano Trevino and includes shares attributable to Blackstone
because of the directorship of Lawrence H. Guffey.
B. Related Party Transactions
Shareholders Agreement
On October 6, 1997, we and our initial shareholders Telinor Telefonia, S.
de R.L. de C.V., Bell Canada International (Mexico Telecom) Limited and Worldtel
Mexico Telecom Ltd (the "Initial Shareholders") entered into a shareholders
agreement (the "Shareholders Agreement"). Soon after, Bell Canada International
Inc. also agreed to be bound by such Shareholders Agreement. 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.
46
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.
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.
47
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$9.1
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 fiscal year ended December 31, 2004 and
through April 19, 2005, we paid GE Capital approximately US$2.0
million in rental payments under these leases.
o In March and May 2000, we and Gemini, S.A. de C.V. (a company
controlled by one of the investors in one of our shareholders) entered
into lease agreements for the lease of land and property on which our
corporate offices and a switch are located. During the fiscal year
ended December 31, 2004 and through April 19, 2005, we paid Gemini
approximately US$2.7 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 and through April 19, 2005, there
were no payments made to Neoris.
o In April 2002, we and Instalaciones y Desconexiones Especializadas,
S.A. de C.V. (a company controlled by the son of Alberto Santos de
Hoyos, one of the investors in one of our shareholders) entered into a
services agreement for the provision of installation services with
regard to customer premise equipment. During the fiscal year ended
December 31, 2004 and through April 19, 2005, we paid them
approximately US$0.6 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 and through April 19, 2005, there were no payments made to
Blackstone under this agreement.
C. Interests of Experts and Counsel
Not applicable.
Item 8. FINANCIAL INFORMATION
A. Consolidated Statements and Other Financial Information
See "Item 18. Financial Statements."
B. During January 2005 we issued an additional US$75 million of our 11%
Senior Notes due 2013.
Not applicable.
48
Item 9. THE OFFER AND LISTING
A. Offer and Listing Details
Not applicable.
B. Plan of Distribution
Not applicable.
C. Markets
Not applicable.
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
Item 10. ADDITIONAL INFORMATION
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
Bylaws
Below is a brief summary of certain significant provisions of our bylaws
and applicable Mexican law. This description does not purport to be complete and
is qualified in its entirety by reference to our bylaws and the provisions of
applicable Mexican law. For a description of the provisions of our bylaws
relating to the board of directors, executive committee and statutory auditors,
See "Item 6. Directors, Senior Management and Employees."
Organization and Register
We are a sociedad anonima de capital variable organized under the laws of
Mexico. We were incorporated in 1994 under the name Telefonia Inalambrica del
Norte, S.A. de C.V., as evidenced by the public deed number 3680 dated July 22,
1994, granted before Rodolfo Vela de Leon, Notary Public number 80 of Monterrey,
N.L., and registered in the Public Registry of Commerce of Monterrey, N.L. on
August 5, 1994 under the mercantile number 1566, page 273, volume 417, third
book, second auxiliary of the Registry. Thereafter, our corporate name changed
to Axtel, S.A. de C.V., as evidenced by the public deed number 1719 dated March
26, 1999, granted before Jose Luis Farias Montemayor, Notary Public number 120
of Monterrey, N.L., and registered in the Public Registry of Commerce of
Monterrey, N.L., on March 29, 1999 under the mercantile number 2182, volume
209-44, fourth book, third auxiliary of the Registry.
49
According to Articles 2 and 3 of our bylaws, our corporate domicile is
located in San Pedro Garza Garcia, N.L., and our corporate purpose is to
install, operate and exploit a public telecommunications network for the
provision of telephony, internet and other value added telecommunication
services to the public, using primarily fixed wireless technology, and/or use,
utilize and exploit frequency bands of the radioelectric spectrum.
Board of Directors
Under our bylaws, our Board of Directors may be formed by up to eleven (11)
directors. Subject to certain provisions of our corporate bylaws, the Series A
shareholders have the right to appoint up to six directors, the Series C
shareholders have the right to appoint up to four directors and the holders of
the majority of Series N shares have the right to appoint one independent Series
N director. None of our shares has cumulative voting rights.
Capital Stock
Axtel currently has two series of outstanding voting shares: Series A and
Series C shares. Such voting shares confer on their holders one vote per share
at any extraordinary, ordinary or special meeting of shareholders and equal
rights and obligations. Additionally, Axtel has one series of outstanding
non-voting shares: Series N shares. All of our outstanding shares are fully paid
and non-assessable.
Shareholder Meetings
Meetings of the shareholders shall be either ordinary, extraordinary or
special. Extraordinary meetings are those called to consider certain matters
specified in Article 182 of the Mexican General Corporations Law and our bylaws.
Such matters include, among others: dissolution; liquidation; amendments to our
bylaws; increases or reductions of the fixed and/or variable portion of our
capital; change of our corporate purpose; transforming our corporate nature or
status; the issuance of preferred, limited or non-voting stock; amortization of
our shares or the issuance of participating securities; the issuance of bonds or
debentures or other debt securities; the listing of any of our shares on a stock
or securities exchange. Ordinary meetings are those called to resolved any other
matters not specifically reserved to an extraordinary meeting or special
meeting. An ordinary meeting must be held at least once each year within the
first four months following the end of the preceding fiscal year to (i) consider
the approval of the financial statements of Axtel for the preceding fiscal year,
(ii) to appoint, remove, ratify or elect directors and statutory auditors and to
determine their compensation and (iii) to determine the allocation of profits
and losses of the preceding year. Special meetings are those called to resolve
any matters relating to any specific series of voting shares voting as a class.
According to our bylaws, shareholders meetings may be called by (i) the
board of directors, (ii) any shareholder owning at 5% of the voting shares,
(iii) any director, or (iv) any statutory auditor. Notice of each meeting shall
be delivered in writing to all shareholders not less than 30 days in advance. In
extraordinary or urgent circumstances such notice may be delivered within a
shorter period as determined by the Chairman of the Board or the Corporate
Secretary.
Preemptive Rights
According to our bylaws, the fixed and/or variable portion of our capital
stock may be increased only by a resolution adopted by an extraordinary meeting
of shareholders. In the event of a capital increase, a holder of existing shares
of a given class has a preemptive right to subscribe to shares of the same class
sufficient to maintain the holder's existing proportionate holding of shares of
that class. Our bylaws provide that for purposes of preemptive rights, the
Series A and Series C shares shall be considered the same class, and the "Series
N" shares shall be considered an independent class.
Under our bylaws, every offer to subscribe for additional shares shall be
made in writing to each shareholder and shall give each shareholder 30 days to
accept the offer. Under Mexican law, preemptive rights must be exercised during
a term fixed by the shareholders at the meeting declaring the capital increase,
which term must last at least 15 business days following (i) the announcement of
the resolution of the shareholders meeting in the Official State Gazette and any
other major newspaper in our corporate domicile, and the simultaneous
transmission of such
50
notice to each foreign resident shareholder or (ii) on the date of such meeting
if all shareholders attended, in person or by proxy. Shares issued or to be
issued pursuant to any capital increase with respect to which preemptive rights
have not been exercised shall be subscribed for as provided for in the
resolution by the shareholders meeting which authorized such increase.
Limitations on Share Ownership
Ownership by non-Mexican nationals of shares of Mexican enterprises is
regulated by the 1993 Ley de Inversion Extranjera (the Foreign Investment Law)
and its regulations. The Foreign Investment Law and its regulations require that
Mexican shareholders retain the power to determine the administrative control
and the management of corporations in industries in which special restrictions
on foreign holdings are applicable. Foreign investment in our shares is limited
to 49% of the total voting stock. Our bylaws provide that the Series A shares
shall always represent at least 51% of the total outstanding voting shares, and
may only be subscribed for by Mexican investors. The Series C shares may
represent up to the remaining 49% of the outstanding voting shares and may be
freely subscribed for by Mexican or non-Mexican investors.
Other Provisions
Forfeiture of shares. As required by Mexican law, the bylaws provide that
non-Mexican holders of our shares (i) are considered Mexican with respect to
such shares that they acquire or hold and (ii) may not invoke the protection of
their own governments in respect of the investment represented by those shares.
Failure to comply with the bylaws may result in a penalty of forfeiture of a
shareholder's capital interests in favor of the Mexican state. If a shareholder
should invoke governmental protection in violation of this provision, its shares
could be forfeited to the Mexican state.
Duration. Article 4 of our bylaws provides that the term of our company is
unlimited.
Conflict of interest. Any shareholder or director that has a conflict of
interest with respect to a transaction of our company is required to abstain
from voting with respect to such transaction at the relevant shareholders or
board of directors meeting. A shareholder that votes on a business transaction
in which its interests conflict with those of our company may be liable for
damages, but only if the transaction would not have been approved without its
vote.
Liquidation. Upon dissolution of Axtel, one or more liquidators must be
appointed by an extraordinary general meeting of the shareholders to wind up its
affairs. All fully paid and outstanding shares of capital stock will be entitled
to participate equally in any distribution upon liquidation.
Actions Against Directors. Action for civil liabilities against directors
may be initiated by resolution of an ordinary shareholders meeting. In the event
the ordinary shareholders meeting decides to bring such action, the directors
against whom such action is to be brought will immediately cease to be
directors. Additionally, shareholders representing not less than 33% of the
outstanding shares may directly exercise such action against the directors,
provided that (i) such shareholders shall not have voted in favor of releasing
such director at the relevant shareholders meeting, and (ii) the claim covers
all the damages alleged to have been caused to Axtel and not only the portion
corresponding to such shareholders. Any recovery of damages with respect to such
action will be for the benefit of Axtel.
Limited Liability. Shareholders' liability for Axtel's losses are limited
to their shareholdings in our company.
C. Material Contracts
Not applicable.
51
D. Exchange Controls
There are currently no exchange controls in Mexico.
E. Taxation
Not applicable.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
Where You May Find More Information
We have filed with the Securities and Exchange Commission a Registration
Statement on Form F-4 (Registration Statement No. 333-123608) under the
Securities Act of 1933, as amended. As of the date of this Form 20-F, this
Registration Statement has not yet been declared effective by the Securities and
Exchange Commission.
This Registration Statement as well as other reports and information, when
so filed, may be inspected and copied from the Public Reference Section of the
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C.
20549 at prescribed rates. Also, any filings we make electronically will be
available to the public over the Internet at the and Exchange Commission's web
site at http://www.sec.gov.
I. Subsidiary Information
Not applicable.
Item 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 5. "Operating and Financial Review and Prospects"
Item 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
Part II
Item 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Not applicable.
Item 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE
OF PROCEEDS
Not applicable.
52
Item 15. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain a set of disclosure controls and procedures designed to ensure
that information required to be disclosed by the Company in report that it files
or submits under the U.S. Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms. An evaluation was carried
out under the supervision and with the participation of the Company's
management, including the Chief Executive Officer and Chief Financial Officer,
of the effectiveness of our disclosure controls and procedures as of December
31, 2004. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that our disclosure controls and procedures are
effective.
Item 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Our board of directors has determined that Hector Medina Aguiar is an audit
committee financial expert as defined under appropriate Securities and Exchange
Commission Guidelines. Our board of directors is in the process of determining
whether Hector Medina Aguiar is "independent" as that term is defined under the
rules of a national securities exchange or national securities association. See
"Item 6A. Directors and Senior Management."
Item 16B. CODE OF ETHICS
We have established a code of ethics that applies to our Chief Executive
Officer, Chief Financial Officer, principal accounting officer and other
corporate and divisional employees. However, our board of directors has not, as
of yet made a determination whether modification of our code of ethics will be
required to comply with Securities and Exchange Commission requirements. We will
provide to any person without charge, upon request, a copy of such code of
ethics. Such requests shall be made in writing to the attention of Jose Manuel
Basave at Axtel, S.A. de C.V., Blvd. Gustavo Diaz Ordaz 3.33 No. L-1, Col.
Unidad San Pedro, San Pedro Garza Garcia, N.L., Mexico, CP 66215.
Item 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
KPMG Cardenas Dosal S.C. ("KPMG") served as our auditors for the years
ended December 31, 2004 and 2003. The following table sets forth the fees paid
to KPMG for the financial years ended December 31, 2003 and 2004.
Year ended December 31
--------------------------------
2004 2003
--------------------------------
(in millions of nominal pesos)
Audit Fees (1)........... Ps. 2.7 2.6
Tax Fees (2)............. -- --
Total Fees............... 2.7 2.6
________________________
(1) Audit fees include fees associated with the annual audit of our
consolidated financial statements. Audit fees also include fees associated
with various audit requirements relating to the offering of the 2013 Senior
Notes.
(2) Tax fees include fees principally incurred for assistance with tax planning
and compliance matters.
We have introduced procedures for the review and pre-approval of any
services performed by KPMG. The procedures require that all proposed engagements
of KPMG for audit and permitted non-audit services are submitted to the audit
committee for approval prior to the beginning of any such services.
We did not have an audit committee prior to January 2004.
53
Item 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable.
Item 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS
Not applicable.
Part III
Item 17. FINANCIAL STATEMENTS
The Company has responded to Item 18 in lieu of this item.
Item 18. FINANCIAL STATEMENTS
See pages F-1 through F-59.
Item 19. EXHIBITS
Exhibit Number Description
-------------- -----------
1.1 Corporate By-laws (Estatutos Sociales) of Axtel, S.A. de C.V.
("Axtel"), together with an English translation (incorporated
herein by reference to Exhibit 3.1 of our Registration Statement
on Form F-4, File No. 333-114196)
2.1 Indenture, dated as of December 16, 2003, among Axtel, the
Subsidiary Guarantors named therein and The Bank of New York, as
Trustee, governing Axtel's $175,000,000 aggregate principal
amount of 11% Senior Notes due 2013 (incorporated herein by
reference to Exhibit 4.1 of our Registration Statement on Form
F-4, File No. 333-114196).
2.2 Specimen Global Note representing Axtel's 11% Senior Notes due
2013 (incorporated herein by reference to Exhibit 4.2 of our
Registration Statement on Form F-4, File No. 333-114196).
2.3 Form of Specimen Global Note representing the exchange notes
(incorporated herein by reference to Exhibit 4.3 of our
Registration Statement on Form F-4, File No. 333-114196).
2.4 Registration Rights Agreement, dated as of December 16, 2003
among Axtel, the Subsidiary Guarantors named therein and Credit
Suisse First Boston LLC (incorporated herein by reference to
Exhibit 4.4 of our Registration Statement on Form F-4, File No.
333-114196).
4.1 Unanimous Shareholders Agreement, dated as of October 6, 1997,
among Bell Canada International (Mexico Telecom) Limited, Telinor
Telefonia, S.A. de C.V. ("Telinor"), Worldtel Mexico Telecom Ltd.
and Axtel (formerly known as Telefonia Inalambrica Del Norte,
S.A. de C.V.) (incorporated herein by reference to Exhibit 9.1 of
our Registration Statement on Form F-4, File No. 333-114196).
4.2 Joinder Agreement, dated as of March 20, 2003, among Axtel and
Nortel Networks Limited (incorporated herein by reference to
Exhibit 9.2 of our Registration Statement on Form F-4, File No.
333-114196).
54
Exhibit Number Description
-------------- -----------
4.3 Concession title granted by the Mexican Ministry of
Communications and Transportation (the "Ministry") in favor of
Axtel (formerly known as Telefonia Inalambrica Del Norte, S.A. de
C.V.), dated June 17, 1996, together with an English translation
of such concession title (incorporated herein by reference to
Exhibit 10.1 of our Registration Statement on Form F-4, File No.
333-114196).
4.4 Amendment, dated December 19, 2002, of concession title granted
by the Ministry in favor of Axtel, dated June 17, 1996, together
with an English translation of such amendment (incorporated
herein by reference to Exhibit 10.2 of our Registration Statement
on Form F-4, File No. 333-114196).
4.5 Concession title granted by the Ministry in favor of Axtel, dated
October 7, 1998, together with an English translation of such
concession title (incorporated herein by reference to Exhibit
10.3 of our Registration Statement on Form F-4, File No.
333-114196).
4.6 Concession title granted by the Ministry in favor of Axtel, dated
April 1, 1998, together with an English translation of such
concession title (incorporated herein by reference to Exhibit
10.4 of our Registration Statement on Form F-4, File No.
333-114196).
4.7 Concession title granted by the Ministry in favor of Axtel, dated
June 4, 1998, together with an English translation of such
concession title (incorporated herein by reference to Exhibit
10.5 of our Registration Statement on Form F-4, File No.
333-114196).
4.8 Engagement Letter, dated as of May 15, 2002, by and among Axtel
and The Blackstone Group L.P. (incorporated herein by reference
to Exhibit 10.6 of our Registration Statement on Form F-4, File
No. 333-114196).
4.9 Restructuring Agreement, dated as of March 20, 2003 by and among
Axtel, Nortel Networks Limited, Nortel Networks de Mexico, S.A.
de C.V. and Toronto Dominion (Texas), Inc. (incorporated herein
by reference to Exhibit 10.7 of our Registration Statement on
Form F-4, File No. 333-114196).
4.10 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).
4.11 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).
4.12 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).
4.13 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).
55
Exhibit Number Description
-------------- -----------
4.14 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 (incorporated herein by
reference to Exhibit 10.13 of our Registration Statement on Form
F-4, File No. 333-123608) (certain portions of Exhibit 10.12 have
been omitted pusuant to a request for confidential treatment).
4.15 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 (incorporated
herein by reference to Exhibit 10.13 of our Registration
Statement on Form F-4, File No. 333-123608) (certain portions of
Exhibit 10.13 have been omitted pusuant to a request for
confidential treatment).
7.1 Statement regarding computation of ratio of earnings to fixed
charges (according to Mexican GAAP) (incorporated herein by
reference to Exhibit 12.1 of our Registration Statement on Form
F-4, File No. 333-114196).
7.2 Statement regarding computation of ratio of earnings to fixed
charges (according to U.S. GAAP) (incorporated herein by
reference to Exhibit 12.2 of our Registration Statement on Form
F-4, File No. 333-114196).
8.1 List of Subsidiaries of Axtel (incorporated herein by reference
to Exhibit 21.1 of our Registration Statement on Form F-4, File
No. 333-114196).
12.1 Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
12.2 Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
13.1 Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
13.2 Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
56
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Audited Consolidated Financial Statements
Report of Independent Auditors..............................................F-1
Consolidated Balance Sheet as of December 31, 2004 and 2003.................F-2
Consolidated Statement of Operations for the fiscal years
ended December 31, 2004, 2003 and 2002....................................F-3
Consolidated Statement of Changes in Financial Position for
the fiscal years ended December 31, 2004, 2003 and 2002 ..................F-4
Consolidated Statement of Changes in Stockholders' Equity
for the fiscal years ended December 31, 2004,
2003 and 2002 ............................................................F-5
Notes to the Audited Consolidated Financial Statements .....................F-6
57
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
SIGNATURES
The Registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf.
Axtel, S.A. de C.V.
/s/ Patricio Jimenez Barrera
----------------------------
Patricio Jimenez Barrera
Chief Financial Officer
April 27, 2005
EXHIBIT 12.1
CERTIFICATION
I, Patricio Jimenez Barrera, certify that:
1. I have reviewed this annual report on Form 20-F of Axtel, S.A. de C.V.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the company as of,
and for, the periods presented in this report;
4. The company's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the company and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the company, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
(b) Evaluated the effectiveness of the company's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the company's internal
control over financial reporting that occurred during the period covered by
the annual report that has materially affected, or is reasonably likely to
materially affect, the company's internal control over financial reporting;
and
5. The company's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
company's auditors and the audit committee of the company's board of directors
(or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the company's ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the company's internal
control over financial reporting.
Date: April 27, 2005
/s/ Patricio Jimenez Barrera
-----------------------------
Patricio Jimenez Barrera
Chief Financial Officer
EXHIBIT 12.2
CERTIFICATION
I, Tomas Milmo Santos, certify that:
1. I have reviewed this annual report on Form 20-F of Axtel, S.A. de C.V.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the company as of,
and for, the periods presented in this report;
4. The company's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the company and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the company, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
(b) Evaluated the effectiveness of the company's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the company's internal
control over financial reporting that occurred during the period covered by
the annual report that has materially affected, or is reasonably likely to
materially affect, the company's internal control over financial reporting;
and
5. The company's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
company's auditors and the audit committee of the company's board of directors
(or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the company's ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the company's internal
control over financial reporting.
Date: April 27, 2005
/s/ Tomas Milmo Santos
-------------------------
Tomas Milmo Santos
Chief Executive Officer
EXHIBIT 13.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Axtel, S.A. de C.V. (the "Company")
on Form 20-F for the fiscal year ended December 31, 2004 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Tomas
Milmo Santos, Chief Executive Officer of the Company, certify, pursuant to 18
U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that, based on my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Dated: April 27, 2005 /s/ Tomas Milmo Santos
-------------------------
Tomas Milmo Santos
Chief Executive Officer
EXHIBIT 13.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Axtel, S.A. de C.V. (the "Company")
on Form 20-F for the fiscal year ended December 31, 2004 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I,
Patricio Jimenez Barrera, Chief Financial Officer of the Company, certify,
pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that, based on my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Dated: April 27, 2005 /s/ Patricio Jimenez Barrera
----------------------------
Patricio Jimenez Barrera
Chief Financial Officer