Registration Statement of a Foreign Private Issuer for Securities Issued in a Business-Combination Transaction — Form F-4
Filing Table of Contents
Document/Exhibit Description Pages Size
1: F-4 Registration Statement of a Foreign Private Issuer 193 843K
for Securities Issued in a
Business-Combination Transaction
2: EX-3.1 Bylaws 140 479K
3: EX-4.1 Indenture Dated 12/16/03 130 434K
4: EX-4.2 Specimen Global Note 18 55K
5: EX-4.3 Form of Specimen Global Note 12 40K
6: EX-4.4 Registration Rights Agreement 22 91K
7: EX-9.1 Unanimous Shareholders Agreement 293 771K
8: EX-9.2 Joinder Agreement 2 14K
14: EX-10 Ex-10.6 Letter 7 34K
9: EX-10.1 Concession - Dated June 17, 1996 25 80K
10: EX-10.2 Amend. Datd December 19, 2002 29 131K
11: EX-10.3 Concession Dated October 7, 1998 19 69K
12: EX-10.4 Concession Dated April 1, 1998 18 62K
13: EX-10.5 Concession Dated June 4, 1998 17 63K
15: EX-10.7 Restructuring Agreement 179 568K
16: EX-10.8 Assignment & Assumption Agreement 9 34K
17: EX-10.9 Master Agreement 137 455K
18: EX-12.1 Ratio of Earnings to Fixed Charges 2± 16K
19: EX-12.2 Ratio of Earnings to Fixed Charges 2± 17K
20: EX-21.1 List of Subsidiaries of Axtel 1 9K
21: EX-23 Ex-23.3, Independent Auditors Consent 1 11K
22: EX-25.1 Form T-1 6 24K
23: EX-99.1 Form of Letter of Transmittal 14 58K
24: EX-99.2 Form of Notice of Guaranteed Delivery 5 22K
25: EX-99.3 Form of Instructions to Reg. Holder 2 14K
26: EX-99.4 Form of Exchange Agent Agreement 9 33K
F-4 — Registration Statement of a Foreign Private Issuer for Securities Issued in a Business-Combination Transaction
Document Table of Contents
As filed with the Securities and Exchange Commission on April 5, 2004
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM F-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AXTEL, S.A. DE C.V.
AND THE GUARANTORS LISTED ON THE TABLE OF ADDITIONAL REGISTRANTS
(Exact name of registrant as specified in its charter)
[Enlarge/Download Table]
United Mexican States 4813 Not Applicable
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification
incorporation or organization) Classification Code Number) Number)
Blvd. Gustavo Diaz Ordaz 3.33 No. L-1
Col. Unidad San Pedro
San Pedro Garza Garcia, N.L.
Mexico, LP 66215
(52)(81) 8114-0000
(Address, including zip code, and telephone number,
including area code, of registrant's
principal executive offices)
__________________________
CT Corporation System
111 Eighth Avenue, 13th Floor
New York, New York 10011
(212) 590-9200
(Name, address, including Zip Code, and
telephone number, including area code, of
agent for service)
with copies to:
Roger Andrus, Esq. Alberto J. Morales, Esq.
Cahill Gordon & Reindel LLP D&A Morales & Asociados, S.C.
80 Pine Street Av. Vallarta 811 Sur
New York, NY 10005-1702 Colonia Mirador
U.S.A. Monterrey, N.L., Mexico 64070
(212) 701-3000 (52)(81) 8129-9200
Approximate date of commencement of proposed sale to the
public: As soon as practicable after this registration
statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 426(b) under the Securities Act, check the following and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering.
|_| __________________ If this Form is a post-effective amendment filed
pursuant to Rule 462(d) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering.
|_| __________________
CALCULATION OF REGISTRATION FEE
[Enlarge/Download Table]
Proposed Maximum
Title of each Class of Securities Amount to be Offering Price Per Proposed Maximum Amount of
to be Registered Registered Unit Aggregate Offering Price (1) Registration Fee (2)
11% Senior Notes due 2013 $175,000,000 100.000% $175,000,000 $22,172.50
Subsidiary Guarantees $175,000,000 -- -- None (3)
(1) The notes being registered are being offered in exchange for 11% senior
notes due 2013 previously sold in transactions exempt from registration
under the Securities Act of 1933. The registration fee was computed based
on the face value of the 11% senior notes due 2013 solely for the purpose
of calculating the registration fee pursuant to Rule 457 under the
Securities Act of 1933, as amended (the "Securities Act").
(2) Calculated pursuant to Rule 457(f)(2) under the Securities Act.
(3) Pursuant to Rule 457(n), no separate fee is payable with respect to the
subsidiary guarantees.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with section 8(a) of
the Securities Act of 1933 or until this registration statement shall become
effective on such date as the Commission, acting pursuant to said section 8(a),
may determine.
================================================================================
Additional Registrants
[Enlarge/Download Table]
Exact name of registrant as State or other jurisdiction of Primary Standard Industrial I.R.S. Employer
specified in its charter incorporation or organization Classification Code Number Identification No.
Impulsora e Inmobiliaria United Mexican States 4813 Not applicable
Regional, S.A. de C.V.*
Instalaciones y Contrataciones, United Mexican States 4813 Not applicable
S.A. de C.V.*
Servicios Axtel, S.A de C.V.* United Mexican States 4813 Not applicable
--------------------------------------------------------------------------------
*The address and telephone number of the principal executive offices of each
additional registrant are the same address and telephone number of the principal
executive offices of Axtel, S.A. de C.V.
SUBJECT TO COMPLETION, DATED , 2004
PROSPECTUS
[OBJECT OMITTED]
[GRAPHIC OMITTED][GRAPHIC OMITTED]
Axtel, S.A. de C.V.
Offer to exchange our 11% senior notes due 2013,
which have been registered under the Securities Act,
for our 11% senior notes due 2013, which have not been registered
Terms of the Exchange Offer:
o Offer to exchange (the "exchange offer") up to $175,000,000 aggregate
principal amount of our new 11% senior notes, which will mature in 2013
(the "exchange notes"), for an equal amount of our old 11% senior notes,
which will mature in 2013 (the "outstanding notes").
o The exchange offer expires at 5:00 p.m., New York City time, on , 2004 (the
"expiration date") unless extended.
o You may withdraw your tender of outstanding notes any time before the
expiration date.
o We will accept any and all outstanding notes validly tendered and not
withdrawn for exchange before the expiration date.
o Not subject to any condition, other than that the exchange offer does not
violate applicable law or any applicable interpretation of the staff of the
Securities and Exchange Commission and certain other customary conditions.
o We will not receive any proceeds from the exchange offer.
o The exchange of notes will not be a taxable exchange for U.S. or Mexican
federal income tax purposes.
o The terms of the exchange notes and the outstanding notes are identical in
all material respects, except for certain transfer restrictions relating to
the outstanding notes.
o The exchange notes will be evidence of the same indebtedness as the
outstanding notes and will be issued under, and entitled to the benefits
of, the same indentures that govern the outstanding notes.
The Exchange notes:
o Interest Payment: semiannually in arrears on June 15 and December 15,
beginning on June 15, 2004.
o Redemption: The exchange notes will be redeemable, in whole or in part, at
any time on or after December 15, 2008 at the redemption prices set forth
under "Description of the Exchange Notes--Optional Redemption." In
addition, prior to December 15, 2006, up to 35% of the notes may be
redeemed with the proceeds from certain equity offerings. In the event of a
change of control or if we sell certain assets, we will be required to
offer to purchase all or part of the exchange notes.
See "Risk Factors," which begins on page 12, for a discussion of certain
factors that should be considered by holders before tendering their outstanding
notes in the exchange offer.
The information contained in this prospectus is exclusively the
responsibility of Axtel and has not been reviewed or authorized by the Comision
Nacional Bancaria y de Valores or CNBV of Mexico. The registration with the
special section of the Registro Nacional de Valores maintained by the CNBV does
not imply a certification of the investment quality of the notes or the solvency
of Axtel. The notes are not registered in the securities section of the Registro
Nacional de Valores and, therefore, are not subject to public offering or
intermediation in Mexico. The acquisition of the notes by any investor of
Mexican nationality will be made at the sole responsibility of such investor.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
--------------------------------------------------------------------------------
The date of this prospectus is , 2004.
TABLE OF CONTENTS
Page
[Enlarge/Download Table]
Industry and Market Data.........................................................................................ii
Forward-Looking Statements.......................................................................................ii
Presentation of Financial Information............................................................................iv
Service of Process and Enforcement of Civil Liabilities...........................................................v
Prospectus Summary................................................................................................1
Summary of the Terms of the Exchange Offer........................................................................5
Summary of the Terms of the Exchange Notes........................................................................8
Risk Factors.....................................................................................................12
Use of Proceeds..................................................................................................24
The Exchange Offer...............................................................................................25
Capitalization...................................................................................................35
Exchange Rates...................................................................................................36
Selected Financial Data..........................................................................................37
Management's Discussion and Analysis of Financial Condition and Results of Operations............................39
Overview of the Mexican Telecommunications Industry..............................................................50
Supervision and Regulation of the Mexican Telecommunications Industry............................................52
Business.........................................................................................................56
Management.......................................................................................................72
Principal Shareholders...........................................................................................76
Certain Relationships and Related Transactions...................................................................77
Description of Other Indebtedness................................................................................80
Description of the Exchange Notes................................................................................81
Material UNITED STATES Federal Income Tax Consequences..........................................................125
Mexican Tax Consequences........................................................................................127
Plan of Distribution............................................................................................129
Legal Matters...................................................................................................130
Experts.........................................................................................................130
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS......................................................................F-1
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with different information. We are not
making an offer to exchange outstanding notes in any jurisdiction where the
exchange offer is not permitted, and will not accept surrenders for exchange
from holders in any such jurisdiction. You should not assume that the
information contained in this prospectus is accurate as of any date other than
the date on the front cover of this prospectus or the date of such information
as specified in this prospectus, if different.
Since the outstanding notes have been registered with the special section
of the Registro Nacional de Valores maintained by the Comision Nacional Bancaria
y de Valores of Mexico, no further registration of the exchange notes with such
special section is required. However, once the exchange notes are registered
under the Securities Act of 1933, we will inform the Comision Nacional Bancaria
y de Valores of Mexico about such registration and the exchange offer being
made, for the purpose of updating such registration with the special section of
the Registro Nacional de Valores. Registration with the special section of the
Registro Nacional de Valores maintained by the Comision Nacional Bancaria y de
Valores does not imply a certification of the investment quality of the notes or
the solvency of the Company.
Each broker-dealer that receives exchange notes for its own account
pursuant to the exchange offer in exchange for outstanding notes that it
acquired as a result of market-making activities or other trading activities
must acknowledge in the letter of transmittal accompanying this prospectus that
it will deliver a prospectus in connection with any resale of such exchange
notes. The letter of transmittal states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the U.S. Securities Act of 1933 (the
"Securities Act"). This prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of
exchange notes received in exchange for outstanding notes where such outstanding
notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. We have agreed that starting on the
expiration date and ending 180 days after the expiration date, we will make this
prospectus available to a broker-dealer for use in connection with any such
resale. See "Plan of Distribution." We have agreed to use our reasonable best
efforts to keep the exchange offer registration statement (as defined herein)
effective, supplemented and amended as required, to ensure that it is available
for such resale of exchange notes during such period.
-i-
Industry and Market Data
We obtained the market and certain other data used in this prospectus from
our own research, surveys or studies conducted by third parties and industry or
general publications, such as Pyramid Research (an Economist Intelligence unit
subsidiary) and other publicly available sources. Industry and general
publications and surveys generally state that they have obtained information
from sources believed to be reliable, but do not guarantee the accuracy and
completeness of such information. While we believe that each of these studies
and publications is reliable, we have not independently verified such data, and
we make no representations as to the accuracy of such information. Certain
market share data is based on published information available for the Mexican
states. There is no comparable data available relating to the particular cities
we serve. In presenting market share estimates for the cities, therefore, we
have estimated the size of the market on the basis of the published information
for the state in which the particular city is located. We believe this method is
reasonable, but the results have not been verified by any independent source.
Forward-Looking Statements
Many statements under the captions "Prospectus Summary," "Risk Factors,"
"Use of Proceeds," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Business," "Regulation" and elsewhere in this
prospectus are "forward-looking statements." These forward-looking statements
include, but are not limited to, statements about our plans, objectives,
expectations and intentions and other statements contained in the prospectus
that are not historical facts. When used in this prospectus, the words
"expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates"
and similar expressions are generally intended to identify forward-looking
statements.
These forward-looking statements reflect our best assessment at the time
and thus involve uncertainty and risk. Therefore, these forward-looking
statements are qualified by reference to the cautionary statements set forth in
this prospectus. It is possible that our future financial performance may differ
materially from our expectations due to a variety of factors, some of which
include, without limitation, the following:
o ability to attract subscribers;
o 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;
-ii-
o the timing and occurrence of events which are beyond our control; and
o other factors described in this prospectus.
Any forward-looking statements in this prospectus are based on certain
assumptions and analysis made by us in light of our experience and perception of
historical trends, current conditions, expected future developments and other
factors we believe are appropriate under the current circumstances.
Forward-looking statements are not a guarantee of future performance and actual
results or developments may differ materially from expectations. You are
therefore cautioned not to place undue reliance on such forward-looking
statements. While we continually review trends and uncertainties affecting our
results of operations and financial condition, we do not intend to update any
particular forward-looking statements contained in this document.
-iii-
Presentation of Financial Information
Our financial statements have been prepared in accordance with Mexican
generally accepted accounting principles, which we refer to as "Mexican GAAP,"
which differ in significant respects from US generally accepted accounting
principles, which we refer to as "US GAAP," including the treatment of the
capitalization of pre-operating expenses, the capitalization of interest,
severance, and deferred income taxes and employees' profit sharing and in the
presentation of cash flow information. Note 24 to our audited consolidated
financial statements, which are part of this prospectus, contains a
reconciliation of our net loss and shareholders' equity to US GAAP as of and for
the years ended December 31, 2003, 2002 and 2001.
Pursuant to Bulletin B-10, "Recognition of the Effects of Inflation on
Financial Information," and Bulletin B-12, "Statement of Changes in Financial
Position," issued by the Mexican Institute of Public Accountants, our
consolidated financial statements are reported in period-end pesos to adjust for
the inter-period effects of inflation. The presentation of financial information
in period-end, or constant, currency units is intended to eliminate the
distorting effect of inflation on the financial statements and to permit
comparisons across periods in comparable monetary units.
Bulletin B-10 requires us to restate nonmonetary assets (other than
inventory) using the Mexican national consumer price index. Bulletin B-10 also
requires restatement of all financial statements to constant pesos as of the
date of the most recent balance sheet presented. Accordingly, all data in the
financial statements and in the selected financial data set forth below has been
restated in constant pesos as of December 31, 2003. References in this
prospectus to "real" amounts are to inflation-adjusted pesos and references to
"nominal" amounts are to unadjusted historical pesos. In the calendar years
2003, 2002 and 2001, the rates of inflation in Mexico, as measured by changes in
the Mexican national consumer price index, published by Banco de Mexico, were
4.0%, 5.7% and 4.4%, respectively.
When reporting under Mexican GAAP and in accordance with Bulletin B-10, we
are required to quantify all financial effects of operating and financing the
business under inflationary conditions. For presentation purposes,
"comprehensive (income) cost of financing" refers to the combined financial
effects of:
o net interest expense or interest income;
o net gains or losses on monetary position; and
o net foreign exchange gains or losses.
The gain or loss on monetary position refers to gains or losses realized
from holding net monetary assets or liabilities and reflect the impact of
inflation on monetary assets and liabilities. For example, a gain on monetary
position results from holding net monetary liabilities in pesos during periods
of inflation, as the purchasing power of the peso declines over time.
Net foreign exchange gains or losses reflect the impact of changes in
foreign exchange rates on assets and liabilities denominated in currencies other
than pesos. A foreign exchange loss arises if a liability is denominated in a
foreign currency which appreciates relative to the peso between the time the
liability is incurred and the date it is repaid, as the appreciation of the
foreign currency results in an increase in the amount of pesos which must be
exchanged to repay the specified amount of the foreign currency liability.
The US dollar amounts provided in this prospectus are translations from the
peso amounts, solely for the convenience of the reader, at the exchange rate
reported by the Banco de Mexico on December 31, 2003 as its noon buying rate for
pesos. However, where peso denominated data is given "in nominal pesos," the
amounts provided are the peso amounts actually paid at the time of the
expenditure. On December 31, 2003, the noon buying rate for pesos was Ps.
11.2360 per US dollar. These transactions should not be construed as
representations that the peso amounts represent such US dollar amounts or could
be converted into US dollars at the rate indicated as of any dates mentioned in
this prospectus.
-iv-
Sums presented in this prospectus may not add due to rounding.
Service of Process and Enforcement of Civil Liabilities
We and our subsidiaries are variable capital corporations (sociedades
anonimas de capital variable) organized under the laws of Mexico, and are
headquartered, managed and operated outside of the United States (principally in
Mexico). Most of our directors and all of our officers reside in Mexico. All or
a substantial portion of our assets and the assets of most of our directors and
all of our officers are located outside of the United States (principally in
Mexico). As a result, it may not be possible for the investors or holders of the
notes to effect service of process outside of Mexico or within the United States
upon us or such persons, or to enforce a judgment obtained in the United States
against us or them outside of Mexico or in the United States courts that is
based on the civil liability provisions under laws of jurisdictions other than
Mexico including the federal and state securities laws or other laws of the
United States.
We have been advised by our special Mexican counsel, D&A Morales y
Asociados, S.C., that no treaty is in effect between the United States and
Mexico calling for the mutual recognition and enforcement of their respective
judgments. The recognition by Mexican courts of a judgment rendered in the
United States is usually done under the principle of reciprocity, which means
that Mexican courts would reexamine judgments rendered in the United States if
such foreign country would reexamine Mexican judgments. Mexican courts may
enforce judgments rendered in the United States through a homologation procedure
consisting of the review by such Mexican courts of the foreign judgment to
ascertain whether certain requirements of due process, reciprocity and public
policy have been complied with, without reviewing the merits of the subject
matter of the case. A judgment rendered in the United States may or need not be
recognized if, among others:
o the foreign court did not have jurisdiction over the subject matter in
a manner that is compatible with or analogous to Mexican laws or the
subject matter is within the exclusive jurisdiction of Mexican courts,
o the judgment was rendered under a system which does not provide
procedures compatible with due process requirements,
o enforcement of the judgment would be contrary to public policy,
o the defendant did not receive adequate personal notice in sufficient
time to defend itself,
o the judgment is not final in the rendering state,
o the judgment conflicts with another final judgment, or
o there is no reciprocity with the rendering state.
Furthermore, there is doubt as to the enforceability, in actions originated
in Mexico, of liabilities based in whole or in part on the United States federal
or state securities laws and as to the enforceability of judgments obtained in
the United States in actions based in whole or in part on the civil liability
provisions of United States federal or state securities laws.
-v-
Prospectus Summary
This summary may not contain all the information that may be important to
you. You should read the entire prospectus, including the financial data and
related notes, before making an investment decision. The terms "Axtel," "our
company," "our" and "we" used in this prospectus refer to Axtel, S.A. de C.V.,
the issuer of the notes, and its wholly owned subsidiaries, Servicios Axtel,
S.A. de C.V., Impulsora e Inmobiliaria Regional, S.A. de C.V. and Instalaciones
y Contrataciones, S.A. de C.V., as a combined entity, except where it is made
clear that such terms mean only the parent company. Unless otherwise specified,
references in this section to the "notes" mean the U.S.$175,000,000 aggregate
principal amount of outstanding notes issued on December 16, 2003 and up to an
equal principal amount of exchange notes we are offering hereby. You should pay
special attention to the "Risk Factors" section beginning on page 12 of this
prospectus to determine whether an investment in the notes is appropriate for
you. All financial data have been restated in constant pesos as of December 31,
2003, except as otherwise indicated.
Our Company
We are a leading telecommunications services provider in Mexico, offering a
wide array of services, including local and long distance telephony, data and
internet to business and residential customers. We believe that we are one of
the largest and fastest growing integrated telecommunications companies in
Mexico, with 349,144 lines in service as of December 31, 2003. For the year
ended December 31, 2003, we generated revenues and operating income of Ps.
2,919.5 million (US$259.8 million) and Ps. 112.4 million (US$10.0 million),
respectively.
We hold concessions to offer local and long distance telecommunications
services throughout the entire country of Mexico. We provide services using a
hybrid wireline and fixed wireless local access network designed to optimize
capital expenditures through the deployment of network access equipment based on
specific customer requirements. Our current network last-mile access options
include fixed wireless access, point-to-point and point-to-multipoint wireless
technologies, as well as copper and metropolitan fiber rings. Since inception we
have invested over Ps. 7,400 million in the aggregate in our network, which
includes 10 digital switches, 207 fixed wireless access sites, of which 57 are
also point-to-multipoint sites, and 431 kilometers of metropolitan fiber optic
rings.
Our strategy is to continue to penetrate our existing markets by offering a
comprehensive portfolio of high quality, facilities-based voice, data, internet
and value-added communications services and to cost-effectively enter into
selective new markets with high growth and revenue opportunity. Our approach is
to bundle multiple voice, data and internet services into integrated
telecommunications solutions for businesses and high-usage residential
customers. For the year ended December 31, 2003, approximately 66% of our
revenues were generated from business lines and 34% of our revenues were
generated from residential lines.
We were founded in 1994. In June 1996, we were awarded by the Mexican
government a concession to install and operate a public telecommunications
network for the offering of local and long distance telephony services in
Mexico. In 1998 and 1999, we won several spectrum auctions, including for 60 MHz
at 10.5 GHz for point-to-multipoint access, for 112 MHz at 15 GHz for
point-to-point backhaul access, for 100 MHz at 23 GHz for point-to-point last
mile access and for 50 MHz at 3.4 GHz for fixed wireless access, which together
allow us to service the entire territory of Mexico. In June 1999, we launched
commercial operations in the city of Monterrey. Our network currently reaches
six of the largest metropolitan areas in Mexico (Mexico City, Monterrey,
Guadalajara, Puebla, Toluca and Leon), which represent approximately 19% of the
population in Mexico. We estimate that our total lines represent approximately
10% of this total addressable market. Due to our concentration of network
facilities in business centers and upper income residential areas, we estimate
that our current network coverage represents a significant portion of the total
Mexican telephony and data telecommunications revenue opportunity.
The Mexican Telecommunications Industry
The Mexican telecommunications market is the second largest in Latin
America. According to Pyramid Research (an Economist Intelligence unit
subsidiary), revenues from telephony communications services in Mexico,
including both fixed and mobile, are expected to grow at a compound annual
growth rate of 4.4%, from US$17.2 billion in 2003 to US$21.3 billion in 2008. We
believe the following factors will continue to drive the growth in the Mexican
telecommunications market:
Stable and Expanding Economy. Mexico is the second largest economy in Latin
America in terms of gross domestic product (US$637.2 billion in 2002). The
Finance Ministry of Mexico expects economic growth in Mexico to be 3.5% in 2004.
Inflation goals continue to be met in Mexico due to a restrictive monetary
policy. Banco de Mexico has an inflation target of 3.9% for 2004. Continued
strong oil prices, more effective tax collection and controlled spending have
been important factors in meeting government deficit targets.
Significant Market Growth Potential. Although Mexico has one of the highest
gross domestic product per capita in Latin America, it has relatively low
teledensity. According to Pyramid Research, at the end of 2003, the fixed-line
penetration rate in Mexico was 15.8 telephone lines per 100 inhabitants,
compared to 23.0 in Chile, 22.3 in Brazil, 21.9 in Argentina and 17.9 in
Colombia. Pyramid Research forecasts that lines in service in Mexico will grow
at a compound annual growth rate of 5.5% between 2003 and 2008. Moreover, the
Mexican government has announced that it is committed to improving the
teledensity rate in Mexico.
Favorable Regulatory Environment. The Mexican telecommunications market has
long been dominated by Telefonos de Mexico, S.A. de C.V. ("Telmex"), the former
government-owned telecommunications monopoly. Since the Mexican government
completed the privatization of Telmex in 1990, the Mexican telecommunications
sector has become increasingly open to competition. The opening of the Mexican
telecommunications market has created an opportunity for competitive carriers to
capture market share from Telmex. As the owner and operator of a network serving
Mexico's largest metropolitan markets, we believe we are well positioned to
continue to take advantage of this market opportunity.
Competitive Strengths
Leading Market Position. By being one of the first competitive providers to
approach customers with bundled local, long distance voice and data services, we
are able to meet pent-up demand for an alternative service provider, as well as
establishing brand awareness and customer relationships prior to market entry by
emerging competitors. We have benefited from our first-competitor-to-market
advantage by capturing an average of approximately 10% market share of our total
addressable market in the six cities where we offer services. In the cities of
Monterrey and Guadalajara, the first two markets where we launched operations in
1999, we have achieved approximately 13% market share of our coverage market in
both of these cities.
Comprehensive Voice and Data Service Portfolio. We provide our customers
with an integrated bundle of services that includes local and long distance
voice services, as well as internet, data and other value-added services. We
believe our comprehensive service portfolio enables us to build strong,
long-term relationships with customers, thereby reducing churn and increasing
our return on our investment in network infrastructure. Furthermore, our digital
access, transport and switching network enable us to capture the current revenue
opportunity in voice services, while also enabling us to provide data services
as demand for those services grows.
Flexible, Technologically Advanced, Reliable Digital Network. Our hybrid
fixed wireless and wireline local access network structure allows us to enter
new markets quickly and cost-effectively. As a result, our return on our
investment in network infrastructure is increased. By utilizing the fixed
wireless access technology model, we are able to quickly cover a substantial
geographic area with minimal initial capital expenditures. We do not incur
incremental capital expenditures for last-mile connectivity until the customer
subscribes to our service. As of December 31, 2003, our network consisted of 10
digital switches, 207 fixed wireless access sites, of which 57 are also
point-to-multipoint sites, and 431 kilometers of metropolitan fiber optic rings
in order to service our 349,144 access lines.
Compelling Financial Profile. We have a diversified revenue base, a
favorable average revenue per user, or ARPU, positive free cash flow and strong
capitalization.
o Diversified revenue base. Our wide array of service offerings and our
349,144 lines in service and over 251,000 customers provide us with a
diverse revenue base.
-2-
o Average Revenue Per User. Our business model targets business and
high-usage residential customers. We believe this model allows us to
achieve a favorable average revenue per user. For the year ended
December 31, 2003, we had an average revenue per user of Ps. 665.
o Positive free cash flow and strong capitalization. Our positive free
cash flow, strong capitalization and low leverage put us in a solid
financial position to continue to execute our business strategy.
Experienced Management Team and Strong Equity Partners. Our senior
management team has extensive entrepreneurial, financial, marketing and
telecommunications expertise. The diverse experience of our senior management
team has contributed significantly to our initial success and rapid growth. In
addition, we benefit from working with strong local partners and experienced
multinational investors such as The Blackstone Group, AIG-GE Capital Latin
American Infrastructure Fund, and affiliates of Metropolitan Life Insurance
Company and The Soros Group. Our local investors include Tomas Milmo Santos,
Tomas Milmo Zambrano, Alberto Santos de Hoyos and Lorenzo Zambrano Trevino.
These businessmen have extensive financial, operating and senior management
experience in large Mexican corporations.
Strategy
Target Service Sectors with High Profitability Potential. We have divided
our target market into the mass market and business market. In the mass market,
we focus on high-usage residential, micro and small business customers. Within
the business market, we focus on medium and large businesses. We have developed
differentiated, targeted telecommunications services plans designed to capture
business and retain high-usage residential customers in each market segment. We
believe that by focusing on the business and high-usage residential customers
within a coverage area we are able to increase the return per dollar invested in
our network infrastructure. For the year ended December 31, 2003, approximately
66% of our revenues were generated from business lines and 34% from residential
lines.
Bundle Products in an Integrated Offering. We believe that the bundling of
voice, data and internet services into communications solutions for our
customers enables us to generate higher revenue per customer and more revenue
per dollar invested in access infrastructure while also generating customer
loyalty. We have focused and will continue to focus on increasing the
penetration of bundled products to our customer base. By being a
facilities-based telecommunications service provider, we believe we are well
positioned to offer our customers the convenience of receiving voice, data and
internet services from a single provider.
Exploit First-Competitor-to-Market Advantage. As Telmex's primary
competitor in local fixed telephony services and the first facilities-based
telecommunications service provider to enter new markets and offer integrated
voice, data and internet services, we will continue to focus on selectively
opening new markets where we believe we can capitalize on the market's desire to
have an alternative carrier and on serving demand unmet by our competitors.
Focus on Customer Service and Retention. Since launching operations, we
have been focused on achieving customer satisfaction levels that are superior to
the incumbent and our other primary competitors. We believe that our
service-driven customer care leads to superior customer satisfaction, which
enhances profitability and cash flow by increasing customer retention and
expanding sales opportunities.
Continue to Expand Technologically Advanced Network Infrastructure. Since
1999, we have successfully launched operations in six cities. We continue to
evaluate opportunities in other regions in order to enhance our coverage area.
We believe that selectively expanding our network and coverage area will enhance
our ability to acquire large business customers with multi-city operations,
which we expect to result in higher revenues and margin improvements while
minimizing capital expenditures.
Our Investors
Our major investors are Telinor Telefonia, S. de R.L. de C.V. ("Telinor"),
a company formed in 1994 by a group of Monterrey businessmen including Tomas
Milmo Santos, Tomas Milmo Zambrano, Lorenzo Zambrano Trevino and Alberto Santos
de Hoyos; LAIF X sprl, an affiliate of AIG-GE Capital Latin American
Infrastructure
-3-
Fund L.P.; and The Blackstone Group, a New York-based investment group. Telinor
holds 58.5% of our voting stock and has a 53.0% economic interest in us. LAIF X
sprl holds 15.7% of our voting stock and has a 14.3% economic interest in us.
The Blackstone Group holds 13.9% of our voting shares and has an 11.7% economic
interest in us. Some of our other direct investors include Tapazeca sprl (an
affiliate of The Soros Group), New Hampshire Insurance Company (an affiliate of
American International Group, or AIG) and Nortel Networks Limited.
Corporate Information
Our corporate offices are located at Blvd. Gustavo Diaz Ordaz km. 3.33 No.
L-1, Col. Unidad San Pedro, San Pedro Garza Garcia, N.L., Mexico, CP 66215
(Telephone +52 (81) 8114-0000).
-4-
Summary of the Terms of the Exchange Offer
Set forth below is a summary description of the terms of the exchange
offer. We refer you to "The Exchange Offer" for a more complete description of
the terms of the exchange offer.
[Enlarge/Download Table]
Exchange Notes ................................ Up to $175.0 million aggregate principal amount of our 11% Senior
Notes due 2013. The terms of the exchange notes are identical in
all material respects to the terms of the outstanding notes,
except that, because the offer of the exchange notes will have
been registered under the Securities Act, the exchange notes will
not be subject to transfer restrictions, registration rights or
the related provisions for increased interest if we default under
the related registration rights agreement.
The Exchange Offer............................. We are offering to exchange up to $175.0 million aggregate
principal amount of exchange notes for a like aggregate principal
amount of outstanding notes. Outstanding notes may only be
tendered in multiples of $1,000.
In connection with the private offering of the outstanding notes
on December 16, 2003, we entered into a registration rights
agreement which grants holders of the outstanding notes certain
exchange and registration rights. This exchange offer is
intended to satisfy our obligations under the registration rights
agreement.
If the exchange offer is not completed within the time
period specified in the registration rights
agreement, we will be required to pay additional
interest on the outstanding notes.
Resale of Exchange Notes....................... Based on existing interpretations by the staff of the SEC set
forth in interpretive letters issued to third parties, we believe
that the exchange notes may be offered for resale, resold or
otherwise transferred by you without compliance with the
registration and prospectus delivery requirements of the
Securities Act, except as set forth below, so long as:
o you are acquiring the exchange notes in the ordinary course of your
business;
o at the time of the consummation of the exchange offer,
you are not participating in, you do not intend to participate in and you
have no arrangement or understanding with any person to participate in the
distribution of the outstanding notes or exchange notes within the meaning
of the Securities Act; and
o you are not our "affiliate" within the meaning of Rule 405 under the
Securities Act.
If any of the statements above are not true and you
transfer any exchange notes without delivering a prospectus that meets the
requirements of the Securities Act or without an exemption from
registration of your exchange notes from those requirements, you may incur
liability under the Securities Act.
-5-
Each broker-dealer that receives exchange notes for its own ac-
count in exchange for outstanding notes that were acquired by
such broker-dealer as a result of market-making or other trading
activities may be a statutory underwriter and must acknowledge
that it will deliver a prospectus in connection with any resale of
the exchange notes. See "Plan of Distribution."
Consequences of Failure to Exchange
Outstanding Notes for Exchange Notes........... If you do not exchange outstanding notes for exchange notes, you
will not be able to offer, sell or otherwise transfer your outstanding notes
except:
o in compliance with the registration requirements of the Se-
curities Act or any other applicable securities laws;
o pursuant to an exemption from the securities laws; or
o in a transaction not subject to the securities laws.
Outstanding notes that remain outstanding after completion of the
exchange offer will continue to bear a legend reflecting these restrictions
on transfer. In addition, upon completion of the exchange offer, you will
not be entitled to any rights to have the resale of outstanding notes
registered under the Securities Act, and we currently do not intend to
register under the Securities Act the resale of any outstanding notes that
remain outstanding after the completion of the exchange offer.
Expiration Date................................ The exchange offer will expire at 5:00 p.m., New York City time,
on , 2004, unless extended. We do not currently intend to
extend the exchange offer.
Interest on the Exchange Notes................. Interest on the exchange notes will accrue at the rate of 11% from
the date of the last periodic payment of interest on the outstanding
notes or, if no interest has been paid, from the original issue date
of the outstanding notes. No additional interest will be paid on
outstanding notes tendered and accepted for exchange.
Conditions to Exchange Offer................... The exchange offer is subject to customary conditions, including that:
o the exchange offer does not violate applicable law or any
applicable interpretations of the SEC staff;
o the outstanding notes are validly tendered in accordance with the
exchange offer;
o no action or proceeding would impair our ability to proceed
with the exchange offer; and
o any governmental approval has been obtained, that we be-
lieve, in our sole discretion, is necessary for the consumma-
tion of the exchange offer as outlined in this prospectus.
Procedures for Tendering Outstanding
-6-
Notes.......................................... If you wish to accept the exchange offer, you must complete, sign
and date the letter of transmittal accompanying this prospectus
and mail or otherwise deliver it, together with your outstanding
notes to be exchanged and any other required documentation to
The Bank of New York, the exchange agent, at the address speci-
fied on the cover page of the letter of transmittal. Alternatively, if
your outstanding notes are held through DTC, you can tender your
outstanding notes through DTC by following the procedures for book-entry
transfer. See "The Exchange Offer Book Entry Transfer." Questions regarding
the tender of outstanding notes or the exchange offer generally should be
directed to the exchange agent at one of its addresses specified in "The
Exchange Offer--Exchange Agent." See "The Exchange Offer--Procedures for
Tendering" and "The Exchange Offer--Guaranteed Delivery Procedures."
Guaranteed Delivery Procedures................. If you wish to tender your outstanding notes and you cannot de-
liver the required documents to the exchange agent by the expiration date,
you may tender your outstanding notes according to the guaranteed delivery
procedures described under the heading "The Exchange Offer--Guaranteed
Delivery Procedures."
Acceptance of Outstanding Notes and
Delivery of Exchange Notes..................... We will accept for exchange all outstanding notes that are properly
tendered in the exchange offer before 5:00 p.m., New York City time,
on the expiration date, as long as all of the terms and conditions
of the exchange offer are met. We will deliver the exchange notes
promptly following the expiration date.
Withdrawal Rights.............................. You may withdraw the tender of your outstanding notes at any time
before 5:00 p.m., New York City time, on the expiration date of
the exchange offer. To withdraw, you must send a written notice of
withdrawal to the exchange agent at one of its addresses specified
in "The Exchange Offer--Exchange Agent" before 5:00 p.m., New York
City time, on the expiration date. See "The Exchange Offer--Withdrawal
of Tenders."
Taxation....................................... We believe that the exchange of outstanding notes for exchange notes
should not be a taxable transaction for U.S. federal income tax purposes.
For a discussion of certain other U.S. and Mexican federal tax considerations
relating to the exchange of the outstanding notes for the exchange notes
and the purchase, ownership and disposition of the exchange notes, see
"Taxation."
Exchange Agent................................. The Bank of New York is the exchange agent. The address, telephone
number and facsimile number of the exchange agent are set forth in
"The Exchange Offer--Exchange Agent" and on the inside back cover
of this prospectus.
Use of Proceeds................................ We will not receive any proceeds from the issuance of the exchange
notes. We are making the exchange offer solely to satisfy our obligations
under the registration rights agreement. See "Use of Proceeds" for a
description of our use of the net proceeds received in connection
with the issuance of the outstanding notes.
-7-
Summary of the Terms of the Exchange Notes
Unless otherwise specified, references in this section to the "notes" mean
the U.S. $175,000,000 aggregate principal amount of outstanding notes issued on
December 16, 2003 and up to an equal principal amount of exchange notes we are
offering hereby
[Enlarge/Download Table]
Issuer........................................ Axtel, S.A. de C.V.
Exchange Notes Offered........................ US$175,000,000 in aggregate principal amount of 11% Senior Notes
due 2013 which have been registered under the Securities Act.
Maturity Date................................. December 15, 2013.
Guarantees.................................... Each of our current subsidiaries and certain of our future
subsidiaries will guarantee the notes with guarantees that will
be unsecured. From and after the issue date, subject to certain
exceptions, each subsidiary that guarantees any of our
indebtedness will be required to guarantee the notes on the same
basis.
Interest Payments............................. Interest will be payable semi-annually in arrears on June 15 and
December 15 of each year, commencing June 15, 2004.
Ranking....................................... The notes are our senior
unsecured obligations.
Accordingly, the notes will
rank:
o effectively junior in right of payment to all existing and future
secured indebtedness and indebtedness owed to statutorily
preferred creditors;
o equal in right of payment to any of our existing and future
senior unsecured indebtedness; and
o senior in right of payment to any of our existing and future
subordinated indebtedness.
In addition, the guarantees of the notes by our subsidiaries will
rank equally to all of such non-guarantor subsidiaries' existing and
future senior unsecured obligations. The notes and the guarantees
thereof will be effectively subordinated to all secured indebtedness
of the guarantors to the extent of the assets securing such indebtedness.
As of December 31, 2003, we had approximately US$193.1 million
of outstanding indebtedness (excluding intercompany liabilities
and guarantees) and the outstanding notes would have ranked
effectively junior in right of payment to approximately $14.7
million of secured liabilities.
Optional Redemption........................... We may redeem any of the notes at any time on or after December
15, 2008, in whole or in part, in cash, at the redemption prices
described in this prospectus, plus accrued and unpaid interest to
the date of redemption.
At any time prior to December 15, 2006, we may redeem up to
35% of the aggregate principal amount of the notes issued
under the indenture governing the notes with the net proceeds
of certain
-8-
equity offerings at a redemption price equal to 111% of the princi-
pal amount of the notes plus accrued and unpaid interest to the date
of redemption. We may make that redemption only if, after the
redemption, at least 65% of the aggregate principal amount of
notes issued under the indenture governing the notes remains outstanding.
Redemption for Tax Reasons.................... Under certain circumstances, we may redeem the notes in whole but
not in part upon not less than 30 and no more than 60 days' prior
notice at a price equal to 100% of the principal amount thereof,
together with accrued and unpaid interest to the date fixed for
redemption plus any additional amounts. See "Description of the
Exchange Notes--Redemption for Changes in Withholding Taxes."
Change of Control............................. If we experience a Change of Control (as defined under
"Description of the Exchange Notes--Repurchase at the Option of
Holders"), we will be required to make an offer to repurchase the
notes at a price equal to 101% of the principal amount thereof,
plus accrued and unpaid interest to the date of repurchase.
Certain Covenants............................. The terms of the notes will restrict our ability and the ability
of our restricted subsidiaries to, among other things:
o incur additional indebtedness or issue preferred stock;
o pay dividends or make other distributions to our
stockholders;
o purchase or redeem capital stock or subordinated
indebtedness;
o make investments;
o create liens;
o incur restrictions on the ability of our restricted
subsidiaries to pay dividends or make other payments to us;
o sell assets;
o consolidate or merge with or into other companies or
transfer all or substantially all of our assets; and
o engage in transactions with affiliates.
These limitations will be subject to a number of important
qualifications and exceptions. See "Description of the Exchange
Notes--Certain Covenants."
-9-
Summary Historical Consolidated Financial Information
The following table provides a summary of our historical consolidated
financial data. The summary historical consolidated financial data for the years
ended December 31, 2001, 2002 and 2003 have been derived from our audited
consolidated financial statements included elsewhere in this prospectus.
The information presented below should be read in conjunction with "Use of
Proceeds," "Capitalization," "Selected Financial Data," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
consolidated financial statements included elsewhere in this prospectus.
[Enlarge/Download Table]
Year Ended December 31,
2001 2002 2003
Constant Ps. in million as of December 31, 2003
Statement of Income Data:
Revenues..................................... 2,242.9 2,452.4 2,919.5
Cost of sales and operating expenses......... (2,808.7) (2,685.2) (2,807.1)
Income (loss) from operations................ (565.8) (232.8) 112.4
Interest expense, net........................ (401.8) (422.0) (198.9)
Foreign exchange gain (loss, net)............ 99.6 (618.2) (319.4)
Monetary position............................ 216.9 280.5 92.8
Other income (expense), net(1)............... (30.9) (27.6) 1,714.5
Cash severance and other special items....... (63.0) (32.4) (10.4)
Income (loss) before income taxes and
employee profit........................... (745.0) (1,052.5) 1,390.9
Income tax and employee profit sharing
benefit (expense)......................... 160.3 241.7 (493.5)
Net income (loss)............................ (584.7) (810.8) 897.4
Operating Data:
Depreciation and amortization................ 644.7 810.5 860.6
Investment in fixed assets (end of period)... 1,582.8 565.4 460.1
Net Cash Flow:
Operating activities...................... (303.6) (11.5) 159.7
Investing activities...................... (1,595.1) (566.8) (556.7)
Financing activities...................... 1,886.4 771.3 1,083.0
Total net cash flows......................... (12.3) 193.0 686.0
Total access lines in service (in thousands)
(end of period)...........................
......................................Business 121.0 116.4 132.4
Residential............................... 169.1 178.7 216.7
Total................................. 290.1 295.1 349.1
[Download Table]
As of
December 31, 2003
(Constant Ps. in
millions)
Balance Sheet Date:
Cash & cash equivalents.................................... 1,013.0
Net working capital investment............................. 73.5
Total assets............................................... 8,129.4
Total debt................................................. 2,169.4
Net debt................................................... 1,156.4
Total liabilities.......................................... 2,747.3
Total shareholders' equity................................. 5,382.1
-10-
Data in Accordance with US GAAP(2)
[Enlarge/Download Table]
Year Ended December 31,
-----------------------------------------------------------------
----------------------- --------------------- -------------------
2001 2002 2003
----------------------- --------------------- -------------------
(Constant Ps. in millions as of December 31, 2003)
Financial Data:
Income (loss) from operations......... (570.8) (123.7) 170.9
Net income (loss)..................... (610.5) (945.6) 2,739.7
Total assets.......................... 7,317.1 7,125.3 7,702.1
Total debt............................ 4,905.8 5,536.3 2,169.4
Total shareholders' equity (deficit).. 1,631.1 746.2 4,854.2
--------------------------------------------------------------------------------
(1) Other income for the year ended December 31, 2003 includes a net gain of
Ps. 1,858.5 million due to our repurchase of certain debt. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Debt Repurchase."
(2) Reconciled in connection with Note 24 of our consolidated financial
statements.
-11-
Risk Factors
You should carefully consider the following risk factors, as well as other
information set forth in this prospectus, prior to making an investment in the
notes. Unless the context otherwise requires, for purposes of this section, the
"notes" shall be deemed to refer collectively to the outstanding and any
exchange notes. The risks described below are not the only ones that may affect
the notes. Additional risks not presently known to us or that we currently deem
immaterial may also impair our business operations. In general, investing in the
securities of issuers in emerging-market countries such as Mexico involves risks
not typically associated with investing in the securities of US companies. To
the extent it relates to the Mexican government or Mexican macroeconomic data,
the following information has been extracted from official publications of the
Mexican government.
Risks Relating to Our Company
Since we have a limited operating history you will not be able to fully evaluate
our historical performance.
We were founded in 1994. In June 1996, we were awarded by the Mexican
government a concession to install and operate a public telecommunications
network for the offering of local and long distance telephony services in
Mexico. We commenced commercial operations in June 1999 by beginning operations
in the city of Monterrey and entered the city of Guadalajara by the end of that
same year. We commenced operations in Mexico City at the beginning of 2000 and
expanded our services to the cities of Puebla, Toluca and Leon a year later.
Because of our limited historical commercial operations, it may be difficult to
fully evaluate our past operating performance.
We may not have sufficient administrative, operational or financial resources to
pursue our growth strategy.
Our expected growth will place a strain on our administrative, operational
and financial resources. The development of our business and the installation
and expansion of our network, services and customer base require significant
expenditures. Since inception we have invested in the aggregate approximately
Ps. 7,400 million in our network and infrastructure. These expenditures,
together with operating expenses, will adversely impact our cash flow and
profitability. We also anticipate that continued growth will require us to
attract and retain qualified personnel who can efficiently manage such growth.
If we are unable to meet the challenges that our growth presents, our results of
operations and financial condition could be adversely affected.
We depend on certain vendors for the deployment of our network.
Our ability to achieve our strategic objectives and our overall performance
and prospects depends and will depend, in large part, upon the successful,
timely and cost-effective acquisition of equipment. From our inception until
December 2003, Nortel Networks was our main supplier of fixed wireless access
technology. On December 23, 2003, Airspan Communications Limited ("Airspan")
acquired Nortel's fixed wireless access business, assuming Nortel's rights and
obligations relating to the supply of fixed wireless access products and related
services to us. Therefore, we currently depend on Airspan for the production of
the fixed wireless access product, which represent most of our current network
access infrastructure. We are Airspan's primary customer for these products. If
Airspan ceases to produce these products, our network expansion and growth could
be slowed and our operating results could be adversely affected. We have a
contingent license from Airspan to use their fixed wireless access technology to
produce these products in the event Airspan ceases production. However, we may
be unable to obtain additional fixed wireless access products on satisfactory
terms, if at all. See "Certain Relationships and Related Transactions."
If we do not successfully maintain, upgrade and efficiently operate accounting,
billing, customer service and management information systems, we may not be able
to maintain and improve our operating efficiencies.
Sophisticated information and processing systems are vital to our
operations and growth and our ability to monitor costs, render monthly invoices
for services, process customer orders, provide customer service and achieve
operating efficiencies. We have installed the accounting, information and
processing systems that we deem necessary to provide services efficiently.
However, there can be no assurance that we will be able to successfully operate
and upgrade such systems or that they will continue to perform as expected. Any
failure in our information and
-12-
processing systems could impair our ability to collect payment from customers
and respond satisfactorily to customer needs.
Our operations are dependent upon our ability to protect our network
infrastructure.
Our operations are dependent upon our ability to protect our network
infrastructure against damage from fire, earthquakes, floods, power loss,
breaches of security, software defects and similar events and to construct
networks that are not vulnerable to the effects of such events. The occurrence
of a natural disaster or other unanticipated problem at our facilities or at the
sites of our switches could cause interruptions in the services we provide. The
failure of a switch would result in the interruption of service to the customers
served by that switch until necessary repairs were effected or replacement
equipment was installed. Repairing or replacing damaged equipment may be costly.
Any damage or failure that causes interruptions in our operations could have a
material adverse effect on our business, financial condition and results of
operations.
If our significant customer fails to perform under our existing agreements, our
business could be adversely impacted.
We have an agreement with Nextel de Mexico, our largest single customer,
which allows Nextel de Mexico to provide telecommunications services to its
customers through access to our network. Under this agreement, we are guaranteed
certain minimum levels of traffic. In 2003, our sales to Nextel de Mexico
accounted for approximately 18% of our net sales. In the event Nextel de Mexico
fails to comply with its obligations under our agreement, or such agreement is
not renewed upon its expiration in December 2005, our results of operations and
financial condition could be materially and adversely affected.
We depend on key personnel; if they were to leave us, we might have an
insufficient number of qualified employees.
We believe that our ability to implement our business strategy and our
future success depends on the continuous employment of our senior management
team, in particular our president and chief executive officer, Tomas Milmo
Santos. Our senior management team has extensive experience in the industry and
is vital in maintaining some of our major customer relationships which may be
difficult to replace. The loss of the technical knowledge, management and
industry expertise of these key employees could make it difficult for us to
execute our business plan effectively and could result in delays in new products
being developed, loss of customers and diversion of resources while we seek
replacements.
We depend on Telmex for interconnection and we may be forced to pay higher
interconnection fees in the future, which could have a material adverse effect
on our business and results of operations.
Telmex exerts significant influence on all aspects of the
telecommunications markets in Mexico, including interconnection agreements. We
use Telmex's network to terminate the vast majority of our customers' calls. Our
interconnection agreement with Telmex expired on December 31, 2003.
Notwithstanding such expiration, the terms and conditions of the agreement
(including the tariffs) are automatically extended until the parties mutually
agree to extend the agreement. If a new interconnection agreement is entered
into with Telmex, the terms and conditions (including rates) of such new
agreement may not permit us to offer services that are both profitable and
competitive. In addition, if the SCT (Secretaria de Comunicaciones y
Transportes), the Mexican telecommunications regulatory authority, ceased to
regulate Telmex's pricing, the resulting competitive climate could have a
material adverse effect on our business and results of operations. See
"Supervision and Regulation of the Mexican Telecommunication
Industry--Interconnection."
A system failure could cause delays or interruptions of service, which could
cause us to lose customers.
To be successful, we will need to continue to provide our customers
reliable service over our network. Some of the risks to our network and
infrastructure include:
o physical damage to access lines;
-13-
o power surges or outages;
o software defects; and
o disruptions beyond our control.
Disruptions may cause interruptions in service or reduced capacity for
customers, either of which could cause us to lose customers and incur additional
expenses.
We operate in a highly competitive environment, which may negatively affect our
operating margins.
The telecommunications industry in Mexico is becoming more competitive.
Over the past two years, prices for local and long distance calls in Mexico
declined by approximately 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 Ley Federal de
Telecomunicaciones enacted in 1995, referred to herein as the Mexican
Telecommunications Law, and Telmex's concessions, Telmex may subsidize its long
distance services with revenues obtained from its local services and as a result
may be able to price its services at rates that are not profitable for us. We
will face significant competition from Telmex in all the areas where we
currently operate.
We depend on revenues from certain highly competitive segments.
High-volume business customers are one of the most attractive niches in the
market. This segment is being addressed by a number of carriers that offer
competitive telecommunications services solutions in order to gain these
accounts. Losing some of these customers could represent a significant loss of
income and lower operating income.
We may need additional financing.
We may require additional financing in the future to service our
indebtedness, including the notes, and fund our operations. We cannot assure you
that we will have sufficient resources and that, if needed, any financing will
be available in the future or on terms acceptable to us. In addition, our
ability to incur additional indebtedness will be restricted by the terms of the
notes or other covenants from other financial agreements currently in place or
into which we may enter in the future.
The technology we use may be made obsolete by the technology used by our
competitors.
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
-14-
wireless system, as well as a fiber optic network, point-to-multipoint,
point-to-point and copper infrastructure, we cannot assure you that these
technologies will not be challenged by competition. We have relied heavily on
the continued performance of wireless technology. Technological changes or
advances in alternative technologies may adversely affect our competitive
position, require us to reduce our prices, require substantial new capital
expenditures and/or require write-downs of obsolete technology.
If our current churn rate increases, our business could be negatively impacted.
The cost of acquiring a new customer is much higher than the cost of
maintaining an existing customer. Accordingly, customer deactivations, or churn,
could have a material negative impact on our operating income, even if we are
able to obtain one new customer for each lost customer. Although our average
monthly churn rate has decreased to approximately 1.6% during 2003 from
approximately 2.2% during 2002, our churn rate was still higher than that of our
main competitors. We believe that our churn rate was mainly due to customer
deactivations resulting from non-payment of bills. If we experience a further
increase in our churn rate, our ability to achieve revenue growth could be
materially impaired. In addition, a decline in general economic conditions could
lead to an increase in churn, particularly among our residential customers.
A majority of our voting stock is controlled by one shareholder, the interests
of which may not always be the same as the interests of the holders; there is a
dispute among certain of our shareholders and us which could affect our ability
to make corporate decisions.
Telinor owns all of our Series A Voting Shares and, as a result, a majority
of all of our voting shares. As a result, Telinor has control over many of our
corporate decisions and will have the ability to prevent our taking any
particular corporate decision, whether or not Telinor's actions are in the best
interest of the holders.
Our other series of voting shares issued and outstanding is Series C Voting
Shares. The holders of the Series C Voting Shares are entitled to certain
rights. Certain actions cannot be approved at a meeting of shareholders without
the vote of a majority of the Series C Voting Shares and certain actions cannot
be approved at the Board of Directors level without the vote of at least one
director appointed by the holders of Series C Voting Shares. These matters
include, among others, issues associated with the fundamental nature of Axtel as
a corporation, changes in its indebtedness, changes in its charter or bylaws,
the issuance or repurchase of securities, initiation or settlement of material
litigation, transactions not in the ordinary course of business and material
capital expenditures.
As a result of a dispute among certain of our shareholders and us, if a
matter requiring the approval of the majority of the Series C Voting Shares is
approved without the affirmative vote of LAIF X sprl (a holder of some of our
Series C voting shares), or a matter requiring the approval of one or more
Series C Directors is approved without the affirmative vote of at least one
director appointed by LAIF X sprl, there may be doubt as to the validity of such
approval. LAIF X sprl has voted in favor of the issuance of the notes and the
exchange notes and no action is required at the Board of Directors level. See
"Business--Legal Proceedings--Shareholding / Shareholder Disputes."
Risks Relating to the Mexican Telecommunications Industry
We operate in a highly regulated industry.
As a provider of public services, we are subject to extensive regulation.
Although the basic regulatory framework governing telecommunications has been in
existence since 1995, it may undergo changes from time to time, which may
materially and adversely affect our business, operations, financial condition
and prospects.
If the Mexican government grants more concessions or amends existing
concessions, the value of our concessions could be severely impaired.
The Mexican government regulates the telecommunications industry. Our
concessions are not exclusive and the Mexican government has granted and may
grant additional concessions covering the same geographic 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.
-15-
Foreign ownership restrictions may limit our ability to raise equity capital.
Mexican law provides that no more than 49% of the full voting stock of a
Mexican corporation holding a concession to provide telecommunications services
other than cellular services may be held by non-Mexicans. Non-Mexicans own 41.5%
of our full voting stock. Any future sales of equity securities to non-Mexicans
in excess of 49% of full voting stock must involve so-called "neutral"
securities with limited or no voting rights or would require a proportional
purchase of voting stock by Mexicans. This national ownership requirement may
limit our ability to raise capital from non-Mexican investors in the future.
Fraud could increase our expenses.
The fraudulent use of telecommunications networks could impose a
significant cost upon service providers, who must bear the cost of services
provided to fraudulent users. We may suffer a loss of revenue as a result of
fraudulent use and incur an additional cash cost due to our obligation to
reimburse carriers the cost of services provided to fraudulent users. Although
technology has been developed to combat this fraudulent use and we have
installed it in our network, this technology does not eliminate fraud entirely.
In addition, because we rely on other long distance carriers to terminate our
calls on their networks, some of which do not have anti-fraud technology in
their networks, we may be particularly exposed to this risk in our long distance
service.
Risks Relating to Mexico
Economic developments in Mexico affect our business.
We are a Mexican company with all of our operations in Mexico. The economic
environment within Mexico can have a significant impact on our business and
financial condition and results of operations and our ability to meet our
obligations under the notes.
Beginning in December 1994 and continuing through 1995, Mexico experienced
an economic crisis characterized by a sharp devaluation of the peso, high
inflation, foreign currency exchange rate instability, high domestic interest
rates, a strong contraction in consumer demand for many products and services,
reduced availability of credit, high unemployment and diminished international
investor confidence in Mexico. Mexico's gross domestic product, which grew at a
real annual rate of 3.5% during 1994, declined by 6.2% in real terms during
1995.
In response to these developments, beginning in February 1995, the Mexican
government implemented a variety of economic programs designed to promote
economic recovery, stabilize foreign currency exchange rates and reduce
inflation. Economic conditions in Mexico improved moderately in 1996 and 1997.
However, a combination of factors led to a slowdown in Mexico's economic growth
in 1998. Notably, the decline in the international price of oil resulted in a
reduction of federal revenues, approximately one-third of which are derived from
petroleum taxes and duties. In addition, the economic crises in Asia and Russia,
as well as the financial turmoil in Brazil, Venezuela and elsewhere, produced
greater volatility in the international financial markets, which further slowed
Mexico's economic growth. In 1998, the inflation rate in Mexico was 18.6%,
interest rates on 28-day Certificados de la Tesoreria de la Federacion ("CETES")
averaged 24.8% and the peso lost 22.7% of its value (in nominal terms) relative
to the US dollar.
During 1999, conditions improved with inflation in Mexico at 12.3%,
interest rates on 28-day CETES averaging 21.4% and the peso appreciating 4.2% in
value (in nominal terms) relative to the US dollar. Throughout 2000, the
improvement shown in 1999 continued. In 2000, the inflation rate was 9.0%,
interest rates on 28-day CETES averaged 15.2% and the peso devalued 1.5% in
value (in nominal terms) relative to the US dollar. The Mexican government
estimated that Mexico's real gross domestic product grew by 5.0% in 1998, 3.6%
in 1999 and 6.6% in 2000.
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 appreci-
-16-
ated 4.8% in value (in nominal terms) relative to the US dollar. During 2002, as
the United States and global economic slowdown continued, the Mexican real gross
domestic product growth rate was 0.7%, the inflation rate was 5.7%, interest
rates on 28-day CETES averaged 11.3% and the peso devalued 13.9% (in nominal
terms) relative to the US dollar. During the year ended December 31, 2003, the
inflation rate was 4.0%, interest rates on 28-day CETES averaged 6.2% and the
peso devalued 7.7% (in nominal terms) relative to the US dollar.
In the past, inflation has led to high interest rates and devaluation of
the peso. Inflation itself, as well as governmental efforts to reduce inflation,
has had significant negative effects on the Mexican economy in general and on
Mexican companies, including us. Inflation in Mexico decreases the real
purchasing power of the population of Mexico, and the Mexican government's
efforts to control inflation by tightening the monetary supply have historically
resulted in higher financing costs, as real interest rates have increased. Such
policies have had and could have an adverse effect on us.
The current global economic slowdown, including the slowdown in the United
States and Mexican economies, and other future economic developments in or
affecting Mexico could impair our business, results of operations, financial
condition, prospects and ability to obtain financing.
Political events in Mexico could affect Mexican economic policy and our results
of operations.
The Mexican government has exercised, and continues to exercise,
significant influence over the Mexican economy. Mexican governmental actions
concerning the economy could have a significant impact on Mexican private sector
entities in general, as well as on market conditions.
Mexican political events may also significantly affect our operations. In
the Mexican national elections held on July 2, 2000, Vicente Fox of the Partido
Accion Nacional, which we refer to as the "PAN," won the presidency. His victory
ended more than 70 years of presidential rule by the Partido Revolucionario
Institucional, which we refer to as the "PRI." Neither the PRI nor the PAN
succeeded in securing a majority in either house of the Mexican Congress.
President Fox assumed office on December 1, 2000. While the transition from
the previous administration was smooth, since assuming office, President Fox has
encountered strong opposition to some of his proposed reforms from both houses
of Mexican Congress, where opposition parties such as the PRI, the Partido de la
Revolucion Democratica (PRD) and/or the Partido Verde Ecologista (PVE) have
frequently joined forces to block PAN initiatives. Further, on July 6, 2003,
Mexican Congressional elections were held. The elections resulted in a reduction
in the number of Congressional seats held by the PAN and an increase in the
number of Congressional seats held by the PRI, among others. We expect that
these events will intensify the current legislative gridlock in the Mexican
Congress, which could lead to a further slowdown in the progress of political
reforms in Mexico. This gridlock could have an adverse effect on us, including
our business, financial condition, prospects and results of operations.
Social and political instability in Mexico or other adverse social or
political developments in or affecting Mexico could adversely affect us and our
ability to obtain financing. It is possible that political uncertainty may
adversely affect financial markets.
We may lose money because of peso devaluation.
While our revenues are almost entirely denominated in pesos, the
substantial majority of our obligations, and all of our long-term debt, are
denominated in US dollars. The value of the Mexican peso has been subject to
significant fluctuations with respect to the US dollar in the past and may be
subject to significant fluctuations in the future. During the year ended
December 31, 2003, the peso was devalued by 7.7% (in nominal terms). Further
declines in the value of the peso relative to the US dollar could adversely
affect our ability to meet our US dollar-denominated obligations, including the
notes. In addition, any further devaluation of the peso may negatively affect
the value of Mexican securities such as the notes.
-17-
Our financial statements do not give you the same information as financial
statements prepared under United States accounting principles.
We prepare our financial statements in accordance with Mexican GAAP. These
principles differ in significant respects from US GAAP, including the treatment
of the capitalization of pre-operating expenses, the amortization of frequency
rights, the capitalization of interest and deferred income taxes and employees'
profit sharing, and in the presentation of cash flow information. In particular,
all Mexican companies must incorporate the effects of inflation directly in
their accounting records and in published financial statements. The effects of
inflation accounting under Mexican GAAP are not eliminated in the reconciliation
of US GAAP. For this and other reasons, the presentation of Mexican financial
statements and reported earnings may differ from that of companies in other
countries. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 24 to the audited consolidated financial
statements.
Risks Relating to the Notes
We and our subsidiary guarantors may incur substantially more debt, which could
further exacerbate the risks associated with our indebtedness.
Although the agreements governing our and our subsidiary guarantors'
outstanding indebtedness and the indenture governing the notes contain
restrictions on the incurrence of additional indebtedness, these restrictions
are subject to a number of qualifications and exceptions, and the indebtedness
incurred in compliance with these restrictions could be substantial. Also, these
restrictions do not prevent us or our subsidiary guarantors from incurring
obligations that do not constitute "indebtedness" as defined in the relevant
agreement. If new debt is added to the current indebtedness levels, the related
risks that we now face could intensify.
Our indebtedness could adversely affect our financial condition and impair our
ability to fulfill our obligations under the notes.
Our ability to meet our debt service requirements, including our
obligations with respect to the notes, will depend on our future performance,
which is subject to a number of factors, many of which are outside our control.
We cannot assure you that we will generate sufficient cash flow from operating
activities to meet our debt service and working capital requirements.
As of December 31, 2003, we had approximately US$193.1 million of
outstanding indebtedness.
Our level of indebtedness may have important negative effects on our future
operations, including:
o impairing our ability to obtain additional financing in the future for
working capital, capital expenditures, acquisitions or other general
corporate purposes or to repurchase the notes from you upon a change
of control;
o requiring us to dedicate a substantial portion of our cash flow to the
payment of principal and interest on our indebtedness, which reduces
the availability of our cash flow to fund working capital, capital
expenditures, acquisitions and other general corporate purposes;
o subjecting us to the risk of increased sensitivity to interest rate
increases on our indebtedness with variable interest rates, including
our borrowings under our credit facilities;
o increasing the possibility of an event of default under the financial
and operating covenants contained in our debt instruments; and
o limiting our ability to adjust to rapidly changing market conditions,
reducing our ability to withstand competitive pressures and making us
more vulnerable to a downturn in general economic conditions or our
business than our competitors with less debt.
-18-
If we are unable to generate sufficient cash flow from operations in the
future to service our debt, we may be required to refinance all or a portion of
our existing debt, including the notes, or to obtain additional financing. We
cannot assure you that any such refinancing would be possible or that any
additional financing could be obtained. Our inability to obtain such refinancing
or financing may have a material adverse effect on us.
The instruments governing our debt, including the exchange notes offered hereby,
contain cross-default provisions that may cause all of the debt issued under
such instruments to become immediately due and payable as a result of a default
under an unrelated debt instrument.
The indenture governing the notes contains numerous operating covenants and
requires us and our subsidiaries to meet certain financial ratios and tests.
Instruments governing our other debt also contain certain affirmative and
negative covenants. Our failure to comply with the obligations contained in the
indenture or other instruments governing our indebtedness could result in an
event of default under the applicable instrument, which could result in the
related debt and the debt issued under other instruments becoming immediately
due and payable. In such event, we would need to raise funds from alternative
sources, which may not be available to us on favorable terms, on a timely basis
or at all. Alternatively, such default could require us to sell our assets and
otherwise curtail operations in order to pay our creditors.
The notes and the guarantees will be unsecured and effectively subordinated to
our secured indebtedness.
The notes and the obligations of the subsidiary guarantors under their
respective guarantees will not be secured by any of our assets. We are a party
to certain financing facilities which are secured by all of our and all of our
subsidiaries' present and future property, including the concessions and
licenses which authorize us to provide telecommunications services in Mexico.
See "Description of Other Indebtedness." As of March 31, 2004, we had US$7.8
million of secured debt outstanding. In the event any of the lenders thereunder
foreclosed on these mortgaged concessions and licenses and we ceased to be the
owner of such concessions and licenses, we would no longer be able to operate as
a telephony services provider in Mexico. In addition, the indenture governing
the notes will permit the incurrence of additional debt, some of which may be
secured debt. Holders of our secured debt will have claims that are effectively
senior to your claims as holders of the notes, to the extent of the value of the
assets securing the secured debt.
If we become insolvent or are liquidated, or if payment under any secured
debt is accelerated, the lenders thereunder would be entitled to exercise the
remedies available to a secured lender. Accordingly, the lender will have
priority over any claim for payment under the notes to the extent of the value
of the assets that constitute its collateral. If this were to occur, it is
possible that there would be no assets remaining from which claims of the
holders of the notes could be satisfied. Further, if any assets did remain after
payment of these lenders, the remaining assets might be insufficient to satisfy
the claims of the holders of the notes and holders of other unsecured debt that
is deemed the same class as the notes, and potentially all other general
creditors who would participate ratably with holders of the notes.
Restrictive covenants in our debt agreements may restrict the manner in which we
can operate our business.
The indenture governing the notes limits, among other things, our ability
and the ability of our restricted subsidiaries to:
o borrow money or issue guarantees;
o pay dividends, redeem capital stock or make other restricted payments;
o create liens to secure indebtedness;
o make certain investments;
o sell certain assets;
-19-
o pledge assets;
o enter into transactions with our affiliates; and
o merge with another entity or sell substantially all of our assets.
If we fail to comply with these covenants, we would be in default under our
credit facility and the indenture, and the principal and accrued interest on the
notes and our other outstanding indebtedness may become due and payable. See
"Description of Other Indebtedness" and "Description of the Exchange
Notes--Certain Covenants." In addition, our future indebtedness agreements may
contain additional affirmative and negative covenants which could be more
restrictive than those contained in the indenture.
We may not have the ability to repurchase the notes upon a change of control as
required by the indenture.
Upon the occurrence of a change of control (as defined in the indenture),
we will be required to offer to purchase all outstanding notes at 101% of their
principal amount plus accrued and unpaid interest to the date of repurchase.
Upon such a change of control, we may not have sufficient funds available to
repurchase all of the notes tendered pursuant to this requirement. In addition,
we may be prohibited by future credit facilities from repurchasing any of the
notes unless the lenders thereunder consent to such repurchase. Our failure to
repurchase the notes would be a default under the indenture, which would, in
turn, be a default under our credit facility and, potentially, other debt. If
the payment of any debt were to be accelerated, we may be unable to repay these
amounts or make the required repurchase of the notes. See "Description of the
Exchange Notes--Repurchase at the Option of Holders."
We may not be able to make payments in US dollars.
In the past, the Mexican economy has experienced balance of payments
deficits and shortages in foreign exchange reserves. While the Mexican
government does not currently restrict the ability of Mexican or foreign persons
or entities to convert pesos to foreign currencies, to US dollars in particular,
it has done so in the past and could do so again in the future. We cannot assure
you that the Mexican government will not implement a restrictive exchange
control policy in the future. Any such restrictive exchange control policy could
prevent or restrict our access to US dollars to meet our US dollar obligations
and could also have a material adverse effect on our business, financial
condition and results of operations. We cannot predict the impact of any such
measures on the Mexican economy.
No public market exists for the exchange notes. An active trading market may not
develop for the exchange notes, which may limit your ability to resell them.
The exchange notes will constitute a new class of securities for which
there is no established trading market. We do not intend to list the notes on a
stock exchange or seek their admission for trading in the National Association
of Securities Dealers Automated Quotation System. We cannot assure you that an
active trading market for the exchange notes will develop or, if a trading
market develops, that it will continue. The lack of an active trading market for
the exchange notes would have a material adverse effect on the market price and
liquidity of the exchange notes. If a market for the exchange notes develops,
the exchange notes may trade at a discount from their initial offering price.
In addition, you may not be able to sell your exchange notes at a
particular time or at a price favorable to you. Future trading prices of the
exchange notes will depend on many factors, including:
o our operating performance and financial condition;
o our ability to complete the offer to exchange the notes for registered
notes or to register the notes for resale;
o the interest of securities dealers in making a market;
-20-
o the market for similar securities; and
o prevailing interest rates.
Historically, the market for non-investment grade debt has been subject to
disruptions that have caused substantial volatility in prices. The market for
the exchange notes, if any, may be subject to similar disruptions. A disruption
may have a negative effect on you as a holder of the notes, regardless of our
prospects or performance.
You may not be able to effect service of process on us, our subsidiaries or
directors or to enforce in Mexican courts judgments obtained against us in the
US.
We and our subsidiaries are variable capital corporations (sociedades
anonimas de capital variable) organized under the laws of Mexico, and are
headquartered, managed and operated outside of the United States (principally in
Mexico). Most of our directors and all of our officers reside in Mexico. All or
a substantial portion of our assets and the assets of most of our directors and
all of our officers are located outside of the United States (principally in
Mexico). As a result, it may not be possible for the investors or holders of the
notes to effect service of process outside of Mexico or within the United States
upon us or such persons, or to enforce a judgment obtained in the United States
against us or them outside of Mexico or in the United States courts that is
based on the civil liability provisions under laws of jurisdictions other than
Mexico including the federal and state securities laws or other laws of the
United States.
We have been advised by our special Mexican counsel, D&A Morales y
Asociados, S.C., that no treaty is in effect between the United States and
Mexico calling for the mutual recognition and enforcement of their respective
judgments. The recognition by Mexican courts of a judgment rendered in the
United States is usually done under the principle of reciprocity, which means
that Mexican courts would reexamine judgments rendered in the United States if
such foreign country would reexamine Mexican judgments. Mexican courts may
enforce judgments rendered in the United States through a homologation procedure
consisting of the review by such Mexican courts of the foreign judgment to
ascertain whether certain requirements of due process, reciprocity and public
policy have been complied with, without reviewing the merits of the subject
matter of the case. A judgment rendered in the United States may or need not be
recognized if, among others:
o the foreign court did not have jurisdiction over the subject matter in
a manner that is compatible with or analogous to Mexican laws or the
subject matter is within the exclusive jurisdiction of Mexican courts,
o the judgment was rendered under a system which does not provide
procedures compatible with due process requirements,
o enforcement of such judgment would be contrary to public policy,
o the defendant did not receive adequate personal notice in sufficient
time to defend itself,
o the judgment is not final in the rendering state,
o the judgment conflicts with another final judgment, or
o there is no reciprocity with the rendering state.
Furthermore, there is doubt as to the enforceability, in actions originated
in Mexico, of liabilities based in whole or in part on the United States federal
or state securities laws and as to the enforceability of judgments obtained in
the United States in actions based in whole or in part on the civil liability
provisions of United States federal or state securities laws.
-21-
Payment of judgments entered against us in Mexico will be in pesos, which may
expose you to exchange rate risks.
If proceedings to enforce our obligations under the notes are brought in
Mexico, Mexican law permits us to pay a resulting judgment in pesos. Under the
Ley Monetaria de Mexico (the "Mexican Monetary Law"), an obligation payable in
Mexico in a currency other than pesos may be satisfied in pesos at the exchange
rate in effect on the date the payment is made. This rate is currently
determined and published by the Banco de Mexico every business day.
Under Mexico's Ley de Concursos Mercantiles (the "Mexican Bankruptcy Law"),
upon our declaration of insolvency or bankruptcy, or in the event that actions
and claims are initiated in the courts of Mexico, our obligations under the
notes:
(i) would be converted into pesos at the exchange rate published by
the Banco de Mexico prevailing at the time of such declaration
and would subsequently be converted into Unidades de Inversion,
which is a unit pegged to the consumer price index determined by
Banco de Mexico, and payment would occur at the time claims of
our other creditors are satisfied;
(ii) would be subject to any provisional remedy ("providencia
precautoria") which may be issued in such proceedings;
(iii) would be dependent upon the outcome of the insolvency or
bankruptcy proceedings;
(iv) would not be adjusted to take into account depreciation of the
peso against the dollar occurring after such declaration of
insolvency or bankruptcy; and
(v) would be subject to certain statutory preferences including tax,
social security and labor claims and secured creditors.
Under the Mexican Bankruptcy Law, it is possible that in the event we are
declared bankrupt, any amount by which the stated principal amount of the notes
exceeds their accreted value may be regarded as not mature and, therefore,
claims of holders of the notes may only be allowed to the extent of the accreted
value of the notes. It is believed that there are no Mexican precedents in
bankruptcy addressing this point and there exists significant uncertainty as to
how a Mexican court would measure the claims to holders of the notes,
particularly given the recent enactment of the Mexican Bankruptcy Law in May
2000.
The collection of interest on interest may not be enforceable in Mexico.
Mexican law does not permit the collection of interest on interest and,
therefore, the accrual of default interest on past due ordinary interest accrued
in respect of the notes may be unenforceable in Mexico.
It is possible that Guarantees may not be enforceable.
All of our current Subsidiary Guarantors are Mexican corporations. The
Guarantees being given by the Subsidiary Guarantors provide a basis for a direct
claim against the Subsidiary Guarantors. However, it is possible that the
Guarantees may not be enforceable. For those Subsidiary Guarantors located in
Mexico, we have been advised by our special Mexican counsel, D&A Morales y
Asociados, S.C., that the laws of Mexico do not prevent their respective
Guarantees from being valid, binding and enforceable against such Subsidiary
Guarantors in accordance with their terms. However, in the event that such a
Subsidiary Guarantor is declared bankrupt, the Guarantee may be deemed to have
been a fraudulent transfer and declared void if such Subsidiary Guarantor failed
to receive fair consideration or reasonably equivalent value in exchange for
such Guarantee. In addition, under Mexican Bankruptcy Law (Ley de Concursos
Mercantiles), if the Company or any of the Subsidiary Guarantors that are
located in Mexico are judicially declared bankrupt, our obligations under the
notes and each of such Subsidiary Guarantors' obligations under its Guarantee
will be subordinated to secured creditors and certain statutorily preferred
creditors,
-22-
such as those holding labor, tax and social security related claims, which will
have preference over any other claims, including claims by any investor in
respect of the notes or such Guarantees. Furthermore, we have been advised that
under Mexican laws, the validity of each Guarantee is subject to the existence
and validity of the obligation being guaranteed. As a consequence thereof, its
enforcement is not independent or irrespective of such obligation being
guaranteed. Furthermore, under Mexican law, a Subsidiary Guarantor may be
released from its obligations under the Guarantee if (i) the holder of the note
gives the Company an extension for payment under the notes without the express
consent of such Subsidiary Guarantor, or (ii) the Company waives any cause that
would otherwise release the Company of its obligations under the notes,
including expirations or statute of limitation provisions.
The obligation of each Subsidiary Guarantor may be subject to review under
United States state or federal fraudulent transfer laws. Under such laws, if a
court in a lawsuit by an unpaid creditor or representative of creditors of a
Subsidiary Guarantor, such as a trustee in a bankruptcy of such Subsidiary
Guarantor as debtor in possession, were to find that at the time such obligation
was incurred such Subsidiary Guarantor, among other things, (a) did not receive
fair consideration or reasonably equivalent value therefor and (b) (i) was
insolvent, (i) was rendered insolvent, (iii) was engaged in a business or
transaction for which its remaining unencumbered assets constituted unreasonably
small capital or (iv) intended to incur or believed that it would incur debts
beyond its ability to pay such debts as they matured, such court could avoid
such Subsidiary Guarantor's obligation and direct the return of any payments
made thereunder to such Subsidiary Guarantor or to a fund for the benefit of its
creditors. Moreover, regardless of the factors identified in the foregoing
clauses (i) through (iv), such court could avoid such obligation and direct such
repayment if it found that the obligation was incurred with an intent to hinder,
delay or defraud such Subsidiary Guarantor's creditors.
The measure of insolvency for purposes of the preceding paragraphs will
vary depending upon the law of the jurisdiction being applied. Generally,
however, an entity would be considered insolvent if it is unable to pay or
satisfy its obligations as they become due, the sum of its debts is greater than
all of its property (including collection rights) at a fair valuation or the
present fair salable value of its assets is less than the amount that will be
required to pay its probable liability on its existing debts as they become
absolute and matured.
If the Guarantees become unenforceable under the conditions described
above, the notes would effectively be subordinated to all liabilities, including
trade payables, of the Subsidiary Guarantors. On December 31, 2003, the
Subsidiary Guarantors had total balance sheet liabilities of Ps. 80.3 million.
Your failure to tender the outstanding notes in the exchange offer may affect
their marketability.
If outstanding notes are tendered for exchange notes and accepted in the
exchange offer, the trading market, if any, for the untendered and tendered but
unaccepted outstanding notes will be adversely affected. Your failure to
participate in the exchange offer will substantially limit, and may effectively
eliminate, opportunities to sell your outstanding notes in the future. We issued
the outstanding notes in a private offering exempt from the registration
requirements of the Securities Act.
Accordingly, you may not offer, sell or otherwise transfer your outstanding
notes except in compliance with the registration requirements of the Securities
Act and any other applicable securities laws, or pursuant to an exemption from
the securities laws, or in a transaction not subject to the securities laws. If
you do not exchange your outstanding notes for exchange notes in the exchange
offer, or if you do not properly tender your outstanding notes in the exchange
offer, your outstanding notes will continue to be subject to these transfer
restrictions after the completion of the exchange offer. In addition, after the
completion of the exchange offer, you will no longer be able to obligate us to
register the outstanding notes under the Securities Act.
-23-
Use of Proceeds
We will not receive any cash proceeds from the exchange offer. We are
making this exchange offer solely to satisfy our obligations under the
registration rights agreement. In consideration for issuing the exchange notes,
we will receive the outstanding notes in an aggregate principal amount equal to
the value of the exchange notes. The outstanding notes surrendered in exchange
for the exchange notes will be retired and canceled. Accordingly, the issuance
of the exchange notes will not result in any change in our indebtedness.
We received approximately US$170 million in net proceeds from the sale of
the outstanding notes, after deducting discounts and offering expenses. We used
approximately US$110 million of such net proceeds for the repayment of debt and
the payment of certain fees and expenses associated with the repayments.
All of the debt that was repaid with the proceeds of the outstanding notes
was incurred in connection with our repurchase of certain debt in March of 2003.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Debt Repurchase."
We plan on using the balance of the net proceeds from the sale of the
outstanding notes, approximately US$60 million, for general corporate purposes.
-24-
The Exchange Offer
Purpose of the Exchange Offer
We issued and sold the outstanding notes in a private offering on December
16, 2003. In connection with that issuance and sale, we entered into a
registration rights agreement with the initial purchasers of the outstanding
notes. In the registration rights agreement, we agreed, among other things, to
o prepare and file with the SEC, as promptly as practicable, a
registration statement relating to the offer to exchange the
outstanding notes for the exchange notes (the "exchange offer
registration statement"), or, under certain circumstances, a "shelf"
registration with respect to the outstanding notes or exchange notes,
(the "shelf registration statement");
o use our reasonable best efforts to cause the exchange offer
registration statement to be declared effective under the Securities
Act within 210 days of December 16, 2003 or, in the case of a shelf
registration statement, as applicable, to be declared effective within
certain specified time periods after a shelf registration is required
or requested; and
o keep the registered exchange offer open for not less than 30 business
days (or longer if required by applicable law) after the date that
notice of the registered exchange offer is mailed to the holders of
the outstanding notes,
These requirements under the registration rights agreement will be
satisfied when we complete the exchange offer. However, if we fail to meet any
of these requirements, and under some other circumstances, the interest rate
borne by the notes that are affected by the registration default with respect to
the first 90-day period, or portion thereof, will be increased by an additional
interest of 0.25% per annum upon the occurrence of each registration default.
The amount of additional interest will increase by an additional 0.25% per annum
each 90-day period, or portion thereof, while a registration default is
continuing until all registration defaults have been cured, provided that the
maximum aggregate increase in the interest rate will in no event exceed one
percent (1%) per annum. Upon
o the effectiveness of the registration statement, in the case of a
registration default caused by a registration statement that was not
declared effective on or prior to the date by which best efforts are
to be used to cause such effectiveness; or
o the effectiveness of the registration statement which had ceased to be
effective, in the case of a registration default caused by a
registration statement that had been declared effective, but ceased to
be effective at any time at which it was required to be effective,
the registration default damages (additional interest) shall cease to accrue.
We have agreed to provide each holder of outstanding notes a copy of the
prospectus that forms part of the registration statement. We have also agreed to
keep the registered exchange offer open for not less than 30 business days and
after the date on which notice of the exchange offer is mailed to holders (or
longer if required by applicable law).
Under the registration rights agreement, our obligations to register the
exchange notes will terminate upon the completion of the exchange offer.
However, we will be required to file a shelf registration statement for a
continuous offering by the holders of the outstanding notes if:
o a change in law or applicable interpretations of the staff of the SEC
do not permit us to effect such an exchange offer; or
o for any other reason we do not consummate the exchange offer within
240 days of December 16, 2003; or
-23-
o an Initial Purchaser shall notify us following consummation of the
exchange offer that outstanding notes held by it are not eligible to
be exchanged for exchange notes in the exchange offer; or
o certain holders are prohibited by law or SEC policy from participating
in the exchange offer or may not resell the exchange notes acquired by
them in the exchange offer to the public without delivering a
prospectus.
During any 365-day period, upon the occurrence of certain events, we will
have the ability to suspend the disposition of outstanding notes pursuant to a
registration statement or shelf registration statement for up to 30 days, if we
determine in our reasonable judgment and upon written advice of counsel that the
continued effectiveness and use of the shelf registration statement would
require the disclosure of confidential information or interfere with any
financing, acquisition, reorganization or other material transaction involving
us.
We will, in the event of the filing of a shelf registration statement,
provide to each holder of outstanding notes that are covered by the shelf
registration statement copies of the prospectus included in the shelf
registration statement and notify each such holder when the shelf registration
statement has become effective. The names of holders of outstanding notes that
propose to sell the outstanding notes pursuant to the shelf registration
statement will be included, as selling security holders, in such prospectus. We
may require such holders to furnish us with information we require to include in
the shelf registration statement and we may exclude them from such shelf
registration statement if they fail to do so within a reasonable time. Selling
holders of outstanding notes that are included in the shelf registration
statement will be subject to certain of the civil liability provisions under the
Securities Act in connection with such sales and will be bound by the provisions
of the registration rights agreement which are applicable to the holder
(including certain indemnification obligations).
Once the exchange offer is complete, we will have no further obligation to
register any of the outstanding notes not tendered to us in the exchange offer.
See "Risk Factors--Factors Relating to the Exchange Notes and the Exchange
Offer--Your failure to tender outstanding notes in the exchange offer may affect
their marketability."
Effect of the Exchange Offer
Based on interpretations by the SEC staff, as set forth in no-action
letters the SEC issued to third parties, we believe that you may offer for
resale, resell and otherwise transfer the exchange notes issued to you in the
exchange offer without compliance with the registration and prospectus delivery
requirements of the Securities Act, except as set forth below, so long as you
are able to make the following representations:
o you are acquiring the exchange notes in the ordinary course of your
business;
o at the time of the consummation of the registered exchange offer, you
are not participating in, you do not intend to participate in and you
have no arrangement or understanding with any person to participate in
the distribution of the outstanding notes or exchange notes within the
meaning of the Securities Act; and
o you are not our "affiliate" within the meaning of Rule 405 under the
Securities Act.
However, we have not sought a no-action letter with respect to the exchange
offer and we cannot assure you that the staff of the SEC would make a similar
determination with respect to the exchange offer. If you are not able to make
the representations set forth in the immediately preceding paragraph, and any
such other representations as may be necessary under applicable SEC rules,
regulations and interpretations, you are a "restricted holder." As a restricted
holder, you will not be able to participate in the exchange offer, you may not
rely on the interpretations of the SEC staff set forth in the no-action letters
referred to above and you may sell your outstanding notes only in compliance
with the registration and prospectus delivery requirements of the Securities Act
or under an exemption from the registration requirements of the Securities Act
or in a transaction not subject to the Securities Act.
In addition, each broker-dealer that receives exchange notes for its own
account pursuant to the exchange offer must acknowledge in the letter of
transmittal that it will deliver a prospectus in connection with any resale of
-26-
such exchange notes. The letter of transmittal states that by so acknowledging
and by delivering a prospectus, a broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the Securities Act. This
prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of exchange notes received in
exchange for securities where such securities were acquired by such
broker-dealer as a result of market-making activities or other trading
activities. We have agreed that, starting on the expiration date and ending on
the close of business 180 days after the expiration date, we will make this
prospectus available to any broker-dealer for use in connection with any such
resale. See "Plan of Distribution." In the registration rights agreement, we
agreed to use our best efforts to keep the exchange offer registration statement
effective, supplemented and amended as required, to ensure that it is available
for such resales of exchange notes during such period.
Except as described above, this prospectus may not be used for an offer to
resell, resale or other transfer of exchange notes.
To the extent outstanding notes are tendered and accepted in the exchange
offer, the principal amount of outstanding notes that will be outstanding will
decrease with a resulting decrease in the liquidity in the market for the
outstanding notes. Outstanding notes that are still outstanding following the
completion of the exchange offer will continue to be subject to transfer
restrictions.
Terms of the Exchange Offer
Upon the terms and subject to the conditions of the exchange offer
described in this prospectus and in the accompanying letter of transmittal, we
will accept for exchange all outstanding notes validly tendered and not
withdrawn before 5:00 p.m., New York City time, on the expiration date. We wi1l
issue $1000 principal amount of exchange notes in exchange for each $1000
principal amount of outstanding notes accepted in the exchange offer. You may
tender some or all of your outstanding notes pursuant to the exchange offer.
However, outstanding notes may be tendered only in integral multiples of $1000
principal amount.
The terms of the exchange notes will be in all material respects identical
to those of the outstanding notes, except for the elimination of certain
transfer restrictions, registration rights, restrictions on holding notes in
certificated form and additional interest provisions. The exchange notes will
evidence the same debt as the outstanding notes and will be issued under and be
entitled to the benefits of the same indenture under which the outstanding notes
were issued. The outstanding notes and the exchange notes will be treated as a
single series of debt securities under the indenture. For a description of the
terms of the indenture and the exchange notes, see "Description of the Exchange
Notes."
The exchange offer is not conditioned upon any minimum aggregate principal
amount of outstanding notes being tendered for exchange. As of the date of this
prospectus, an aggregate of $175.0 million principal amount of outstanding notes
is outstanding. This prospectus is being sent to all registered holders of
outstanding notes. There will be no fixed record date for determining registered
holders of outstanding notes entitled to participate in the exchange offer.
We intend to conduct the exchange offer in accordance with the applicable
requirements of the Securities Act and the U.S. Securities Exchange Act of 1934
(the "Exchange Act") and the rules and regulations of the SEC. Holders of
outstanding notes do not have any appraisal or dissenters' rights under
applicable law or under the indenture in connection with the exchange offer.
Outstanding notes that are not tendered for exchange in the exchange offer will
remain outstanding and continue to accrue interest and will be entitled to the
rights and benefits their holders have under the indenture relating to the
outstanding notes.
We will be deemed to have accepted for exchange validly tendered
outstanding notes when we have given oral or written notice of the acceptance to
the exchange agent. The exchange agent will act as agent for the tendering
holders of outstanding notes for the purposes of receiving the exchange notes
from us and delivering the exchange notes to the tendering holders. Subject to
the terms of the registration rights agreement, we expressly reserve the right
to amend or terminate the exchange offer, and not to accept for exchange any
outstanding notes not previously accepted for exchange, upon the occurrence of
any of the conditions specified below under "--Conditions." All outstanding
notes accepted for exchange will be exchanged for exchange notes promptly
following the expir-
-27-
ation date. If we decide for any reason to delay for any period our acceptance
of any outstanding notes for exchange, we will extend the expiration date for
the same period.
If we do not accept for exchange any tendered outstanding notes because of
an invalid tender, the occurrence of certain other events described in this
prospectus or otherwise, such unaccepted outstanding notes will be returned,
without expense, to the holder tendering them or the appropriate book-entry will
be made, in each case, as promptly as practicable after the expiration date.
We are not making, nor is our board of directors making, any recommendation
to you as to whether to tender or refrain from tendering all or any portion of
your outstanding notes in the exchange offer. No one has been authorized to make
any such recommendation. You must make your own decision whether to tender in
the exchange offer and, if you decide to do so, you must also make your own
decision as to the aggregate amount of outstanding notes to tender after reading
this prospectus and the letter of transmittal and consulting with your advisers,
if any, based on your own financial position and requirements.
Expiration Date; Extensions; Amendments
The term "expiration date" means 5:00 p.m., New York City time, on , 2004,
unless we, in our sole discretion, extend the exchange offer, in which case the
term "expiration date" shall mean the latest date and time to which the exchange
offer is extended.
If we determine to extend the exchange offer, we will notify the exchange
agent of any extension by oral or written notice. We will notify the registered
holders of outstanding notes of the extension no later than 5:00 p.m., New York
City time, on the business day immediately following the previously scheduled
expiration date.
We reserve the right, in our sole discretion:
o to delay accepting for exchange any outstanding notes;
o to extend the exchange offer or to terminate the exchange offer and to
refuse to accept outstanding notes not previously accepted if any of
the conditions set forth below under "--Conditions" have not been
satisfied by the expiration date; or
o subject to the terms of the registration rights agreement to amend the
terms of the exchange offer in any manner.
Any such delay in acceptance, extension, termination or amendment will be
followed as promptly as practicable by oral or written notice to the registered
holders of outstanding notes. If we amend the exchange offer in a manner that we
determine to constitute a material change, we will promptly disclose the
amendment in a manner reasonably calculated to inform the holders of the
outstanding notes of the amendment.
During any extension of the exchange offer, all outstanding notes
previously tendered will remain subject to the exchange offer, and we may accept
them for exchange. We will return any outstanding notes that we do not accept
for exchange for any reason without expense to the tendering holder as promptly
as practicable after the expiration or earlier termination of the exchange
offer.
Interest on the Exchange Notes and the Outstanding Notes
Any outstanding notes not tendered or accepted for exchange will continue
to accrue interest at the rate of 11% per annum in accordance with their terms.
The exchange notes will accrue interest at the rate of 11% per annum from the
date of the last periodic payment of interest on the outstanding notes or, if no
interest has been paid, from the original issue date of outstanding notes.
Interest on the exchange notes and any outstanding notes not tendered or
accepted for exchange will be payable semi-annually in arrears on June 15 and
December 15 of each year, commencing on June 15, 2004.
-28-
Procedures For Tendering
Only a registered holder of outstanding notes may tender those notes in the
exchange offer. To tender in the exchange offer:
o a holder must complete, sign and date the letter of transmittal, have
the signatures thereon guaranteed if required by the letter of
transmittal, and mail or otherwise deliver such letter of transmittal,
together with the outstanding notes and all other documents required
by the letter of transmittal, to the exchange agent at one of the
addresses set forth below under "--Exchange Agent," before 5:00 p.m.,
New York City time, on the expiration date; or
o the exchange agent must receive, before the expiration date, a timely
confirmation of a book-entry transfer of the tendered outstanding
notes into the exchange agent's account at The Depository Trust
Company, or DTC, or the depositary, and timely receipt by the exchange
agent of an agent's message (as defined below under "--Book-Entry
Transfer") and any other documents required by the letter of
transmittal according to the procedure for book-entry transfer
described below; or
o the holder must comply with the guaranteed delivery procedures
described below.
A tender of outstanding notes by a holder that is not withdrawn prior to
the expiration date will constitute an agreement between that holder and us in
accordance with the terms and subject to the conditions set forth in this
prospectus and in the letter of transmittal.
The method of delivery of outstanding notes, letters of transmittal and all
other required documents to the exchange agent, including delivery through DTC,
is at the holder's election and risk. Instead of delivery by mail, we recommend
that holders use an overnight or hand delivery service. If delivery is by mail,
we recommend that holders use certified or registered mail, properly insured,
with return receipt requested. In all cases, holders should allow sufficient
time to assure delivery to the exchange agent before the expiration date.
Holders should not send letters of transmittal or other required documents to
us. Holders may request their respective brokers, dealers, commercial banks,
trust companies or other nominees to effect the above transactions for them.
Any beneficial owner whose outstanding notes are registered in the name of
a broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender those notes should contact the registered holder promptly and instruct
it to tender on the beneficial owner's behalf.
We will determine, in our sole discretion, all questions as to the
validity, form, eligibility (including time of receipt), acceptance of tendered
outstanding notes and withdrawal of tendered outstanding notes, and our
determination will be final and binding. We reserve the absolute right to reject
any and all outstanding notes not properly tendered or any outstanding notes the
acceptance of which would, in the opinion of us or our counsel, be unlawful. We
also reserve the absolute right to waive any defects or irregularities or
conditions of the exchange offer as to any particular outstanding notes either
before or after the expiration date. Our interpretation of the terms and
conditions of the exchange offer as to any particular outstanding notes either
before or after the expiration date, including the instructions in the letter of
transmittal, will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of outstanding notes for
exchange must be cured within such time as we shall determine. Although we
intend to notify holders of any defects or irregularities with respect to
tenders of outstanding notes for exchange, neither we nor the exchange agent nor
any other person shall be under any duty to give such notification, nor shall
any of them incur any liability for failure to give such notification. Tenders
of outstanding notes will not be deemed to have been made until all defects or
irregularities have been cured or waived. Any outstanding notes received by the
exchange agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by the exchange
agent to the tendering holders or, in the case of outstanding notes delivered by
book-entry transfer within DTC, will be credited to the account maintained
within DTC by the participant in DTC which delivered such outstanding notes,
unless otherwise provided in the letter of transmittal, as soon as practicable
following the expiration date.
-29-
In addition, we reserve the right in our sole discretion (a) to the extent
permitted by applicable law, to purchase or make offers for any outstanding
notes that remain outstanding after the expiration date, in privately negotiated
transactions or otherwise and (b) as set forth below under "--Conditions," to
terminate the exchange offer. The terms of any such purchases or offers could
differ from the terms of the exchange offer.
By signing, or otherwise becoming bound by, the letter of transmittal, each
tendering holder of outstanding notes (other than certain specified holders)
will represent to us that:
o it is acquiring the exchange notes in the ordinary course of its
business;
o it is not engaging in and does not intend to engage in a distribution
of the exchange notes;
o it has no arrangements or understandings with any person to
participate in the exchange offer for the purpose of distributing the
exchange notes within the meaning of the Securities Act; and
o it is not our "affiliate," within the meaning of Rule 405 under the
Securities Act, or, if it is our affiliate, it will comply with the
registration and prospectus delivery requirements of the Securities
Act to the extent applicable.
If the tendering holder is a broker-dealer that will receive exchange notes
for its own account in exchange for outstanding notes that were acquired as a
result of market-making activities or other trading activities, it may be deemed
to be an "underwriter" within the meaning of the Securities Act. Any such holder
will be required to acknowledge in the letter of transmittal that it will
deliver a prospectus in connection with any resale of these exchange notes.
However, by so acknowledging and by delivering a prospectus, the holder will not
be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act.
Book-Entry Transfer
The exchange agent will establish a new account or utilize an existing
account with respect to the outstanding notes at DTC promptly after the date of
this prospectus. Any financial institution that is a participant in DTC's
systems may make book-entry delivery of outstanding notes by causing DTC to
transfer these outstanding notes into the exchange agent's account in accordance
with DTC's procedures for transfer. Exchange for the outstanding notes so
tendered will only be made after timely confirmation of this book-entry transfer
of outstanding notes into the exchange agent's account and timely receipt by the
exchange agent of an agent's message and any other documents required by the
letter of transmittal. The term "agent's message" means a message transmitted by
DTC to, and received by, the exchange agent and forming a part of a book-entry
confirmation, that states that DTC has received an express acknowledgment from a
participant in DTC tendering outstanding notes that are the subject of the
book-entry confirmation stating (1) the aggregate principal amount of
outstanding notes that have been tendered by such participant, (2) that such
participant has received and agrees to be bound by the terms of the letter of
transmittal and (3) that we may enforce such agreement against the participant.
Although delivery of outstanding notes may be effected through book-entry
transfer into the exchange agent's account at DTC, the letter of transmittal,
properly completed and validly executed, with any required signature guarantees,
or an agent's message in lieu of the letter of transmittal, and any other
required documents, must be delivered to and received by the exchange agent at
one of its addresses listed below under "--Exchange Agent," before 5:00 p.m.,
New York City time, on the expiration date, or the guaranteed delivery procedure
described below must be complied with.
Delivery of documents to DTC in accordance with its procedures does not
constitute delivery to the exchange agent.
All references in this prospectus to deposit or delivery of outstanding
notes shall be deemed to also refer to DTC's book-entry delivery method.
-30-
2
Guaranteed Delivery Procedures
Holders who wish to tender their outstanding notes and (1) whose
outstanding notes are not immediately available or (2) who cannot deliver a
confirmation of book-entry transfer of outstanding notes into the exchange
agent's account at DTC, the letter of transmittal or any other required
documents to the exchange agent prior to the expiration date or (3) who cannot
complete the procedure for book-entry transfer on a timely basis, may effect a
tender if:
o the tender is made through an eligible institution;
o before the expiration date, the exchange agent receives from the
eligible institution a properly completed and duly executed notice of
guaranteed delivery, by facsimile transmission, mail or hand delivery,
listing the principal amount of outstanding notes tendered, stating
that the tender is being made thereby and guaranteeing that, within
three business days after the expiration date, a duly executed letter
of transmittal together with a confirmation of book-entry transfer of
such outstanding notes into the exchange agent's account at DTC, and
any other documents required by the letter of transmittal and the
instructions thereto, will be deposited by such eligible institution
with the exchange agent; and
o the properly completed and executed letter of transmittal and a
confirmation of book-entry transfer of all tendered outstanding notes
into the exchange agent's account at DTC and all other documents
required by the letter of transmittal are received by the exchange
agent within three business days after the expiration date.
Upon request to the exchange agent, a notice of guaranteed delivery will be
sent to holders who wish to tender their outstanding notes according to the
guaranteed delivery procedures described above.
Withdrawal of Tenders
Except as otherwise provided in this prospectus, tenders of outstanding
notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on
the expiration date.
For a withdrawal to be effective, the exchange agent must receive a written
or facsimile transmission notice of withdrawal at one of its addresses set forth
below under "--Exchange Agent." Any notice of withdrawal must:
o specify the name of the person who tendered the outstanding notes to
be withdrawn;
o identify the outstanding notes to be withdrawn, including the
principal amount of such outstanding notes;
o if certificates for outstanding notes have been delivered or otherwise
identified to the exchange agent, be signed by the holder in the same
manner as the original signature on the letter of transmittal by which
the outstanding notes were tendered and include any required signature
guarantees; and
o if outstanding notes have been tendered pursuant to the procedure for
book-entry transfer described above, specify the name and number of
the account at DTC to be credited with the withdrawn outstanding notes
and otherwise comply with the procedures of DTC.
We will determine, in our sole discretion, all questions as to the
validity, form and eligibility (including time of receipt) of any notice of
withdrawal, and our determination shall be final and binding on all parties. Any
outstanding notes so withdrawn will be deemed not to have been validly tendered
for exchange for purposes of the exchange offer and no exchange notes will be
issued with respect thereto unless the outstanding notes so withdrawn are
validly retendered. Properly withdrawn outstanding notes may be retendered by
following one of the procedures described above under "--Procedures for
Tendering" at any time prior to the expiration date.
-31-
Any outstanding notes that are tendered for exchange through the facilities
of DTC but that are not exchanged for any reason will be credited to an account
maintained with DTC for the outstanding notes as soon as practicable after
withdrawal, rejection of tender or termination of the exchange offer.
Conditions
Despite any other term of the exchange offer, we will not be required to
accept for exchange, or to issue exchange notes in exchange for, any outstanding
notes, and we may terminate the exchange offer as provided in this prospectus
prior to the expiration date, if:
o the exchange offer, or the making of any exchange by a holder of
outstanding notes, would violate applicable law or any applicable
interpretation of the SEC staff; or
o the outstanding notes are not tendered in accordance with the exchange
offer; or
o the tendering holder cannot make the representations set forth in the
first paragraph under "--Effect of the Exchange Offer" and any such
other representations as may be necessary under applicable SEC rules,
regulations and interpretations to render available the use of an
appropriate form for registration of the exchange notes under the
Securities Act; or
o any action or proceeding is instituted or threatened in any court or
by or before any governmental agency with respect to the exchange
offer which, in our judgment, would reasonably be expected to impair
our ability to proceed with the exchange offer; or
o any governmental approval has not been obtained which we believe, in
our sole discretion, is necessary for the consummation of the exchange
offer as outlined in this prospectus.
These conditions are for our sole benefit and may be asserted by us
regardless of the circumstances giving rise to any of these conditions or may be
waived by us, in whole or in part, at any time and from time to time in our
discretion. Our failure at any time to exercise any of the foregoing rights
shall not be deemed a waiver of the right and each right shall be deemed an
ongoing right which may be asserted at any time and from time to time.
If we determine that any of the conditions are not satisfied, we may:
o refuse to accept and return to the tendering holder any outstanding
notes or credit any tendered outstanding notes to the account
maintained within DTC by the participant in DTC which delivered the
outstanding notes; or
o extend the exchange offer and retain all outstanding notes tendered
before the expiration date, subject to the rights of holders to
withdraw the tenders of outstanding notes (see "--Withdrawal of
Tenders" above); or
o waive the unsatisfied conditions with respect to the exchange offer
prior to the expiration date and accept all properly tendered
outstanding notes that have not been withdrawn or otherwise amend the
terms of the exchange offer in any respect as provided under "--
Expiration Date; Extensions; Amendments."
In addition, we will not accept for exchange any outstanding notes
tendered, and we will not issue exchange notes in exchange for any of the
outstanding notes, if at that time any stop order is threatened or in effect
with respect to the registration statement of which this prospectus constitutes
a part or the qualification of the indenture under the Trust Indenture Act of
1939.
-32-
4
Exchange Agent
The Bank of New York has been appointed as the exchange agent for the
exchange offer. All signed letters of transmittal and other documents required
for a valid tender of your outstanding notes should be directed to the exchange
agent at one of the addresses set forth below. Questions and requests for
assistance, requests for additional copies of this prospectus or of the letter
of transmittal and requests for notices of guaranteed delivery should be
directed to the exchange agent addressed as follows:
BY HAND DELIVERY, REGISTERED MAIL OR OVERNIGHT CARRIER
The Bank of New York
101 Barclay Street
Floor 7E
New York, New York 10286
Attention: Corporate Trust Operations, Reorganization
FACSIMILE TRANSMISSION:
212-298-1915
Confirm by Telephone:
(212) 815-5920
FOR INFORMATION WITH RESPECT TO THE EXCHANGE OFFER, CALL:
Carolle Montreuil of the Exchange Agent
at (212) 815-5920
Delivery to other than the above addresses or facsimile number will not
constitute a valid delivery.
Fees and Expenses
We will bear the expenses of soliciting tenders. We have not retained any
dealer-manager in connection with the exchange offer and will not make any
payments to brokers, dealers or others soliciting acceptance of the exchange
offer. The principal solicitation is being made by mail; however, additional
solicitation may be made by facsimile, telephone or in person by our officers
and employees.
We will pay the expenses to be incurred in connection with the exchange
offer. These expenses include fees and expenses of the exchange agent and the
trustee, accounting and legal fees, printing costs, and related fees and
expenses.
Transfer Taxes
Holders of outstanding notes who tender their outstanding notes for
exchange notes will not be obligated to pay any transfer taxes in connection
therewith, except that holders who instruct us to register exchange notes in the
name of, or request that outstanding notes not tendered or not accepted in the
exchange offer be returned to, a person other than the registered tendering
holder will be responsible for the payment of any applicable transfer tax
thereon.
Accounting Treatment
We will record the exchange notes in our accounting records at the same
carrying values as the outstanding notes on the date of the exchange.
Accordingly, we will recognize no gain or loss, for accounting purposes, as a
result of the exchange offer. Under Mexican GAAP, the expenses of the exchange
offer and the unamortized expenses relating to the issuance of the outstanding
notes will be amortized over the term of the exchange notes.
-33-
Consequences of Failure to Exchange
Holders of outstanding notes who do not tender and exchange their
outstanding notes for exchange notes pursuant to the exchange offer will
continue to be subject to the restrictions on transfer of the outstanding notes
as set forth in the legend printed thereon as a consequence of the issuance of
the outstanding notes pursuant to an exemption from the Securities Act and
applicable state securities laws. Outstanding notes not exchanged pursuant to
the exchange offer will continue to accrue interest at 11% per annum, and the
outstanding notes will otherwise remain outstanding in accordance with their
terms. Holders of outstanding notes do not have any appraisal or dissenters'
rights under applicable law in connection with the exchange offer.
In general, the outstanding notes may not be offered or sold unless
registered under the Securities Act, except pursuant to an exemption from, or in
a transaction not subject to, the Securities Act and applicable state securities
laws. Upon completion of the exchange offer, holders of outstanding notes will
not be entitled to any rights to have the resale of outstanding notes registered
under the Securities Act, and we currently do not intend to register under the
Securities Act the resale of any outstanding notes that remain outstanding after
completion of the exchange offer.
-34-
Capitalization
Our consolidated capitalization set forth below was calculated in
accordance with Mexican GAAP. This table should be read in conjunction with, and
is qualified in its entirety by reference to, the information under the section
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and our consolidated financial statements and the notes
thereto included elsewhere in this prospectus.
The following table sets forth our cash and cash equivalents and our
capitalization on a consolidated basis as of December 31, 2003:
[Enlarge/Download Table]
As of
December 31, 2003(1)
(US$
(Ps. millions) millions)(1)
Cash and cash equivalents...................... 1,013.0 90.2
Total debt(2):.................................
Other debt(3)............................. 194.1 17.3
Outstanding notes......................... 1,975.3 175.8
Total debt................................ 2,169.4 193.1
Total stockholders' equity................ 5,382.1 479.0
Total capitalization................... 7,551.5 672.1
------------------------------
(1) Peso amounts have been translated into US dollars, solely for the
convenience of the reader, at the rate of 11.2360 pesos per US dollar, the
free exchange rate on December 31, 2003.
(2) Including accrued interest as of December 31, 2003 of Ps. 6.0 million.
(3) Other debt includes US$4.6 million with Siemens Financial Services, Inc.,
US$6.3 with Banorte short term credit facility, US$2.5 million with HP
Operations (including Compaq Financial Services), US$0.9 million with CIT
(The Capita Corporation), US$0.4 million with Hewlett Packard Mexico, S. de
R.L., US$0.4 million with SR Telecom Inc. and US$2.1 million with other
financial institutions. As of March 31, 2004 all amounts owed to Siemens
Financial Services, Inc., Hewlett Packard Mexico, S. de R.L. and SR Telecom
Inc. were repaid in full.
-35-
Exchange Rates
As of March 31, 2004, the noon buying rate in the spot market for the
purchase of US dollars (in nominal pesos per US dollar) was Ps. 11.1540(1). The
following table sets forth, for the periods indicated, the period end, average,
high and low noon buying rates, in each case for the purchase of US dollars, all
expressed in nominal pesos per US dollar.
[Enlarge/Download Table]
Noon buying rate(1)
Prior Years Period End Average High Low
Year ended December 31, 1999........................ Ps. 9.48 Ps. 9.55 Ps. 10.60 Ps. 9.24
Year ended December 31, 2000........................ 9.62 9.46 10.09 9.18
Year ended December 31, 2001........................ 9.16 9.34 9.97 8.95
Year ended December 31, 2002........................ 10.43 9.66 10.43 9.00
Year ended December 31, 2003........................ 11.24 10.79 11.41 10.11
(1) Source: Federal Reserve Bank of New York
The following table sets forth, for the periods indicated, the period end,
average, high and low noon buying rates, in each case for the purchase of US
dollars, all expressed in nominal pesos per US dollar.
Noon buying rate(1)
2003/2004 High Low
September 2003.............................. 11.04 10.77
October 2003................................ 10.97 11.32
November 2003............................... 11.40 10.98
December 2003............................... 11.41 11.17
January 2004................................ 11.10 10.81
February 2004............................... 11.25 10.97
(1) Source: Federal Reserve Bank of New York
The outstanding notes referenced in this prospectus constitute
substantially all of our indebtedness. Devaluation of the peso in relation to
the US dollar will adversely affect our ability to meet our US
dollar-denominated obligations, including the notes. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and capital resources" and "Risk Factors--Risks Relating
to Mexico--We may lose money because of peso devaluation."
In the past, the Mexican economy has suffered balance of payment deficits
and shortages in foreign exchange reserves. While the Mexican government does
not currently restrict the ability of Mexican or foreign persons or entities to
convert pesos to US dollars, it has done so in the past and may do so in the
future. Any such restrictive exchange control policy could adversely affect our
ability to make payments in US dollars, and could also have a material adverse
effect on our financial condition and results of operations.
-36-
Selected Financial Data
The following table provides our selected historical consolidated financial
data. The selected historical consolidated financial data for the years ended
December 31, 2001, 2002 and 2003 have been derived from our audited consolidated
financial statements included elsewhere in this prospectus.
The information presented below should be read in conjunction with "Use of
Proceeds," "Capitalization," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements
included elsewhere in this prospectus.
[Enlarge/Download Table]
Year Ended December 31,
1999 2000 2001 2002 2003
(Constant Ps. in millions as of December 31, 2003, except ratios and margins)
Statement of Income Data:
Revenues .......................... 105.7 1,052.7 2,242.9 2,452.4 2,919.5
Cost of sales and operating
expenses........................ (448.8) (1,935.2) (2,808.7) (2,685.2) (2,807.1)
Income (loss) from operations ..... (343.2) (882.4) (565.8) (232.8) 112.4
Interest expense, net ............. (62.2) (243.0) (401.8) (422.0) (198.9)
Foreign exchange gain (loss,
net)............................ (9.4) (18.9) 99.6 (618.2) (319.4)
Monetary position.................. 56.6 166.0 216.9 280.5 92.8
Other income (expense), net(l)..... -- 13.2 (30.9) (27.6) 1,714.5
Cash severance and special
items........................... -- -- (63.0) (32.4) (10.4)
Income (loss) before income
taxes and employee profit ...... (358.3) (965.2) (745.0) (1,052.5) 1,390.9
Income tax and employee profit
sharing expense (benefit) ...... -- 221.2 160.3 241.7 (493.5)
Net income (loss) ................. (358.3) (744.0) (584.7) (810.8) 897.4
Operating Data:
Depreciation and amortization ..... 33.2 335.4 644.7 810.5 860.6
Investment in fixed assets
(end of period) ................ 1,144.8 3,083.6 1,582.8 565.4 460.1
Net Cash Flow:
Operating activities .............. (369.4) (620.3) (303.6) (11.5) 159.7
Investing activities............... (1,254.4) (3,177.3) (1,595.1) (566.8) (556.7)
Financing activities .............. 1,646.5 3,841.5 1,886.4 771.3 1,083.0
Total net cash flows .............. 22.8 43.8 (12.3) 193.0 686.0
Ratio of earnings to fixed
charges under Mexican
GAAP(2).......................... N/A N/A N/A N/A 5.7x
Ratio of earnings to fixed
charges under U.S. GAAP(2)...... N/A N/A N/A N/A 10.4x
Total access lines in service
(in thousands) (end of
period):
Business .......................... 3.2 72.5 121.0 116.4 132.4
Residential ....................... 25.2 144.3 169.1 178.7 216.7
Total.............................. 28.4 216.8 290.1 295.1 349.1
-37-
As of December 31, 2003
Balance Sheet Data:
Cash & cash equivalents ............................ 1,013.0
Net working capital investment ..................... 73.5
Total assets ....................................... 8,129.4
Total debt ......................................... 2,169.4
Total liabilities .................................. 2,747.3
Total shareholders' equity ......................... 5,382.1
Data in Accordance with US GAAP(3)
[Enlarge/Download Table]
Year Ended December 31,
2000 2001 2002 2003
(Constant Ps. in millions as of December 31, 2003)
Statement of Operations Data:
Income (loss) from operations ..... (1,004.2) (570.8) 123.7) 170.9
Net income (loss)................... (1,139.1) (610.5) (945.6) 2,739.7
Total assets........................ 6,378.2 7,317.1 7,125.3 7,702.1
Total shareholders' equity.......... 1,242.9 1,631.1 746.2 4,854.2
(1) Other income for the year ended December 31, 2003 includes a net gain of
Ps. 1,858.5 due to our repurchase of certain debt. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Debt Repurchase."
(2) For purposes of determining the ratio of earnings to fixed charges,
earnings are defined as our income from operations before income taxes,
plus fixed charges. Fixed charges consist of interest expense on all
indebtedness, amortization of debt issuance costs and 33% of lease
payments, which represents the amounts considered to be the interest
factor. According to Mexican GAAP, earnings in 1999, 2000, 2001 and 2002
were insufficient to cover to cover fixed charges by Ps. 280.2 million, Ps.
630.1 million, Ps. 232.0 million and Ps. 529.9 million, respectively.
According to U.S. GAAP, earnings in 1999, 2000, 2001 and 2002 were
insufficient to cover to cover fixed charges by Ps. 407.2 million, Ps.
749.7 million, Ps. 93.1 million and Ps. 420.8 million, respectively.
(3) Reconciled in connection with Note 24 of our consolidated financial
statements.
-38-
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion should be read in conjunction with our financial
statements and the notes thereto included elsewhere in this prospectus. The
following discussion includes certain forward-looking statements. For a
discussion of important factors, including the continuing development of our
business, actions of regulatory authorities and competitors and other factors
which could cause actual results to differ materially from the results referred
to in the forward-looking statements, see "Risk Factors."
Overview
We provide bundled local and long distance voice services, as well as data
and internet services. Our integrated service offering enables us to maximize
the recurring revenue received from each customer, increasing the return
achieved on our investment in infrastructure, sales and marketing and
distribution. Long distance services, for example, have been a significant
source of revenue, but would not be cost-effective to provide as a stand-alone
service offering because of the significant downward pricing pressure on long
distance services in Mexico. In addition, we believe and have found that
customers prefer to purchase their telecommunications services from a single
provider and receive a single bill. We believe customer loyalty is increased
with the provision of additional services, resulting in a lower customer churn
rate.
Key performance indicators
Management evaluates the performance of the Company by tracking the
following indicators:
[Enlarge/Download Table]
2001 2002 2003
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Revenues(1) ... 469.3 528.6 641.0 604.0 563.0 613.5 626.4 649.5 664.7 710.2 746.8 797.8
Cost of Revenues
and Operating
Expenses(1) (605.6) (637.5) (732.5) (833.1) (666.4) (680.7) (703.7) (634.4) (667.7) (696.4) (704.3) (738.7)
Access Lines(2) 265.3 287.8 280.1 290.1 290.7 285.7 289.0 295.1 300.2 311.1 332.7 349.1
ARPU(3) ....... 538.3 590.5 676.1 622.1 573.1 632.8 645.5 656.8 655.0 680.6 671.1 652.5
(1) Amounts in constant Ps. in millions as of December 31, 2003.
(2) Amounts in thousands at end of period.
(3) ARPU means average revenue per user. Amounts in constant Ps. as of December
31, 2003.
Revenues
We derive our revenues from:
o Local calling services. We generate revenue by enabling our customers
to originate and receive an unlimited number of calls within a defined
local service area. Customers are charged an initial fee for
activating the service, a flat monthly fee for basic service, a per
call fee and a per minute usage fee for calls completed on a cellular
line ("calling party pays calls").
o Long distance services. We generate revenues by providing long
distance services for our customers' completed calls.
o Other services. We generate revenues by providing other services to
our customers which include internet, data, interconnection and
dedicated private line service, as well as value-added services such
as caller ID, call waiting, call forwarding and voicemail.
-39-
The following summarizes our revenues and percentage of revenues from
operations from these sources:
[Enlarge/Download Table]
Revenues (Constant Ps.
in millions as of % of Revenues
December 31, 2003) Year ended
Year ended December 31, December 31,
Revenue Source 2001 2002 2003 2001 2002 2003
Ps.
Local calling services.. Ps. 1,657.4 Ps. 1,832.3 2,180.8 73.9% 74.7% 74.7%
Long distance services.. 299.8 289.8 296.1 13.4% 11.8% 10.1%
Other services.......... 285.7 330.3 442.7 12.7% 13.5% 15.2%
Ps.
Total................... Ps. 2,242.9 Ps. 2,452.4 2,919.5 100.0% 100.0% 100.0%
Cost of Revenues and Operating Expenses
Our costs are categorized as follows:
o Cost of revenues include expenses related to the termination of our
customers' cellular and long distance calls in other carriers'
networks, as well as expenses related to billing, payment processing,
operator services and our leasing of private circuit links.
o Operating expenses include costs incurred in connection with general
and administrative matters including compensation and benefits, the
costs of leasing land related to our operations and costs associated
with sales and marketing and the maintenance of our network.
o Depreciation and amortization includes depreciation of all
communications network and equipment and amortization of preoperating
expenses and the cost of spectrum licenses.
Access Lines
Our access lines are separated into residential and business
categories. We determine the number of our total access lines by
adding to the ending balance of access lines from the previous period
the gross installed access lines during such period and then
subtracting any access lines that were disconnected during such
period. By determining the number of our access lines, we are able to
estimate our share of a particular geographic market.
ARPU (Average Revenue Per User)
Average revenue per user is used as an industry-standard measurement
of a telecommunication company's ability to maximize the amount of
revenue we derive from each customer in light of the amount of capital
expenditures made to attract such customer. This measurement allows us
to gauge our return on investment as compared with both our domestic
competitors in Mexico as well as other telecommunication services
providers abroad.
Debt Repurchase
During the first quarter of 2003, we implemented a significant
restructuring of our debt and equity and entered into agreements to replace our
most significant supply contracts. From the commencement of the roll-out of our
network, Nortel Networks had been our main supplier of network equipment and our
most significant lender. As of December 31, 2002, our total indebtedness to
Nortel Networks was US$511.5 million. After extensive negotiations, we agreed
with Nortel to repurchase this debt in exchange for (i) non-voting shares of our
stock representing 9.9% of our total outstanding shares, (ii) a cash payment of
US$125.2 million and (iii) a promissory note in the face amount of US$24.2
million. These debt repurchase transactions resulted in a net gain for financial
statement purposes of US$168.9 million recorded in March 2003 and additional
shareholder's equity of US$60.0 million. Although there was no negative impact
on our cash flow in terms of accrued tax liabilities in connection with these
transactions, we did decrease our accumulated Net Operating Losses and tax loss
carryforwards due to the financial gain. In December 2003, the promissory note
in the amount of US$24.2 million in favor of Nortel was repaid in full with the
net proceeds received in connection with the issuance of the outstanding notes.
-40
As part of the Nortel debt repurchase transaction, we renegotiated our
supply arrangements with Nortel, and entered into five agreements: three
agreements relating to the provision of fixed wireless access equipment, and two
agreements relating to the provision of non-fixed wireless access equipment.
Under such agreements, we assumed certain purchase obligations, including: (i)
the obligation to purchase not less than 25,000 RSS units (customer premise
equipment) in year 2003; 20,000 customer premise equipment kits in year 2004;
25,000 customer premise equipment kits in year 2005; 30,000 customer premise
equipment kits in year 2006; and 35,000 customer premise equipment kits in year
2007; (ii) the obligation to purchase not less than 20 ratio base station units
in year 2003; 30 radio base station units in year 2004; and 20 radio base
station units in each of years 2005, 2006 and 2007; (iii) the obligation to
purchase a minimum amount of US$0.6 million during year 2003 and US$2.1 million
during each of the following four years. In addition, as part of these
agreements, we are obligated to make yearly payments of US$3.8 million for
technical services regarding our fixed wireless access platform. On December 23,
2003, Airspan Communications Limited ("Airspan") acquired Nortel's fixed
wireless access business, assuming Nortel's rights and obligations under some of
these agreements.
Bell Canada International Limited, or BCI, one of our founding
shareholders, was also a party to a certain Technical Services Agreement and a
Secondment Agreement with us. BCI has embarked upon a Canadian court ordered
plan of dissolution. In connection with our on-going capital needs and BCI's
plans to dissolve, we agreed to pay BCI US$13.2 million to terminate all the
rights and obligations of both parties under the two agreements, including our
obligation to pay fees in the future based on our financial performance, and in
full settlement of any and all claims that BCI may have against us arising out
of or related to the Secondment Agreement and the Technical Services Agreement
that we previously entered into. Such US$13.2 million amount was evidenced by a
cash payment of US$2.8 million on May 30, 2003 and three non-negotiable
promissory notes: (a) US$1.1 million paid on June 30, 2003; (b) US$1.1 million
paid on September 20, 2003; and (c) US$1.2 million payable on December 31, 2003.
In addition, we issued in favor of BCI another promissory note with a future
value of US$9.4 million payable in June 2006. Due to these transactions with
BCI, we recorded an extraordinary expense of US$10.7 million. In December 2003,
all these amounts owed to BCI were repaid in full with the net proceeds received
in connection with the issuance of the outstanding notes.
Finally, in connection with the foregoing transactions, on February 28,
2003 we issued a capital call to our existing shareholders for the subscription
and payment of shares representing additional capital of US$60.0 million.
Certain of our shareholders assigned their subscription rights with respect to
such shares to some of their shareholders or members. As a result, the number of
our shareholders increased from 3 to 11. However, each of our new shareholders
is an indirect shareholder of ours through their equity interest in the
respective holding companies of Telinor and Worldtel, that own our stock. As is
required under Mexican law, Mexican shareholders continue to own more than 51%
of our voting stock.
Year Over Year Comparisons
Year Ended December 31, 2003 Compared with Year Ended December 31, 2002
Revenues from Operations
Revenues from operations increased to Ps. 2,919.5 million for year 2003
from Ps. 2,452.4 million for the year ended 2002, an increase of Ps. 467.1
million, or 19%. The number of access lines increased to 349,144 from 295,141,
an increase of 18%, and our average revenue per user increased to Ps. 664.6 from
Ps. 627.0. During the year 2003, the Company launched new and innovative
commercial offers, thus allowing the Company to increase the number of lines in
service, which had a favorable impact on the 2003 revenues.
Local services. Local service revenues increased to Ps. 2,180.8 million for
the year ended 2003 from Ps. 1,832.3 million for the year ended 2002, an
increase of Ps. 348.4 million, or 19%. These increases were primarily due to
higher monthly rent and cellular consumption driven by specifically targeted
offers to capture high consumption customers.
Long distance services. Long distance services revenues increased to Ps.
296.1 million for the year ended 2003 from Ps. 289.8 million for the year ended
2003, an increase of Ps. 6.3 million, or 2%. This is a consequence of a higher
number of lines in use during the year.
-41-
Other services. Revenue from other services increased to Ps. 442.7 million
in 2003 from Ps. 330.3 million in 2002, an increase of Ps. 112.4 million, or
34%. The increase was due to different factors, including but not limited to the
following: higher termination of calls in our network, increase in international
traffic through our international gateway and more subscription of our value
added services.
Cost of Revenues and Operating Expenses
Cost of Revenues. Cost of revenues from operations increased to Ps. 808.4
million for the year ended 2003 from Ps. 612.2 million for the year ended 2002,
an increase of Ps. 196.2 million, or 32%. This increase was due primarily to a
Ps. 195.9 million increase in our underlying costs related to calling party pays
call revenues.
Operating expenses. Operating expenses decreased to Ps. 1,138.1 million for
the year ended 2003 from Ps. 1,262.4 million for the year ended 2002, a decrease
of Ps. 124.3 million, or 10%. This decrease was attributable to the improvements
made on collections policies/processes which resulted in less provision for
doubtful accounts.
Depreciation and Amortization. Depreciation and amortization from
continuing operations increased to Ps. 860.6 million for the year ended 2003
from Ps. 810.5 million for the year ended 2002, an increase of Ps. 50.1 million,
or 6%. This increase in depreciation and amortization goes in line with the
Company's growth and investments.
Year Ended December 31, 2002 Compared with Year Ended December 31, 2001
Revenues from Operations
Revenues from operations increased to Ps. 2,452.4 million for year 2002
from Ps. 2,242.9 million for the year ended 2001, an increase of Ps. 209.6
million, or 9%. The number of access lines increased to 295,141 from 290,132, an
increase of 2%, and our average revenue per user increased to Ps. 627.0 from Ps.
609.7. During the year 2001, we commenced offering our services in three new
cities, Puebla, Toluca and Leon, which contributed positively to the increase in
revenue and customer base. We derived our revenues from the following sources:
Local services. Local service revenues increased to Ps. 1,832.3 million for
the year ended 2002 from Ps. 1,657.4 million for the year ended 2001, an
increase of Ps. 174.9 million, or 11%. This increase was primarily due to the
increase in consumption levels in cellular and measured service on a per line
basis as a result of the acquisition of high consumption customers through the
development of offers specifically targeted to such customers.
Long distance services. Long distance services revenues decreased to Ps.
289.8 million for the year ended 2002 from Ps. 299.8 million for the year ended
2001, a decrease of Ps. 10.0 million, or 3%, due to a lower consumption on a per
line basis following the introduction of alternative options to complete long
distance traffic, like trunking services, voice over IP, among others.
Other services. Revenue from other services increased to Ps. 330.3 million
in 2002 from Ps. 285.7 million in 2001, an increase of Ps. 44.6 million, or 16%.
Cost of Revenues and Operating Expenses
Cost of Revenues. Cost of revenues from operations increased to Ps. 612.2
million for the year ended 2002 from Ps. 521.3 million for the year ended 2001,
an increase of Ps. 90.9 million, or 17%. This increase was due primarily to a
Ps. 127.4 million increase in our underlying costs related to calling party pays
call revenues, which was partially offset by a decrease in the cost of investing
related to a reduction in gross additions over the prior year.
Operating expenses. Operating expenses from operations decreased to Ps.
1,262.4 million for the year ended 2002 from Ps. 1,642.6 million for the year
ended 2001, a decrease of Ps. 380.2 million, or 23%. This decrease was
attributable primarily to a significant reduction in bad debt expense due to an
improved customer profile, as well as a significant rationalization of our
workforce.
-42-
Depreciation and Amortization. Depreciation and amortization from
continuing operations increased to Ps. 810.5 million for the year ended 2002
from Ps. 644.7 million for the year ended 2001, an increase of Ps. 165.8
million, or 26%. This increase in depreciation and amortization expense reflects
the continuing expansion of our asset base.
Year Ended December 31, 2001 Compared with Year Ended December 31, 2000
Revenues from Operations
Revenues from operations increased to Ps. 2,242.9 million for the year
ended 2001 from Ps. 1,052.7 million for the year ended 2000, an increase of Ps.
1,190.1 million, or 113%. The number of access lines increased to 290,132 from
216,760, an increase of 34%. During the year 2001, we grew our customer base by
beginning to offer our services in three new cities, Puebla, Toluca and Leon,
which contributed positively to the increase of our revenue and customer base.
We derived our revenues from the following sources:
Local services. Local service revenues increased to Ps. 1,657.4 million for
the year ended 2001 from Ps. 783.0 million for the year ended 2000, an increase
of Ps. 874.5 million, or 112%, attributable primarily to targeted sales to high
consumption customers as well as a 134% and 195% increase in our monthly fees
and usage fees due to an increase in the number of access lines.
Long distance services. Long distance services revenues increased to Ps.
299.8 million for the year ended 2001 from Ps. 106.8 million for the year ended
2000, an increase of Ps. 192.9 million, or 181%. The increase in revenues was
attributable to a higher number of lines in services and higher consumption on a
per line basis.
Other services. Revenue from other services increased to Ps. 285.7 million
for the year ended 2001 from Ps. 163.0 million for the year ended 2000, an
increase of Ps. 122.7 million, or 75%, which was attributable to the
introduction of our internet service products, as well as an increase in
value-added services.
Cost of Revenues and Operating Expenses
Cost of Revenues. Cost of revenues from operations increased to Ps. 521.3
million for the year ended 2001 from Ps. 222.3 million for the year ended 2000,
an increase of Ps. 299.0 million, or 135%. This growth was due primarily to a
Ps. 265.4 million increase in our underlying costs related to calling party pays
calls, as well as increased long distance costs due to higher consumption
levels.
Operating expenses. Operating expenses from operations increased to Ps.
1,642.6 million for the year ended 2001 from Ps. 1,377.5 million for the year
ended 2000, an increase of Ps. 265.2 million, or 19%. The increase was due
primarily to our higher reserves for bad debt expenses, as well as increased
costs related to our growth and the correspondent need for additional personnel
and facilities.
Depreciation and Amortization. Depreciation and amortization from
operations increased to Ps. 644.7 million for the year ended 2001 from Ps. 335.4
million for the year ended 2000, an increase of Ps. 309.3 million, or 92%. This
increase in depreciation and amortization expense was attributable to an
increase in capital expenditures for consolidation and expansion of our network
coverage into additional cities.
Liquidity and Capital Resources
Historically we have relied primarily on vendor financing, private equity
contributions, internal cash from operations and the proceeds from bank debt to
fund our operations, capital expenditures and working capital requirements.
After giving effect to the offering of the outstanding notes and the net
proceeds therefrom, we believe that we will be able to meet our debt service
obligations and fund our operating requirements in the future with cash flow
from operations, although no assurance can be given in this regard. We will
continue to focus on investments in fixed assets and working capital management,
including the collection of accounts receivable and management of accounts
payable. Net cash provided by operating activities was Ps. 159.7 million, Ps.
(11.5) million and Ps. (303.6) million for the years ended December 31, 2003,
2002 and 2001, respectively.
-43-
Net cash used in investing activities was Ps. 556.7 million, Ps. 566.8
million and Ps. 1,595.1 million for the years ended December 31, 2003, 2002 and
2001, respectively. These cash flows primarily reflect investments in fixed
assets of Ps. 460.1 million, Ps. 565.4 million and Ps. 1,582.8 million for the
years ended December 31, 2003, 2002 and 2001, respectively.
Net cash provided by (used in) financing activities from continuing
operations was Ps. 1,083.0 million, Ps. 771.3 million and Ps. 1,886.4 million
for the years ended December 31, 2003, 2002 and 2001, respectively.
Since our inception, we have invested over Ps. 7,400 million as we built
out our infrastructure. Our total investment in fixed assets was approximately
Ps. 565.4 million in 2002 and was approximately Ps. 460.1 million in 2003. We
expect to make additional investments in future years as we selectively expand
our network into other areas of Mexico in order to exploit market opportunities
as well as to maintain our existing network and facilities.
Market risks
Our primary foreign currency exposure relates to our US dollar-denominated
debt. Most of our debt obligations at December 31, 2003 were denominated in US
dollars. Substantially all of our debt obligations would have been denominated
in US dollars. Therefore, we are exposed to currency exchange rate risks that
could significantly affect our ability to meet obligations. We have reduced our
exposure through the purchase of options contracts which mature in less than a
year.
The following table provides information about the details of our option
contracts as of December 31, 2003 (in thousands except average strike price):
[Enlarge/Download Table]
Coverage in Average Fair Value
Foreign Currency Mexican Pesos Strike Price in US Dollars Maturity Date
At December 31, 2003:
Purchased puts (Axtel may
sell peso/buy USD)
Mexican peso............... 56,500 11.30 91.1 March 17, 2004
56,500 $ 91.1
Written calls (Counterparty
may buy peso/sell USD)
Mexican peso............... 55,400 11.08 (41.2) March 17, 2004
55,400 $ (41.2)
Prior to entering into foreign currency hedging contracts, we evaluate the
counterparties' credit ratings. Credit risk represents the accounting loss that
would be recognized at the reporting date if counterparties failed to perform as
contracted. We do not currently anticipate non-performance by such
counterparties.
The exchange rate of the peso to the US dollar is a freely floating rate
and the peso has experienced significant devaluation in previous years. Any
significant decrease in the value of the peso relative to the US dollar in the
near term may have a material adverse effect on our results of operations and
financial condition, including our ability to repay or repurchase the notes.
Capitalization of preoperating expenses
We commenced commercial operations in June 1999. As permitted under Mexican
GAAP, during our preoperating stage we were able to capitalize all of our
general and administrative expenses and our net comprehensive cost of financing.
Beginning in June 1999, we are required to amortize all previously
capitalized general and administrative expenses and to depreciate all previously
capitalized net comprehensive cost of financing. These capitalized preoperating
expenses are amortized on a straight-line basis for a period not exceeding ten
years.
-44-
Summary of contractual obligations
The following table discloses aggregate information about our contractual
obligations and the periods in which payments are due.
[Enlarge/Download Table]
Less than More than 5
Total 1 year 1-3 years 3-5 years years
pro forma, payments due by period
(US$ in millions)
Contractual obligations:
Debt maturing within one year.......... 12.9 12.9 -- -- --
Long-term debt......................... 180.1 -- 5.1 -- 175.0
Operating leases....................... 6.3 4.1 2.2 -- --
Nortel/Airspan......................... 70.1 14.7 35.4 20.0 --
Total contractual cash obligation...... 269.4 31.7 42.7 20.0 175.0
US GAAP Reconciliation
We describe below the principal differences between Mexican GAAP and US
GAAP. See Note 24 to the audited consolidated financial statements for
reconciliation to US GAAP of shareholders' equity and net loss for the
respective periods presented.
Recognition of the effects of inflation on financial information. Under
Mexican GAAP, the effects of inflation are reflected in financial statements and
such a convention has no counterpart under US GAAP. However, although Mexican
GAAP includes the effects of inflation in financial statements, the SEC does not
require the restatement of financial statements to reconcile the effects of the
Mexican GAAP inflation accounting.
Preoperating expenses. Under Mexican GAAP, all expenses incurred while a
company is in the preoperating or development stages are deferred and considered
as a component of a company's assets. Such capitalized expenses are amortized on
a straight-line basis for a period not exceeding 10 years after the
corresponding asset commences operations. According to US GAAP, such
preoperating or development expenses are expensed and reported as a deficit to
shareholders' equity recorded during the developing stage.
Deferred income tax and employees statutory profit sharing. Under Mexican
GAAP deferred income tax is accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit (TA) carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. Deferred income tax and employees statutory profit sharing is
recognized only for timing differences arising from the reconciliation of book
income to income for profit sharing purposes, on which it may reasonably be
estimated that a future liability or benefit will arise and there is no
indication that the liabilities or benefits will not materialize. Under US GAAP,
deferred income tax and employees statutory profit sharing are determined under
the asset and liability method recognizing the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss carryforwards.
Statement of changes in financial position. In accordance with Mexican
GAAP, we present statements of changes in financial position in constant pesos.
This presentation identifies the generation and application of resources
representing differences between beginning and ending financial statements
balances in constant pesos.
The changes in the consolidated financial statement balances included in
our audited consolidated financial statements constitute cash flow activity
stated in constant pesos (including monetary losses which are considered as cash
losses in the financial statements presented in constant pesos). SFAS No. 95
does not provide guidance with respect to inflation adjusted financial
statements. However, US GAAP requires that non-cash financing and investing
transactions should be excluded from the statement of cash flows and reported in
related disclosures.
-45-
Vacations. Under Mexican GAAP, vacation expenses are recognized when taken,
rather than in the period when they are earned by an employee, as is required
under US GAAP. Beginning in January of 2003, Mexican GAAP required the
recognition of vacation expense when such is earned.
Severance. Under Mexican GAAP, severance payments should be recognized in
earnings in the period in which they are paid, unless such payments are used by
an entity as a substitution for pension benefits, in which case, they should be
considered as a pension plan. Under US GAAP, post-employment benefits for former
or inactive employees, excluding retirement benefits, are accounted for under
the provisions of SFAS No. 112, which requires recognition of certain benefits,
including severance, over an employee's service life.
Capitalization of interest. In accordance with Mexican GAAP, capitalization
of interest or, during inflationary periods, comprehensive cost of financing or
income incurred in the period of construction and installation of an asset is
permitted. The interest to be capitalized is that of the specific financing
obtained for the construction of the related asset. Under US GAAP,
capitalization of interest is required for certain qualifying assets that
require a period of time to get them ready for their intended use. The amount of
interest to be capitalized is that portion of the interest cost incurred during
the assets' acquisition period that theoretically could have been avoided if
expenditures for the assets had not been made, and is not limited to
indebtedness attributable to the asset.
Devaluation and Inflation
On December 20, 1994, the Mexican government responded to exchange rate
pressures by increasing the upper limit of the then existing free market peso/US
dollar exchange rate band by 15% and, two days later, by eliminating the band to
allow the peso to fluctuate freely against the US dollar. This resulted in a
major devaluation of the peso relative to the US dollar. While the noon buying
rate had been Ps. 3.45 per US$1.00 on December 19, 1994, by December 31, 1994
the noon buying rate had fallen over Ps. 5.00 per US$1.00, representing a 44.9%
devaluation. The peso continued to decline against the US dollar during 1995,
closing at a noon buying rate of Ps. 7.74 per US$1.00 on December 31, 1995,
which represented a 54.8% devaluation relative to the US dollar for the year.
The Mexican economy began to recover in 1996 and 1997, as exchange rates
stabilized, inflation decreased and real gross domestic product grew by 5.2% and
6.8%, respectively. However, the financial crisis in Asia and Russia, together
with the weakness in the price of oil in 1998, which is a significant source of
revenue for the Mexican government, contributed to renewed weakness in the peso,
which devalued 22.7% relative to the US dollar. In 1999, the peso appreciated
4.2% relative to the US dollar. From 1999-2000, the peso-to-dollar denominated
exchange rate remained relatively stable. In 2001, the peso-to-dollar exchange
rate showed a slight recovery of 4.8% from Ps. 9.62 on December 31, 2000 to Ps.
9.16 on December 31, 2001. However, in 2002, the peso devaluated 13.9% relative
to the US dollar. In 2003, the peso devalued approximately 7.7% relative to the
US dollar.
Peso devaluation has contributed to sharp increases in inflation.
Inflation, which had been 7.1% in 1994, increased to 52.0% and 27.7% in 1995 and
1996, respectively. After a reduction to 15.7% in 1997, inflation was 18.6% in
1998. In 1999, 2000 and 2001, the inflation rate decreased to 12.3%, 9.0% and
4.4%, respectively. In 2002 and 2003, the inflation rate was 5.7% and 4.0%,
respectively.
The general economic conditions in Mexico resulting from a devaluation of
the peso and inflation may have a negative impact on our results of operations
and financial condition, primarily as a result of:
o the resulting decrease in the purchasing power of Mexican consumers,
which results in a decrease in the demand for telephony services;
o our inability, due to competitive pressures, to increase our prices in
line with inflation; and
o an increase in the peso-carrying amount of our US dollar-denominated
debt, reflecting the additional amounts of pesos required to meet such
debt.
See "Risk Factors--Risks Relating to Mexico--We may lose money because of
peso devaluation."
-46-
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 2003, the FASB issued FASB Interpretation No. 46 (revised
December 2003), Consolidation of Variable Interest Entities, which addresses how
a business enterprise should evaluate whether it has a controlling financial
interest in an entity through means other than voting rights and accordingly,
should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46
Consolidation of Variable Interest Entities, which was issued in January 2003.
The Company will be required to apply FIN 46R to variable interests in VIEs
created after December 31, 2003. For variable interests in VIEs created before
January 1, 2004, the Interpretation will be applied beginning on January 1,
2005. 10 For any VIEs that must be consolidated under FIN 46R that were created
before January 1, 2004, the assets, liabilities and noncontrolling interests of
such VIE initially would be measured at their carrying amounts, with any
differences between the net amount added to the balance sheet and any previously
recognized interest being recognized as the cumulative effect of an accounting
change. If determining the carrying amounts is not practicable, fair value at
the date FIN 46R first applies may be used to measure the assets, liabilities,
and noncontrolling interest of the VIE.
FASB Statement No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity, was issued in May 2003. This
Statement establishes standards for the classification and measurement of
certain financial instruments with characteristics of both liabilities and
equity. The Statement also includes required disclosures for financial
instruments within its scope. For the Company, the Statement was effective for
instruments entered into or modified after May 31, 2003 and otherwise will be
effective as of January 1, 2004, except for mandatory redeemable financial
instruments. In the case of certain mandatory redeemable financial instruments,
the Statement will be effective for the Company on January 1, 2005. The
effective date has been deferred indefinitely for certain types of mandatory
redeemable financial instruments. We currently do not have any financial
instruments that are within the scope of this Statement.
Critical Accounting Policies
Our consolidated financial statements included elsewhere in this annual
report have been prepared in accordance with Mexican GAAP, which differ in
significant respects from respects from US GAAP. See note 24 to our consolidated
financial statements, included elsewhere in this Offering Circular, for a
description of the principal differences between Mexican GAAP and US GAAP as
they relate to us.
We have identified below the accounting policies we have applied under
Mexican GAAP that are critical to understanding our overall financial reporting.
-47-
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 difference. If this
determination cannot be made, a valuation allowance is established to reduce the
carrying value of the asset.
Deferred income tax and employees statutory profit sharing is recognized
only for timing differences arising from the reconciliation of book income to
income for profit sharing purposes, on which it may be reasonably estimated that
a future liability or benefit will arise and there is no indication that the
liabilities or benefits will not materialize.
Recognition of the effects of inflation
Under Mexican GAAP, the financial statements are restated to reflect the
loss of purchasing power (inflation) of their functional currency. The inflation
effects arising from holding monetary assets and liabilities are reflected in
the income statements as monetary position result. Inventories, fixed assets and
deferred charges, with the exception and the equity accounts, are restated to
account for inflation using the Mexican National Consumer price Index (NCPI)
published by Banco de Mexico (central bank). The result is reflected as an
increase in the carrying value of each item. Income statement accounts are also
restated for inflation into constant Mexican Pesos as of the reporting date.
Impairment of long-lived assets
We evaluate periodically the adjusted values of our property, plant,
systems and equipment and other non-current assets, to determine whether there
is an indication of potential impairment.
Recoverability of assets to be held and used is measured by a comparison of
the carrying amount of an asset to future net revenues expected to be generated
by the asset. If such assets are considered to be impaired, the impairment is
measured by the amount by which the carrying amount of the asset exceeds the
expected net revenues. Assets to be disposed of are reported at the lower of the
carrying amount or realizable value.
Revenue Recognition
On December 3, 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" (SAB 101). This bulletin
summarizes the point of view of the SEC in the recognition of revenues in the
financial statements according to US GAAP. The SEC concluded that only when all
the following conditions are met is revenue recognition appropriate:
(a) there is persuasive evidence of an agreement;
(b) the delivery was made or the services rendered;
(c) the sales price to the purchaser is fixed or determinable;
(d) collection is reasonably assured.
-48-
SAB 101, specifically in Topic 13A, Question 5, discusses the situation of
recognizing as revenue certain non-refundable cash items. SAB 101 provides that
the seller should not recognize non-refundable charges generated in certain
transactions when there is continuous involvement by the vendor.
One of the examples provided by SAB 101 is activation revenues from
telecommunication services. The SAB concludes that unless the charge for the
activation service is an exchange for products delivered or services rendered
that represent the culmination of a separate revenue-generating process, the
deferral method of revenue is appropriate.
Based on the provisions and interpretations of SAB 101, for purposes of the
US GAAP reconciliation, the Company has deferred the activation revenues over a
three-year period starting in the month such charge is originated. This period
was determined based on Company experience. The net effect of the deferral and
amortization is presented in the above US GAAP reconciliation.
-49-
Overview of the Mexican Telecommunications Industry
General
Mexico is a unique telecommunications market in Latin America as it
combines a stable macroeconomic environment, a strong currency and relatively
low penetration of fixed lines. As a result, Mexico's importance in Latin
America's telecommunications market is expected to become more pronounced over
the next four years.
Since the Mexican government initiated the liberalization of the Mexican
telecommunications sector, which began with the privatization of Telefonos de
Mexico, S.A. de C.V., known as Telmex, in 1990, the Mexican telecommunications
sector has become increasingly open to competition. Some of the measures
implemented by the government in its liberalization process include the
introduction of competition in long distance and local telephony services, the
auctioning of spectrum and tariff rebalancing. The opening of the Mexican
telecommunications market has created an opportunity for competitive carriers to
capture market share from Telmex.
Mexican Market Characteristics
Mexico is the second largest country in Latin America in terms of
population, with approximately 101.9 million people as of December 31, 2002. In
addition, with a gross domestic product of US$637.2 billion and gross domestic
product per capita of US$6,260 as of December 31, 2002, Mexico is the second
largest economy and has one of the highest incomes per capita in Latin America.
However, according to Pyramid Research, Mexico has relatively low wireline
penetration compared to other countries in Latin America, with 15.8 lines per
100 inhabitants at the end of 2003.
Mexico's under-penetrated fixed communications market leaves significant
room for growth. According to Pyramid Research, Mexico's fixed line penetration
is expected to grow from 15.8 lines per 100 inhabitants in 2003 to 19.1 lines
per 100 inhabitants in 2008.
Market Size and Projected Growth Trends
The Mexican communications services market, in terms of revenues, is the
second largest in Latin America. Revenues from communications services in
Mexico, including both fixed and mobile, are expected by Pyramid Research to
grow at a 4.4% compound annual growth rate, from US$17.2 billion in 2003 to
US$21.3 billion in 2008.
MEXICAN COMMUNICATIONS SERVICES MARKET GROWTH
Revenues (US$ billions)
[Object Omitted]
Source: Pyramid Research, Q4 2003
The fixed communications sector, which includes basic telephony, such as
local and long distance voice services, and data telecommunications services, is
an important part of the Mexican telecommunications industry
-50-
because of its size and the various areas of opportunity. In 2003, revenues from
the fixed communications sector were approximately US$11.2 billion, or 66% of
the total Mexican telecommunications industry. Driven by pent-up demand and a
wider availability of services, revenues from fixed communications services in
Mexico are expected to reach US$13.1 billion in 2008.
Mobile telephony services is one of the fastest growing segments of the
Mexican communications services market. In 2003, revenues from the mobile
communications sector were approximately $5.9 billion, or 35% of the total
Mexican communications services industry. According to Pyramid Research, in
2003, there were approximately 30.6 million mobile subscribers in Mexico, giving
Mexico the third largest penetration rate in Latin America. Pyramid anticipates
that Mexico will continue to experience rapid growth in the number of mobile
subscribers growing from approximately 30.6 million subscribers in 2003 to 42.6
million subscribers in 2008, representing a compound annual growth rate of 7%.
Basic telephony services, with US$9.1 billion in revenues in 2003, account
for the largest share of revenues in the Mexican communications services market.
Furthermore, within basic telephony, local telephony services are, and are
expected to continue to be, the predominant source of revenue. According to
Pyramid Research, in 2003, revenues from local telephony services in Mexico were
US$6.6 billion, accounting for 72% of basic telephony revenues and 39% of total
fixed and mobile communications revenues. By 2008, revenues from local telephony
services in Mexico are expected to reach US$8.2 billion, accounting for 80% of
basic telephony revenues and 39% of total fixed and mobile communications
revenues.
-51-
Supervision and Regulation of the Mexican
Telecommunications Industry
Current Regulatory Environment
General
The telecommunications industry in Mexico is subject to the Federal
Telecommunications Law (Ley Federal de Telecomunicaciones), which was enacted in
1995, and its regulations. In addition, certain rules under the General Means of
Communications Law (Ley de Vias Generales de Comunicacion) and the
Telecommunications Regulations (Reglamento de Telecomunicaciones) generally
remain effective and are referred to as the Old Telecommunications Law.
Under the Federal Telecommunications Law, the Mexican telecommunications
industry is regulated for regulatory, administrative and operational matters by
COFETEL (Comision Federal de Telecomunicaciones). COFETEL was created in 1996 as
a separate entity from the SCT (Secretaria de Comunicaciones y Transportes) to
regulate and promote the efficient development of the telecommunications
industry in Mexico. COFETEL is responsible for, among other things:
o enacting regulations and technical standards for the
telecommunications industry;
o ensuring that concession holders fulfill the terms and obligations of
their concessions and permits;
o suspending operators without concessions;
o resolving interconnection controversies between competitors; and
o maintaining a registry of applicable rates.
The SCT retains the authority to grant and revoke all concessions and
permits. COFETEL makes recommendations to the SCT on major issues, such as
amending existing telecommunications legal framework, allocating spectrum
frequencies, granting, transferring, renewing or revoking concessions and
applying penalties for concession violations. The SCT has final decision making
power on these issues. Once a final decision is made, COFETEL implements the
related regulations.
Concessions and permits
To provide telephony services in Mexico through a public telecommunications
network, a service provider must first obtain a concession from the SCT.
Pursuant to the Federal Telecommunications Law, concessions for public
telecommunications networks may not exceed a term of 30 years, and concessions
for spectrum frequencies may not exceed a term of 20 years. Generally,
concessions for public telecommunications networks and spectrum frequencies may
be extended for a term equivalent to the term for which the concessions were
originally granted as long as the concessionaire is in compliance with ongoing
obligations stated therein. Concessions specify, among other things:
o the type and technical specifications of the network, system or
telecommunication services that may be provided;
o the allocated spectrum frequencies, if applicable;
o the geographical region in which the holder of the concession may
provide the telecommunication service;
o the required capital expenditure program;
-52-
19
o the term during which such service may be provided;
o the payment, where applicable, required to be made to acquire the
concession, including, if applicable, the participation of the Mexican
government in the revenues of the holder of the concession; and
o any other rights and obligations affecting the concession holder.
In addition to concessions, the SCT may also grant permits for the
following:
o installing, operating or exploiting transmission-ground stations; and
o providing telecommunications services as a reseller.
There is no legally mandated maximum term for these permits unless
specifically stated in the permit. Under the Federal Telecommunications Law, a
company needs to register with COFETEL the rates for the telecommunications
services that it wishes to provide in order to be able to provide them to the
public.
The Mexican Congress enacted a law, effective January 1, 2002, that
expanded the scope of the sales and use tax to include additional services,
including services provided by telecommunications service providers such as
value-added services, at a rate of 10%. An amendment to this law, effective
January 1, 2003, confirmed that our core business (the offering of local and
long distance services) is not subject to the tax. Although we believe, based on
the advice of our tax and regulatory advisors, that certain other services that
are part of our local service offerings are also not subject to such tax, we
cannot assure you that the tax authorities may not interpret the law otherwise
or impose other taxes from time to time.
Ownership restrictions. Under the Federal Telecommunications Law and the
Mexican Foreign Investment Law (Ley Federal de Inversion Extranjera), basic
telephony concessions may be granted only to:
o Mexican individuals; and
o Mexican corporations in which non-Mexicans own 49% or less of the full
voting stock and that are not otherwise controlled by non-Mexicans.
However, in the case of concessions for cellular telecommunications
services, foreign investment participation may exceed 49% of the voting stock
with the prior approval of the Mexican Foreign Investment Bureau of the Mexican
Ministry of Economy (Secretaria de Economia).
Pursuant to the Foreign Investment Law, the Mexican Ministry of Economy may
also authorize the issuance of non-voting or limited-voting stock (also known as
"neutral shares") that are not counted for purposes of determining the foreign
investment percentage of a Mexican corporation under the Mexican Foreign
Investment Law. Any share transfers resulting in a violation of these foreign
ownership requirements are invalid under Mexican law.
Transfer. Concessions are transferable after the first three-year period of
the concession, if the SCT approves the transfer of the concession title, the
assignee agrees to comply with the terms of the concession and such a transfer
does not violate the foreign ownership requirements of the Federal
Telecommunications Law and the Mexican Foreign Investment Law.
Termination. A concession or a permit may be terminated pursuant to the
Federal Telecommunications Law upon the following events:
o expiration of its term;
o resignation by the concession holder or the permit holder;
-53-
20
o revocation prior to the end of its term under certain circumstances,
such as:
o dissolution or bankruptcy of the concession holder or the
permitholder;
o failure to exercise the rights of the concession within 180 days of
its granting;
o failure to provide interconnection services with other holders of
telecommunications concessions and permits without just cause;
o loss of the concession or permit holder's Mexican nationality;
o unauthorized assignment, transfer or encumbrance of the concession or
permit;
o unauthorized interruption of service;
o taking any action that impairs the rights of other concessionaires or
permit holders;
o failure to comply with the obligations or conditions specified in the
concession or permit; and
o failure to pay the Mexican government its fee for the concession or,
where applicable, its participation in the revenues of the holder of
the concession.
The SCT may revoke a concession for violations in any of the circumstances
referred to in the first four instances above. Under the last four instances
above, the SCT would have to fine the concessionaire at least three times for
the same failure before moving to revoke a concession.
Expropriation
The Mexican government has the statutory right to permanently expropriate
any telecommunications concession and claim any related assets for reasons of
public interest. Under Mexican law, the Mexican government is obligated to
compensate the owner of such assets in the case of a statutory expropriation.
The amount of the compensation is to be determined by appraisers. If the party
affected by the expropriation disagrees with the appraisal amount, such party
may initiate judicial action against the government. In such a case, the
relevant judicial authority will determine the appropriate amount of
compensation to be paid. We are not aware of any instance in which the SCT has
exercised its expropriation rights in connection with a telecommunications
company.
Temporary seizure
The Mexican government, through the SCT, may also temporarily seize all
assets related to a telecommunications concession or permit in the event of a
natural disaster, war, significant public disturbance, threats to internal peace
or for economic reasons or for other reasons related to national security. If
the Mexican government temporarily seizes such assets, except in the event of
war, it must indemnify the concession holder for all losses and damages,
including lost revenues. We are not aware of any instance in which the SCT has
exercised its temporary seizure powers in connection with a fixed or mobile
telecommunications company.
Rates for telecommunications services
Before the Federal Telecommunications Law was enacted in June 1995, the
SCT's approval was required for setting the rates charged for all basic local,
long distance and certain value-added local and long distance telecommunications
services. Historically, the SCT permitted rate increases based on the cost of
service, the level of competition, the financial situation of the carrier and
certain macroeconomic factors. Carriers were not allowed to discount the rates
authorized by the SCT, although operators occasionally waived activation fees on
a promotional basis. Interconnection rates also required SCT approval. Rates for
private dedicated circuit services through microwave networks and private
networks through satellites were not regulated before the Federal
Telecommunications Law was enacted.
-54-
Under the Federal Telecommunications Law, rates for telecommunications
services (including local, cellular and long distance telephony services) are
now freely determined by the providers of such services, except that such rates
may not be set below a service provider's long-term incremental cost.
In addition, COFETEL is authorized to impose specific rate, quality and
service requirements on those companies determined by the Federal Antitrust
Commission (Comision Federal de Competencia) to have substantial market power
pursuant to the provisions of Mexico's antitrust statute. All rates for
telecommunications services (other than value-added services) must be registered
with COFETEL prior to becoming effective. The Federal Telecommunications Law
prohibits telecommunications providers from cross-subsidizing among their
services and requires that they keep separate accounting for each of their
services.
The Mexican Antitrust Commission has found that Telmex has substantial
power in the following five markets: interconnection, local services, domestic
long distance services, international long distance services and long distance
resale, as defined under Mexico's antitrust statute. Based on this finding,
COFETEL issued a resolution in September 2000 regulating Telmex as a dominant
carrier and imposing special obligations regarding, among other things, quality
of services, tariffs and information disclosure. However, Telmex has obtained an
injunction against any potential action by COFETEL for the purpose of
implementing such resolution. As a result of this injunction, Telmex is not
currently subject to the specific obligations covered by COFETEL's resolution.
-55-
Business
Our Company
We believe we are a leading telecommunications services provider in Mexico,
offering a wide array of services, including local and long distance telephony,
data and internet to business and residential customers. We believe that we are
one of the largest and fastest growing integrated telecommunications companies
in Mexico, with 349,144 lines in service as of December 31, 2003. For the year
ended December 31, 2003, we generated revenues and operating income of Ps.
2,919.5 million (US$259.8 million) and Ps. 112.4 million (US$10.0 million),
respectively.
We hold concessions to offer local and long distance telecommunications
services nationwide. We provide services using a hybrid wireline and fixed
wireless local access network designed to optimize capital expenditures through
the deployment of network access equipment based on specific customer
requirements. Our current network last-mile access options include fixed
wireless access, point-to-point and point-to-multipoint wireless technologies,
as well as copper and metropolitan fiber rings. Since inception we have invested
in the aggregate over Ps. 7,400 million in our network, which includes 10
digital switches, 207 fixed wireless access sites, of which 57 are also
point-to-multipoint sites, and 431 kilometers of metropolitan fiber optic rings.
Our strategy is to continue to penetrate our existing markets by offering a
comprehensive portfolio of high quality, facilities-based voice, data, internet
and value-added communications services and to cost-effectively enter into
selective new markets with high growth and revenue opportunity. Our approach is
to bundle multiple voice, data and internet services into integrated
telecommunications solutions for businesses and high-usage residential
customers. For the year ended December 31, 2003, approximately 66% of our
revenues were generated from business lines and 34% of our revenues were
generated from residential lines. We estimate that our total lines represent
approximately 10% of our total addressable market.
We were founded in 1994. In June 1996, we were awarded by the Mexican
government a concession to install and operate a public telecommunications
network for the offering of local and long distance telephony services in
Mexico. In 1998 and 1999, we won several spectrum auctions, including for 60 MHz
at 10.5 GHz for point-to-multipoint access, for 112 MHz at 15 GHz for
point-to-point backhaul access, for 100 MHz at 23 GHz for point-to-point last
mile access and for 50 MHz at 3.4 GHz for fixed wireless access, which together
allow us to service the entire territory of Mexico. In June 1999, we launched
commercial operations in the city of Monterrey. Our network currently reaches
six of the largest metropolitan areas in Mexico (Mexico City, Monterrey,
Guadalajara, Puebla, Toluca and Leon), which represent approximately 19% of the
population of Mexico. Due to our concentration of network facilities in business
centers and upper income residential areas, we estimate that our current network
coverage represents a significant portion of the total Mexican telephony and
data telecommunications revenue opportunity.
Competitive Strengths
Leading Market Position. By being one of the first competitive providers to
approach customers with bundled local, long distance voice and data services, we
believe we are able to meet pent-up demand for an alternative service provider,
as well as establishing brand awareness and customer relationships prior to
market entry by emerging competitors. We have benefited from our
first-competitor-to-market advantage by capturing an average of approximately
10% market share of our total addressable market in the six cities where we
offer services. In Monterrey and Guadalajara, the first two markets where we
launched operations in 1999, we have achieved approximately 13% market share of
our coverage market in both of these cities.
Comprehensive Voice and Data Service Portfolio. We provide our customers an
integrated bundle of services that includes local and long distance voice
services, as well as internet, data and other value-added services. We believe
our comprehensive service portfolio enables us to build strong, long-term
relationships with customers, thereby reducing churn and increasing our return
on our investment in network infrastructure. Furthermore, our digital access,
transport and switching network enable us to capture the current revenue
opportunity in voice services, while also enabling us to provide data services
as demand for those services grows.
-56-
22
Flexible, Technologically Advanced, Reliable Digital Network. Our hybrid
fixed wireless and wireline local access network structure allows us to enter
new markets quickly and cost-effectively. As a result, our return on our
investment in network infrastructure is increased. By utilizing the FWA
technology model, we are able to quickly cover a substantial geographic area
with minimal initial capital expenditures. We do not incur incremental capital
expenditures for last-mile connectivity until the customer subscribes to our
service. As of December 31, 2003, our network consisted of 10 digital switches,
207 FWA sites, of which 57 are also PMP sites, and 431 kilometers of
metropolitan fiber optic rings in order to service our 349,144 access lines.
Compelling Financial Profile. We have a diversified revenue base, a
favorable average revenue per user and a strong overall financial profile.
o Diversified revenue base. Our wide array of service offerings and our
349,144 lines in service and over 251,000 customers provide us with a
diverse revenue base.
o Average Revenue Per User. Our business model targets business and
high-usage residential customers. We believe this model allows us to
achieve a favorable average revenue per user. For the year ended
December 31, 2003, we had an average revenue per user of Ps. 665.
o Positive free cash flow and strong capitalization. Our positive free
cash flow, strong capitalization and low leverage put us in a solid
financial position to continue to execute our business strategy.
o Efficient network build-out strategy. Fixed wireless access technology
gives us the ability to rapidly initiate large geographic coverage
areas while minimizing our upfront capital expenditures and reducing
our payback period.
Experienced Management Team and Strong Equity Partners. Our senior
management team has extensive entrepreneurial, financial, marketing and
telecommunications expertise. The diverse experience of our senior management
team has contributed significantly to our initial success and rapid growth. In
addition, we benefit from working with strong local partners and experienced
multinational investors such as The Blackstone Group, AIG-GE Capital Latin
American Infrastructure Fund, and affiliates of Metropolitan Life Insurance
Company and The Soros Group. Our local investors include Tomas Milmo Santos,
Tomas Milmo Zambrano, Alberto Santos de Hoyos and Lorenzo Zambrano Trevino.
These businessmen have extensive financial, operating and senior management
experience in large Mexican corporations.
Strategy
The key elements of our business strategy are:
Target Service Sectors with High Profitability Potential. We have divided
our target market into the mass market and business market. In the mass market
we focus on high-usage residential, micro and small business customers. Within
the business market we focus on medium and large businesses. We have developed
differentiated, targeted telecommunications services plans designed to capture
business and retain high-usage residential customers in each market segment. We
believe that by focusing on the business and high-usage residential customers
within a coverage area we are able to increase the return per dollar invested in
our network infrastructure. For the year ended December 31, 2003, approximately
66% of our revenues were generated from business lines and 34% from residential
lines.
Bundle Products in an Integrated Offering. We believe that the bundling of
voice, data and internet services into communications solutions for our
customers enables us to generate higher revenue per customer and more revenue
per dollar invested in access infrastructure while also generating customer
loyalty. We have focused and will continue to focus on increasing the
penetration of bundled products to our customer base. By being a
facilities-based telecommunications service provider, we believe we are well
positioned to offer our customers the convenience of receiving voice, data and
internet services from a single provider.
-57-
23
Exploit First-Competitor-to-Market Advantage. As Telmex's primary
competitor in local fixed telephony services and the first facilities-based
telecommunications service provider to enter new markets and offer integrated
voice, data and internet services, we will continue to focus on selectively
opening new markets where we believe we can capitalize on the market's desire to
have an alternative carrier and on serving demand unmet by our competitors.
Focus on Customer Service and Retention. Since launching operations, we
have been focused on achieving customer satisfaction levels that are superior to
the incumbent and our primary competitors. We believe that our service-driven
customer care leads to superior customer satisfaction, which enhances
profitability and cash flow by increasing customer retention and expanding sales
opportunities.
Continue to Expand Technologically Advanced Network Infrastructure. Since
1999, we have successfully launched operations in six cities. We continue to
evaluate opportunities in other regions in order to enhance our coverage area.
We believe that selectively expanding our network and coverage area will enhance
our ability to acquire large business customers with multi-city operations,
which we expect to result in higher revenues and margin improvements while
minimizing capital expenditures.
Our Services
We offer local and long distance telephony services, as well as data and
internet services to business and residential customers. We also provide
value-added services such as call waiting, call forwarding, three-way-calling,
call barring and multi-line hunting (centrex). We also provide internet services
in dial-up, dedicated and on-demand fashion. We have integrated access
technologies that allow the internet access required by different types of
customers, such as dial-up connection, Internet Fixed Wireless Access (an
always-on data channel that allows for the continuous use of the voice line
while navigating on the internet), and dedicated private lines of all speeds. We
have also launched dedicated private lines for both local and domestic long
distance telephony markets. For the latter, we use both our own and leased
infrastructure.
The following chart summarizes each component of our revenue sources for
the year ended December 31, 2003:
[Enlarge/Download Table]
Revenue Source % Revenue Description
Local services................... 75% We generate revenue by enabling our customers to
originate and receive an unlimited number of
calls within a defined local service area.
Customers are charged an initial fee for activating
the service, a flat monthly fee for basic service, a
per call fee and a per minute usage fee, depending on
the type of call.
Long distance services........... 10% We generate revenues by providing long distance
services for our customers' completed calls.
Other services................... 15% We generate revenues by providing other services to our
customers such as internet, data, interconnection and
dedicated private line service, as well as value-added
services such as caller ID, call waiting, call
forwarding and voicemail.
----------------------------------- ---------------------- ---------------------------------------------------------
Total 100%
As of December 31, 2003 we offered the following products and services:
-58-
Products and Services
[Enlarge/Download Table]
Voice Data
o Business and Residential Line o Local and Domestic Private Lines
o Long Distance o High Speed Private Lines
o Digital Trunks o Co-location
o Voicemail o Virtual Private Network-- MPLS
o Centrex Line
o Customer Premise Equipment - Internet
o Telephone Sets, Key Systems and PBX o Dial Up Internet
o Call Waiting, Call Forwarding, Caller ID, o Dedicated Internet
Conference Call o Web Hosting
o Directory Assistance o Internet on Demand
o Operator Services o Internet FWA
o Automatic Dialing o Co-location
o Unique Number
o Prepaid Services Bundles
o Collect Calls o Axtel in a Box
o Virtual Line o Axtel NeXt
o Toll Free Services
Our Markets
We launched commercial operations in June 1999 in the city of Monterrey.
Our network currently reaches six of the largest metropolitan areas in Mexico
(Mexico City, Monterrey, Guadalajara, Puebla, Toluca and Leon), which represent
approximately 19% of the population of Mexico. As of December 31, 2003, we had
349,144 lines. Due to our concentration of network facilities in business
centers and upper income residential areas, we estimate that the cities in which
we operate represent the majority of the total Mexican telecommunications
revenue opportunity.
Our city roll-out was determined taking into consideration the following
criteria:
o Size of telecommunications opportunity. According to COFETEL, for the
nine months ended September 30, 2003, nearly 70% of the number of net
lines added by the 32 states in Mexico were concentrated in only 10
states: Mexico, Distrito Federal, Jalisco, Nuevo Leon, Veracruz, Baja
California, Puebla, Guanajuato, Chihuahua and Tamaulipas. The six
cities we currently serve are in these states and five of them are
state capitals.
o Regional economy. According to INEGI (Instituto Nacional de Economia,
Estadistica e Informatica), in 2001, 53.2% of the total gross domestic
product in Mexico was generated in six states in which we have a
presence.
o Operational synergies. To become more efficient in launching cities,
we decided to open clusters of cities. The cities of Toluca and Puebla
are close enough to Mexico City and Leon is close enough to
Guadalajara to allow for quick systems and operations integration and
network buildout.
Within these cities, studies were conducted using geographical, statistical
and self-generated market research data to determine where the opportunity was
concentrated. Our network has been built upon this comprehensive data allowing
for fast penetration and cost-efficiency.
Our "first-competitor-to-market" advantage has enabled us to capture an
average of approximately 10% market share of our coverage market in the six
cities in which we offer services. In Monterrey and Guadalajara, the first two
markets where we launched services, we have achieved market shares of
approximately 13% in both cities. In particular, in the business segment, we
estimate that in Monterrey and Guadalajara we have achieved approxi-
-59-
mately a 14% and 17% market share, respectively. The table below provides our
access lines and estimated market share of our coverage market as of December
31, 2003 for each of the cities where we offer services.
Market Share Within Coverage Market
As of December 31, 2003
[Enlarge/Download Table]
Date Residential Business Total
City Launched Lines Share Lines Share Lines Share
Monterrey June 1999 71,024 12.1% 39,174 14.4% 110,198 12.9%
Guadalajara December 1999 41,514 11.2 28,785 16.8 70,299 13.0
Mexico City March 2000 77,898 8.3 45,954 8.3 123,852 8.3
Puebla January 2001 13,427 4.8 8,594 9.4 22,021 6.0
Toluca January 2001 5,747 4.5 3,054 9.4 8,801 5.5
Leon January 2001 7,109 6.1 6,864 13.4 13,973 8.3
Total 6 Cities 216,719 9.0% 132,425 11.3% 349,144 9.7%
Source: Share percentages are Company estimates
Our largest single customer is Nextel de Mexico, which provides
telecommunications services to its customers through access to our network. We
first entered into an agreement with Nextel de Mexico for the provision of our
services in April 2001, and such agreement has been extended three times.
Pursuant to the most recent agreement with Nextel de Mexico, we are guaranteed
certain minimum levels of traffic through December 2005. This arrangement with
Nextel de Mexico accounted for approximately 18% our net sales in the year 2003.
Marketing and Sales
Our marketing strategy is to position ourselves as the first and best
alternative provider of local, long distance and internet and data services in
Mexico. We undertake direct mail marketing (both special delivery and bill
inserts) as well as telemarketing in order to generate geographically targeted
brand awareness and to up-sell new services to existing customers. We also build
brand awareness through the use of outdoor advertising on bus stops and
billboards, printed media including newspapers and magazines, advertisements on
the radio and television and sponsorships of local news programs. Our brand
strategy is to convey a modern, attractive image using simple, visual
communication and portraying a human profile.
We complement this marketing campaign with focused sales efforts directed
to our target market using a variety of sales channels. Our primary sales
methods are:
o Direct Sales. Account executives seek out a particular business
customer and establish an appointment.
o Door to Door. Salespeople walk through a neighborhood soliciting
potential customers.
o Telemarketing. Salespeople call potential customers from an extensive
database developed by us. This same team receives calls from potential
customers that have been addressed by our advertising and promotional
campaigns.
o Sales Booths. Salespeople stand at strategically determined areas
where potential customers carry out their shopping activities.
o MAPs (Modulos de Atencion y Pago). Axtel-branded sales and service
offices located at strategic locations within our targeted cities.
o Indirect Channels (Sales Distributors). Selected companies are
certified to carry out sales activities in the name of Axtel. These
companies target specific niches over which they have influence.
-60-
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 1.6% during 2003 as
compared to 2.2% during 2002 as a result of management initiatives to improve
customer retention as well as the billing and collection process.
Pricing
In the residential market, in order to attract new subscribers, we
frequently offer flexible and attractive initial pricing. Once a customer has
chosen our services, we focus on customer satisfaction and offer the customer
benefits, rather than lower pricing, in order to maximize our retention rate.
For instance, we install and activate second lines for free and allow customers
free service trials for value-added services. In the business market, we attract
users by providing volume discounts on local calls and provide additional
services and discounts to customers who sign long-term contracts. To date, this
strategy has allowed us to capture significant market share without eroding the
value of the market through excessive price competition.
We generally seek to maintain our prices at market levels. We offer pricing
plans that are simple in order to assure customers of the integrity of the
billing process. Our pricing structure rewards consumption by increasing
discounts in relation to the amount billed. Our ability to introduce new
products such as Axtel.NeXt, a bundled product that provides voice services and
always-on internet access, allows us to position ourselves as a value-added
provider rather than as a price-cutter.
Our Network
We provide services using a hybrid local access network, designed to
optimize capital expenditures through the deployment of network access equipment
based on specific customer requirements. Our current network access options
include fixed wireless access, point-to-point and point-to-multipoint, high
quality copper and metropolitan fiber. We switch our traffic using DMS equipment
that interconnects with Telmex's equipment and that of other local and long
distance carriers in each city, as shown below.
[Download Table]
FWA Sites PMP Sites (1) Switches Fiber (Kms)
Mexico............................ 85 27 3 154
Monterrey......................... 50 13 2 108
Guadalajara....................... 44 9 2 89
Puebla............................ 15 3 1 63
Toluca............................ 6 2 1 7
Leon.............................. 7 3 1 9
Total........................ 207 57 10 431
(1) PMP Sites are included in FWA Sites
In order to deliver superior network reliability, we have acquired advanced
network technology and initially contracted network construction on a turn-key
basis from proven 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 Nortel Networks' customer
access equipment (currently, Airspan's equipment), microwave radios and DMS
switching equipment. Our internet platform uses Cisco's routing platform with
Compaq
-61-
servers and Microsoft software applications. Our fiber networks use Lucent
Technology Allwave fiber and Nortel Networks DNX SDH equipment. The combination
of these network components enables us to deliver network reliability, which we
believe is superior to the incumbent's legacy network.
Through our current use of Nortel's Proximity II Fixed Wireless Access
technology, we are able to provide our customers quality voice service and 64
Kbps data speeds. We consider Fixed Wireless Access technology to be ideal for
our residential and micro and small business customers. Internet Fixed Wireless
Access technology provides our customers with always-on data connections with
speeds up to 96 Kbps by using an Internet Protocol interface and dynamic
timeslot assignments, which improves the data rates experienced by customers and
also increases our network efficiency.
Basic voice and data services are delivered over all of our access
technologies. Advanced data services and internet access with data rates ranging
from 64 Kbps to 2,048 Kbps require deployment of the additional equipment to
support the customer's requirements. In general, the capabilities of the access
technologies increase directly with the cost of the solution. Our hybrid access
capability enables us to:
o provide a full range of voice, data and internet services;
o rapidly meet demand;
o penetrate specific target markets; and
o scale the infrastructure deployed to market demand and individual
customer requirements.
This network infrastructure allows us to satisfy the requirements of
diverse market segments while maintaining a low-cost position relative to our
competition.
Build-out strategy
Our network is built on a modular basis. Once a region of opportunity has
been identified and the decision to expand has been made, we build our network
in tandem with our sales efforts within the region. This approach provides
greater flexibility and minimizes the time lag between the incurrence of capital
expenditures and the generation of service revenues. This model differs
significantly from a traditional wireline network covering the same geographic
area in which the vast majority of capital expenditures are incurred prior to
obtaining customer subscriptions.
Last-mile connectivity
The last-mile connectivity portion of our network is comprised of a mix of
wireless technologies as well as fiber optics for customers within our
metropolitan fiber optics rings. Our access technology is determined by
cost-effectiveness analysis, customer applications and availability of service.
We use fixed wireless access to serve customers requiring between 1 and 9 lines
(POTS) in a single point of service. Point-to-multipoint is used for customers
that require between 10 and 30 lines (POTS) and/or require low-speed (below
2,048 Kbps) dedicated private line accesses. Our point-to-point and fiber optics
accesses are used for customers requiring digital trunks or dedicated private
line accesses of more than 2Mbps. Hybrid solutions are being used in order to
reach more customers by expanding service using copper, PDMX and multi-tenant
solutions.
Recently, we signed contracts with Telefonica Data de Mexico, a subsidiary
of Telefonica de Espana, pursuant to which we will have the right to use
capacity in Telefonica's long haul fiber infrastructure which is located between
the northern border of Mexico and Mexico City. Telefonica Data de Mexico will
have the right to use a pair of dark fibers in a portion of our metropolitan
fiber rings. This agreement should enable us to reduce our long distance costs
by shifting a portion of our traffic from other carriers' long distance
infrastructure to our own network.
-62-
Network backbone
As of December 31, 2003, our network backbone consisted of 431 kilometers
of metropolitan fiber optic rings in the cities where we have presence. Our
network is comprised of several technologies such as fixed wireless access,
point-to-point, point-to-multipoint, copper and fiber. Each city we currently
reach is served by a Nortel DMS-100 digital switch which collects all calls
originated and terminated in our network. We have geographically deployed 207
sites/Hubs (technology concentrators) in order to serve our target markets.
Switching
We use Nortel's DMS-100 digital switches to route traffic within each city.
These switches are capable of handling up to approximately 100,000 lines in a
modular basis. The switches are capable of providing analog lines, E1 digital
lines, digital high speed data services, centrex services and operator assisted
service. In addition, they can provide private clear-channel digital lines, data
transmission and value-added services such as four digit dialing, conference,
call back, caller ID, call waiting, hot line and hunt group among others.
Operational support systems
Since launching operations, we have implemented and integrated an
information technology architecture that is based upon SAP software for
enterprise resource planning, Kenan software for billing and an internally
created customer relationship management system. These systems enable us to
perform on-line sales and service provisioning. We have been able to manage
customer requests, generate accurate bills and produce timely financial
statements. We have also integrated Siebel's customer relationship management
software into the core of our information technology architecture. These systems
allow us to respond to customer requests with speed, quality and accuracy.
We have also implemented an advanced network management system, which
allows us to detect, diagnose and solve network problems in real time. This
system is being expanded to integrate all network components in order to improve
fault management and response times.
In July 2003, we received authorization from the Mexican Federal
Telecommunication Commission (COFETEL) to install and operate an international
gateway, which allows us to establish interconnection agreements with other
countries for incoming and outgoing traffic. By sending outbound traffic we will
also have the right to receive incoming traffic. This mechanism is in accordance
with the Rules of Proportional Return. Tariffs are applied to this international
traffic in accordance with international settlement rates. See
"--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
-63-
o 50 MHz at 3.4 GHz, nationwide divided in 9 regions for local telephony
using fixed wireless access technology.
We paid a license fee of Ps. 569.7 million (in nominal pesos) for these
spectrum licenses. Each of the spectrum licenses has a term of 20 years and may
be renewed at our option for additional 20-year periods as long as we are in
compliance with all of our obligations thereunder and as long as an agreement is
reached on the new conditions set forth by the SCT.
The concession expressly permits us to provide the following services:
o basic local telephony;
o nationwide long distance telephony;
o the sale or lease of network capacity for the generation, transmission
or reception of signs, signals, writings, images, voice, sounds or
other information of any nature;
o the purchase and lease of network capacity from other carriers,
including the lease of digital circuits;
o value-added services;
o operator services;
o data, video, audio and video conference services, except for cable or
other restricted television, continuous music or digital audio
services; and
o credit or debit telephone cards.
We have the required regulatory authority to provide such services to
Mexico's entire population. Some of our concessions require us to offer services
in certain geographic areas where we are not currently offering services. We
have, in the past, obtained waivers to such requirements. These waivers have
expired and we have applied for the renewal of such waivers. We have been
advised in writing by COFETEL that we are not in a situation contemplated in the
Federal Telecommunications Law which may result in revocation of any of our
licenses. We expect to maintain all of our concessions for each such geographic
area where we do not presently offer our services. However, in the event that we
were to lose our concessions for these areas where we do not presently offer our
services, our concessions for the geographic areas where we do presently offer
our services will not be adversely affected.
Interconnection
In accordance with the Federal Telecommunications Law, all holders of
concessions for the installation, operation and exploitation of public
telecommunications networks are required to provide interconnection services to
other holders of public telecommunications network concessions.
All terms of interconnection (such as point of interconnection and
interconnection fees) are negotiated between telecommunications concessionaires
under COFETEL's supervision. Should telecommunications concessionaires be unable
to agree on the terms of interconnection, including rates charged, after a
certain period of negotiation, either concessionaire may request that COFETEL
resolve any interconnection term at issue. Telecommunications concessionaires
are prohibited from adopting discriminatory practices in the application of
rates or any other terms of interconnection.
In accordance with Mexican Telecommunications Regulations, we have
established interconnection agreements as follows:
-64-
Local interconnection
We entered into an interconnection agreement with Telmex in March of 1999.
This agreement included provisions concerning local switched interconnection,
local non-switched interconnection, signaling, co-location and local transiting,
and provided for an interconnection rate of US$0.00975 per minute. This
interconnection agreement expired on December 31, 2003. However, its terms and
conditions (including the interconnection rate) are automatically extended until
the parties mutually agree to extend the agreement or execute a new
interconnection agreement.
In addition to Axtel-Telmex local interconnection agreements, we have
established interconnection agreements with most of the local fixed carriers,
such as Telefonos del Noroeste, S.A. de C.V. ("Telnor"), Alestra, S. de R.L. de
C.V. ("Alestra"), Operadora Unefon, S.A. de C.V. ("Unefon") and Maxcom
Telecomunicaciones, S.A. de C.V. ("Maxcom"). The terms and conditions for each
agreement are similar to those established with Telmex. Although we have no
local interconnection agreement with Avantel Servicios Locales, S.A. de C.V.
("Avantel") or with Megacable Comunicaciones de Mexico, S.A. de C.V. due to
particular legal issues between those operators and COFETEL, traffic is
exchanged and interconnected between us and those local carriers through transit
agreements with Telmex.
Pursuant to those local interconnection contracts, we have established
"bill and keep" agreements. Under the "bill and keep" agreements, if the
imbalance between calls originated by a local carrier (Maxcom, Alestra, Telmex,
Unefon, Telnor, etc.) and terminated by us and calls originated by us and
terminated by such local carrier during a given month does not exceed a
predetermined percentage, then no interconnection fees are payable by the net
user of interconnection services. If the imbalances are in excess of the
predetermined percentage, which is 30% to date, then the net user must pay all
interconnection fees related to calls originated by it in that period. The bill
and keep agreements contain exceptions regarding internet traffic and long
duration calls so that these will not affect the calculation of the permitted
imbalance percentage. The prices and tariffs charged under these local
interconnection agreements are denominated in US dollars and then converted into
Mexican pesos based on monthly rates published by Banco de Mexico.
Mobile interconnection
We have reciprocal interconnection agreements with all-cellular providers,
such as Telcel, Unefon, Iusacell and Telefonica Movil (including Cedetel and
Pegaso PCS) within each of the local coverage areas in which we operate. As of
December 2003, the interconnection fee with the cellular carriers was Ps.1.90
per minute for wireline to mobile interconnection under the "calling party pays"
mode. For mobile to wireline calls, we receive US$0.00975 per minute from the
mobile carrier.
Long distance interconnection
In our local operation, we have long distance interconnection agreements in
place with major long distance carriers such as LADA (Telmex and Telnor Long
Distance operation), Grupo Iusacell, Alestra, Marcatel, and Protel. Other long
distance carriers transit traffic though Telmex. As of December 2003, the
interconnection fee we receive from long distance carriers was US$0.00975 per
minute.
In our long distance operation, we have established agreements with local
networks such as Maxcom, Telmex and Telnor. In addition to the interconnection
rate described above, we may pay extra charges for our local interconnection
with Telmex and Telnor.
International settlement
The international settlement rates that US carriers use to settle accounts
with Mexican telecommunications companies are US$0.055 (Mexico City, Monterrey
and Guadalajara), US$0.0850 (197 equal access cities) and US$0.1175 (non equal
access cities) per minute as of December 2003.
-65-
In 1996, COFETEL implemented the "Rules of Proportional Return" system for
allocating international long distance calls for each Mexican carrier based upon
the carrier's percentage of outbound international calls. The "proportional
return" system may be eliminated or phased out in the future.
Customer Service
A key element of our competitive strategy is to consistently provide
reliable, responsive customer service. In order to achieve this goal, we have
established a 24 hour/7 day a week customer service center for voice, data and
internet services which is staffed by highly trained personnel. We have
implemented a comprehensive training, testing and certification program for all
staff that directly interacts with customers.
We provide post-sales service on a nationwide basis through the following
four operations:
o Customer Service provides post-sales customer support, ranging from
general information, additions, moves and changes to billing inquires
and technical support.
o Operator Services is a 24/7 operation providing directory assistance,
wake-up calls, time of day, emergency calls and placing domestic and
international long distance calls.
o Repair Answer is our customer contact group that addresses and manages
all customer trouble reports and provides on-line technical support
and analysis.
o Local Test analyzes and tests all trouble reports that are not
resolved on-line by Repair Answer. This team is accountable for
routing "in service" and "out of service" trouble reports to Repair
Dispatch. Both Repair and Local Test work closely with our network
maintenance center in order to monitor and fix network disruptions.
Billing and Collection
We believe our billing and collection process is an important aspect of our
competitive advantage.
Our billing team receives and validates the call detail record from the
network and bills customers on a monthly basis, typically within 14 days from
the end of the billing period. During 2003, we have made significant
improvements in shortening the billing process through internal improving
efficiencies.
An ongoing revenue assurance process which consists of reviewing the
billing stream, payments and adjustments, as well as fraud detection and control
has become part of our regular billing operation. This process has contributed
to minimizing fraud and risk.
To facilitate the reception of payments and to make the payment process
convenient for customers, we have developed a number of payment reception
channels. Some of these channels are:
o convenience stores;
o banks;
o Axtel MAPs (Axtel's Sales Points);
o website e-billing;
o supermarkets; and
o automatic charges to credit cards, checking and debit accounts (upon
customer approval).
-66-
These channels provide easy and fast options for the customer to select the
most suitable and convenient alternative for a prompt payment.
To ensure customers pay on time, we use preventive tactics such as calls to
remind customers that have failed to pay promptly on their previous payment due
dates and call interception. Additional procedures involve suspension of long
distance and cellular outgoing calling, suspension of outbound calling and total
suspension of service.
Past due accounts are turned over to external collections agencies 90 days
after due date. Accounts are disconnected 180 days after due date. Prior to
disconnection, we conduct a negotiation of the outstanding balance with the
customer as part of our retention efforts oriented to provide alternate
solutions payment programs. Alternatives include reconnection of the service
under a pre-payment scheme with a payment schedule for the outstanding balance.
Competition
We compete primarily in the local telephony services market on the basis of
features, customer service and value. Our direct competitors are wireline and
fixed wireless local telephony operators.
We do not compete directly in the long distance market. Although we provide
long distance service, we view such service as a part of our suite of products
for our telephony customers. As a result, we currently do not offer our long
distance service separately from our local telephony service.
There may be opportunities for consolidation in the Mexican
telecommunications industry. Although it is not the focus of our strategy, we
intend to review and evaluate opportunities from time to time and, if an
appropriate opportunity arises, we may pursue it through the strategic
acquisition of assets or an acquisition of, or combination with, another
company.
Telmex. Our main local telephony competitor is Telmex, the former
state-owned telecommunications monopoly. Telmex has significantly greater
financial and other resources than we have and serves all of the cities and
segments that we serve. In addition, Telmex has an established customer base
which represents the vast majority of the wireline local telephony lines in
Mexico.
We interconnect with and use Telmex's network to service our own customers
and we are dependent upon Telmex to meet certain telecommunications needs of our
customers and to maintain our service standards. In addition, because Telmex is
the dominant provider of local telephony services, a significant number of our
customers maintain an ongoing relationship with Telmex. Telmex has a presence
throughout Mexico and its established and long-standing customer base gives it a
substantial competitive advantage. See "Risk Factors--Risks Relating to
Axtel--We depend on Telmex for interconnection."
We believe we are competing effectively against Telmex by providing
fast-deployment infrastructure in underserved areas, and by providing value to
customers through high quality customer service.
Avantel. Avantel commenced operations in 1996 by providing only long
distance telephony services to residential and business customers. In 2000,
Avantel started to offer local service to some of its corporate customers. We
believe we are competing effectively against Avantel by developing and offering
to corporate customers customized telecommunications service packages, which
include attractive pricing, additional product value and applications and access
technologies to meet customer needs.
Alestra. Alestra commenced operations in 1996, providing only long distance
telephony services to residential and business customers. Like Avantel, in 2000,
Alestra also started to offer local service to some of its corporate customers.
We believe we are competing effectively against Alestra by developing and
offering to corporate customers customized telecommunications service packages,
which include attractive pricing, additional product value and applications and
access technologies to meet customer needs.
-67-
Maxcom. Maxcom commenced operations in 1999 targeting residential and
business customers in the cities of Puebla, Mexico City and recently in
Queretaro. It has deployed a wireline network in these cities and after four
years of operations, its customer base has grown to approximately 140,000 lines.
We currently compete in Puebla and Mexico City and we believe we compete
effectively on the basis of outstanding customer service and price.
Properties
All of our properties are located in Mexico. Our corporate headquarters are
located in Monterrey, Mexico. Our Monterrey office consists of 39,779 square
meters, and the lease on this property expires in 2015. We also own eight
buildings throughout the six cities where we operate. These are the facilities
in which we have installed our switches. We have over 200 towers on leased land
throughout our service areas.
Employees
As of December 31, 2003, all of our employees, except our executive
officers and certain other managers, are members of one of two labor unions. We
believe we have good relationships with our employees and their respective
unions.
Legal Proceedings
We are currently party to the following material legal proceedings:
Metronet Dispute
On October 2002, Metronet, S.A. de C.V. ("Metronet") filed an action
against us in the Fourth Civil Court in Monterrey (Mexico). Metronet claims that
we wrongfully terminated a letter of intent and is seeking payment for services
and direct damages of approximately US$3.8 million, plus other expenses and
attorneys' fees. The trial court ruled against us. This lawsuit, which we are
vigorously defending, is currently in the appeal stage.
Spectrasite Dispute
In March 2002, Spectrasite Communications Mexico, S. de R.L. de C.V.
("Spectrasite Mexico") filed an action against us in the 30th Civil Court in
Mexico City. Spectrasite Mexico is seeking recovery of a deposit in the amount
of US$13.0 million that Spectrasite Mexico made with us in connection with a
proposed sale-leaseback of towers. We, in turn, countersued Spectrasite Mexico
and Spectrasite Communications Inc. for breach of contract in a related action.
If the court rules against us, the deposit will have to be reimbursed as will
Spectrasite Mexico's legal costs and expenses and any other applicable amounts
considered direct damages in accordance with applicable Mexican laws. If the
court rules in our favor, we may be able to retain the deposit and/or any other
applicable amounts considered as direct damages in accordance with applicable
Mexican laws, in addition to receiving payment of our legal costs and expenses.
This lawsuit is in the discovery stage.
Rendall Dispute
On June 27, 2003, we and Telinor jointly filed an action against Rendall &
Associates seeking a court pronouncement that neither of us owed any amounts to
Rendall & Associates. Rendall & Associates seeks payment from Telinor of
approximately US$3.0 million pursuant to an expired services agreement between
Rendall & Associates and Telinor. We believe Rendall & Associates' allegations
are without merit and that the court may find in our favor. This proceeding is
in its initial stages.
Shareholding / Shareholder 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 Bank Fund L.P., Blackstone
Offshore Capital Partners
-68-
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, and issued in
Telinor's name, for the account of Blackstone. As a result of the subscription,
Series A voting shares were issued in Telinor's name. Subsequently, the portion
of the voting shares issued in Telinor's name which Telinor had advised us it
was subscribing for the account of Blackstone were exchanged for Series C voting
shares. The record ownership of these Series C voting shares was placed in
Blackstone's name. We and Telinor believe these actions were proper because
Blackstone, as a non-Mexican investor, cannot hold our Series A voting shares.
LAIF X sprl , a holder of Series C voting shares which would own a majority of
the Series C voting shares absent Blackstone's ownership of Series C voting
shares, 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 asserts that Blackstone's holding of Series C voting shares is
invalid and that our current board of directors is not properly constituted
because the directors representing the Series C shareholders, elected with
Blackstone's vote, were not properly elected. However, the subscription
agreement submitted to us by LAIF X sprl states that Worldtel Mexico Telecom
Limited ("WorldTel") assigned its subscription rights to participate in the
capital call to its direct shareholders, among which LAIF IV Ltd. was an
assignee. It also states that LAIF IV Ltd. thereafter re-assigned its rights to
subscribe its pro-rata share of Axtel shares to LAIF X sprl, which in turn
subscribed and paid for some of our shares arising out of the capital call.
Prior to such subscription and payment for Axtel shares by LAIF X sprl, Telinor
had subscribed and paid in full the entire capital call, subject to WordlTel's
exercise of pre-emptive rights. As a consequence of LAIF X sprl's subscription,
we refunded to Telinor the amount paid by LAIF X sprl. Telinor now claims that
the re-assignment of rights between LAIF IV Ltd. and LAIF X sprl was invalid
under Mexican law, and as a consequence thereof, the subscription made by LAIF X
sprl is also invalid. Therefore, Telinor claims that the shares allocated to
LAIF X should be allocated to Telinor under its subscription agreement because
Telinor requested and paid for these shares prior to LAIF X sprl's subscription
and payment.
These disputes have evolved as follows:
(i) In October 2003, LAIF X sprl filed a petition before the trial court
located in Monterrey (Mexico), seeking preliminary injunctive relief
consisting of an order to suspend the effectiveness of the resolutions
adopted during the meeting of our shareholders held on October 9,
2003, with respect to the appointment of members of our board of
directors by the holders of Series C shares, pending the resolution of
the dispute through the dispute resolution process set forth in our
bylaws. The trial court dismissed this action and the State Superior
Court of Appeals (Sala Novena Civil) confirmed such dismissal. LAIF X
sprl may still request the review of this decision by a Federal Court.
(ii) In December 2003, LAIF X sprl invoked the dispute resolution process
in our bylaws and filed a demand for arbitration before the
International Centre for Dispute Resolution of the American
Arbitration Association against Axtel, Telinor and Blackstone
(referred to collectively herein as the respondents). Each of the
respondents submitted on time its answer to the demand for
arbitration. This proceeding is in its initial stages; each of the
claimants and respondents has selected one arbitrator, and the
International Centre for Dispute Resolution is in the process of
selecting the president of the arbitration tribunal. In this
arbitration proceeding, LAIF X sprl seeks, among other things, the
following relief: (a) an order preventing Axtel from taking, without
LAIF X sprl's express written consent, any action that under our
bylaws is subject to the approval of the holders of the majority of
the Series C voting shares or the approval of at least one of our
Series C directors; (b) a declaration that the transfer of Series A
voting shares to Blackstone and their conversion into Series C shares
was not in full compliance with our bylaws; (c) an order to nullify
the Series C shares issued to Blackstone; (d) a declaration that the
election of our board of directors on October 9, 2003 was conducted in
breach of our bylaws; and (e) an order to remove our current board of
directors as appointed on October 9, 2003.
(iii) In January 2004, Telinor filed a lawsuit in Monterrey (Mexico)
against LAIF IV Ltd., LAIF X sprl and Axtel. In this lawsuit, Telinor
is challenging the validity of a re-assignment of preferential
subscription rights by LAIF IV Ltd. in favor of LAIF X sprl, and as a
consequence thereof, the subscription of shares made by LAIF X sprl.
If the court rules in favor of Telinor, the re-
-69-
assignment of preferential subscription rights by LAIF IV Ltd. in
favor of LAIF X sprl may be judicially declared invalid, LAIF X
sprl's status as a shareholder of Axtel may be revoked, and the
shares subscribed by LAIF X sprl may be judicially assigned to
Telinor..
(iv) In February 2004, LAIF X sprl filed a petition against the
respondents before the United States District Court, Southern
District of New York, in order to (a) compel the respondents to
arbitrate any and all disputes with LAIF X sprl arising directly
or indirectly out of our bylaws, and (b) to obtain injunctive
relief and enjoin the respondents from commencing or pursuing any
lawsuit against LAIF X sprl (its affiliates, employees, officers,
and agents) arising directly or indirectly out of our bylaws in
any jurisdiction without a prior determination by the arbitration
tribunal that such action would indeed be outside the scope of
its jurisdiction. On March 1, 2004, the injunctive relief sought
by LAIF X sprl was denied as to Axtel and Blackstone with the
consent of LAIF X sprl; and on March 8, 2004, it was denied as to
Telinor in all respects. On March 26, 2004, LAIF X sprl appealed
the District Court's order as to Telinor before the Court of
Appeals for the Second Circuit.
(v) In March 2004, LAIF X sprl submitted to the International Centre
for Dispute Resolution an amendment to its demand for arbitration
requesting additional relief consisting of a declaration that,
pursuant to our bylaws, LAIF X sprl is a legitimate shareholder
of Axtel.
Enforceability of Civil Liabilities Against Foreign Persons
We and our subsidiaries are variable capital corporations (sociedades
anonimas de capital variable) organized under the laws of Mexico, and are
headquartered, managed and operated outside of the United States (principally in
Mexico). Most of our directors and all of our officers reside in Mexico. All or
a substantial portion of our assets and the assets of most of our directors and
all of our officers are located outside of the United States (principally in
Mexico). As a result, it may not be possible for the investors or holders of the
notes to effect service of process outside of Mexico or within the United States
upon us or such persons, or to enforce a judgment obtained in the United States
against us or them outside of Mexico or in the United States courts that is
based on the civil liability provisions under laws of jurisdictions other than
Mexico including the federal and state securities laws or other laws of the
United States.
We have been advised by our special Mexican counsel, D&A Morales y
Asociados, S.C., that no treaty is in effect between the United States and
Mexico calling for the mutual recognition and enforcement of their respective
judgments. The recognition by Mexican courts of a judgment rendered in the
United States is usually done under the principle of reciprocity, which means
that Mexican courts would reexamine judgments rendered in the United States if
such foreign country would reexamine Mexican judgments. Mexican courts may
enforce judgments rendered in the United States through a homologation procedure
consisting of the review by such Mexican courts of the foreign judgment to
ascertain whether certain requirements of due process, reciprocity and public
policy have been complied with, without reviewing the merits of the subject
matter of the case. A judgment rendered in the United States may or need not be
recognized if, among others:
o the foreign court did not have jurisdiction over the subject matter in
a manner that is compatible with or analogous to Mexican laws or the
subject matter is within the exclusive jurisdiction of Mexican courts,
o the judgment was rendered under a system which does not provide
procedures compatible with due process requirements,
o enforcement of the judgment would be contrary to public policy,
o the defendant did not receive adequate personal notice in sufficient
time to defend itself,
o the judgment is not final in the rendering state,
-70-
o the judgment conflicts with another final judgment, or
o there is no reciprocity with the rendering state.
Furthermore, there is doubt as to the enforceability, in actions originated
in Mexico, of liabilities based in whole or in part on the United States federal
or state securities laws, and as to the enforceability of judgments obtained in
the United States in actions based in whole or in part on the civil liability
provisions of United States federal or state securities laws.
-71-
Management
Our Board of Directors is comprised of eleven members. Subject to certain
provisions of the corporate bylaws, the Series A shareholders have the right to
appoint up to six directors, the Series C shareholders have the right to appoint
up to four directors and the holders of the majority of Series N shares have the
right to appoint one independent Series N director. The directors of each series
of shares may be elected at our ordinary general meeting of shareholders or at
special meetings of holders of each series of shares. All board members hold
their positions indefinitely, unless they resign or are removed by the
shareholders. Under the Mexican Companies Law, we are required to have one
statutory auditor, who is elected by our shareholders at the ordinary general
shareholders meeting. Our statutory auditor is Gerardo Gonzalez Rodriguez and
his alternate is Ricardo Gonzalez Villarreal. As statutory auditor, his primary
role is to report to our shareholders at the annual ordinary shareholders
meeting regarding the accuracy and sufficiency of, and reasonable basis for, the
financial information presented to the shareholders by the Board of Directors.
The following table presents information concerning our current directors
and executive officers:
[Enlarge/Download Table]
Name Age Position
Tomas Milmo Santos...................... 38 Chairman, Series A Director and Chief Executive Officer
Patricio Jimenez Barrera................ 38 Chief Financial Officer
Andres Velazquez Romero................. 38 Mass Market Executive Director
Samuel Lee Belmonte..................... 38 Business Market Executive Director
Ivan Alonso Hernandez................... 39 Chief Technology Officer
Rafael Garza Blanc...................... 55 Human Resources Vice President
Tomas Milmo Zambrano.................... 68 Series A Director
Alberto Santos de Hoyos................. 62 Series A Director
Lorenzo Zambrano Trevino................ 59 Series A Director
Alberto Garza Santos.................... 39 Series A Director
Hector Medina Aguiar.................... 52 Series A Director
Everett J. Santos(1).................... 63 Series C Director
Bertrand Guillot(1)..................... 40 Series C Director
Iain Aitken(1).......................... 48 Series C Director
Lawrence H. Guffey(1)................... 35 Series C Director
Elias Makris(1)(2)...................... 40 Series N Director
Gabriel Montana(1)...................... 33 Series C Alternate Director(3)
Patricio D'Apice(1)..................... 33 Series C Alternate Director(3)
Benjamin Jenkins(1)..................... 32 Series C Alternate Director(3)
(1) See "Business--Legal Proceedings--Shareholding / Shareholder Disputes."
(2) Mr. Makris has submitted his resignation to the board. His successor has
not been appointed.
(3) The role of the alternative director is to perform the role of the primary
director if the primary director is not in attendance.
Set forth below is a brief description of our directors and executive
officers:
Tomas Milmo Santos has held the position of Chief Executive Officer of
Axtel since 1994 and Series A Director since October 1997. Mr. Milmo was also
appointed Chairman of the Board of Directors in October 2003. Prior to joining
Axtel, Mr. Milmo worked at Carbonifera de San Patricio, S.A. de C.V., a
medium-sized mining company in Mexico. In 1988 he was named CEO of that same
company, holding this post until 1990, when he founded and became CEO of Milmar,
S.A. de C.V., a housing development company that developed and sold over 10,000
homes between 1990 and 1993. He is a member of the Board of Directors of Telinor
Telefonia, S. de R.L. de C.V., Cemex, S.A. de C.V. and Universidad de Monterrey.
Mr. Milmo holds a degree in Business Economics from Stanford University.
-72-
Patricio Jimenez Barrera has held the position of Chief Financial Officer
of Axtel since January 1998. Prior to joining Axtel, Mr. Jimenez held a variety
of finance-related positions, including an investment banker while at
Invermexico Casa de Bolsa, a corporate treasurer while at Grupo Cydsa, S.A. and
an investment banker, international treasurer, financing and correspondent
banker while at Banca Serfin, S.A. (Mexico's third largest bank). Immediately
prior to joining Axtel, Mr. Jimenez was responsible for the International
Division at Banca Serfin, S.A. He is a member of the board of Seguros Banorte
Generali and Pensiones Banorte Generali. Mr. Jimenez is a CPA and holds a degree
from the Instituto Tecnologico y de Estudios Superiores de Monterrey.
Andres Velazquez Romero has held the position of Mass Market Executive
Director of Axtel since May 2002. Prior to his present position, Mr. Velazquez
held the Treasurer and Administrative Director positions at Axtel. Mr. Velazquez
has been responsible for treasury, risk management, credit lines, funding
structure and foreign exchange for a number of banking institutions. Prior to
joining Axtel, he was the COO in charge of the Banca Serfin International Agency
in New York. Mr. Velazquez holds a degree in Economics from the ITAM in Mexico
City.
Samuel Lee Belmonte has held the position of Business Market Executive
Director of Axtel since May 2002. Prior to his present position, Mr. Lee held
the Engineering Director position at Axtel. Mr. Lee has 17 years of experience
in operations and telecommunications areas. He has been responsible for the
technical support of large national companies. Prior to joining Axtel, he was
Product Development Director with Iusacell. Mr. Lee holds a B.S. degree in
Electronic Systems Engineering and an M.B.A.
Ivan Alonso Hernandez has held the position of Technology Vice President of
Axtel since May 2002. Prior to his present position, Mr. Alonso held the
Information Technology and Business Process Director positions at Axtel. Mr.
Alonso has over 17 years experience in information technology and
telecommunications areas with various companies, including Copamex Services &
Real Estate Division. He has also collaborated with financing institutions
including Banco del Atlantico & Banpais, with responsibility for the
telecommunications group of its Northeast Division. Mr. Alonso holds a B.S.
degree in Electronics and Communications Engineering from the Instituto
Tecnologico y de Estudios Superiores de Monterrey.
Rafael Garza Blanc has held the position of Human Resources Vice President
of Axtel since July 1997. Prior to his present position, Mr. Garza Blanc has
held the Administrative and Human Resources Vice President positions at Axtel.
Mr. Garza Blanc has 26 years experience in business. His career with Conductores
Monterrey (now Xignux), one of the main copper-wiring producing companies in
Latin America, evolved from being a plant engineer to becoming the company CEO.
His background includes consulting activities in various firms. Mr. Garza holds
a degree in Electrical Engineering and an M.B.A.
Tomas Milmo Zambrano has been a Series A Director of Axtel since October
1997 and held the position of Chairman of the Board of Directors from October
1997 until 2003. Mr. Milmo Zambrano was founder and Chairman of Grupo Javer S.A.
de C.V., one of the largest housing development companies in Mexico, and of
Incasa, S.A. de C.V., one of the largest aggregate producers in Mexico. He was
also Chairman and CEO of both Carbonifera de San Patricio S.A. de C.V. and
Carbon Industrial, S.A. de C.V., medium-sized mining companies in Mexico. He was
a Director of Cemex, S.A. de C.V. until 1996.
Alberto Santos de Hoyos has been a Series A Director of Axtel since October
1997. Mr. Santos is a director of Banco de Mexico (regional), Grupo Cydsa, S.A.,
Sigma Alimentos and Seguros Comercial America. He has been Senator and
Representative of the Mexican Congress; President and Vice-President of the
Camara de la Industria de Transformacion de Nuevo Leon; Vice-President of the
Mexican Confederacion de Camaras Industriales (CONCAMIN); and President of the
Comision de Productos Basicos of CONCAMIN; President of the Camara Nacional de
la Industria Azucarera y Alcoholera. Mr. Santos has also been Chairman of the
Board, CEO and director of Gamesa. Mr. Santos holds a degree in Business
Administration from the Instituto Tecnologico y de Estudios Superiores de
Monterrey.
Lorenzo Zambrano Trevino has been a Series A Director of Axtel since
October 1997. Mr. Zambrano is the Chairman of the Board and CEO of Cemex, S.A.
de C.V. He is also the Chairman of the Boards of Directors of the Instituto
Tecnologico y de Estudios Superiores de Monterrey and the Americas Society. He
is a member of the Executive Committee of Grupo 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.
-73-
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
US Securities and Exchange Commission.
Bertrand F. Guillot has been a Series C Director of Axtel since October
2003. Mr. Guillot is the director of the Private Equity Latin America Group of
AIG Global Investment Corp. He is also co-founder of WestNord, an investment
bank boutique specializing in debt and equity raising for projects and mergers
and acquisitions. Previously, he was the Director, Media & Telecom Project
Finance Head, Senior Vice President and Relationship Management Head of ANZ
Investment Bank. He was also the vice-president of the Telecom Unit Head within
the Project Finance Group of Citibank N.A. He has been directly involved in
private equity and project finance in emerging markets for the past 10 years.
Mr. Guillot studied in Paris, London and Madrid. He holds a Baccalaureat in
Economics and an International Finance degree from the European Business School.
Iain Aitken has been a Series C Director of Axtel since October 2003. Mr.
Aitken is a Senior Advisor at Soros Private Funds Management LLC, focusing
primarily on private equity transactions. Prior to joining Soros in September
2000, Mr. Aitken was engaged in his private consultancy practice, advising
clients on restructuring and real estate matters. From 1991 to 1999, Mr. Aitken
served as a Senior Vice President of ABN AMRO Bank N.V., one of the world's
largest financial institutions, engaged in real estate and corporate debt
restructuring. Previously, he served in a number of corporate banking positions
in New York with the European American Banking Corporation (EABC), an investment
company representing a consortium of European Banks, including ABN. Mr. Aitken
was seconded to EABC having served in London with the International Division of
Midland Bank PLC, another consortium member. Mr. Aitken is currently a director
of Hainan Airlines Co., Limited (China), UniMark Group Inc. (US), Batavia
Investment Fund Limited, Mustcom Limited, Philippine Discovery Investment
Company Ltd. He holds a B.A. degree in Monetary Economics from the University of
Stirling in Scotland.
Lawrence H. Guffey has been a Series C Director of Axtel since October
2003. Mr. Guffey had served as Series A Director from May 2000 through October
2003. Mr. Guffey is also a Senior Managing Director in the Private Equity group
of Blackstone. Mr. Guffey has led Blackstone's efforts in virtually all media
and communications-related investments and has day-to-day responsibility for
management of Blackstone Communications Advi-
-74-
sors. Since joining Blackstone in 1991, Mr. Guffey has been involved in the
execution of Blackstone's investments in Axtel, Bresnan Communications,
Centennial Communications Corp., Crowley Wireless (Salmon PCS), CommNet
Cellular, CTI Holdings, Encoda Systems (a LiveWire Media company), iPCS,
Iusacell, LiveWire, PaeTec, TWFanch-one, TWFanch-two, Universo Online and US
Radio. Before joining Blackstone, Mr. Guffey worked in the Acquisitions Group at
Trammell Crow Ventures, the principal investment arm of Trammell Crow Company.
He currently serves as a director of Centennial Communications, Encoda Systems,
Orcom and FiberNet. Mr. Guffey holds a degree from Rice University.
Elias Makris has been a Series N Director of Axtel since October 2003. Mr.
Makris is the Managing Director in the Structured and Customer Finance of the
Americas Group of Nortel Networks. Elias Makris joined Nortel in 1999 and has
held positions of increasing responsibility within the treasury and customer
finance organizations of Nortel. Prior to his current position, he held the
positions of Director, Customer Finance North America and Director, Global
Credit. Previously, Mr. Makris worked for Bank of Montreal, where he held the
position of Director, Structured Finance. He joined Bank of Montreal in 1996
from Export Development Corporation, where he held various finance positions
since 1988. Mr. Makris has led financing and investing activities in Europe,
Asia and North America, in support of telecom, aerospace and other market
segments. Mr. Makris holds an M.B.A. from the University of Western Ontario in
London and a B.A. degree in Economics from Concordia University in Montreal.
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.
-75-
Principal Shareholders
Mexican law limits foreign ownership of those companies, like ours, owning
certain telecommunications concessions to 49% of the voting stock of such
companies. The following table sets forth each owner of 5% or more of our voting
stock:
[Enlarge/Download Table]
Number of Number of
Series A Series C Total
Shares Shares Percent of Percent
Beneficially Beneficially Outstanding of Voting
Shareholders Owned Owned Shares(1) Shares
(millions of shares) (%)
Telinor Telefonia, S. de R.L. de
C.V.(2)(3)....................... 1,253.2 -- 53.0 58.5
LAIF X sprl (affiliate of AIG-GE
Capital Latin American
Infrastructure Fund L.P.)(4)(6).. -- 336.0 14.3 15.7
The Blackstone Group(5)(6).......... -- 298.0 11.7 13.9
Tapazeca Sprl (affiliate of The
Soros Group)(7).................. -- 122.0 5.0 5.7
All directors and executive officers
as a group (five persons)(8)...... 1,253.2 298.0 64.7 72.4
(1) Nortel Networks Limited owns 250.8 million "N" shares, representing 9.9% of
our outstanding shares. The holder of the majority of the Series "N" shares
(which is currently Nortel Networks Limited) has the right to elect one
independent Series "N" and up to one alternate director.
(2) "A" shares held by Telinor Telefonia, S. de R.L. de C.V. may be deemed to
be beneficially owned by Tomas Milmo Santos, Alberto Santos de Hoyos, Tomas
Milmo Zambrano and Lorenzo Zambrano Trevino, as each is a director of
Telinor.
(3) Also owns 88.5 million "N" shares. The business address of Telinor
Telefonia, S. de R.L. de C.V. is Ave. Vasconcelos 210 Ote Piso 12. Colonia
Residencial San Agustin, Garza Garcia, N.L. 66280.
(4) Also owns 25.3 million "N" shares. The business address of LAIF X sprl is
13A Avenue de Tervuren 1040 Brussels, Belgium.
(5) Includes 238.0 million "C" shares owned by Blackstone Capital Partners III
Merchant Banking Fund L.P., 43.2 million "C" shares owned by Blackstone
Offshore Capital Partners III L.P. and 16.4 million "C" shares owned by
Blackstone Family Investment Partnership III L.P. The business address of
the Blackstone entities is c/o The Blackstone Group, 345 Park Avenue, New
York, New York 10154.
(6) See "Business--Legal Proceedings--Shareholding / Shareholder 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.
-76-
Certain Relationships and Related Transactions
Shareholders Agreement
On October 6, 1997, we and our initial shareholders Telinor Telefonia, S.
de R.L. de C.V., Bell Canada International (Mexico Telecom) Limited and Worldtel
Mexico Telecom Ltd (the "Initial Shareholders") entered into a shareholders
agreement (the "Shareholders Agreement"). Soon after, Bell Canada International
Inc. also agreed to be bound by such Shareholders Agreement.
This Shareholders Agreement includes provisions related to, among others,
(i) the form of the Bylaws to be agreed upon and formalized among the Initial
Shareholders, (ii) their initial capital contributions, (iii) the designation of
members to our board of directors, (iv) certain restrictions on transfers of
shares, (v) pre-emptive rights, (vi) transfers to permitted assignees, (vii)
tag-along rights and (viii) rights of first offer.
As a consequence of the capital call of February 28, 2003, the Initial
Shareholders and Bell Canada International Inc. were materially and
significantly diluted.
On February 28, 2003, the Extraordinary Meeting of Shareholders of Company
resolved that in the event of any inconsistency between the Shareholders
Agreement and our current Bylaws, the Bylaws will prevail.
Secondment and Technical Services Agreement
Simultaneously with the execution of the Shareholders Agreement, we entered
into a Secondment Agreement and a Technical Services Agreement with Bell Canada
International Inc., whereby Bell Canada agreed to provide us personnel with
expertise in telecommunications, as well as engineering, operations, and other
services. Such agreements provided for fixed and variable payments to be made by
us to Bell Canada from time to time. Between 1997 and 2002, we paid Bell Canada
US$11.7 million in fees for services rendered.
On May 30, 2003, we entered into a termination agreement with Bell Canada
International Inc. and Bell Canada International (Mexico Telecom) Limited for
the termination of the Secondment Agreement and the Technical Services Agreement
and the granting of mutual releases between the parties with respect to any and
all outstanding obligations under or arising out from the Secondment Agreement,
the Technical and Assistance Agreement, the Shareholders Agreement, and from any
shareholder, creditor or commercial relationship between the parties. Such
termination agreement provides for our payment to Bell Canada of US$13.2 million
as a full and complete satisfaction of any obligation by us to pay any amounts
under the Secondment Agreement and the Technical Services Agreement. All amounts
owed to Bell Canada were paid in full in December 2003.
Supply Contracts and Financing Agreement
During 1998 and 1999, we entered into several supply and services contracts
with Nortel Networks Limited and Nortel Networks de Mexico, S.A. de C.V., for
the provision of equipment and related services for the building of our network.
The equipment provided under such contracts include Fixed Wireless Access,
Transmission, Switch, Internet Services Routing Platform, Last Mile SDH Fiber
Optic Electronics, Last Mile Point-to-Point Microwave, PDMX, and the
installation of Fiber Optic Materials.
In June 1999, we entered into a Finance Agreement with Toronto Dominion
(Texas), Inc. as administrative and collateral agent, and Nortel Networks
Limited as lender, for the principal amount of US$455.0 million, for the
financing of equipment and services provided under the supply contracts. Such
finance agreement was amended and restated on June 18, 2001, with Nortel
Networks Limited, as administrative agent, Toronto Dominion, as collateral
agent, and Nortel Networks Limited, as lender.
On March 20, 2003, we entered into a Restructuring Agreement with Nortel
Networks Limited and Nortel Networks de Mexico, S.A. de C.V. for the
restructuring of the current outstanding liabilities and indebtedness arising
from the Amended and Restated Finance Agreement and the Supply and Services
Contracts. Such Restructuring Agreement provided for (i) our payment to Nortel
Network of US$125.2 million; (ii) our subscription of a promis-
-77-
sory 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.
During 2002, we paid Nortel Networks US$32.4 million for services and
equipment they provided to us. In March 2003, we also restructured our
commercial relationship with Nortel Networks whereby all of the previous supply
agreements and service contracts we had with Nortel Networks were canceled and
we entered into five new agreements, which are briefly described as follows:
o Purchase and License Agreement among us, Nortel Networks Limited and
Nortel Networks de Mexico, S.A. de C.V. regarding the supply of fixed
wireless access equipment and certain services related thereto. On
December 23, 2003, Airspan Communications Limited ("Airspan") acquired
Nortel's fixed wireless access business, assuming Nortel's rights and
obligations under this agreement. We are Airspan's primary customer
for their fixed wireless access technology. We have a contingent
license from Airspan to produce such technology ourselves or through a
third party (see below).
o Technical Assistance Support Services Agreement for fixed wireless
access equipment, between us and Nortel Networks UK Limited pursuant
to which the latter will provide technical support services for our
fixed wireless access platform. On December 23, 2003, Airspan acquired
Nortel's fixed wireless access business, assuming Nortel's rights and
obligations under this agreement.
o Purchase and License Agreement for non-fixed wireless access
equipment, among us, Nortel Networks Limited and Nortel Networks de
Mexico, S.A. de C.V. regarding the provision of non-fixed wireless
access equipment, such as switches and electronic equipment and
certain services related thereto.
o Technical Assistance Support Services Agreement for non-fixed wireless
access equipment, between us and Nortel Networks de Mexico, S.A. de
C.V. pursuant to which Nortel Networks will provide technical
assistance support services for our switch and SDH platform and other
non-fixed wireless access equipment supplied by Nortel Networks.
o Fixed Wireless Access Technology License Agreement entered into
between us and Nortel Networks Limited pursuant to which Nortel
Networks granted to us a contingent license to produce and manufacture
the fixed wireless access products ourselves or contract a third party
to produce such fixed wireless access products. On December 23, 2003,
Airspan acquired Nortel's fixed wireless access business, assuming
Nortel's obligations under this agreement.
Other Transactions
o In March 1999, we and GE Capital Fleet Services de Mexico, S. de R.L.
de C.V. (a subsidiary of one of the investors in one of our
shareholders) entered into a lease agreement for the lease of our
fleet vehicles. During the year ended December 31, 2003, we paid GE
Capital US$1.0 million in rental payments under these leases.
o In March and May 2000, we and Gemini, S.A. de C.V. (a company
controlled by one of the investors in one of our shareholders) entered
into lease agreements for the lease of land and property on which our
corporate offices and a switch are located. During the year ended
December 31, 2003, we paid Gemini US$1.9 million in rental payments
under these leases.
o In August 2002, we and Neoris de Mexico, S.A. de C.V. (a consulting
firm indirectly controlled by the indirect shareholders) entered into
a professional services agreement for the provision of technical
assistance to us with respect to a customer care platform. During the
year ended December 31, 2003, we paid Neoris approximately US$0.1
million in fees for services.
-78-
o In April 2002, we and Instalaciones y Desconexiones Especializadas,
S.A. de C.V. (a company controlled by the son of Alberto Santos de
Hoyos, one of the investors in one of our shareholders) entered into a
services agreement for the provision of installation services with
regard to customer premise equipment. During the year ended December
31, 2003, we paid them approximately US$0.4 million in fees for
services.
o The Blackstone Group advised us in connection with the Restructuring
Agreement dated as of March 20, 2003 that we entered into with Nortel
Networks and Toronto Dominion. We paid the Blackstone Group US$5.6
million in fees under this agreement.
-79-
Description of Other Indebtedness
The following is a description of our other indebtedness.
Banorte Letter of Credit Facility
We entered into a $6.5 million letter of credit facility in March 2003 with
Banorte to finance the purchase of equipment. As of December 31, 2003, we had
reimbursement obligations of $1.3 million relating to letters of credit that had
been drawn. This facility is renewed annually and we pay customary issuance and
acceptance fees. This indebtedness is secured by all of our assets including our
concessions and licenses.
HP Operations Unsecured Promissory Notes
We signed promissory notes for an aggregate amount of US$2.7 million in
favor of HP Operations Mexico S. de R.L. de C.V. The term of the notes is for 3
years accruing at an interest rate of 10%. Principal and interests are payable
on a monthly basis. The outstanding balance is US$2.5 million.
The Capita Corporation Mexico Financial Leasing
We have entered into financial leasing agreements with The Capita
Corporation Mexico to finance the purchase of infrastructure. The aggregate
outstanding amount as of December 31, 2003 is approximately US$0.9 million.
-80-
Description of the Exchange Notes
We issued the outstanding notes and will issue the exchange notes (unless
the context otherwise requires, for purposes of this section, the "Notes" shall
be deemed to refer collectively to the outstanding and any exchange notes) under
an Indenture (the "Indenture") among itself, the Subsidiary Guarantors and The
Bank of New York, as Trustee. The terms of the Notes include those stated in the
Indenture and those made part of the Indenture by reference to the Trust
Indenture Act.
Certain terms used in this description are defined under the subheading
"--Certain Definitions." In this description, the word "Company" refers only to
AXTEL, S.A. de C.V. and not to any of its subsidiaries.
The following description is only a summary of the material provisions of
the Indenture and the Registration Rights Agreement. We urge you to read the
Indenture and the Registration Rights Agreement because they, not this
description, define your rights as holders of these Notes. You may request
copies of these agreements at our address set forth under the heading "Where You
Can Find More Information."
The form and terms of the exchange notes are the same in all material
respects as the form and terms of the outstanding notes, except that the
exchange notes will have been registered under the Securities Act and therefore
will not bear legends restricting their transfer. The outstanding notes have not
been registered under the Securities Act and are subject to transfer
restrictions.
Brief Description of the Exchange Notes
These Notes:
o are unsecured senior obligations of the Company;
o are senior in right of payment to any future Subordinated Obligations
of the Company;
o are guaranteed by each Subsidiary Guarantor; and
o are subject to registration with the SEC pursuant to the Registration
Rights Agreement.
Principal, Maturity and Interest
The Company will issue the Notes initially with a maximum aggregate
principal amount of US$175 million. The Company will issue the Notes in
denominations of $1,000 and any integral multiple of $1,000. The Notes will
mature on December 15, 2013. Subject to our compliance with the covenant
described under the subheading "--Certain Covenants--Limitation on
Indebtedness," we are entitled to, without the consent of the holders, issue
more Notes under the Indenture on the same terms and conditions and with the
same CUSIP numbers as the Notes being offered hereby in an unlimited aggregate
principal amount (the "Additional Notes"). The Notes and the Additional Notes,
if any, provided that such Additional Notes are treated as fungible with the
Notes for US Federal income tax purposes, will be treated as a single class for
all purposes of the Indenture, including waivers, amendments, redemptions and
offers to purchase. Unless the context otherwise requires, for all purposes of
the Indenture and this "Description of the Exchange Notes," references to the
Notes include any Additional Notes actually issued.
Interest on these Notes will accrue at the rate of 11% per annum and will
be payable semiannually in arrears on June 15 and December 15, commencing on
June 15, 2004. We will make each interest payment to the holders of record of
these Notes on the immediately preceding June 1 and December 1. We will pay
interest on overdue principal at 1% per annum in excess of the above rate and
will pay interest on overdue installments of interest at such higher rate to the
extent lawful.
Interest on these Notes will accrue from the date of original issuance.
Interest will be computed on the basis of a 360-day year comprised of twelve
30-day months.
-81-
43
Additional interest may accrue on the Notes in certain circumstances
pursuant to the Registration Rights Agreement.
Optional Redemption
Except as set forth below, we will not be entitled to redeem the Notes at
our option prior to December 15, 2008.
On and after December 15, 2008, we will be entitled at our option to redeem
all or a portion of these Notes upon not less than 30 nor more than 60 days'
notice, at the redemption prices (expressed in percentages of principal amount
on the redemption date), plus accrued interest to the redemption date (subject
to the right of Holders of record on the relevant record date to receive
interest due on the relevant interest payment date), if redeemed during the
12-month period commencing on December 15 of the years set forth below:
Period Redemption Price
2008................................. 105.500%
2009................................. 103.667%
2010................................. 101.833%
2011 and thereafter.................. 100.000%
Prior to December 15, 2006, we may at our option on one or more occasions
redeem Notes (which includes Additional Notes, if any) in an aggregate principal
amount not to exceed 35% of the aggregate principal amount of the Notes (which
includes Additional Notes, if any) originally issued prior to the redemption
date at a redemption price (expressed as a percentage of principal amount) of
111%, plus accrued and unpaid interest to the redemption date, with the net cash
proceeds from one or more Equity Offerings; provided, however, that
(1) at least 65% of such aggregate principal amount of Notes (which
includes Additional Notes, if any) remains outstanding
immediately after the occurrence of each such redemption (other
than Notes held, directly or indirectly, by the Company or its
Affiliates); and
(2) each such redemption occurs within 75 days after the date of the
related Equity Offering.
Selection and Notice of Redemption
If we are redeeming less than all the Notes at any time, the Trustee will
select Notes on a pro rata basis, by lot or by such other method as the Trustee
in its sole discretion shall deem to be fair and appropriate.
We will redeem Notes of $1,000 or less in whole and not in part. We will
cause notices of redemption to be mailed by first-class mail at least 30 but not
more than 60 days before the redemption date to each holder of Notes to be
redeemed at its registered address.
If any Note is to be redeemed in part only, the notice of redemption that
relates to that Note will state the portion of the principal amount thereof to
be redeemed. We will issue a new Note in a principal amount equal to the
unredeemed portion of the original Note in the name of the holder upon
cancellation of the original Note. Notes called for redemption become due on the
date fixed for redemption. On and after the redemption date, interest ceases to
accrue on Notes or portions of them called for redemption.
Mandatory Redemption; Offers to Purchase; Open Market Purchases
We are not required to make any mandatory redemption or sinking fund
payments with respect to the Notes. However, under certain circumstances, we may
be required to offer to purchase Notes as described under the captions "--Change
of Control" and "--Certain Covenants--Limitation on Sales of Assets and
Subsidiary Stock." We may at any time and from time to time purchase Notes in
the open market or otherwise.
-82-
Additional Amounts
We and the Subsidiary Guarantors are required to make all our payments
under or with respect to the Notes free and clear of and without withholding or
deduction for or on account of any present or future tax, duty, levy, impost,
assessment or other governmental charge (including penalties, interest and other
liabilities related thereto) (hereinafter "Taxes") imposed or levied by any
jurisdiction in which the payor is organized or incorporated or resident for tax
purposes or any jurisdiction from or through which any such payment is made
(each, a "Relevant Taxing Jurisdiction"), unless we are required to withhold or
deduct Taxes by law.
If we or any Subsidiary Guarantor are so required to withhold or deduct any
amount for or on account of Taxes imposed by a Relevant Taxing Jurisdiction from
any payment made under or with respect to the Notes, we will be required to pay
such additional amounts ("Additional Amounts") as may be necessary so that the
net amount received by you (including Additional Amounts) after such withholding
or deduction will not be less than the amount you would have received if such
Taxes had not been withheld or deducted. However, no additional amounts will be
paid for or on account of:
(1) Taxes that would not have been imposed but for the fact that:
(A) the Holder of Notes has or had a present or former
connection (or imputed connection) with the Relevant Taxing
Jurisdiction (including, without limitation, being resident,
domiciled or a national of, or engaging in business or
maintaining a permanent establishment in, or being
physically present in, the Relevant Taxing Jurisdiction)
other than by merely owning, or receiving payment under, the
Notes;
(B) the Holder of Notes presented the Notes more than 30 days
after the payment in question first became due and payable
or the date on which payment thereof is duly provided for,
whichever is later, except to the extent the Holder would
have been entitled to the Additional Amounts if it had
presented the Notes for payment during that 30-day period;
(2) estate, inheritance, gift, sales, excise, transfer, personal
property or similar Taxes;
(3) Taxes payable otherwise than by withholding or deduction from
payments of, or in respect of, principal of, or any premium or
interest on, the Notes;
(4) Taxes imposed or withheld because the Holder failed to comply
with our reasonable request:
(A) to provide information concerning the nationality,
residence, identity or address of the Holder; or
(B) to make any declaration or similar claim or satisfy any
information or reporting requirement, required by law,
regulation, or other practice of the Relevant Taxing
Jurisdiction as a precondition to any exemption from all or
part of any Taxes, but only to the extent the Holder is
legally entitled to such exemption; or
(5) any combination of these Tax matters above.
Furthermore, no Additional Amounts will be paid with respect to any payment
under the Notes to any Holder who is a fiduciary or partnership or any person
other than the sole beneficial owner of the payment, to the extent the payment
would, under the laws of the Relevant Taxing Jurisdiction, be treated as being
derived or received for tax purposes by a beneficiary or settlor with respect to
the fiduciary or a member of the partnership or a beneficial owner who would not
have been entitled to the Additional Amounts had it been the Holder of the
Notes.
-83-
45
Upon request, we will provide the Trustee with official receipts or other
documentation satisfactory to the Trustee evidencing the payment of the Taxes
with respect to which Additional Amounts are paid.
Whenever in the Indenture there is mentioned, in any context:
(1) the payment of principal;
(2) purchase prices in connection with a purchase of Notes;
(3) interest; or
(4) any other amount payable on or with respect to any of the Notes,
such reference shall be deemed to include payment of Additional Amounts as
described under this heading to the extent that, in such context, Additional
Amounts are, were or would be payable in respect thereof.
We will pay any present or future stamp, documentary or other similar
excise taxes, governmental charges or levies that arise in any jurisdiction from
the execution, delivery, enforcement or registration of the Notes, the Indenture
or any other document or instrument related to them (including, without
limitation, any such taxes that are referred to as "court" or "property" taxes)
excluding such taxes, charges or levies imposed by any jurisdiction outside of
the United Mexican States and the jurisdiction of incorporation of any
Subsidiary Guarantor, the jurisdiction of incorporation of any successor of the
Company or any jurisdiction in which a paying agent of the Company, a successor
or a subsidiary Guarantor (as the case may be) is located, and we will agree to
indemnify the Holders for any such taxes paid by such Holders.
The obligations described under this heading will survive any termination,
defeasance or discharge of the Indenture and will apply mutatis mutandis to any
jurisdiction in which any successor Person to the Company or any Subsidiary
Guarantor is organized or any political subdivision or taxing authority or
agency thereof or therein.
For a discussion of Mexican withholding taxes applicable to payments under
or with respect to the Notes, see "Taxation--Material US Federal Tax
Considerations" and "Taxation--Material Mexican Tax Consequences."
Redemption for Changes in Withholding Taxes
The Company may redeem the Notes in whole, but not in part, upon giving not
less than 30 nor more than 60 days' prior notice mailed by first class mail to
each holder's registered address, at 100% of their principal amount, plus
accrued and unpaid interest to the redemption date (subject to the right of
holders of record on the relevant record date to receive interest due on the
relevant interest payment date) and including Additional Amounts payable in
respect of such payment, if (i) the Company certifies to the Trustee immediately
prior to the giving of such notice that as a result of any change in or
amendment to the laws, regulations, general rules or treaties of any Relevant
Taxing Jurisdiction, or any change in the application or official interpretation
of such laws, regulations, general rules or treaties, which change or amendment
becomes effective after the Issue Date, the Company has become or will become
obligated to pay Additional Amounts with respect to the Notes in excess of the
Additional Amounts that would be payable were payments of interest or discounts
deemed to be interest on the Notes subject to a 10% withholding tax ("Excessive
Additional Amounts") and (ii) such obligations cannot be avoided by the Company
taking reasonable measures available to it; provided, however, that (a) no such
notice of redemption will be given earlier than 60 days prior to the earliest
date on which the Company would be obligated to pay such Excessive Additional
Amounts and (b) at the time such notice is given, the Company's obligation to
pay such Additional Amounts (including any Excessive Additional Amounts) remains
in effect. Prior to giving of any notice of redemption described in this
paragraph, the Company will deliver to the Trustee an Officers' Certificate
stating that the Company is entitled to effect such redemption in accordance
with the terms set forth in the Indenture and setting forth in reasonable detail
a statement of the facts relating thereto (together with a written Opinion of
Counsel to the effect that the Company has become obligated to pay such
Excessive Additional Amounts as a result of a change or amendment described
above and that the Company cannot avoid payment of such Excessive Additional
Amounts by taking reasonable measures available to it and that all governmental
approvals necessary for the Company to effect
-84-
such redemption have been obtained and are in full force and effect or
specifying any such necessary approvals that as of the date of such opinion have
not been obtained)
Guarantees
The Subsidiary Guarantors will jointly and severally guarantee, on a senior
unsecured basis, our obligations under these Notes. The Subsidiary Guarantors
include certain of our Subsidiaries existing on the Issue Date and will include
any of our future Restricted Subsidiaries that Incur Indebtedness. The
obligations of each Subsidiary Guarantor under its Subsidiary Guaranty will be
limited as necessary to prevent that Subsidiary Guaranty from constituting a
fraudulent conveyance under applicable law. See "Risk Factors--Risks Relating to
the Notes--It is possible that guarantees may not be enforceable."
Each Subsidiary Guarantor that makes a payment under its Subsidiary
Guaranty will be entitled upon payment in full of all guaranteed obligations
under the Indenture to a contribution from each other Subsidiary Guarantor in an
amount equal to such other Subsidiary Guarantor's pro rata portion of such
payment based on the respective net assets of all the Subsidiary Guarantors at
the time of such payment determined in accordance with GAAP.
If a Subsidiary Guaranty were rendered voidable, it could be subordinated
by a court to all other indebtedness (including guarantees and other contingent
liabilities) of the applicable Subsidiary Guarantor, and, depending on the
amount of such indebtedness, a Subsidiary Guarantor's liability on its
Subsidiary Guaranty could be reduced to zero. See "Risk Factors--It is possible
that Guarantees may not be enforceable."
Pursuant to the Indenture, (A) a Subsidiary Guarantor may consolidate with,
merge with or into, or transfer all or substantially all its assets to any other
Person to the extent described below under "--Certain Covenants--Merger and
Consolidation" and (B) the Capital Stock of a Subsidiary Guarantor may be sold
or otherwise disposed of to another Person to the extent described below under
"--Certain Covenants--Limitation on Sales of Assets and Subsidiary Stock";
provided, however, that in the case of the consolidation, merger or transfer of
all or substantially all the assets of such Subsidiary Guarantor, if such other
Person is not the Company or a Subsidiary Guarantor, such Subsidiary Guarantor's
obligations under its Subsidiary Guaranty must be expressly assumed by such
other Person, except that such assumption will not be required in the case of:
(1) the sale or other disposition (including by way of consolidation
or merger) of a Subsidiary Guarantor, including the sale or
disposition of Capital Stock of a Subsidiary Guarantor following
which such Subsidiary Guarantor is no longer a Subsidiary; or
(2) the sale or disposition of all or substantially all the assets of
a Subsidiary Guarantor;
in each case other than to the Company or an Affiliate of the Company and as
permitted by the Indenture. Upon any sale or disposition described in clause (1)
or (2) above, the obligor on the related Subsidiary Guaranty will be released
from its obligations thereunder.
The Subsidiary Guaranty of a Subsidiary Guarantor also will be released:
(1) upon the designation of such Subsidiary Guarantor as an
Unrestricted Subsidiary;
(2) at such time as such Subsidiary Guarantor does not have any
Indebtedness outstanding that would have required such Subsidiary
Guarantor to enter into a Guaranty Agreement pursuant to the
covenant described under "--Certain Covenants--Future
Guarantors"; or
(3) if we exercise our legal defeasance option or our covenant
defeasance option as described under "--Defeasance."
-85-
Ranking
Senior Indebtedness versus Notes
The indebtedness evidenced by these notes and the Subsidiary Guarantees
will be unsecured and will rank pari passu in right of payment to the unsecured
Senior Indebtedness of the Company and the Subsidiary Guarantors, as the case
may be. The notes will be guaranteed by the Subsidiary Guarantors.
As of December 31, 2003:
(1) the Company's Senior Indebtedness would have been approximately
US$193.1 million, including US$14.7 million of secured
indebtedness; and
(2) the Subsidiary Guarantors would have had no indebtedness.
The notes are unsecured obligations of the Company. Secured debt and other
secured obligations of the Company will be effectively senior to the notes to
the extent of the value of the assets securing such debt or other obligations.
Liabilities of Subsidiaries versus Notes
A substantial portion of our operations is conducted through our
subsidiaries. Any right we have to receive the assets of any such subsidiary
upon such subsidiary's liquidation or reorganization (and the consequent right
of the holders of the notes to participate in the distribution of the proceeds
of those assets) effectively will be subordinated by operation of law to the
claims of such subsidiary's creditors (including trade creditors) and holders of
its preferred stock, except to the extent that such subsidiaries guarantee our
obligations under the Notes, and except to the extent that we are recognized as
a creditor or preferred stockholder of such subsidiary, in which case our claims
would still be subordinate to any indebtedness or preferred stock of such
subsidiary senior in right of payment to that held by us.
As of the Issue Date, all our continuing existing subsidiaries will be
Subsidiary Guarantors. Although the Indenture limits the incurrence of
Indebtedness and preferred stock of certain of our subsidiaries, such limitation
is subject to a number of significant qualifications. Moreover, the Indenture
does not impose any limitation on the incurrence by such subsidiaries of
liabilities that are not considered Indebtedness under the Indenture. See
"--Certain Covenants--Limitation on Indebtedness."
Book-Entry, Delivery And Form
The outstanding notes have been, and the exchange notes will be represented
by a single, permanent Global Security (which may be subdivided) in definitive,
fully registered form without interest coupons (each a "Global Security") in
minimum denominations of $1000 and integral multiples in excess thereof. Each
Global Security will be deposited with the Trustee as custodian for DTC and
registered in the name of a nominee of DTC for credit to the respective accounts
of the purchaser at DTC.
Except in the limited circumstances described below under " --Certificated
Notes," owners of beneficial interest in the Global Security will not be
entitled to receive physical delivery of Certificated Notes. The notes are not
issuable in bearer form. The Global Security may be transferred, in whole or in
part, only to another nominee of DTC.
The Global Security. Ownership of beneficial interests in the Global
Security will be limited to persons who have accounts with DTC ("participants")
or persons who hold interests through participants. Ownership of beneficial
interests in the Global Security will be shown on, and the transfer of that
ownership will be effected only through, records maintained by DTC or its
nominee (with respect to interests of participants) and the records of
participants (with respect to interests of persons other than participants).
-86-
48
So long as DTC, or its nominee, is the registered owner or holder of the
Global Security, DTC or such nominee, as the case may be, will be considered the
sole owner or holder of the notes represented by the Global Security for all
purposes under the Indenture and the notes. No beneficial owner of an interest
in the Global Security will be able to transfer that interest except in
accordance with the applicable procedures of DTC, in addition to those provided
for under the Indenture and, if applicable, those of Euroclear and Clearstream
Banking.
Payments of the principal of, premium, if any, and interest on, the Global
Security will be made to DTC or its nominee, as the case may be, as the
registered owner thereof. Neither us, the notes trustee nor any paying agent
will have any responsibility or liability for any aspect of the records relating
to or payments made on account of beneficial ownership interests in the Global
Security or for maintaining, supervising or reviewing any records relating to
such beneficial ownership interests.
We expect that DTC or its nominee, upon receipt of any payment of
principal, premium, if any, or interest in respect of the Global Security, will
credit participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount at maturity of the
Global Security as shown on the records of DTC or its nominee. We also expect
that payments by participants to owners of beneficial interests in the Global
Security held through such participants will be governed by standing
instructions and customary practices, as is now the case with securities held
for the accounts of customers registered in the names of nominees for such
customers. Such payments will be the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in same-day funds. Transfers
between participants in Euroclear and Clearstream Banking will be effected in
the ordinary way in accordance with their respective rules and operating
procedures.
We expect that DTC will take any action permitted to be taken by a holder
of notes (including the presentation of notes for exchange as described below)
only at the direction of one or more participants to whose account the DTC
interests in the Global Security is credited and only in respect of such portion
of the aggregate principal amount at maturity of notes as to which such
participant or participants have given such direction. However, if there is an
Event of Default under the notes, DTC will exchange the Global Security for
notes.
We understand that DTC is a limited purpose trust company organized under
the laws of the State of New York, a "banking organization" within the meaning
of the New York Banking Law, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the Uniform Commercial Code and a "Clearing
Agency" registered pursuant to the provisions of Section 17A under the Exchange
Act. DTC was created to hold securities for its participants and facilitate the
clearance and settlement of securities transactions between participants through
electronic book-entry changes in accounts of its participants, thereby
eliminating the need for physical movement of certificates and certain other
organizations. Indirect access to the DTC system is available to others such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly
("indirect participants").
Although DTC, Euroclear and Clearstream Banking are expected to follow the
foregoing procedures in order to facilitate transfers of interests in the Global
Security among participants of DTC, Euroclear and Clearstream Banking, they are
under no obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. Neither we nor the notes trustee
will have any responsibility for the performance by DTC, Euroclear or
Clearstream Banking or their respective participants or indirect participants of
their respective obligations under the rules and procedures governing their
operations.
Certificated Notes
If DTC is at any time unwilling or unable to continue as a depositary for
the Global Security and a successor depositary is not appointed by us within 90
days, we will issue Certificated Notes in exchange for the Global Security.
Holders of an interest in the Global Security may receive Certificated Notes in
accordance with DTC's rules and procedures in addition to those provided for
under the Indenture.
-87-
49
Change of Control
Upon the occurrence of any of the following events (each, a "Change of
Control"), each Holder shall have the right to require that the Company
repurchase such Holder's Notes at a purchase price in cash equal to 101% of the
principal amount thereof on the date of purchase plus accrued and unpaid
interest, if any, to the date of purchase (subject to the right of holders of
record on the relevant record date to receive interest due on the relevant
interest payment date):
(1) prior to the first public offering of common stock of the
Company, any "person" (as such term is used in Sections 13(d) and
14(d) of the Exchange Act), other than one or more Permitted
Holders, is or becomes the beneficial owner (as defined in Rules
13d-3 and 13d-5 under the Exchange Act, except that for purposes
of this clause (1) and clause (2) below, (x) such person shall be
deemed to have "beneficial ownership" of all shares that any such
person has the right to acquire, whether such right is
exercisable immediately or only after the passage of time and (y)
such person shall not be deemed to have "beneficial ownership" of
any shares solely as a result of a voting or similar agreement
entered into in connection with a merger agreement or asset sale
agreement), directly or indirectly, of more than 50% of the total
voting power of the Voting Stock of the Company (for purposes of
this clause (1) such "person" (the "specified person") shall be
deemed to beneficially own any Voting Stock of the Company held
by any other Person (the "parent entity") so long as such
"specified person" beneficially owns (as so defined), directly or
indirectly, in the aggregate a majority of the voting power of
the Voting Stock of the parent entity);
(2) after the first public offering of common stock of the Company,
any "person" (as such term is used in Sections 13(d) and 14(d) of
the Exchange Act), other than one or more Permitted Holders, is
or becomes the beneficial owner (as defined in clause (1) above),
directly or indirectly, of more than 35% of the total voting
power of the Voting Stock of the Company; provided, however, that
Permitted Holders beneficially own (as defined in Rules 13d-3 and
13d-5 under the Exchange Act), directly or indirectly, in the
aggregate a lesser percentage of the total voting power of the
Voting Stock of the Company than such other person and do not
have the right or ability by voting power, contract or otherwise
to elect or designate for election a majority of the Board of
Directors (for the purposes of this clause (2), such other person
shall be deemed to beneficially own any Voting Stock of a
specified person held by a parent entity, if such other person is
the beneficial owner (as defined in clause (1)), directly or
indirectly, of more than 35% of the voting power of the Voting
Stock of such parent entity and the Permitted Holders
beneficially own (as defined in this clause (2)), directly or
indirectly, in the aggregate a lesser percentage of the voting
power of the Voting Stock of such parent entity and do not have
the right or ability by voting power, contract or otherwise to
elect or designate for election a majority of the board of
directors of such parent entity);
(3) individuals who on the Issue Date constituted the Board of
Directors (together with any new directors whose election by such
Board of Directors or whose appointment or nomination for
election by the shareholders of the Company was approved by a
vote of a majority of the directors of the Company then still in
office who were either directors on the Issue Date or whose
appointment, election or nomination for election was approved by
the Permitted Holders or by directors previously so approved)
cease for any reason to constitute a majority of the Board of
Directors then in office;
(4) the adoption of a plan relating to the liquidation or dissolution
of the Company; provided, however, that this clause (4) will not
be applicable to (A) a Restricted Subsidiary consolidating with,
merging into or transferring all or part of its properties and
assets to the Company or (B) the Company merging with an
Affiliate of the Company solely for the purpose and with the sole
effect of reincorporating the Company in another jurisdiction; or
-88-
(5) the merger or consolidation of the Company with or into another
Person or the merger of another Person with or into the Company,
or the sale of all or substantially all the assets of the Company
(determined on a consolidated basis) to another Person other than
a transaction in which holders of securities that represented
100% of the Voting Stock of the Company immediately prior to such
transaction (or other securities into which such securities are
converted as part of such merger or consolidation transaction)
own directly or indirectly at least a majority of the voting
power of the Voting Stock of the transferee Person or surviving
Person in such merger or consolidation transaction immediately
after such transaction.
Within 30 days following any Change of Control, we will mail a notice to
each Holder with a copy to the Trustee (the "Change of Control Offer") stating:
(1) that a Change of Control has occurred and that such Holder has
the right to require us to purchase such Holder's Notes at a
purchase price in cash equal to 101% of the principal amount
thereof on the date of purchase, plus accrued and unpaid
interest, if any, to the date of purchase (subject to the right
of Holders of record on the relevant record date to receive
interest on the relevant interest payment date);
(2) the circumstances and relevant facts regarding such Change of
Control (including information with respect to pro forma
historical income, cash flow and capitalization, in each case
after giving effect to such Change of Control);
(3) the purchase date (which shall be no earlier than 30 days nor
later than 60 days from the date such notice is mailed); and
(4) the instructions, as determined by us, consistent with the
covenant described hereunder, that a Holder must follow in order
to have its Notes purchased.
We will not be required to make a Change of Control Offer following a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer made by us and
purchases all Notes validly tendered and not withdrawn under such Change of
Control Offer.
We will comply, to the extent applicable, with the requirements of Section
14(e) of the Exchange Act and any other securities laws or regulations in
connection with the repurchase of Notes as a result of a Change of Control. To
the extent that the provisions of any securities laws or regulations conflict
with the provisions of the covenant described hereunder, we will comply with the
applicable securities laws and regulations and shall not be deemed to have
breached our obligations under the covenant described hereunder by virtue of our
compliance with such securities laws or regulations.
The Change of Control purchase feature of the Notes may in certain
circumstances make more difficult or discourage a sale or takeover of the
Company and, thus, the removal of incumbent management. The Change of Control
purchase feature is a result of negotiations between the Company and the Initial
Purchaser. We have no present intention to engage in a transaction involving a
Change of Control, although it is possible that we could decide to do so in the
future. Subject to the limitations discussed below, we could, in the future,
enter into certain transactions, including acquisitions, refinancings or other
recapitalizations, that would not constitute a Change of Control under the
Indenture, but that could increase the amount of indebtedness outstanding at
such time or otherwise affect our capital structure or credit ratings.
Restrictions on our ability to Incur additional Indebtedness are contained in
the covenants described under "--Certain Covenants--Limitation on Indebtedness,"
"--Limitation on Liens" and "--Limitation on Sale/Leaseback Transactions." Such
restrictions can only be waived with the consent of the holders of a majority in
principal amount of the Notes then outstanding. Except for the limitations
contained in such covenants, however, the Indenture will not contain any
covenants or provisions that may afford holders of the Notes protection in the
event of a highly leveraged transaction.
-89-
Future indebtedness that we may incur may contain prohibitions on the
occurrence of certain events that would constitute a Change of Control or
require the repurchase of such indebtedness upon a Change of Control. Moreover,
the exercise by the holders of their right to require us to repurchase their
Notes could cause a default under such indebtedness, even if the Change of
Control itself does not, due to the financial effect of such repurchase on us.
Finally, our ability to pay cash to the holders of Notes following the
occurrence of a Change of Control may be limited by our then existing financial
resources. There can be no assurance that sufficient funds will be available
when necessary to make any required repurchases.
The definition of "Change of Control" includes a disposition of all or
substantially all of the assets of the Company to any Person. Although there is
a limited body of case law interpreting the phrase "substantially all," there is
no precise established definition of the phrase under applicable law.
Accordingly, in certain circumstances there may be a degree of uncertainty as to
whether a particular transaction would involve a disposition of "all or
substantially all" of the assets of the Company. As a result, it may be unclear
as to whether a Change of Control has occurred and whether a holder of Notes may
require the Company to make an offer to repurchase the Notes as described above.
The provisions under the Indenture relative to our obligation to make an
offer to repurchase the Notes as a result of a Change of Control may be waived
or modified with the written consent of the holders of a majority in principal
amount of the Notes.
Certain Covenants
The Indenture contains covenants including, among others, the following:
Limitation on Indebtedness
(a) The Company will not, and will not permit any Restricted Subsidiary to,
Incur, directly or indirectly, any Indebtedness; provided, however, that the
Company and the Subsidiary Guarantors will be entitled to Incur Indebtedness if,
on the date of such Incurrence and after giving effect thereto on a pro forma
basis the Consolidated Leverage Ratio would be less than 4.0 to 1.
(b) Notwithstanding the foregoing paragraph (a), the Company and the
Restricted Subsidiaries will be entitled to Incur any or all of the following
Indebtedness:
(1) Indebtedness owed to and held by the Company or a Wholly Owned
Subsidiary; provided, however, that (A) any subsequent issuance
or transfer of any Capital Stock which results in any such Wholly
Owned Subsidiary ceasing to be a Wholly Owned Subsidiary or any
subsequent transfer of such Indebtedness (other than to the
Company or a Wholly Owned Subsidiary) shall be deemed, in each
case, to constitute the Incurrence of such Indebtedness by the
obligor thereon, (B) if the Company is the obligor on such
Indebtedness, such Indebtedness is expressly subordinated to the
prior payment in full in cash of all obligations with respect to
the Notes, and (C) if a Subsidiary Guarantor is the obligor on
such Indebtedness, such Indebtedness is expressly subordinated to
the prior payment in full in cash of all obligations of such
obligor with respect to its Subsidiary Guaranty;
(2) the Notes and the Exchange Notes (other than any Additional
Notes);
(3) Indebtedness outstanding on the Issue Date (other than
Indebtedness described in clause (1) or (2) of this covenant);
(4) Refinancing Indebtedness in respect of Indebtedness Incurred
pursuant to paragraph (a) or pursuant to clause (2) or (3) or
this clause;
-90-
(5) Hedging Obligations consisting of Interest Rate Agreements
directly related to Indebtedness permitted to be Incurred by the
Company and its Restricted Subsidiaries pursuant to the
Indenture;
(6) obligations in respect of performance, bid and surety bonds and
completion guarantees provided by the Company or any Restricted
Subsidiary in the ordinary course of business;
(7) Indebtedness arising from the honoring by a bank or other
financial institution of a check, draft or similar instrument
drawn against insufficient funds in the ordinary course of
business; provided, however, that such Indebtedness is
extinguished within two Business Days of its Incurrence;
(8) Purchase Money Obligations and Capital Lease Obligations, in an
aggregate principal amount at any time outstanding not exceeding
an amount equal to 5% of Consolidated Total Assets at any time
outstanding;
(9) Indebtedness consisting of the Subsidiary Guaranty of a
Subsidiary Guarantor and any Guarantee by a Subsidiary Guarantor
of Indebtedness Incurred pursuant to paragraph (a) or pursuant to
clause (1), (2), (3) or pursuant to clause (4) to the extent the
Refinancing Indebtedness Incurred thereunder directly or
indirectly Refinances Indebtedness Incurred pursuant to paragraph
(a) or pursuant to clause (2) or (3); and
(10) Indebtedness of the Company or of any of its Restricted
Subsidiaries in an aggregate principal amount which, when taken
together with all other Indebtedness of the Company and its
Restricted Subsidiaries outstanding on the date of such
Incurrence (other than Indebtedness permitted by clauses (1)
through (9) above or paragraph (a)) does not exceed $15 million.
(c) Notwithstanding the foregoing, neither the Company nor any Subsidiary
Guarantor will Incur any Indebtedness pursuant to the foregoing paragraph (b) if
the proceeds thereof are used, directly or indirectly, to Refinance any
Subordinated Obligations of the Company or any Subsidiary Guarantor unless such
Indebtedness shall be subordinated to the Notes or the applicable Subsidiary
Guaranty to at least the same extent as such Subordinated Obligations.
(d) For purposes of determining compliance with this covenant:
(1) in the event that an item of Indebtedness (or any portion
thereof) meets the criteria of more than one of the types of
Indebtedness described above, the Company, in its sole
discretion, will classify such item of Indebtedness (or any
portion thereof) at the time of Incurrence and will only be
required to include the amount and type of such Indebtedness in
one of the above clauses; and
(2) the Company will be entitled to divide and classify an item of
Indebtedness in more than one of the types of Indebtedness
described above.
(e) For purposes of determining compliance with any US dollar denominated
restriction on the Incurrence of Indebtedness where the Indebtedness Incurred is
denominated in a different currency, the amount of such Indebtedness will be the
US Dollar Equivalent determined on the date of the Incurrence of such
Indebtedness; provided, however, that if any such Indebtedness denominated in a
different currency is subject to a Currency Agreement with respect to US dollars
covering all principal, premium, if any, and interest payable on such
Indebtedness, the amount of such Indebtedness expressed in US dollars will be as
provided in such Currency Agreement. The principal amount of any Refinancing
Indebtedness Incurred in the same currency as the Indebtedness being Refinanced
will be the US Dollar Equivalent of the Indebtedness Refinanced, except to the
extent that (1) such US Dollar Equivalent was determined based on a Currency
Agreement, in which case the Refinancing Indebtedness will be
-91-
determined in accordance with the preceding sentence, and (2) the principal
amount of the Refinancing Indebtedness exceeds the principal amount of the
Indebtedness being Refinanced, in which case the US Dollar Equivalent of such
excess will be determined on the date such Refinancing Indebtedness is Incurred.
Limitation on Restricted Payments
(a) The Company will not, and will not permit any Restricted Subsidiary,
directly or indirectly, to make a Restricted Payment if at the time the Company
or such Restricted Subsidiary makes such Restricted Payment:
(1) a Default shall have occurred and be continuing (or would result
therefrom);
(2) the Company is not entitled to Incur an additional $1.00 of
Indebtedness pursuant to paragraph (a) of the covenant described
under "--Limitation on Indebtedness"; or
(3) the aggregate amount of such Restricted Payment and all other
Restricted Payments since the Issue Date would exceed the sum of
(without duplication):
(A) 50% of the Adjusted Consolidated Net Income accrued during
the period (treated as one accounting period) from October
1, 2003 to the end of the most recent fiscal quarter ending
at least 45 days prior to the date of such Restricted
Payment (or, in case such Adjusted Consolidated Net Income
shall be a deficit, minus 100% of such deficit); plus
(B) 100% of the aggregate Net Cash Proceeds received by the
Company from the issuance or sale of its Capital Stock
(other than Disqualified Stock) subsequent to the Issue Date
(other than an issuance or sale to a Subsidiary of the
Company and other than an issuance or sale to an employee
stock ownership plan or to a trust established by the
Company or any of its Subsidiaries for the benefit of their
employees) and 100% of any cash capital contribution
received by the Company from its shareholders subsequent to
the Issue Date; plus
(C) the amount by which Indebtedness of the Company is reduced
on the Company's balance sheet upon the conversion or
exchange (other than by a Subsidiary of the Company)
subsequent to the Issue Date of any Indebtedness of the
Company convertible or exchangeable for Capital Stock (other
than Disqualified Stock) of the Company (less the amount of
any cash, or the fair value of any other property,
distributed by the Company upon such conversion or
exchange); provided, however, that the foregoing amount
shall not exceed the Net Cash Proceeds received by the
Company or any Restricted Subsidiary from the sale of such
Indebtedness (excluding Net Cash Proceeds from sales to a
Subsidiary of the Company or to an employee stock ownership
plan or to a trust established by the Company or any of its
Subsidiaries for the benefit of their employees); plus
(D) an amount equal to the sum of (i) the net reduction in the
Investments (other than Permitted Investments) made by the
Company or any Restricted Subsidiary in any Person resulting
from repurchases, repayments or redemptions of such
Investments by such Person, proceeds realized on the sale of
such Investment and proceeds representing the return of
capital (excluding dividends and distributions), in each
case received by the Company or any Restricted Subsidiary,
and (ii) to the extent such Person is an Unrestricted
Subsidiary, the portion (proportionate to the Company's
equity interest in such Subsidiary) of the fair market value
of the net assets of such Unrestricted Subsidiary at the
time such Unrestricted Subsidiary is designated a Restricted
Subsidiary; provided, however, that the foregoing sum shall
not exceed, in the case of any such Person or Unre-
-92-
stricted Subsidiary, the amount of Investments (excluding
Permitted Investments) previously made (and treated as a
Restricted Payment) by the Company or any Restricted
Subsidiary in such Person or Unrestricted Subsidiary.
(b) The preceding provisions will not prohibit:
(1) any Restricted Payment made out of the Net Cash Proceeds of the
substantially concurrent sale of, or made by exchange for,
Capital Stock of the Company (other than Disqualified Stock and
other than Capital Stock issued or sold to a Subsidiary of the
Company or an employee stock ownership plan or to a trust
established by the Company or any of its Subsidiaries for the
benefit of their employees) or a substantially concurrent cash
capital contribution received by the Company from its
shareholders; provided, however, that (A) such Restricted Payment
shall be excluded in the calculation of the amount of Restricted
Payments and (B) the Net Cash Proceeds from such sale or such
cash capital contribution (to the extent so used for such
Restricted Payment) shall be excluded from the calculation of
amounts under clause (3)(B) of paragraph (a) above;
(2) any purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value of Subordinated Obligations
of the Company or a Subsidiary Guarantor made by exchange for, or
out of the proceeds of the substantially concurrent sale of,
Indebtedness of such Person which is permitted to be Incurred
pursuant to the covenant described under "--Limitation on
Indebtedness"; provided, however, that such purchase, repurchase,
redemption, defeasance or other acquisition or retirement for
value shall be excluded in the calculation of the amount of
Restricted Payments;
(3) dividends paid within 60 days after the date of declaration
thereof if at such date of declaration such dividend would have
complied with this covenant; provided, however, that at the time
of payment of such dividend, no other Default shall have occurred
and be continuing (or result therefrom); provided further,
however, that such dividend shall be included in the calculation
of the amount of Restricted Payments;
(4) so long as no Default has occurred and is continuing, the
repurchase or other acquisition of shares of Capital Stock of the
Company or any of its Subsidiaries from employees, former
employees, directors or former directors of the Company or any of
its Subsidiaries (or permitted transferees of such employees,
former employees, directors or former directors), pursuant to the
terms of the agreements (including employment agreements) or
plans (or amendments thereto) approved by the Board of Directors
under which such individuals purchase or sell or are granted the
option to purchase or sell, shares of such Capital Stock;
provided, however, that the aggregate amount of such repurchases
and other acquisitions (excluding amounts representing
cancellation of Indebtedness) shall not exceed $2 million in any
calendar year; provided further, however, that such repurchases
and other acquisitions shall be excluded in the calculation of
the amount of Restricted Payments;
(5) payments of dividends on Disqualified Stock issued pursuant to
the covenant described under "--Limitation on Indebtedness";
provided, however, that such dividends shall be excluded in the
calculation of the amount of Restricted Payments;
(6) repurchases of Capital Stock deemed to occur upon exercise of
stock options if such Capital Stock represents a portion of the
exercise price of such options; provided, however, that such
Restricted Payments shall be excluded in the calculation of the
amount of Restricted Payments;
(7) cash payments in lieu of the issuance of fractional shares in
connection with the exercise of warrants, options or other
securities convertible into or exchangeable for Capital Stock of
the Company; provided, however, that any such cash payment shall
not be for the pur-
-94-
pose of evading the limitation of the covenant described under
this subheading (as determined in good faith by the Board of
Directors); provided further, however, that such payments shall
be excluded in the calculation of the amount of Restricted
Payments;
(8) in the event of a Change of Control, and if no Default shall have
occurred and be continuing, the payment, purchase, redemption,
defeasance or other acquisition or retirement of Subordinated
Obligations of the Company or any Subsidiary Guarantor, in each
case, at a purchase price not greater than 101% of the principal
amount of such Subordinated Obligations, plus any accrued and
unpaid interest thereon; provided, however, that prior to such
payment, purchase, redemption, defeasance or other acquisition or
retirement, the Company (or a third party to the extent permitted
by the Indenture) has made a Change of Control Offer with respect
to the Notes as a result of such Change of Control and has
repurchased all Notes validly tendered and not withdrawn in
connection with such Change of Control Offer; provided further,
however, that such repurchase and other acquisitions shall be
included in the calculation of the amount of Restricted Payments;
(9) payments of intercompany subordinated Indebtedness, the
Incurrence of which was permitted under clause (3) of paragraph
(b) of the covenant described under "--Limitation on
Indebtedness"; provided, however, that no Default has occurred
and is continuing or would otherwise result therefrom; provided
further, however, that such payments shall be excluded in the
calculation of the amount of Restricted Payments; or
(10) Restricted Payments in an amount which, when taken together with
all Restricted Payments made pursuant to this clause (10), does
not exceed $10 million; provided, however, that (A) at the time
of each such Restricted Payment, no Default shall have occurred
and be continuing (or result therefrom) and (B) such dividends
shall be included in the calculation of the amount of Restricted
Payments.
Limitation on Restrictions on Distributions from Restricted Subsidiaries
The Company will not, and will not permit any Restricted Subsidiary to,
create or otherwise cause or permit to exist or become effective any consensual
encumbrance or restriction on the ability of any Restricted Subsidiary to (a)
pay dividends or make any other distributions on its Capital Stock to the
Company or a Restricted Subsidiary or pay any Indebtedness owed to the Company,
(b) make any loans or advances to the Company or (c) transfer any of its
property or assets to the Company, except:
(1) with respect to clauses (a), (b) and (c),
(A) any encumbrance or restriction pursuant to an agreement in
effect at or entered into on the Issue Date;
(B) any encumbrance or restriction with respect to a Restricted
Subsidiary pursuant to an agreement relating to any
Indebtedness Incurred by such Restricted Subsidiary on or
prior to the date on which such Restricted Subsidiary was
acquired by the Company (other than Indebtedness Incurred as
consideration in, or to provide all or any portion of the
funds or credit support utilized to consummate, the
transaction or series of related transactions pursuant to
which such Restricted Subsidiary became a Restricted
Subsidiary or was acquired by the Company) and outstanding
on such date;
(C) any encumbrance or restriction pursuant to an agreement
effecting a Refinancing of Indebtedness Incurred pursuant to
an agreement referred to in clause (A) or (B) of clause (1)
of this covenant or this clause (C) or contained in any
amendment to an agreement referred to in clause (A) or (B)
of clause (1) of this covenant or this clause (C); provided,
however, that the encumbrances and restric-
-94-
tions with respect to such Restricted Subsidiary contained
in any such refinancing agreement or amendment are no less
favorable to the Noteholders than encumbrances and
restrictions with respect to such Restricted Subsidiary
contained in such predecessor agreements; and
(D) any encumbrance or restriction with respect to a Restricted
Subsidiary imposed pursuant to an agreement entered into for
the sale or disposition of all or substantially all the
Capital Stock or assets of such Restricted Subsidiary
pending the closing of such sale or disposition; and
(2) with respect to clause (c) only,
(A) any encumbrance or restriction consisting of customary
nonassignment provisions in leases governing leasehold
interests to the extent such provisions restrict the
transfer of the lease or the property leased thereunder; and
(B) any encumbrance or restriction contained in security
agreements or mortgages securing Indebtedness of a
Restricted Subsidiary to the extent such encumbrance or
restriction restricts the transfer of the property subject
to such security agreements or mortgages.
Limitation on Sales of Assets and Subsidiary Stock
(a) The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, consummate any Asset Disposition unless:
(1) the Company or such Restricted Subsidiary receives consideration
at the time of such Asset Disposition at least equal to the fair
market value (including as to the value of all non-cash
consideration), as determined in good faith by the Board of
Directors, of the shares and assets subject to such Asset
Disposition;
(2) except in the case of a Permitted Asset Swap, at least 75% of the
consideration thereof received by the Company or such Restricted
Subsidiary is in the form of cash or cash equivalents; and
(3) an amount equal to 100% of the Net Available Cash from such Asset
Disposition is applied by the Company (or such Restricted
Subsidiary, as the case may be)
(A) first, to the extent the Company elects (or is required by
the terms of any Indebtedness), to prepay, repay, redeem,
purchase, defease or otherwise acquire Senior Indebtedness
of the Company or Indebtedness (other than any Disqualified
Stock) of a Wholly Owned Subsidiary (in each case other than
Indebtedness owed to the Company or an Affiliate of the
Company) within one year from the later of the date of such
Asset Disposition or the receipt of such Net Available Cash;
(B) second, to the extent of the balance of such Net Available
Cash after application in accordance with clause (A), to the
extent the Company elects, to acquire Additional Assets
within one year from the later of the date of such Asset
Disposition or the receipt of such Net Available Cash; and
(C) third, to the extent of the balance of such Net Available
Cash after application in accordance with clauses (A) and
(B), to make an offer to the holders of the Notes (and to
holders of other Senior Indebtedness of the Company
designated
-95-
57
by the Company) to purchase Notes (and such other Senior
Indebtedness of the Company) pursuant to and subject to the
conditions contained in the Indenture;
provided, however, that in connection with any prepayment, repayment, purchase,
redemption, defeasance or other acquisition of Indebtedness pursuant to clause
(A) or (C) above, the Company or such Restricted Subsidiary shall permanently
retire such Indebtedness and shall cause the related loan commitment (if any) to
be permanently reduced in an amount equal to the principal amount so prepaid,
repaid, purchased, redeemed, defeased or otherwise acquired.
Notwithstanding the foregoing provisions of this covenant, the Company and
the Restricted Subsidiaries will not be required to apply any Net Available Cash
in accordance with this covenant except to the extent that the aggregate Net
Available Cash from all Asset Dispositions which is not applied in accordance
with this covenant exceeds $5 million. Pending application of Net Available Cash
pursuant to this covenant, such Net Available Cash shall be invested in
Temporary Cash Investments or applied to temporarily reduce revolving credit
indebtedness.
For the purposes of this covenant, the following are deemed to be cash or
cash equivalents:
(1) the assumption of Indebtedness of the Company (other than
obligations in respect of Disqualified Stock of the Company) or
any Restricted Subsidiary (other than obligations in respect of
Disqualified Stock or Preferred Stock of a Subsidiary Guarantor)
and the release of the Company or such Restricted Subsidiary from
all liability on such Indebtedness in connection with such Asset
Disposition; and
(2) securities received by the Company or any Restricted Subsidiary
from the transferee that are promptly converted by the Company or
such Restricted Subsidiary into cash, to the extent of cash
received in that conversion.
(b) In the event of an Asset Disposition that requires the purchase of
Notes (and other Senior Indebtedness of the Company) pursuant to clause
(a)(3)(C) above, the Company will purchase Notes tendered pursuant to an offer
by the Company for the Notes (and such other Senior Indebtedness) at a purchase
price of 100% of their principal amount (or, in the event such other Senior
Indebtedness of the Company was issued with significant original issue discount,
100% of the accreted value thereof) without premium, plus accrued but unpaid
interest (or, in respect of such other Senior Indebtedness of the Company, such
lesser price, if any, as may be provided for by the terms of such Senior
Indebtedness) in accordance with the procedures (including prorating in the
event of oversubscription) set forth in the Indenture. If the aggregate purchase
price of the securities tendered exceeds the Net Available Cash allotted to
their purchase, the Company will select the securities to be purchased on a pro
rata basis but in round denominations, which in the case of the Notes will be
denominations of $1,000 principal amount or multiples thereof. The Company shall
not be required to make such an offer to purchase Notes (and other Senior
Indebtedness of the Company) pursuant to this covenant if the Net Available Cash
available therefor is less than $2 million (which lesser amount shall be carried
forward for purposes of determining whether such an offer is required with
respect to the Net Available Cash from any subsequent Asset Disposition). Upon
completion of such an offer to purchase, Net Available Cash will be deemed to be
reduced by the aggregate amount of such offer.
(c) The Company will comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of Notes pursuant to this
covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, the Company will comply
with the applicable securities laws and regulations and will not be deemed to
have breached its obligations under this covenant by virtue of its compliance
with such securities laws or regulations.
Limitation on Affiliate Transactions
(a) The Company will not, and will not permit any Restricted Subsidiary to,
enter into or permit to exist any transaction (including the purchase, sale,
lease or exchange of any property, employee compensation ar-
-96-
58
rangements or the rendering of any service) with, or for the benefit of, any
Affiliate of the Company (an "Affiliate Transaction") unless:
(1) the terms of the Affiliate Transaction are no less favorable to
the Company or such Restricted Subsidiary than those that could
be obtained at the time of the Affiliate Transaction in
arm's-length dealings with a Person who is not an Affiliate;
(2) if such Affiliate Transaction involves an amount in excess of $1
million, the terms of the Affiliate Transaction are set forth in
writing and two Officers of the Company have certified that the
criteria set forth in clause (1) are satisfied in an Officers'
Certificate; and
(3) if such Affiliate Transaction involves an amount in excess of $5
million, a majority of the directors of the Company disinterested
with respect to such Affiliate Transaction have determined in
good faith that the criteria set forth in clause (1) are
satisfied and have approved the relevant Affiliate Transaction as
evidenced by a resolution of the Board of Directors; provided,
however, that a director will not be deemed disinterested with
respect to transactions between the Company or a Restricted
Subsidiary on the one hand and an immediate family member of such
director or an entity affiliated with such immediate family
member on the other; and
(4) if such Affiliate Transaction involves an amount in excess of $10
million, the Board of Directors shall also have received a
written opinion from an Independent Qualified Party to the effect
that such Affiliate Transaction is fair, from a financial
standpoint, to the Company and its Restricted Subsidiaries or is
not less favorable to the Company and its Restricted Subsidiaries
than could reasonably be expected to be obtained at the time in
an arm's-length transaction with a Person who was not an
Affiliate.
(b) The provisions of the preceding paragraph (a) will not prohibit:
(1) any Investment (other than a Permitted Investment) or other
Restricted Payment, in each case permitted to be made pursuant to
(but only to the extent included in the calculation of the amount
of Restricted Payments made pursuant to paragraph (a)(3) of) the
covenant described under "--Limitation on Restricted Payments";
(2) any issuance of securities, or other payments, awards or grants
in cash, securities or otherwise pursuant to, or the funding of,
employment arrangements, stock options and stock ownership plans
approved by the Board of Directors;
(3) loans or advances to employees in the ordinary course of business
in accordance with the past practices of the Company or its
Restricted Subsidiaries, but in any event not to exceed $2
million in the aggregate outstanding at any one time;
(4) the payment of reasonable fees to directors of the Company and
its Restricted Subsidiaries who are not employees of the Company
or its Restricted Subsidiaries;
(5) any transaction with a Restricted Subsidiary or joint venture or
similar entity which would constitute an Affiliate Transaction
solely because the Company or a Restricted Subsidiary owns an
equity interest in or otherwise controls such Restricted
Subsidiary, joint venture or similar entity;
(6) the issuance or sale of any Capital Stock (other than
Disqualified Stock) of the Company; and
-97-
(7) transactions entered into in the ordinary course of business,
consistent with past practices, on terms that are substantially
similar to those that could be obtained at the time of such
transactions in arm's-length dealings with a Person who is not an
Affiliate.
Limitation on Line of Business
The Company will not, and will not permit any Restricted Subsidiary, to
engage in any business other than a Related Business.
Limitation on the Sale or Issuance of Capital Stock of Restricted
Subsidiaries
The Company
(1) will not, and will not permit any Restricted Subsidiary to, sell,
lease, transfer or otherwise dispose of any Capital Stock of any
Restricted Subsidiary to any Person (other than the Company or a
Wholly Owned Subsidiary), and
(2) will not permit any Restricted Subsidiary to issue any of its
Capital Stock (other than, if necessary, shares of its Capital
Stock constituting directors' or other legally required
qualifying shares) to any Person (other than to the Company or a
Wholly Owned Subsidiary),
unless
(A) immediately after giving effect to such issuance, sale or other
disposition, neither the Company nor any of its Subsidiaries own
any Capital Stock of such Restricted Subsidiary; or
(B) immediately after giving effect to such issuance, sale or other
disposition, such Restricted Subsidiary would no longer
constitute a Restricted Subsidiary and any Investment in such
Person remaining after giving effect thereto is treated as a new
Investment by the Company and such Investment would be permitted
to be made under the covenant described under "--Limitation on
Restricted Payments" if made on the date of such issuance, sale
or other disposition.
For purposes of this covenant, the creation of a Lien on any Capital Stock
of a Restricted Subsidiary to secure Indebtedness of the Company or any of its
Restricted Subsidiaries will not be deemed to be a violation of this covenant;
provided, however, that any sale or other disposition by the secured party of
such Capital Stock following foreclosure of its Lien will be subject to this
covenant.
Limitation on Liens
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, Incur or permit to exist any Lien (the "Initial Lien")
of any nature whatsoever on any of its properties (including Capital Stock of a
Restricted Subsidiary), whether owned at the Issue Date or thereafter acquired,
securing any Indebtedness, other than Permitted Liens, without effectively
providing that the Notes shall be secured equally and ratably with (or prior to)
the obligations so secured for so long as such obligations are so secured.
Any Lien created for the benefit of the Holders of the Notes pursuant to
the preceding sentence shall provide by its terms that such Lien shall be
automatically and unconditionally released and discharged upon the release and
discharge of the Initial Lien.
-98-
Limitation on Sale/Leaseback Transactions
The Company will not, and will not permit any Restricted Subsidiary to,
enter into any Sale/Leaseback Transaction with respect to any property unless:
(1) the Company or such Restricted Subsidiary would be entitled to
(A) Incur Indebtedness in an amount equal to the Attributable
Debt with respect to such Sale/Leaseback Transaction pursuant to
the covenant described under "--Limitation on Indebtedness" and
(B) create a Lien on such property securing such Attributable
Debt without equally and ratably securing the Notes pursuant to
the covenant described under "--Limitation on Liens";
(2) the net proceeds received by the Company or any Restricted
Subsidiary in connection with such Sale/Leaseback Transaction are
at least equal to the fair market value (as determined by the
Board of Directors) of such property; and
(3) the Company applies the proceeds of such transaction in
compliance with the covenant described under "--Limitation on
Sale of Assets and Subsidiary Stock."
Merger and Consolidation
The Company will not consolidate with or merge with or into, or convey,
transfer or lease, in one transaction or a series of transactions, directly or
indirectly, all or substantially all its assets to, any Person, unless:
(1) the resulting, surviving or transferee Person (the "Successor
Company") shall be a Person organized and existing under the laws
of the United Mexican States or the laws of any political
subdivision thereof, the laws of the United States of America,
any State thereof or the District of Columbia, or the European
Union or any of its member nations and the Successor Company (if
not the Company) shall expressly assume, by an indenture
supplemental thereto, executed and delivered to the Trustee, in
form satisfactory to the Trustee, all the obligations of the
predecessor Company under the Notes and the Indenture;
(2) immediately after giving pro forma effect to such transaction
(and treating any Indebtedness which becomes an obligation of the
Successor Company or any Subsidiary as a result of such
transaction as having been Incurred by such Successor Company or
such Subsidiary at the time of such transaction), no Default
shall have occurred and be continuing;
(3) immediately after giving pro forma effect to such transaction,
the Successor Company would be able to Incur an additional $1.00
of Indebtedness pursuant to paragraph (a) of the covenant
described under "--Limitation on Indebtedness";
(4) the Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such
consolidation, merger or transfer and such supplemental indenture
(if any) comply with the Indenture;
(5) the Company shall have delivered to the Trustee an Opinion of
Counsel to the effect that the holders will not recognize income,
gain or loss for US Federal income tax purposes as a result of
such transaction and will be subject to US Federal income tax on
the same amounts, in the same manner and at the same times as
would have been the case if such transaction had not occurred;
and
(6) the Company shall have delivered an Opinion of Counsel in the
United Mexican States to the effect that the holders of the Notes
will not recognize income, gain or loss for income tax purposes
of such jurisdiction as a result of such transaction and will be
subject to in-
-99-
come tax in such jurisdiction on the same amounts, in the same
manner and at the same times as would have been the case if such
transaction had not occurred;
provided, however, that clause (3) will not be applicable to (A) a Restricted
Subsidiary consolidating with, merging into or transferring all or part of its
properties and assets to the Company or (B) the Company merging with an
Affiliate of the Company solely for the purpose and with the sole effect of
reincorporating the Company in another jurisdiction.
For purposes of this covenant, the sale, lease, conveyance, assignment,
transfer or other disposition of all or substantially all of the properties and
assets of one or more Subsidiaries of the Company, which properties and assets,
if held by the Company instead of such Subsidiaries, would constitute all or
substantially all of the properties and assets of the Company on a consolidated
basis, shall be deemed to be the transfer of all or substantially all of the
properties and assets of the Company.
The Successor Company will be the successor to the Company and shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under the Indenture, and the predecessor Company, except in the case
of a lease, shall be released from the obligation to pay the principal of and
interest on the Notes.
The Company will not permit any Subsidiary Guarantor to consolidate with or
merge with or into, or convey, transfer or lease, in one transaction or a series
of transactions, all or substantially all of its assets to any Person unless:
(1) except in the case of a Subsidiary Guarantor (x) that has been
disposed of in its entirety to another Person (other than to the
Company or an Affiliate of the Company), whether through a
merger, consolidation or sale of Capital Stock or assets or (y)
that, as a result of the disposition of all or a portion of its
Capital Stock, ceases to be a Subsidiary, the resulting,
surviving or transferee Person (if not such Subsidiary) shall be
a Person organized and existing under the laws of the
jurisdiction under which such Subsidiary was organized or under
the laws of the United States of America, or any State thereof or
the District of Columbia or the United Mexican States, and such
Person shall expressly assume, by a Guaranty Agreement, in a form
satisfactory to the Trustee, all the obligations of such
Subsidiary, if any, under its Subsidiary Guaranty;
(2) immediately after giving effect to such transaction or
transactions on a pro forma basis (and treating any Indebtedness
which becomes an obligation of the resulting, surviving or
transferee Person as a result of such transaction as having been
issued by such Person at the time of such transaction), no
Default shall have occurred and be continuing; and
(3) the Company delivers to the Trustee an Officers' Certificate and
an Opinion of Counsel, each stating that such consolidation,
merger or transfer and such Guaranty Agreement, if any, complies
with the Indenture.
Future Guarantors
The Company will cause each Restricted Subsidiary that Incurs any
Indebtedness to, at the same time, execute and deliver to the Trustee a Guaranty
Agreement pursuant to which such Restricted Subsidiary will Guarantee payment of
the Notes on the same terms and conditions as those set forth in the Indenture.
SEC Reports
The Company will furnish to the Noteholders and the Trustee and make
available to securities analysts and prospective investors upon request: (i)
within 120 days from the end of each fiscal year, an annual report on Form 20-F
containing the information required to be contained therein for such fiscal year
and (ii) within 45 days after the end of each of the first three fiscal quarters
in each fiscal year, quarterly reports on Form 6-K containing all the
information that would be required to be contained in a filing with the SEC on
Form 10-Q if the Company were re-
-100-
quired to file such Form, including a "Management's Discussion and Analysis of
Financial Condition and Results of Operations." All reports required by this
paragraph will be prepared in all material respects in accordance with all the
rules and regulations applicable to the relevant Form, which for purposes of
filings on Form 6-K will require including all the information required to be
included in such Form 6-K by the preceding sentence. In addition, whether or not
the Company is subject to the periodic reporting requirements of the Exchange
Act, the Company will file a copy of each of the reports with the SEC for public
availability within the time periods specified above (unless the SEC will not
accept such a filing). The Company agrees that it will not take any action for
the purpose of causing the SEC not to accept any such filings. If,
notwithstanding the foregoing, the SEC will not accept the Company's filings for
any reason, the Company will post the reports referred to in this paragraph on
its website within the time periods specified above.
At any time that any of the Company's Subsidiaries are Unrestricted
Subsidiaries, then the quarterly and annual financial information required by
the preceding paragraph will include a reasonably detailed presentation, either
on the face of the financial statements or in the footnotes thereto, and in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," of the financial condition and results of operations of the Company
and its Restricted Subsidiaries separate from the financial condition and
results of operations of the Unrestricted Subsidiaries of the Company.
In addition, the Company will furnish to the Holders of the Notes and to
prospective investors, upon the requests of such Holders, any information
required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act so
long as the Notes are not freely transferable under the Securities Act.
Defaults
Each of the following is an Event of Default:
(1) a default in the payment of interest on the Notes when due,
continued for 30 days;
(2) a default in the payment of principal of any Note when due at its
Stated Maturity, upon optional redemption, upon required
purchase, upon declaration of acceleration or otherwise;
(3) the failure by the Company to comply with its obligations under
"--Certain Covenants--Merger and Consolidation" above;
(4) the failure by the Company to comply for 30 days after notice
with any of its obligations in the covenants described above
under "Change of Control" (other than a failure to purchase
Notes) or under "--Certain Covenants" under "--Limitation on
Indebtedness," "--Limitation on Restricted Payments,"
"--Limitation on Restrictions on Distributions from Restricted
Subsidiaries," "--Limitation on Sales of Assets and Subsidiary
Stock" (other than a failure to purchase Notes), "--Limitation on
Affiliate Transactions," "--Limitation on Line of Business,"
"--Limitation on the Sale or Issuance of Capital Stock of
Restricted Subsidiaries" or "--Limitation on Liens,"
"--Limitation on Sale/Leaseback Transactions," "--Future
Guarantors" or "--SEC Reports";
(5) the failure by the Company or any Subsidiary Guarantor to comply
for 60 days after notice with its other agreements contained in
the Indenture;
(6) Indebtedness of the Company, any Subsidiary Guarantor or any
Significant Subsidiary is not paid within any applicable grace
period after final maturity or is accelerated by the holders
thereof because of a default and the total amount of such
Indebtedness unpaid or accelerated exceeds $10 million (the
"cross acceleration provision");
(7) certain events of bankruptcy, insolvency or reorganization of the
Company, a Subsidiary Guarantor or any Significant Subsidiary
(the "bankruptcy provisions");
-101-
(8) any judgment or decree for the payment of money in excess of $10
million is entered against the Company, a Subsidiary Guarantor or
any Significant Subsidiary, remains outstanding for a period of
60 consecutive days following such judgment and is not
discharged, waived or stayed (the "judgment default provision");
or
(9) a Subsidiary Guaranty ceases to be in full force and effect
(other than in accordance with the terms of such Subsidiary
Guaranty) or a Subsidiary Guarantor denies or disaffirms its
obligations under its Subsidiary Guaranty.
However, a default under clauses (4) and (5) will not constitute an Event of
Default until the Trustee or the holders of 25% in principal amount of the
outstanding Notes notify the Company of the default and the Company does not
cure such default within the time specified after receipt of such notice.
If an Event of Default occurs and is continuing, the Trustee or the holders
of at least 25% in principal amount of the outstanding Notes may declare the
principal of and accrued but unpaid interest on all the Notes to be due and
payable. Upon such a declaration, such principal and interest shall be due and
payable immediately. If an Event of Default relating to certain events of
bankruptcy, insolvency or reorganization of the Company occurs and is
continuing, the principal of and interest on all the Notes will ipso facto
become and be immediately due and payable without any declaration or other act
on the part of the Trustee or any holders of the Notes. Under certain
circumstances, the holders of a majority in principal amount of the outstanding
Notes may rescind any such acceleration with respect to the Notes and its
consequences.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default occurs and is continuing, the Trustee will
be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the holders of the Notes unless
such holders have offered to the Trustee reasonable indemnity or security
against any loss, liability or expense. Except to enforce the right to receive
payment of principal, premium (if any) or interest when due, no holder of a Note
may pursue any remedy with respect to the Indenture or the Notes unless:
(1) such holder has previously given the Trustee notice that an Event
of Default is continuing;
(2) holders of at least 25% in principal amount of the outstanding
Notes have requested the Trustee to pursue the remedy;
(3) such holders have offered the Trustee reasonable security or
indemnity against any loss, liability or expense;
(4) the Trustee has not complied with such request within 60 days
after the receipt thereof and the offer of security or indemnity;
and
(5) holders of a majority in principal amount of the outstanding
Notes have not given the Trustee a direction inconsistent with
such request within such 60-day period.
Subject to certain restrictions, the holders of a majority in principal amount
of the outstanding Notes are given the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Trustee or of
exercising any trust or power conferred on the Trustee. The Trustee, however,
may refuse to follow any direction that conflicts with law or the Indenture or
that the Trustee determines is unduly prejudicial to the rights of any other
holder of a Note or that would involve the Trustee in personal liability.
If a Default occurs, is continuing and is known to the Trustee, the Trustee
must mail to each holder of the Notes notice of the Default within 90 days after
it occurs. Except in the case of a Default in the payment of principal of or
interest on any Note, the Trustee may withhold notice if and so long as a
committee of its Trust Officers determines that withholding notice is not
opposed to the interest of the holders of the Notes. In addition, we are
required to deliver to the Trustee, within 120 days after the end of each fiscal
year, a certificate indicating whether
-102-
the signers thereof know of any Default that occurred during the previous year.
We are required to deliver to the Trustee, within 30 days after the occurrence
thereof, written notice of any event which would constitute certain Defaults,
their status and what action we are taking or propose to take in respect
thereof.
Amendments and Waivers
Subject to certain exceptions, the Indenture may be amended with the
consent of the holders of a majority in principal amount of the Notes then
outstanding (including consents obtained in connection with a tender offer or
exchange for the Notes) and any past default or compliance with any provisions
may also be waived with the consent of the holders of a majority in principal
amount of the Notes then outstanding. However, without the consent of each
holder of an outstanding Note affected thereby, an amendment or waiver may not,
among other things:
(1) reduce the amount of Notes whose holders must consent to an
amendment;
(2) reduce the rate of or extend the time for payment of interest on
any Note;
(3) reduce the principal of or change the Stated Maturity of any
Note;
(4) change the provisions applicable to the redemption of any Note as
described under "--Optional Redemption" or "--Redemption for
Changes in Withholding Taxes" above;
(5) make any Note payable in money other than that stated in the
Note;
(6) impair the right of any holder of the Notes to receive payment of
principal of and interest on such holder's Notes on or after the
due dates therefor or to institute suit for the enforcement of
any payment on or with respect to such holder's Notes;
(7) make any change in the amendment provisions which require each
holder's consent or in the waiver provisions;
(8) make any change in the ranking or priority of any Note that would
adversely affect the Noteholders;
(9) make any change in, or release other than in accordance with the
Indenture, any Subsidiary Guaranty that would adversely affect
the Noteholders; or
(10) make any change in the provisions of the Indenture described
under "--Additional Amounts" that adversely affects the rights of
any Noteholder or amend the terms of the Notes or the Indenture
in any way that would result in the loss of an exemption from any
of the Taxes described thereunder.
Notwithstanding the preceding, without the consent of any holder of the
Notes, the Company, the Subsidiary Guarantors and Trustee may amend the
Indenture:
(1) to cure any ambiguity, omission, defect or inconsistency;
(2) to provide for the assumption by a successor corporation of the
obligations of the Company, or any Subsidiary Guarantor under the
Indenture;
(3) to provide for uncertificated Notes in addition to or in place of
certificated Notes (provided that the uncertificated Notes are
issued in registered form for purposes of Section 163(f) of the
Code, or in a manner such that the uncertificated Notes are
described in Section 163(f)(2)(B) of the Code);
-103-
(4) to add Guarantees with respect to the Notes, including any
Subsidiary Guarantees, or to secure the Notes;
(5) to add to the covenants of the Company or a Subsidiary Guarantor
for the benefit of the holders of the Notes or to surrender any
right or power conferred upon the Company or a Subsidiary
Guarantor;
(6) to make any change that does not adversely affect the rights of
any holder of the Notes;
(7) to comply with any requirement of the SEC in connection with the
qualification of the Indenture under the Trust Indenture Act; or
(8) to make any amendment to the provisions of the Indenture relating
to the form, authentication, transfer and legending of Notes;
provided, however, that (a) compliance with the Indenture as so
amended would not result in Notes being transferred in violation
of the Securities Act or any other applicable securities law and
(b) such amendment does not materially affect the rights of
Holders to transfer Notes.
The consent of the holders of the Notes is not necessary under the
Indenture to approve the particular form of any proposed amendment. It is
sufficient if such consent approves the substance of the proposed amendment.
After an amendment under the Indenture becomes effective, we are required
to mail to holders of the Notes a notice briefly describing such amendment.
However, the failure to give such notice to all holders of the Notes, or any
defect therein, will not impair or affect the validity of the amendment.
Transfer
The Notes will be issued in registered form and will be transferable only
upon the surrender of the Notes being transferred for registration of transfer.
We may require payment of a sum sufficient to cover any tax, assessment or other
governmental charge payable in connection with certain transfers and exchanges.
Defeasance
At any time, we may terminate all our obligations under the Notes and the
Indenture ("legal defeasance"), except for certain obligations, including those
respecting the defeasance trust and obligations to register the transfer or
exchange of the Notes, to replace mutilated, destroyed, lost or stolen Notes and
to maintain a registrar and paying agent in respect of the Notes.
In addition, at any time we may terminate our obligations under "--Change
of Control" and under the covenants described under "--Certain Covenants" (other
than the covenant described under "--Merger and Consolidation"), the operation
of the cross acceleration provision, the bankruptcy provisions with respect to
Subsidiary Guarantors and Significant Subsidiaries and the judgment default
provision described under "--Defaults" above and the limitations contained in
clause (3) of the first paragraph under "--Certain Covenants--Merger and
Consolidation" above ("covenant defeasance").
We may exercise our legal defeasance option notwithstanding our prior
exercise of our covenant defeasance option. If we exercise our legal defeasance
option, payment of the Notes may not be accelerated because of an Event of
Default with respect thereto. If we exercise our covenant defeasance option,
payment of the Notes may not be accelerated because of an Event of Default
specified in clause (4), (6), (7) (with respect only to Significant Subsidiaries
and Subsidiary Guarantors) or (8) under "--Defaults" above or because of the
failure of the Company to comply with clause (3) of the first paragraph under
"--Certain Covenants--Merger and Consolidation" above. If we exercise our legal
defeasance option or our covenant defeasance option, each Subsidiary Guarantor
will be released from all of its obligations with respect to its Subsidiary
Guaranty.
-104-
In order to exercise either of our defeasance options, we must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or US
Government Obligations for the payment of principal and interest on the Notes to
redemption or maturity, as the case may be, and must comply with certain other
conditions, including delivery to the Trustee of (1) an Opinion of Counsel to
the effect that holders of the Notes will not recognize income, gain or loss for
US Federal income tax purposes as a result of such deposit and defeasance and
will be subject to US Federal income tax on the same amounts and in the same
manner and at the same times as would have been the case if such deposit and
defeasance had not occurred (and, in the case of legal defeasance only, such
Opinion of Counsel must be based on a ruling of the Internal Revenue Service or
other change in applicable US Federal income tax law) and (2) an Opinion of
Counsel in the United Mexican States to the effect that holders of the Notes
will not recognize income, gain or loss for income tax purposes of such
jurisdiction as a result of such deposit and defeasance and will be subject to
income tax of such jurisdiction on the same amounts and in the same manner and
at the same times as would have been the case if such deposit and defeasance had
not occurred.
Concerning the Trustee
The Bank of New York is the Trustee under the Indenture. We have appointed
The Bank of New York as Registrar and Paying Agent with regard to the Notes. In
addition, The Bank of New York will act as Exchane Agent in connection with the
Exchange Offer contemplated hereby.
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company or any Subsidiary Guarantor, to
obtain payment of claims in certain cases, or to realize on certain property
received in respect of any such claim as security or otherwise. The Trustee will
be permitted to engage in other transactions; provided, however, if it acquires
any conflicting interest it must either eliminate such conflict within 90 days,
apply to the SEC for permission to continue or resign.
The Holders of a majority in principal amount of the outstanding Notes will
have the right to direct the time, method and place of conducting any proceeding
for exercising any remedy available to the Trustee, subject to certain
exceptions. If an Event of Default occurs (and is not cured), the Trustee will
be required, in the exercise of its power, to use the degree of care of a
prudent man in the conduct of his own affairs. Subject to such provisions, the
Trustee will be under no obligation to exercise any of its rights or powers
under the Indenture at the request of any Holder of Notes, unless such Holder
shall have offered to the Trustee security and indemnity satisfactory to it
against any loss, liability or expense and then only to the extent required by
the terms of the Indenture.
No Personal Liability of Directors, Officers, Employees and Stockholders
No director, officer, employee, incorporator or stockholder of the Company
or any Subsidiary Guarantor will have any liability for any obligations of the
Company or any Subsidiary Guarantor under the Notes, any Subsidiary Guaranty or
the Indenture or for any claim based on, in respect of, or by reason of such
obligations or their creation. Each Holder of the Notes by accepting a Note
waives and releases all such liability. The waiver and release are part of the
consideration for issuance of the Notes. Such waiver and release may not be
effective to waive liabilities under the US Federal securities laws, and it is
the view of the SEC that such a waiver is against public policy.
Governing Law
The Indenture and the Notes will be governed by, and construed in
accordance with, the laws of the State of New York.
Enforceability of Judgments
Since all of our operating assets and the operating assets of our
subsidiaries are situated outside the United States, any judgment obtained in
the United States against us or our subsidiaries, including judgments with
respect to the payment of principal, interest, redemption price and any purchase
price with respect to the Notes, may not be collectible within the United
States.
-105-
A judgment obtained in a competent State or Federal court sitting in the
Borough of Manhattan, City of New York, United States of America arising out of
or in relation to the obligations of the Company under the Notes would be
enforceable in Mexico against us or our subsidiaries, provided that all federal
and state procedural requirements under Mexican law (as the applicable case may
be), including laws concerning statute of limitations and expirations, are
satisfied; and further provided that:
(1) such judgment is obtained in compliance with legal requirements
of the jurisdiction of the court rendering such judgment and in
compliance with all legal requirements of the Notes;
(2) such judgment is strictly for the payment of a certain sum of
money, based on an in personam (as opposed to an in rem) action;
(3) service of process was made personally on the defendant or a duly
authorized process agent;
(4) such judgment does not contravene Mexican law, public policy of
Mexico, international treaties or agreements binding upon Mexico
or generally accepted principles of international law;
(5) the applicable procedure under the laws of Mexico with respect to
the enforcement of foreign judgments (including issuance of a
letter rogatory by the competent authority of such jurisdiction
requesting enforcement of such judgment and the certification of
such judgment as authentic by the corresponding authorities of
such jurisdiction in accordance with the laws thereof) is
complied with;
(6) such judgment is final in the jurisdiction where obtained; and
(7) the courts of such jurisdiction recognize the principles of
reciprocity in connection with the enforcement of Mexican
judgments in such jurisdiction.
Consent to Jurisdiction and Service
The Company, each Subsidiary Guarantor and the Trustee consent that any
legal action, suit or proceeding arising out of or relating to the Notes may be
instituted in the United States District Court of the Southern District of New
York and the courts of the State of New York sitting in New York, Borough of
Manhattan, and will submit to and accept the jurisdiction of any such court.
The Company and each Subsidiary Guarantor will irrevocably appoint CT
Corporation System, domiciled at 1633 Broadway, New York, New York 10019 as its
agent for service of process for actions relating to the Notes, the Registration
Rights Agreement or the Indenture brought under Federal or state securities laws
brought in the United States District Court of the Southern District of New York
and the courts of the State of New York sitting in New York, Borough of
Manhattan.
Certain Definitions
"Additional Assets" means:
(1) any property, plant, equipment or licenses used in a Related
Business;
(2) the Capital Stock of a Person that becomes a Restricted
Subsidiary as a result of the acquisition of such Capital Stock
by the Company or another Restricted Subsidiary; or
(3) Capital Stock constituting a minority interest in any Person that
at such time is a Restricted Subsidiary;
-106-
provided, however, that any such Restricted Subsidiary described in clause (2)
or (3) above is primarily engaged in a Related Business.
"Adjusted Capital Expenditures" means
(1) for any period ending on or before September 30, 2005, the
product obtained by multiplying (A) Eight Quarter Average Capital
Expenditures by (B) the Number of Test Quarters; or
(2) for any period ending on or after October 1, 2005, capital
expenditures made by the Company and its Restricted Subsidiaries
for such period.
"Adjusted Consolidated Net Income" for any period means Consolidated Net
Income
(1) plus, to the extent deducted in calculating such Consolidated Net
Income, depreciation and amortization expense of the Company and
its consolidated Restricted Subsidiaries (excluding amortization
expense attributable to a prepaid operating activity item that
was paid in cash in a prior period) for such period; and
(2) less Adjusted Capital Expenditures for such period.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing. For
purposes of the covenants described under "--Certain Covenants--Limitation on
Restricted Payments," "--Certain Covenants--Limitation on Affiliate
Transactions" and "--Certain Covenants--Limitation on Sales of Assets and
Subsidiary Stock" only, "Affiliate" shall also mean any beneficial owner of
Capital Stock representing 10% or more of the total voting power of the Voting
Stock (on a fully diluted basis) of the Company or of rights or warrants to
purchase such Capital Stock (whether or not currently exercisable) and any
Person who would be an Affiliate of any such beneficial owner pursuant to the
first sentence hereof.
"Asset Disposition" means any sale, lease, transfer or other disposition
(or series of related sales, leases, transfers or dispositions) by the Company
or any Restricted Subsidiary, including any disposition by means of a merger,
consolidation or similar transaction (each referred to for the purposes of this
definition as a "disposition"), of:
(1) any shares of Capital Stock of a Restricted Subsidiary (other
than directors' qualifying shares or shares required by
applicable law to be held by a Person other than the Company or a
Restricted Subsidiary);
(2) all or substantially all the assets of any division or line of
business of the Company or any Restricted Subsidiary; or
(3) any other assets of the Company or any Restricted Subsidiary
outside of the ordinary course of business of the Company or such
Restricted Subsidiary
(other than, in the case of clauses (1), (2) and (3) above,
(A) a disposition by a Restricted Subsidiary to the Company or by the
Company or a Restricted Subsidiary to a Wholly Owned Subsidiary;
(B) for purposes of the covenant described under "--Certain
Covenants--Limitation on Sales of Assets and Subsidiary Stock"
only, (i) a disposition that constitutes a Restricted Pay-
-107-
ment (or would constitute a Restricted Payment but for the
exclusions from the definition thereof) and that is not
prohibited by the covenant described under "--Certain
Covenants--Limitation on Restricted Payments" and (ii) a
disposition of all or substantially all the assets of the Company
in accordance with the covenant described under "--Certain
Covenants--Merger and Consolidation";
(C) a disposition of assets with a fair market value of less than
$500,000;
(D) a disposition of cash or Temporary Cash Investments; and
(E) the creation of a Lien (but not the sale or other disposition of
the property subject to such Lien)).
"Attributable Debt" in respect of a Sale/Leaseback Transaction means, as at
the time of determination, the present value (discounted at the interest rate
borne by the Notes, compounded annually) of the total obligations of the lessee
for rental payments during the remaining term of the lease included in such
Sale/Leaseback Transaction (including any period for which such lease has been
extended); provided, however, that if such Sale/Leaseback Transaction results in
a Capital Lease Obligation, the amount of Indebtedness represented thereby will
be determined in accordance with the definition of "Capital Lease Obligation."
"Average Life" means, as of the date of determination, with respect to any
Indebtedness, the quotient obtained by dividing:
(1) the sum of the products of the numbers of years from the date of
determination to the dates of each successive scheduled principal
payment of or redemption or similar payment with respect to such
Indebtedness multiplied by the amount of such payment by
(2) the sum of all such payments.
"Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board.
"Business Day" means each day which is not a Legal Holiday.
"Capital Lease Obligation" means an obligation that is required to be
classified and accounted for as a capital lease for financial reporting purposes
in accordance with GAAP, and the amount of Indebtedness represented by such
obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be terminated by the lessee without payment of a
penalty. For purposes of the covenant described under "--Certain
Covenants--Limitations on Liens," a Capital Lease Obligation will be deemed to
be secured by a Lien on the property being leased.
"Capital Stock" of any Person means any and all shares, interests
(including partnership interests), rights to purchase, warrants, options,
participations or other equivalents of or interests in (however designated)
equity of such Person, including any Preferred Stock, but excluding any debt
securities convertible into such equity.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its consolidated Restricted Subsidiaries.
"Consolidated Leverage Ratio" as of any date of determination means the
ratio of (a) the aggregate amount of Indebtedness of the Company and its
Restricted Subsidiaries as of such date of determination to (b) EBITDA for the
most recent four consecutive fiscal quarters ending at least 45 days prior to
such date of determination (the "Reference Period"); provided, however, that:
-108-
70
(1) if the transaction giving rise to the need to calculate the
Consolidated Leverage Ratio is an Incurrence of Indebtedness, the
amount of such Indebtedness shall be calculated after giving
effect on a pro forma basis to such Indebtedness;
(2) if the Company or any Restricted Subsidiary has repaid,
repurchased, defeased or otherwise discharged any Indebtedness
that was outstanding as of the end of such fiscal quarter or if
any Indebtedness is to be repaid, repurchased, defeased or
otherwise discharged on the date of the transaction giving rise
to the need to calculate the Consolidated Leverage Ratio (other
than, in each case, Indebtedness Incurred under any revolving
credit agreement), the aggregate amount of Indebtedness shall be
calculated on a pro forma basis and EBITDA shall be calculated as
if the Company or such Restricted Subsidiary had not earned the
interest income, if any, actually earned during the Reference
Period in respect of cash or Temporary Cash Investments used to
repay, repurchase, defease or otherwise discharge such
Indebtedness;
(3) if since the beginning of the Reference Period the Company or any
Restricted Subsidiary shall have made any Asset Disposition, the
EBITDA for the Reference Period shall be reduced by an amount
equal to the EBITDA (if positive) directly attributable to the
assets which are the subject of such Asset Disposition for the
Reference Period or increased by an amount equal to the EBITDA
(if negative) directly attributable thereto for the Reference
Period;
(4) if since the beginning of the Reference Period the Company or any
Restricted Subsidiary (by merger or otherwise) shall have made an
Investment in any Restricted Subsidiary (or any Person which
becomes a Restricted Subsidiary) or an acquisition of assets
which constitutes all or substantially all of an operating unit
of a business, EBITDA for the Reference Period shall be
calculated after giving pro forma effect thereto (including the
Incurrence of any Indebtedness) as if such Investment or
acquisition occurred on the first day of the Reference Period;
and
(5) if since the beginning of the Reference Period any Person (that
subsequently became a Restricted Subsidiary or was merged with or
into the Company or any Restricted Subsidiary since the beginning
of such Reference Period) shall have made any Asset Disposition,
any Investment or acquisition of assets that would have required
an adjustment pursuant to clause (3) or (4) above if made by the
Company or a Restricted Subsidiary during the Reference Period,
EBITDA for the Reference Period shall be calculated after giving
pro forma effect thereto as if such Asset Disposition, Investment
or acquisition occurred on the first day of the Reference Period.
For purposes of this definition, whenever pro forma effect is to be given to an
acquisition of assets, the amount of income or earnings relating thereto and the
amount of Consolidated Interest Expense associated with any Indebtedness
Incurred in connection therewith, the pro forma calculations shall be determined
in good faith by a responsible financial or accounting Officer of the Company.
If any Indebtedness bears a floating rate of interest and is being given pro
forma effect, the interest on such Indebtedness shall be calculated as if the
rate in effect on the date of determination had been the applicable rate for the
entire period (taking into account any Interest Rate Agreement applicable to
such Indebtedness if such Interest Rate Agreement has a remaining term in excess
of 12 months).
If any Indebtedness is Incurred under a revolving credit facility and is
being given pro forma effect, the interest on such Indebtedness shall be
calculated based on the average daily balance of such Indebtedness for the four
fiscal quarters subject to the pro forma calculation to the extent that such
Indebtedness was incurred solely for working capital purposes.
"Consolidated Net Income" means, for any period, the net income of the
Company and its consolidated Subsidiaries; provided, however, that there shall
not be included in such Consolidated Net Income:
(1) any net income of any Person (other than the Company) if such
Person is not a Restricted Subsidiary, except that:
(A) subject to the exclusion contained in clause (4) below, the
Company's equity in the net income of any such Person for
such period shall be included in such Consolidated Net
Income up to the aggregate amount of cash actually
distributed by such Person during such period to the Company
or a Restricted Subsidiary as a dividend or other
distribution (subject, in the case of a dividend or other
distribution paid to a Restricted Subsidiary, to the
limitations contained in clause (3) below); and
(B) the Company's equity in a net loss of any such Person for
such period shall be included in determining such
Consolidated Net Income;
(2) any net income (or loss) of any Person acquired by the Company or
a Subsidiary in a pooling of interests transaction (or any
transaction accounted for in a manner similar to a pooling of
interests) for any period prior to the date of such acquisition;
(3) any net income of any Restricted Subsidiary if such Restricted
Subsidiary is subject to restrictions, directly or indirectly, on
the payment of dividends or the making of distributions by such
Restricted Subsidiary, directly or indirectly, to the Company,
except that:
(A) subject to the exclusion contained in clause (4) below, the
Company's equity in the net income of any such Restricted
Subsidiary for such period shall be included in such
Consolidated Net Income up to the aggregate amount of cash
actually distributed by such Restricted Subsidiary during
such period to the Company or another Restricted Subsidiary
as a dividend or other distribution (subject, in the case of
a dividend or other distribution paid to another Restricted
Subsidiary, to the limitation contained in this clause); and
(B) the Company's equity in a net loss of any such Restricted
Subsidiary for such period shall be included in determining
such Consolidated Net Income;
(4) any gain (or loss) realized upon the sale or other disposition of
any assets of the Company, its consolidated Subsidiaries or any
other Person (including pursuant to any sale-and-leaseback
arrangement) which is not sold or otherwise disposed of in the
ordinary course of business and any gain (or loss) realized upon
the sale or other disposition of any Capital Stock of any Person;
(5) any net, after-tax, extraordinary or non-recurring gains or
losses or income or expenses; and
(6) the cumulative effect of a change in accounting principles;
in each case, for such period. Notwithstanding the foregoing, for the purposes
of the covenant described under "--Certain Covenants--Limitation on Restricted
Payments" only, there shall be excluded from Consolidated Net Income any
repurchases, repayments or redemptions of Investments, proceeds realized on the
sale of Investments or return of capital to the Company or a Restricted
Subsidiary to the extent such repurchases, repayments, redemptions, proceeds or
returns increase the amount of Restricted Payments permitted under such covenant
pursuant to clause (a)(3)(D) thereof.
"Consolidated Secured Leverage Ratio" means, as of any date of
determination, the ratio of (1) the aggregate amount of Indebtedness of the
Company and its Restricted Subsidiaries that is secured by Liens as of such date
of determination to (2) EBITDA for the period of (i) the most recent four
consecutive fiscal quarters ending at least 45 days prior to the date of
determination or (ii) if quarterly information is available for the immediately
preceding
-110-
fiscal quarter and such financial information is included in the reports filed
or delivered pursuant to the covenant described under "Certain Covenants--SEC
Reports," the most recent four consecutive fiscal quarters, with such pro forma
and other adjustments to each of Indebtedness and EBITDA as are appropriate and
consistent with the pro forma and other adjustment provisions set forth in the
definition of Consolidated Leverage Ratio.
"Consolidated Total Assets" means, as of any date of determinations, the
total assets shown on the consolidated balance sheet of the Company and its
Restricted Subsidiaries as of the most recent date for which such a balance
sheet is available, determined on a consolidated basis in accordance with GAAP
(and, in the case of any determination relating to any Incurrence of
Indebtedness or any Investment, on a pro forma basis including any property or
assets being acquired in connection therewith).
"Currency Agreement" means in any foreign exchange contract, currency swap
agreement or other similar agreement with respect to currency values.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
which by its terms (or by the terms of any security into which it is convertible
or for which it is exchangeable at the option of the holder) or upon the
happening of any event:
(1) matures or is mandatorily redeemable (other than redeemable only
for Capital Stock of such Person which is not itself Disqualified
Stock) pursuant to a sinking fund obligation or otherwise;
(2) is convertible or exchangeable at the option of the holder for
Indebtedness or Disqualified Stock; or
(3) is mandatorily redeemable or must be purchased upon the
occurrence of certain events or otherwise, in whole or in part;
in each case on or prior to the first anniversary of the Stated Maturity of
the Notes; provided, however, that any Capital Stock that would not
constitute Disqualified Stock but for provisions thereof giving holders
thereof the right to require such Person to purchase or redeem such Capital
Stock upon the occurrence of an "asset sale" or "change of control"
occurring prior to the first anniversary of the Stated Maturity of the
Notes shall not constitute Disqualified Stock if:
(4) the "asset sale" or "change of control" provisions applicable to
such Capital Stock are not more favorable to the holders of such
Capital Stock than the terms applicable to the Notes and
described under "--Certain Covenants--Limitation on Sales of
Assets and Subsidiary Stock" and "--Certain Covenants--Change of
Control"; and
(5) any such requirement only becomes operative after compliance with
such terms applicable to the Notes, including the purchase of any
Notes tendered pursuant thereto.
The amount of any Disqualified Stock that does not have a fixed redemption,
repayment or repurchase price will be calculated in accordance with the terms of
such Disqualified Stock as if such Disqualified Stock were redeemed, repaid or
repurchased on any date on which the amount of such Disqualified Stock is to be
determined pursuant to the Indenture; provided, however, that if such
Disqualified Stock could not be required to be redeemed, repaid or repurchased
at the time of such determination, the redemption, repayment or repurchase price
will be the book value of such Disqualified Stock as reflected in the most
recent financial statements of such Person.
"EBITDA" for any period means the sum of Consolidated Net Income, plus the
following to the extent deducted in calculating such Consolidated Net Income:
-111-
72
(1) all expense for income tax or asset tax of the Company and its
consolidated Restricted Subsidiaries;
(2) Consolidated Interest Expense;
(3) depreciation and amortization expense of the Company and its
consolidated Restricted Subsidiaries (excluding amortization
expense attributable to a prepaid operating activity item that
was paid in cash in a prior period); and
(4) all other non-cash charges of the Company and its consolidated
Restricted Subsidiaries (excluding any such non-cash charge to
the extent that it represents an accrual of or reserve for cash
expenditures in any future period);
in each case for such period. Notwithstanding the foregoing, the provision for
taxes based on the income or profits of, and the depreciation and amortization
and non-cash charges of, a Restricted Subsidiary shall be added to Consolidated
Net Income to compute EBITDA only to the extent (and in the same proportion,
including by reason of minority interests) that the net income or loss of such
Restricted Subsidiary was included in calculating Consolidated Net Income and
only if a corresponding amount would be permitted at the date of determination
to be dividended to the Company by such Restricted Subsidiary without prior
approval (that has not been obtained), pursuant to the terms of its charter and
all agreements, instruments, judgments, decrees, orders, statutes, rules and
governmental regulations applicable to such Restricted Subsidiary or its
stockholders.
"Eight Quarter Average Capital Expenditures" means, at any date of
determination, the quotient obtained by dividing (A) the sum of capital
expenditures made by the Company and its Restricted Subsidiaries for the eight
fiscal quarters preceding such date through and including the end of the most
recent fiscal quarter ending at least 45 days prior to the date of determination
by (B) eight.
"Equity Offering" means any sale of Capital Stock (other than Disqualified
Stock).
"Exchange Act" means the US Securities Exchange Act of 1934, as amended.
"Exchange Notes" means the debt securities of the Company issued pursuant
to the Indenture in exchange for, and in an aggregate principal amount equal to,
the Notes, in compliance with the terms of the Registration Rights Agreement.
"GAAP" means generally accepted accounting principles in Mexico as in
effect on the Issue Date.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any Person and any
obligation, direct or indirect, contingent or otherwise, of such Person:
(1) to purchase or pay (or advance or supply funds for the purchase
or payment of) such Indebtedness of such Person (whether arising
by virtue of partnership arrangements, or by agreements to
keep-well, to purchase assets, goods, securities or services, to
take-or-pay or to maintain financial statement conditions or
otherwise); or
(2) entered into for the purpose of assuring in any other manner the
obligee of such Indebtedness of the payment thereof or to protect
such obligee against loss in respect thereof (in whole or in
part);
provided, however, that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning.
"Guaranty Agreement" means a supplemental indenture, in a form satisfactory
to the Trustee, pursuant to which a Subsidiary Guarantor guarantees the
Company's obligations with respect to the Notes on the terms provided for in the
Indenture.
-112-
73
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement or Currency Agreement.
"Holder" or "Noteholder" means the Person in whose name a Note is
registered on the Registrar's books.
"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; provided, however, that any Indebtedness of a Person existing at the time
such Person becomes a Restricted Subsidiary (whether by merger, consolidation,
acquisition or otherwise) shall be deemed to be Incurred by such Person at the
time it becomes a Restricted Subsidiary. The term "Incurrence" when used as a
noun shall have a correlative meaning. Solely for purposes of determining
compliance with "--Certain Covenants--Limitation on Indebtedness":
(1) amortization of debt discount or the accretion of principal with
respect to a non-interest bearing or other discount security;
(2) the payment of regularly scheduled interest in the form of
additional Indebtedness of the same instrument or the payment of
regularly scheduled dividends on Capital Stock in the form of
additional Capital Stock of the same class and with the same
terms; and
(3) the obligation to pay a premium in respect of Indebtedness
arising in connection with the issuance of a notice of redemption
or making of a mandatory offer to purchase such Indebtedness
will not be deemed to be the Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication):
(1) the principal in respect of (A) indebtedness of such Person for
money borrowed and (B) indebtedness evidenced by notes,
debentures, bonds or other similar instruments for the payment of
which such Person is responsible or liable, including, in each
case, any premium on such indebtedness to the extent such premium
has become due and payable;
(2) all Capital Lease Obligations of such Person and all Attributable
Debt in respect of Sale/Leaseback Transactions entered into by
such Person;
(3) all obligations of such Person issued or assumed as the deferred
purchase price of property, all conditional sale obligations of
such Person and all obligations of such Person under any title
retention agreement (but excluding trade accounts payable arising
in the ordinary course of business);
(4) all obligations of such Person for the reimbursement of any
obligor on any letter of credit, bankers' acceptance or similar
credit transaction (other than obligations with respect to
letters of credit securing obligations (other than obligations
described in clauses (1) through (3) above) entered into in the
ordinary course of business of such Person to the extent such
letters of credit are not drawn upon or, if and to the extent
drawn upon, such drawing is reimbursed no later than the tenth
Business Day following payment on the letter of credit);
(5) the amount of all obligations of such Person with respect to the
redemption, repayment or other repurchase of any Capital Stock of
such Person or any Subsidiary of such Person or that are
determined by the value of such Capital Stock, the principal
amount of such Capital Stock to be determined in accordance with
the Indenture;
(6) all obligations of the type referred to in clauses (1) through
(5) of other Persons and all dividends of other Persons for the
payment of which, in either case, such Person is re-
-113-
sponsible or liable, directly or indirectly, as obligor,
guarantor or otherwise, including by means of any Guarantee;
(7) all obligations of the type referred to in clauses (1) through
(6) of other Persons secured by any Lien on any property or asset
of such Person (whether or not such obligation is assumed by such
Person), the amount of such obligation being deemed to be the
lesser of the value of such property or assets and the amount of
the obligation so secured; and
(8) to the extent not otherwise included in this definition, Hedging
Obligations of such Person.
Notwithstanding the foregoing, in connection with the purchase by the Company or
any Restricted Subsidiary of any business, the term "Indebtedness" will exclude
post-closing payment adjustments to which the seller may become entitled to the
extent such payment is determined by a final closing balance sheet or such
payment depends on the performance of such business after the closing; provided,
however, that, at the time of closing, the amount of any such payment is not
determinable and, to the extent such payment thereafter becomes fixed and
determined, the amount is paid within 30 days thereafter.
The amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date of all obligations as described above;
provided, however, that in the case of Indebtedness sold at a discount, the
amount of such Indebtedness at any time will be the accreted value thereof at
such time.
"Independent Qualified Party" means an investment banking firm, accounting
firm or appraisal firm of national standing; provided, however, that such firm
is not an Affiliate of the Company.
"Interest Rate Agreement" means any interest rate swap agreement, interest
rate cap agreement or other financial agreement or arrangement with respect to
exposure to interest rates.
"Investment" in any Person means any direct or indirect advance, loan
(other than advances to customers in the ordinary course of business that are
recorded as accounts receivable on the balance sheet of the lender) or other
extensions of credit (including by way of Guarantee or similar arrangement) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition of Capital Stock, Indebtedness or other
similar instruments issued by such Person. Except as otherwise provided for
herein, the amount of an Investment shall be its fair value at the time the
Investment is made and without giving effect to subsequent changes in value.
For purposes of the definition of "Unrestricted Subsidiary," the definition
of "Restricted Payment" and the covenant described under "--Certain
Covenants--Limitation on Restricted Payments":
(1) "Investment" shall include the portion (proportionate to the
Company's equity interest in such Subsidiary) of the fair market
value of the net assets of any Subsidiary of the Company at the
time that such Subsidiary is designated an Unrestricted
Subsidiary; provided, however, that upon a redesignation of such
Subsidiary as a Restricted Subsidiary, the Company shall be
deemed to continue to have a permanent "Investment" in an
Unrestricted Subsidiary equal to an amount (if positive) equal to
(A) the Company's "Investment" in such Subsidiary at the time of
such redesignation less (B) the portion (proportionate to the
Company's equity interest in such Subsidiary) of the fair market
value of the net assets of such Subsidiary at the time of such
redesignation; and
(2) any property transferred to or from an Unrestricted Subsidiary
shall be valued at its fair market value at the time of such
transfer, in each case as determined in good faith by the Board
of Directors.
"Issue Date" means December 16, 2003.
-114-
75
"Legal Holiday" means a Saturday, a Sunday or a day on which banking
institutions are not required to be open in the State of New York or the United
Mexican States.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Moody's" means Moody's Investors Service, Inc. and any successor to its
rating agency business.
"Net Available Cash" from an Asset Disposition means cash payments received
therefrom (including any cash payments received by way of deferred payment of
principal pursuant to a note or installment receivable or otherwise and proceeds
from the sale or other disposition of any securities received as consideration,
but only as and when received, but excluding any other consideration received in
the form of assumption by the acquiring Person of Indebtedness or other
obligations relating to such properties or assets or received in any other
non-cash form), in each case net of:
(1) all legal, title and recording tax expenses, commissions and
other fees and expenses incurred, and all Federal, state,
provincial, foreign and local taxes required to be accrued as a
liability under GAAP, as a consequence of such Asset Disposition;
(2) all payments made on any Indebtedness which is secured by any
assets subject to such Asset Disposition, in accordance with the
terms of any Lien upon or other security agreement of any kind
with respect to such assets, or which must by its terms, or in
order to obtain a necessary consent to such Asset Disposition, or
by applicable law, be repaid out of the proceeds from such Asset
Disposition;
(3) all distributions and other payments required to be made to
minority interest holders in Restricted Subsidiaries as a result
of such Asset Disposition;
(4) the deduction of appropriate amounts provided by the seller as a
reserve, in accordance with GAAP, against any liabilities
associated with the property or other assets disposed in such
Asset Disposition and retained by the Company or any Restricted
Subsidiary after such Asset Disposition; and
(5) any portion of the purchase price from an Asset Disposition
placed in escrow, whether as a reserve for adjustment of the
purchase price, for satisfaction of indemnities in respect of
such Asset Disposition or otherwise in connection with that Asset
Disposition; provided, however, that upon the termination of that
escrow, Net Available Cash will be increased by any portion of
funds in the escrow that are released to the Company or any
Restricted Subsidiary.
"Net Cash Proceeds," with respect to any issuance or sale of Capital Stock
or Indebtedness, means the cash proceeds of such issuance or sale net of
attorneys' fees, accountants' fees, underwriters' or placement agents' fees,
discounts or commissions and brokerage, consultant and other fees actually
incurred in connection with such issuance or sale and net of taxes paid or
payable as a result thereof.
"Number of Test Quarters" means, at any date of determination, the number
of completed fiscal quarters after September 30, 2003 ending at least 45 days
prior to the date of determination; provided, however, that such Number of Test
Quarters shall be at least one.
"Obligations" means, with respect to any Indebtedness, all obligations for
principal, premium, interest, penalties, fees, indemnifications, reimbursements,
and other amounts payable pursuant to the documentation governing such
Indebtedness.
"Officer" means the Chairman of the Board, the Chief Executive Officer, any
Vice President, the Chief Financial Officer or the Secretary of the Company.
-115-
76
"Officers' Certificate" means a certificate signed by two Officers.
"Opinion of Counsel" means a written opinion from legal counsel who is
acceptable to the Trustee. The counsel may be an employee of or counsel to the
Company or the Trustee.
"Permitted Asset Swap" means the disposition by the Company or its
Restricted Subsidiaries of Telecommunication Assets to another Person or Persons
in exchange for which the Company and the Restricted Subsidiaries receive
Telecommunications Assets having, in the reasonable judgment of the
disinterested members of the Board of Directors, a fair market value
substantially equivalent to or greater than the fair market value of the
Telecommunications Assets so disposed; provided, however, that no such
disposition or series of related dispositions shall constitute Permitted Asset
Swaps to the extent that the aggregate fair market value of the
Telecommunications Assets so disposed, when combined with the fair market value
of all other Telecommunications Assets disposed of in one or more Permitted
Asset Swaps (x) in the twelve calendar months preceding such disposition exceeds
US $15 million or (y) since the Issue Date exceeds US $60 million; provided
further, however, that if the book value of the Telecommunications Assets to be
disposed in a Permitted Asset Swap (or in a series of related Permitted Asset
Swaps) exceeds US $7.5 million, such disposition shall not constitute a
Permitted Asset Swap unless an Independent Qualified Party shall have determined
in writing that the fair market value of the Telecommunications Assets to be
received by the Company and its Restricted Subsidiaries is substantially
equivalent to or greater than the fair market value of the Telecommunications
Assets to be disposed.
"Permitted Holders" means each of the direct shareholders of record of the
Company as of the Issue Date (as identified in the indenture), and any Affiliate
thereof and the shareholders of Telinor Telefonia, S. de R.L. de C.V.
"Permitted Investment" means an Investment by the Company or any Restricted
Subsidiary in:
(1) the Company, a Restricted Subsidiary or a Person that will, upon
the making of such Investment, become a Restricted Subsidiary;
provided, however, that the primary business of such Restricted
Subsidiary is a Related Business;
(2) another Person if, as a result of such Investment, such other
Person is merged or consolidated with or into, or transfers or
conveys all or substantially all its assets to, the Company or a
Restricted Subsidiary; provided, however, that such Person's
primary business is a Related Business;
(3) cash and Temporary Cash Investments;
(4) receivables owing to the Company or any Restricted Subsidiary if
created or acquired in the ordinary course of business and
payable or dischargeable in accordance with customary trade
terms; provided, however, that such trade terms may include such
concessionary trade terms as the Company or any such Restricted
Subsidiary deems reasonable under the circumstances;
(5) payroll, travel and similar advances to cover matters that are
expected at the time of such advances ultimately to be treated as
expenses for accounting purposes and that are made in the
ordinary course of business;
(6) loans or advances to employees made in the ordinary course of
business consistent with past practices of the Company or such
Restricted Subsidiary;
(7) stock, obligations or securities received in settlement of debts
created in the ordinary course of business and owing to the
Company or any Restricted Subsidiary or in satisfaction of
judgments;
-116-
(8) any Person to the extent such Investment represents the non-cash
portion of the consideration received for (A) an Asset
Disposition as permitted pursuant to the covenant described under
"--Certain Covenants--Limitation on Sales of Assets and
Subsidiary Stock" or (B) a disposition of assets not constituting
an Asset Disposition;
(9) any Person where such Investment was acquired by the Company or
any of its Restricted Subsidiaries (A) in exchange for any other
Investment or accounts receivable held by the Company or any such
Restricted Subsidiary in connection with or as a result of a
bankruptcy, workout, reorganization or recapitalization of the
issuer of such other Investment or accounts receivable or (B) as
a result of a foreclosure by the Company or any of its Restricted
Subsidiaries with respect to any secured Investment or other
transfer of title with respect to any secured Investment in
default;
(10) any Person to the extent such Investments consist of prepaid
expenses, negotiable instruments held for collection and lease,
utility and workers' compensation, performance and other similar
deposits made in the ordinary course of business by the Company
or any Restricted Subsidiary;
(11) any Person to the extent such Investments consist of Hedging
Obligations otherwise permitted under the covenant described
under "--Certain Covenants--Limitation on Indebtedness";
(12) any Person to the extent such Investment exists on the Issue
Date, and any extension, modification or renewal of any such
Investments existing on the Issue Date, but only to the extent
not involving additional advances, contributions or other
Investments of cash or other assets or other increases thereof
(other than as a result of the accrual or accretion of interest
or original issue discount or the issuance of pay-in-kind
securities), in each case, pursuant to the terms of such
Investment as in effect on the Issue Date; and
(13) Persons to the extent such Investments, when taken together with
all other Investments made pursuant to this clause (13)
outstanding on the date such Investment is made, do not exceed
$10 million.
"Permitted Liens" means, with respect to any Person:
(1) pledges or deposits by such Person under workers' compensation
laws, unemployment insurance laws or similar legislation, or good
faith deposits in connection with bids, tenders, contracts (other
than for the payment of Indebtedness) or leases to which such
Person is a party, or deposits to secure public or statutory
obligations of such Person or deposits of cash or United States
government bonds to secure surety or appeal bonds to which such
Person is a party, or deposits as security for contested taxes or
import duties or for the payment of rent, in each case Incurred
in the ordinary course of business;
(2) Liens imposed by law, such as carriers', warehousemen's and
mechanics' Liens, in each case for sums not yet due or being
contested in good faith by appropriate proceedings or other Liens
arising out of judgments or awards against such Person with
respect to which such Person shall then be proceeding with an
appeal or other proceedings for review and Liens arising solely
by virtue of any statutory or common law provision relating to
banker's Liens, rights of set-off or similar rights and remedies
as to deposit accounts or other funds maintained with a creditor
depository institution; provided, however, that (A) such deposit
account is not a dedicated cash collateral account and is not
subject to restrictions against access by the Company in excess
of those set forth by regulations promulgated by the Federal
Reserve Board and (B) such deposit account is not intended by the
Company or any Restricted Subsidiary to provide collateral to the
depository institution;
-117-
78
(3) Liens for property taxes not yet subject to penalties for
non-payment or which are being contested in good faith by
appropriate proceedings;
(4) Liens in favor of issuers of surety bonds or letters of credit
issued pursuant to the request of and for the account of such
Person in the ordinary course of its business; provided, however,
that such letters of credit do not constitute Indebtedness;
(5) minor survey exceptions, minor encumbrances, easements or
reservations of, or rights of others for, licenses,
rights-of-way, sewers, electric lines, telegraph and telephone
lines and other similar purposes, or zoning or other restrictions
as to the use of real property or Liens incidental to the conduct
of the business of such Person or to the ownership of its
properties which were not Incurred in connection with
Indebtedness and which do not in the aggregate materially
adversely affect the value of said properties or materially
impair their use in the operation of the business of such Person;
(6) Liens securing Indebtedness Incurred to finance the construction,
purchase or lease of, or repairs, improvements or additions to,
property, plant or equipment of such Person; provided, however,
that the Lien may not extend to any other property owned by such
Person or any of its Restricted Subsidiaries at the time the Lien
is Incurred (other than assets and property affixed or
appurtenant thereto), and the Indebtedness (other than any
interest thereon) secured by the Lien may not be Incurred more
than 180 days after the later of the acquisition, completion of
construction, repair, improvement, addition or commencement of
full operation of the property subject to the Lien;
(7) Liens existing on the Issue Date;
(8) Liens on property or shares of Capital Stock of another Person at
the time such other Person becomes a Subsidiary of such Person;
provided, however, that the Liens may not extend to any other
property owned by such Person or any of its Restricted
Subsidiaries (other than assets and property affixed or
appurtenant thereto);
(9) Liens on property at the time such Person or any of its
Subsidiaries acquires the property, including any acquisition by
means of a merger or consolidation with or into such Person or a
Subsidiary of such Person; provided, however, that the Liens may
not extend to any other property owned by such Person or any of
its Restricted Subsidiaries (other than assets and property
affixed or appurtenant thereto);
(10) Liens securing Indebtedness or other obligations of a Subsidiary
of such Person owing to such Person or a Wholly Owned Subsidiary
of such Person;
(11) Liens securing Hedging Obligations so long as such Hedging
Obligations relate to Indebtedness that is, and is permitted to
be under the Indenture, secured by a Lien on the same property
securing such Hedging Obligations;
(12) Liens securing directly or indirectly obligations in respect of
term loans or revolving loans or other Indebtedness (including
principal, premium, interest, penalties, fees, indemnifications,
reimbursements and other amounts relating thereto) permitted to
be Incurred under the Indenture; provided, however, that, at the
time of Incurrence of the Indebtedness so secured and after
giving effect thereto, the Consolidated Secured Leverage Ratio
would be no greater than 2 to 1;
(13) Liens to secure any Refinancing (or successive Refinancings) as a
whole, or in part, of any Indebtedness secured by any Lien
referred to in the foregoing clause (6), (7), (8), (9) and (14)
below; provided, however, that:
-118-
(A) such new Lien shall be limited to all or part of the same
property and assets that secured or, under the written
agreements pursuant to which the original Lien arose, could
secure the original Lien (plus improvements and accessions
to, such property or proceeds or distributions thereof); and
(B) the Indebtedness secured by such Lien at such time is not
increased to any amount greater than the sum of (i) the
outstanding principal amount or, if greater, committed
amount of the Indebtedness described under clause (6), (7),
(8), (9) or (14) at the time the original Lien became a
Permitted Lien and (ii) an amount necessary to pay any fees
and expenses, including premiums, related to such
refinancing, refunding, extension, renewal or replacement;
and
(14) Liens securing Purchase Money Obligations or Capital Lease
Obligations Incurred in compliance with the covenant described
under "--Certain Covenants--Limitation on Indebtedness."
Notwithstanding the foregoing, "Permitted Liens" will not include any Lien
described in clause (6), (8), (9) or (14) above to the extent such Lien applies
to any Additional Assets acquired directly or indirectly from Net Available Cash
pursuant to the covenant described under "--Certain Covenants--Limitation on
Sale of Assets and Subsidiary Stock." For purposes of this definition, the term
"Indebtedness" shall be deemed to include interest on such Indebtedness.
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.
"Pesos" means the legal currency of the United Mexican States.
"Preferred Stock," as applied to the Capital Stock of any Person, means
Capital Stock of any class or classes (however designated) which is preferred as
to the payment of dividends or distributions, or as to the distribution of
assets upon any voluntary or involuntary liquidation or dissolution of such
Person, over shares of Capital Stock of any other class of such Person.
"principal" of a Note means the principal of the Note plus the premium, if
any, payable on the Note which is due or overdue or is to become due at the
relevant time.
"Purchase Money Obligations" means any Indebtedness Incurred to finance or
refinance the acquisition, leasing, construction or improvement of property
(real or personal) or assets, and whether acquired through the direct
acquisition of such property or assets or the Capital Stock of any Person owning
such property or assets, or otherwise.
"Refinance" means, in respect of any Indebtedness, to refinance, extend,
renew, refund, repay, prepay, purchase, redeem, defease or retire, or to issue
other Indebtedness in exchange or replacement for, such Indebtedness.
"Refinanced" and "Refinancing" shall have correlative meanings.
"Refinancing Indebtedness" means Indebtedness that Refinances any
Indebtedness of the Company or any Restricted Subsidiary existing on the Issue
Date or Incurred in compliance with the Indenture, including Indebtedness that
Refinances Refinancing Indebtedness; provided, however, that:
(1) such Refinancing Indebtedness has a Stated Maturity no earlier
than the Stated Maturity of the Indebtedness being Refinanced;
(2) such Refinancing Indebtedness has an Average Life at the time
such Refinancing Indebtedness is Incurred that is equal to or
greater than the Average Life of the Indebtedness being
Refinanced;
-119-
(3) such Refinancing Indebtedness has an aggregate principal amount
(or if Incurred with original issue discount, an aggregate issue
price) that is equal to or less than the aggregate principal
amount (or if Incurred with original issue discount, the
aggregate accreted value) then outstanding or committed (plus
fees and expenses, including any premium and defeasance costs)
under the Indebtedness being Refinanced; and
(4) if the Indebtedness being Refinanced is subordinated in right of
payment to the Notes, such Refinancing Indebtedness is
subordinated in right of payment to the Notes at least to the
same extent as the Indebtedness being Refinanced;
provided further, however, that Refinancing Indebtedness shall not include (A)
Indebtedness of a Subsidiary that Refinances Indebtedness of the Company or (B)
Indebtedness of the Company or a Restricted Subsidiary that Refinances
Indebtedness of an Unrestricted Subsidiary.
"Registration Rights Agreement" means the Registration Rights Agreement
dated December 16, 2003, among the Company, the Subsidiary Guarantors and Credit
Suisse First Boston LLC.
"Related Business" means any business in which the Company or any of the
Restricted Subsidiaries was engaged on the Issue Date and any business related,
ancillary or complementary to such business.
"Restricted Payment" with respect to any Person means:
(1) the declaration or payment of any dividends or any other
distributions of any sort in respect of its Capital Stock
(including any payment in connection with any merger or
consolidation involving such Person) or similar payment to the
direct or indirect holders of its Capital Stock (other than (A)
dividends or distributions payable solely in its Capital Stock
(other than Disqualified Stock), (B) dividends or distributions
payable solely to the Company or a Restricted Subsidiary and (C)
pro rata dividends or other distributions made by a Subsidiary
that is not a Wholly Owned Subsidiary to minority stockholders
(or owners of an equivalent interest in the case of a Subsidiary
that is an entity other than a corporation));
(2) the purchase, redemption or other acquisition or retirement for
value of any Capital Stock of the Company held by any Person
(other than by a Restricted Subsidiary) or of any Capital Stock
of a Restricted Subsidiary held by any Affiliate of the Company
(other than by a Restricted Subsidiary), including in connection
with any merger or consolidation and including the exercise of
any option to exchange any Capital Stock (other than into Capital
Stock of the Company that is not Disqualified Stock);
(3) the purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value, prior to scheduled maturity,
scheduled repayment or scheduled sinking fund payment of any
Subordinated Obligations of the Company or any Subsidiary
Guarantor (other than (A) from the Company or a Restricted
Subsidiary or (B) the purchase, repurchase, redemption,
defeasance or other acquisition of Subordinated Obligations
purchased in anticipation of satisfying a sinking fund
obligation, principal installment or final maturity, in each case
due within one year of the date of such purchase, repurchase,
redemption, defeasance or other acquisition); or
(4) the making of any Investment (other than a Permitted Investment)
in any Person.
"Restricted Subsidiary" means any Subsidiary of the Company that is not an
Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to property
owned by the Company or a Restricted Subsidiary on the Issue Date or thereafter
acquired by the Company or a Restricted Subsidiary whereby the
-120-
Company or a Restricted Subsidiary transfers such property to a Person and the
Company or a Restricted Subsidiary leases it from such Person.
"SEC" means the US Securities and Exchange Commission.
"Securities Act" means the US Securities Act of 1933, as amended.
"Senior Indebtedness" means with respect to any Person:
(1) Indebtedness of such Person, whether outstanding on the Issue
Date or thereafter Incurred; and
(2) all other Obligations of such Person (including interest accruing
on or after the filing of any petition in bankruptcy or for
reorganization relating to such Person whether or not post-filing
interest is allowed in such proceeding) in respect of
Indebtedness described in clause (1) above
unless, in the case of clauses (1) and (2), in the instrument creating
or evidencing the same or pursuant to which the same is outstanding, it
is provided that such Indebtedness or other obligations are subordinate
in right of payment to the Notes or the Subsidiary Guaranty of such
Person, as the case may be; provided, however, that Senior Indebtedness
shall not include:
(1) any obligation of such Person to the Company or any Subsidiary;
(2) any liability for any national, state, local or other taxes owed
or owing by such Person;
(3) any accounts payable or other liability to trade creditors
arising in the ordinary course of business (including guarantees
thereof or instruments evidencing such liabilities);
(4) any Indebtedness or other Obligation (and any accrued or unpaid
interest in respect thereof) of such Person which is subordinate
or junior in any respect to any other Indebtedness or other
Obligation of such Person; or
(5) that portion of any Indebtedness which at the time of Incurrence
is Incurred in violation of the Indenture.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"Standard & Poor's" means Standard & Poor's, a division of The McGraw-Hill
Companies, Inc., and any successor to its rating agency business.
"Stated Maturity" means, with respect to any security, the date specified
in such security as the fixed date on which the final payment of principal of
such security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency unless such contingency has occurred).
"Subordinated Obligation" means, with respect to a Person, any Indebtedness
of such Person (whether outstanding on the Issue Date or thereafter Incurred)
which is subordinate or junior in right of payment to the Notes or a Subsidiary
Guaranty of such Person, as the case may be, pursuant to a written agreement to
that effect.
"Subsidiary" means, with respect to any Person, any corporation,
association, partnership or other business entity of which more than 50% of the
total voting power of shares of Voting Stock is at the time owned or controlled,
directly or indirectly, by:
-121-
(1) such Person;
(2) such Person and one or more Subsidiaries of such Person; or
(3) one or more Subsidiaries of such Person.
"Subsidiary Guarantor" means Instalaciones y Contrataciones, S.A. de C.V.,
Servicios Axtel, S.A. de C.V. and Inmobiliaria e Impulsora Regional, S.A. de
C.V. and each other Subsidiary of the Company that executes the Indenture as a
guarantor on the Issue Date and each other Subsidiary of the Company that
thereafter guarantees the Notes pursuant to the terms of the Indenture, in each
case unless and until such Subsidiary is released from its obligation under its
Subsidiary Guaranty pursuant to the terms of the Indebtedness.
"Subsidiary Guaranty" means a Guarantee by a Subsidiary Guarantor of the
Company's obligations with respect to the Notes.
"Telecommunications Assets" means any property, including licenses and
applications, bids and agreements to acquire licenses, or other authority to
provide telecommunications services, used or intended for use primarily in
connection with a Related Business.
"Temporary Cash Investments" means any of the following:
(1) any investment in direct obligations of the United States of
America or any agency thereof or obligations guaranteed by the
United States of America or any agency thereof;
(2) investments in demand and time deposit accounts, certificates of
deposit and money market deposits maturing within 180 days of the
date of acquisition thereof issued by a bank or trust company
which is organized under the laws of the United States of
America, any State thereof or any foreign country recognized by
the United States of America, and which bank or trust company has
capital, surplus and undivided profits aggregating in excess of
$50 million (or the foreign currency equivalent thereof) and has
outstanding debt which is rated "A" (or such similar equivalent
rating) or higher by at least one nationally recognized
statistical rating organization (as defined in Rule 436 under the
Securities Act) or any money-market fund sponsored by a
registered broker dealer or mutual fund distributor;
(3) repurchase obligations with a term of not more than 30 days for
underlying securities of the types described in clause (1) above
entered into with a bank meeting the qualifications described in
clause (2) above;
(4) investments in commercial paper, maturing not more than 90 days
after the date of acquisition, issued by a corporation (other
than an Affiliate of the Company) organized and in existence
under the laws of the United States of America or any foreign
country recognized by the United States of America with a rating
at the time as of which any investment therein is made of "P-1"
(or higher) according to Moody's or "A-1" (or higher) according
to Standard and Poor's;
(5) investments in securities with maturities of six months or less
from the date of acquisition issued or fully guaranteed by any
state, commonwealth or territory of the United States of America,
or by any political subdivision or taxing authority thereof, and
rated at least "A" by Standard & Poor's or "A" by Moody's;
(6) "Certificados de la Tesoreria de la Federacion (Cetes), Bonos de
Desarrollo del Gobierno Federal (Bondes) or Bonos Ajustables del
Gobierno Federal (Adjustabonos)," in each case, issued by the
government of the United Mexican States;
-122-
(7) any other instruments issued or guaranteed by the government of
the United Mexican States and denominated and payable in pesos;
(8) investments in money market funds that invest substantially all
their assets in securities of the types described in clauses (1)
through (7) above; or
(9) demand deposits, certificates of deposit, time deposits and
bankers' acceptances maturing not more than 180 days (or 365 days
in the case of clause (A)(I) or (B)(I)) after the acquisition
thereof (A) denominated in pesos and issued by (I) any of the
five top-rated banks (as evaluated by any internationally
recognized rating agency) organized under the laws of the United
Mexican States or any other state thereof, or (II) any such bank
which at the date of acquisition is a lender to or has made
available a line of credit to (in each case in an amount equal to
or greater than the amount of the proposed acquisition), the
Company or any of its Restricted Subsidiaries; (B) in any
jurisdiction other than the United Mexican States where the
Company or any of its Restricted Subsidiaries conducts business
and (I) issued by one of the three largest banks doing business
in such jurisdiction, or (II) any such bank in such jurisdiction
which at the date of acquisition is a lender to or has made
available a line of credit to (in each case in an amount equal to
or greater than the amount of the proposed acquisition), the
Company or any of its Restricted Subsidiaries; (C) issued by any
bank which at the date of acquisition is a lender to or has made
available a line of credit to the Company or any of its
Restricted Subsidiaries and which is not under intervention,
receivership or any similar arrangement at the time of
acquisition; provided that the aggregate amount of all such
demand deposits, certificates of deposit, time deposits and
bankers' acceptances acquired in accordance with this clause (C)
does not exceed $50 million at any one time; or (D) issued by any
bank which at the date of acquisition has an outstanding loan to
the Company or any of its Restricted Subsidiaries in an aggregate
principal amount at least equal to the aggregate principal amount
of such demand deposit, certificate of deposit, time deposit or
banker's acceptance.
"Trust Indenture Act" means the Trust Indenture Act of 1939 (15 USC.ss.ss.
77aaa-77bbbb) as in effect on the Issue Date.
"Trust Officer" means the Chairman of the Board, the President or any other
officer or assistant officer of the Trustee assigned by the Trustee to
administer its corporate trust matters.
"Trustee" means The Bank of New York until a successor replaces it and,
thereafter, means the successor.
"Unrestricted Subsidiary" means:
(1) any Subsidiary of the Company that at the time of determination
shall be designated an Unrestricted Subsidiary by the Board of
Directors in the manner provided below; and
(2) any Subsidiary of an Unrestricted Subsidiary.
The Board of Directors may designate any Subsidiary of the Company (including
any newly acquired or newly formed Subsidiary) to be an Unrestricted Subsidiary
unless such Subsidiary or any of its Subsidiaries owns any Capital Stock or
Indebtedness of, or holds any Lien on any property of, the Company or any other
Subsidiary of the Company that is not a Subsidiary of the Subsidiary to be so
designated; provided, however, that either (A) the Subsidiary to be so
designated has total assets of $1,000 or less or (B) if such Subsidiary has
assets greater than $1,000, such designation would be permitted under the
covenant described under "--Certain Covenants--Limitation on Restricted
Payments."
The Board of Directors may designate any Unrestricted Subsidiary to be a
Restricted Subsidiary; provided, however, that immediately after giving effect
to such designation (A) the Company could Incur $1.00 of additional Indebtedness
under paragraph (a) of the covenant described under "--Certain
Covenants--Limitation on Indebted-
-123-
ness" and (B) no Default shall have occurred and be continuing. Any such
designation by the Board of Directors shall be evidenced to the Trustee by
promptly filing with the Trustee a copy of the resolution of the Board of
Directors giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing provisions.
"US Dollar Equivalent" means with respect to any monetary amount in a
currency other than US dollars, at any time for determination thereof, the
amount of US dollars obtained by converting such foreign currency involved in
such computation into US dollars at the spot rate for the purchase of US dollars
with the applicable foreign currency as published in The Wall Street Journal in
the "Exchange Rates" column under the heading "Currency Trading" on the date two
Business Days prior to such determination.
Except as described under "--Certain Covenants--Limitation on
Indebtedness," whenever it is necessary to determine whether the Company has
complied with any covenant in the Indenture or a Default has occurred and an
amount is expressed in a currency other than US dollars, such amount will be
treated as the US Dollar Equivalent determined as of the date such amount is
initially determined in such currency.
"US Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable at the issuer's option.
"Voting Stock" of a Person means all classes of Capital Stock of such
Person then outstanding and normally entitled (without regard to the occurrence
of any contingency) to vote in the election of directors, managers or trustees
thereof.
"Wholly Owned Subsidiary" means a Restricted Subsidiary all the Capital
Stock of which (other than directors' qualifying shares) is owned, directly or
indirectly, by the Company or one or more other Wholly Owned Subsidiaries.
-124-
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following is a general summary of the principal U.S. federal income tax
consequences associated with the exchange of outstanding notes for exchange
notes and the beneficial ownership and disposition of the exchange notes by U.S.
holders (as defined below). This summary is based on the U.S. Internal Revenue
Code of 1986, as amended (the "Code"), Treasury regulations promulgated
thereunder, rulings, official pronouncements and judicial decisions, all as in
effect on the date of this prospectus and all of which are subject to change,
possibly with retroactive effect, or different interpretations. This summary
only addresses tax considerations for holders that hold the notes and the
exchange notes received therefor as "capital assets" (generally, property held
for investment). Moreover, this summary is for general information only and does
not address all of the tax consequences that may be relevant to specific
investors in light of their particular circumstances or to investors subject to
special treatment under U.S. federal income tax laws (such as non-U.S. holders
(as defined below), banks, insurance companies, tax-exempt entities, retirement
plans, dealers in securities, brokers, expatriates, partnerships, other
pass-through entities, persons who hold their notes as part of a straddle,
hedge, conversion transaction or other integrated investment, persons whose
functional currency is not the U.S. dollar, persons subject to the alternative
minimum tax or persons deemed to sell the notes under the constructive sale
provisions of the Code), all of whom may be subject to tax rules that differ
significantly from those summarized below. The discussion below does not address
U.S. federal estate and gift tax considerations or the effect of any U.S. state,
local or non-U.S. tax law.
HOLDERS OF THE NOTES ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE
PARTICULAR TAX CONSIDERATIONS FOR THEM RELATING TO THE EXCHANGE OF THE
OUTSTANDING NOTES FOR EXCHANGE NOTES AND THE OWNERSHIP AND DISPOSITION OF THE
NOTES, INCLUDING THE APPLICABILITY OF U.S. FEDERAL, STATE OR LOCAL TAX LAWS OR
NON-U.S. TAX LAWS, ANY CHANGES IN APPLICABLE TAX LAWS AND ANY PENDING OR
PROPOSED LEGISLATION OR REGULATIONS.
For purposes of this summary, a "U.S. holder" is a beneficial holder of a
note that is, for U.S. federal income tax purposes:
o an individual who is a citizen or resident of the United States;
o a corporation created or organized in or under the laws of the United
States, or any political subdivision thereof;
o an estate the income of which is subject to U.S. federal income tax
regardless of the source thereof; or
o a trust (1) if a court within the United States is able to exercise
primary supervision over its administration and one or more U.S.
persons have the authority to control all of its substantial
decisions, or (2) that validly elects to be treated as a United States
person for U.S. federal income tax purposes.
If a partnership is a beneficial owner of a note, the treatment of a
partner in the partnership generally will depend upon the status of the partner
and the activities of the partnership.
The term "non-U.S. holder" means a beneficial owner of notes that is, for
U.S. federal income tax purposes, a nonresident alien or a corporation, trust or
estate that is not a U.S. holder.
Exchange of Notes
The exchange of outstanding notes for exchange notes pursuant to this
exchange offer will not constitute a taxable event for U.S. federal income tax
purposes. Consequently, no gain or loss will be recognized by a holder of the
outstanding notes upon receipt of an exchange note. A holder's adjusted tax
basis of the exchange note will be the same as the adjusted tax basis of the
outstanding note exchanged therefor. A holder's holding period of the exchange
note will include the holding period of the outstanding note exchanged therefor.
-125-
Payment of Interest
A U.S. holder must include in the U.S. holder's gross income all payments
of stated interest in respect of the exchange notes, and additional amounts, if
any, on account of non-U.S. withholding taxes (in each case, without reduction
for any such taxes withheld), at the time accrued or paid, in accordance with
the U.S. holder's usual method of tax accounting for U.S. federal income tax
purposes. Interest on the exchange notes generally will be treated as foreign
source income for U.S. federal income tax purposes.
Because a U.S. holder's stated interest income will not be reduced by the
non-U.S. taxes withheld, a U.S. holder generally will be required to include
more interest in the U.S. holder's gross income than the U.S. holder actually
receives in cash interest. A U.S. holder may, subject to some limitations, be
eligible to claim either a U.S. federal income tax deduction or a credit for
non-U.S. taxes withheld from stated interest paid on exchange notes. The rules
relating to foreign tax credits are extremely complex and U.S. holders should
consult with their own tax advisors regarding the availability of a foreign tax
credit and the application of the foreign tax credit limitations to their
particular situations.
Market Discount
Under the market discount rules of the Code, a U.S. Holder who
purchases an exchange note at a market discount will generally be required to
treat any gain recognized on the sale, exchange, retirement or other taxable
disposition of the exchange note as ordinary income to the extent of the accrued
market discount during the U.S. Holder's holding period that has not been
previously included in income. Market discount is generally defined as the
amount by which a U.S. Holder's purchase price for an exchange note is less than
the exchange note's stated redemption price at maturity (generally, the exchange
note's principal amount) of the exchange note on the date of purchase, subject
to a statutory de minimis exception. In general, market discount accrues on a
ratable basis over the remaining term of the exchange note unless a U.S. Holder
makes an irrevocable election to accrue market discount on a constant yield to
maturity basis.
A U.S. Holder who acquires an exchange note at a market discount may be
required to defer a portion of any interest expense that otherwise may be
deductible on any indebtedness incurred or continued to purchase or carry such
exchange note until the U.S. Holder disposes of the exchange note in a taxable
transaction. A U.S. Holder who has elected under applicable Code provision to
include market discount in income annually as such discount accrues will not,
however, be required to treat any gain recognized as ordinary income or to defer
any deductions for interest expense under these rules. This election to include
market discount in income currently, once made, applies to all market discount
obligations acquired on or after the first day of the taxable year to which the
election applies and may not be revoked without the consent of the Internal
Revenue Service (the "IRS").
Holders should consult their tax advisors as to the portion of any gain
that would be taxable as ordinary income under the market discount rules and any
other consequences of the market discount rules that may apply to them in
particular.
Amortizable Bond Premium
A U.S. Holder who purchases an exchange note for an amount in excess of
its principal amount will be considered to have purchased the exchange note at a
premium. A U.S. Holder may elect to amortize the premium over the remaining term
of the exchange note on a constant yield method. The amount amortized in any
year will be treated as a reduction of the U.S. Holder's interest income from
the exchange note. A U.S. Holder who elects to amortize the premium on an
exchange note must reduce its tax basis in the exchange note by the amount of
the premium amortized in any year. An election to amortize bond premium applies
to all taxable debt obligations then owned and thereafter acquired by the U.S.
Holder and may be revoked only with the consent of the IRS. Bond premium on an
exchange note held by a U.S. Holder who does not make such an election will
decrease the capital gain or increase the capital loss otherwise recognized on
the disposition of the exchange note.
-126-
Sale, Exchange, Retirement or Other Dispositions
A U.S. holder generally will recognize gain or loss for U.S. federal income
tax purposes upon the sale, exchange, retirement or other disposition of the
exchange notes in an amount equal to the difference between the amount realized
and the U.S. holder's adjusted tax basis in the exchange notes. For this
purpose, the amount realized does not include any amount attributable to accrued
and unpaid interest on the exchange notes (which will be taxable as ordinary
income as described above). A U.S. holder's tax basis in the exchange notes
generally will equal the cost of such exchange notes to such holder.
Subject to the market discount rules summarized above, the gain or loss
upon the sale, exchange, retirement or other disposition of the exchange notes
generally will be capital gain or loss. If, at the time of such disposition, the
exchange notes have been held for more than one year, such gain or loss will be
a long-term capital gain or loss. Under current law, long-term capital gains
recognized by an individual or other non-corporate U.S. holder are generally
subject to a reduced U.S. federal income tax rate. Capital losses are subject to
limits on deductibility. Any gain or loss recognized by a U.S. holder generally
will be treated as from sources within the United States for U.S. federal income
tax purposes. Therefore, if any such gain is subject to Mexican tax, a U.S.
holder may not be able to credit the Mexican tax paid against its U.S. federal
income tax liability.
Backup Withholding and Information Reporting
U.S. backup withholding (at a current rate of 28%) may apply to some
payments to a U.S. holder of principal and interest on the exchange notes and/or
proceeds from the sale or retirement of the exchange notes if the U.S. holder
fails to furnish to the paying agent the U.S. holder's taxpayer identification
number, that is, the U.S. holder's social security number or employer
identification number, or fails to otherwise comply with the applicable
requirements of the backup withholding rules. Some U.S. holders, including
corporations, are not subject to backup withholding. In addition, such payments
of principal and interest on the exchange notes and/or proceeds from the sale or
retirement of the exchange notes will generally be subject to information
reporting requirements.
Any amounts withheld under the backup withholding rules from a payment
to a U.S. holder with respect to the exchange notes will be allowed as a refund
or credit against such U.S. holder's U.S. federal income tax liability;
provided, however, that the U.S. holder timely furnishes the required
information to the IRS.
Mexican Tax Consequences
The following is a general summary of the principal Mexican federal
income tax consequences of the acquisition, ownership and disposition of the
notes by holders that are not residents of Mexico for Mexican federal tax
purposes and that do not have a permanent establishment in Mexico (a "foreign
holder"). This summary is based on the Mexican federal income tax law ("Ley del
Impuesto sobre la Renta") and regulations as in effect on the date of this
prospectus, all of which are subject to change, possibly with retroactive
effect, or different interpretations. This summary does not address all of the
tax consequences that may be applicable to specific holders of the notes and
does not purport to be a comprehensive description of all the tax considerations
that may be relevant to a decision to purchase, own or dispose of the notes.
Potential investors are urged to consult with their own tax advisor
regarding the particular consequences to them of an investment (including the
purchase, ownership or disposition) in the notes under the laws of Mexico or any
other jurisdiction in which they may be subject to tax.
For purposes of Mexican taxation, an individual or corporation that
does not satisfy the requirements to be considered a resident of Mexico for tax
purposes, specified below, is deemed a non-resident of Mexico for tax purposes.
An individual is a resident of Mexico if the individual establishes the
individual's home in Mexico. When such individual also has a home in another
country, he shall be deemed to be a resident of Mexico if his center of vital
interest is in Mexico. In accordance with Mexican Tax Laws, it shall be
considered that the individual has his center of vital interest in Mexico, when
(a) more than the 50% of the income obtained by such individual in the
respective calendar year comes from Mexico; or (b) Mexico is the principal
center of his professional activities. A legal entity is a resident of Mexico if
it has been incorporated pursuant to Mexican law or if it maintains the
principal
-127-
administration of its business or the effective location of its management in
Mexico. A Mexican citizen is presumed to be resident of Mexico unless such
person can demonstrate otherwise. If a legal entity or an individual is deemed
to have a permanent establishment in Mexico for Mexican tax purposes, all income
attributable to that permanent establishment will be subject to Mexican taxes,
in accordance with applicable tax laws.
The summary description of the Mexican federal income tax laws set
forth below is based on the laws in force as of the date of this prospectus and
is subject to any changes in applicable Mexican tax laws. The governments of the
United States and Mexico ratified an income tax treaty and protocol which came
into effect on January 1, 1994 (the US-Mexico Tax Treaty). The United States and
Mexico have also entered into an agreement that covers the exchange of
information with respect to tax matters.
Mexico has also entered into and is negotiating tax treaties for the
avoidance of double taxation with several other countries.
Each prospective holder of a note should consult such holder's tax
advisors with respect to the tax treatment applicable to that holder.
This summary of some Mexican income tax considerations deals only with
holders of notes that are foreign holders.
Payment of Interest
Pursuant to Article 195, Section II, paragraph (a) of the Mexican
Income Tax Law, payments of interest to foreign holders will be subject to
Mexican withholding tax at a rate of 4.9%, if, as expected, the following
requirements are met:
o The notes are registered with the Special Section of the National
Securities Registry (Registro Nacional de Valores e Intermediarios -
RNV) and evidence of such registration is filed with the Secretaria de
Hacienda y Credito Publico (the Ministry of Finance and Public
Credit);
o The notes are placed outside of Mexico through banks or brokerage
houses in a country with which Mexico has in force a treaty for
avoidance of double taxation (which currently includes the United
States of America); and
o We duly and timely comply with the information requirements
established in the general rules issued by the Tax Administration
Service (Servicio de Administration Tributaria - SAT) for those
purposes.
If any of the above-mentioned requirements is not met, the Mexican
withholding tax will be 10.0%.
Neither the 4.9% rate nor the 10.0% rate will apply and, therefore,
higher withholding tax rates will apply if the effective beneficiaries, directly
or indirectly, individually or jointly with related parties, receive more than
5.0% of the interest paid on the notes and (1) own directly or indirectly,
individually or jointly with related parties, more than 10.0% of our voting
stock or (2) are entities 20.0% or more of whose stock is owned directly or
indirectly, individually or jointly, by parties related to us.
As of the date of this prospectus, the US-Mexico Tax Treaty is not
expected to have any material effect on the Mexican tax consequences described
herein, because, as described above, under Mexico's income tax law, we will be
entitled to withhold taxes in connection with interest payments under the notes
at a 4.9% rate.
Payments of interest on the notes to non-Mexican pension and retirement
funds will be exempt from Mexican withholding tax provided that:
o Such fund is duly incorporated pursuant to the laws of its country of
residence and is the effective beneficiary of the interest payment;
-128
o Such income is exempt from taxes in its country of residence; and
o Such fund is registered with the Ministry of Finance and Public Credit
for these purposes.
We have agreed, subject to certain exceptions, to pay additional
amounts in respect of the above-mentioned Mexican withholding taxes. See
"Description of the Exchange Notes--Additional Amounts."
Payment of Principal
Under Mexican Income Tax Law, principal paid to a foreign holder of the
notes by us is not subject to Mexican withholding tax.
Taxation of Capital Gains
Capital gains resulting from the sale or other disposition of our notes
by a foreign holder will not be subject to Mexican income or withholding taxes
in Mexico.
However, as amended on January 1, 2003, the Mexican Income Tax Law will
impose a tax upon the sale at discount of a note by a Mexican resident or by a
non-resident to a purchaser that is also a non-resident, if the non-resident
seller has a permanent establishment in Mexico. In such case, the tax should be
withheld by the seller, considering as interest the difference between the sales
price over the sum of the face value and the accrued interest, by applying the
corresponding withholding tax rates mentioned above; otherwise, no Mexican
taxation nor withholding taxes would apply.
Other Mexican Taxes
There are no Mexican estate, inheritance, succession or gift taxes
generally applicable to the acquisition, ownership or disposition of the notes
by foreign holders. There are no Mexican stamp, issuer registration or similar
taxes or duties payable by foreign holders of the notes.
Plan of Distribution
Each broker-dealer that receives Exchange Securities for its own
account pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Securities. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of Exchange Securities received in
exchange for Initial Securities where such Initial Securities were acquired as a
result of market-making activities or other trading activities. The Company has
agreed that, for a period of 180 days after the Expiration Date, it will make
this prospectus, as amended or supplemented, available to any broker-dealer for
use in connection with any such resale. In addition, until , 2004, all dealers
effecting transactions in the Exchange Securities may be required to deliver a
prospectus.
The Company will not receive any proceeds from any sale of Exchange
Securities by broker-dealers. Exchange Securities received by broker-dealers for
their own account pursuant to the Exchange Offer may be sold from time to time
in one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the Exchange Securities or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer or the purchasers of any such Exchange
Securities. Any broker-dealer that resells Exchange Securities that were
received by it for its own account pursuant to the Exchange Offer and any broker
or dealer that participates in a distribution of such Exchange Securities may be
deemed to be an "underwriter" within the meaning of the Securities Act and any
profit on any such resale of Exchange Securities and any commission or
concessions received by any such persons may be deemed to be underwriting
compensation under the Securities Act. The Letter of Transmittal states that, by
acknowledging that it will deliver and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
-129-
For a period of 180 days after the Expiration Date the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The Company has agreed to pay all expenses
incident to the Exchange Offer (including the expenses of one counsel for the
Holders of the Securities) other than commissions or concessions of any brokers
or dealers and will indemnify the Holders of the Securities (including any
broker-dealers) against certain liabilities, including liabilities under the
Securities Act.
The exchange notes will constitute a new issue of securities with no
established trading market. We do not intend to list the exchange notes on any
national securities exchange or to seek approval for quotation through any
automated quotation system. The initial purchasers informed us that, following
the completion of the initial distribution of the outstanding notes, they
intended to make a market in the outstanding notes. However, any such market
making may be discontinued at any time. Accordingly, we cannot guarantee the
development or liquidity of any trading market for the exchange notes. If a
trading market does not develop or is not maintained, holders of the exchange
notes may experience difficulty in reselling the exchange notes or may be unable
to sell them at all. If a market for the exchange notes develops, any such
market may cease to continue at any time. in addition, if a market for the
exchange notes develops, the market prices of the exchange notes may be
volatile. Factors such as fluctuations in our earnings and cash flow, the
difference between our actual results and results expected by investors and
analysts and Mexican and U.S. currency and economic developments could cause the
market prices of the exchange notes to fluctuate substantially.
Legal Matters
Cahill Gordon & Reindel LLP will pass upon certain United States legal
matters for us in connection with the exchange notes offered hereby. D & A
Morales y Asociados, S.C., Monterrey, Mexico, will pass upon certain Mexican
legal matters for us in connection with the exchange notes offered hereby.
Experts
The consolidated financial statements of Axtel, S.A. de C.V. as of
December 31, 2003, 2002 and 2001 and for each of years then ended in this
prospectus have been audited by KPMG Cardenas Dosal S.C., independent auditors,
as stated in their report appearing or incorporated by reference herein.
-130-
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
[Enlarge/Download Table]
Audited Consolidated Financial Statements
Report of Independent Auditors................................................................................. F-1
Consolidated Balance Sheet as of December 31, 2003 and 2002 ................................................... F-2
Consolidated Statement of Operations for the fiscal years ended December 31, 2003, 2002 and
2001........................................................................................................... F-3
Consolidated Statement of Changes in Financial Position for the fiscal years
ended December
31, 2003, 2002, 2001 and 2000............................................................................... F-4
Consolidated Statement of Changes in Stockholders' Equity for the fiscal years ended December
31, 2003, 2002, 2001 and 2000............................................................................... F-5
Notes to the Audited Consolidated Financial Statements ........................................................ F-6
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 2003
(With comparative figures for 2002 and 2001)
(With Independent Auditors' Report Thereon)
(Translation from Spanish Language Original)
Independent Auditors' Report
(Translation from Spanish Language Original)
The Board of Directors and Stockholders
Axtel, S.A. de C.V.:
We have examined the consolidated balance sheets of Axtel, S.A. de C.V. and
subsidiaries as of December 31, 2003 and 2002, and the related consolidated
statements of operations, changes in stockholders' equity, and changes in
financial position for each of the years in the three-year period ended December
31, 2003. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America and Mexico. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Axtel,
S.A. de C.V. and its subsidiaries as of December 31, 2003 and 2002, and the
consolidated results of their operations, the changes in their stockholders'
equity and the changes in their financial position for each of the years in the
three-year period ended December 31, 2003, in conformity with accounting
principles generally accepted in Mexico.
Accounting principles generally accepted in Mexico vary in certain significant
respects from accounting principles generally accepted in the United States of
America. The application of accounting principles in the United States of
America would have affected the results of operations for each of the years in
the three-year period ended December 31, 2003, and the stockholders' equity as
of December 31, 2003 and 2002 to the extent summarized in note 24 to the
consolidated financial statements.
KPMG Cardenas Dosal, S.C.
Rafael Gomez Eng
Monterrey, N,L., Mexico
February 20, 2004
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Consolidated Balance Sheets
(Thousand pesos of constant purchasing power as of December 31, 2003)
[Enlarge/Download Table]
December 31
-----------------------------------
Assets 2003 2002
----------------- ----------------
Current assets:
Cash and cash equivalents (including $4,497 and $7,491 of restricted
cash as of December 31, 2003 and 2002) $ 1,012,974 326,989
Accounts receivable (note 5) 421,843 348,641
Refundable taxes and other accounts receivable 19,992 14,440
Prepaid expenses (note 8) 183,886 19,004
Inventories (note 9) 21,552 21,537
----------------- ----------------
Total current assets 1,660,247 730,611
Property, systems and equipment, net (notes 10 and 14) 5,192,361 5,504,798
Telephone concession rights, net of accumulated amortization of $196,866
and $148,481 in 2003 and 2002, respectively 715,446 763,831
Pre-operating expenses, net (note 11) 200,128 235,514
Deferred income taxes (note 16) 251,986 736,143
Other assets, net (note 12) 109,250 113,579
----------------- ----------------
Total assets $ 8,129,418 8,084,476
================= ================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 310,192 364,253
Accrued interest 66,982 277,313
Notes payable (note 13) 24,000 51,805
Current maturities of long-term debt (note 14) 54,408 179,347
Taxes payable 69,250 76,162
Bell Canada International, Inc. (note 7) - 26,810
Other accounts payable (note 17) 194,317 31,001
----------------- ----------------
Total current liabilities 719,149 1,006,691
Long-term debt, excluding current maturities (note 14) 2,023,987 5,027,865
Other long-term accounts payable (note 17) 2,172 211,485
Seniority premiums (note 15) 2,000 1,332
----------------- ----------------
Total liabilities 2,747,308 6,247,373
----------------- ----------------
Stockholders' equity (note 18):
Common stock 6,738,148 4,074,389
Additional paid-in capital 133,323 148,138
Deficit (1,601,722) (2,497,785)
Cumulative deferred income tax effect 112,361 112,361
----------------- ----------------
Total stockholders' equity 5,382,110 1,837,103
Commitments and contingencies (note 22)
----------------- ----------------
Total liabilities and stockholders' equity $ 8,129,418 8,084,476
================= ================
The accompanying notes are an integral part of the consolidated financial statements.
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Consolidated Statements of Operations
(Thousand pesos of constant purchasing power as of December 31, 2003)
[Enlarge/Download Table]
Years ended December 31,
-----------------------------------------------------
2003 2002 2001
-----------------------------------------------------
Rental, installation, service and other revenues 2,919,515 2,452,412 2,242,859
(note 19) $
---------------- ----------------- ----------------
Operating costs and expenses:
Cost of sales and services (808,427) (612,211) (521,315)
Selling and administrative expenses (note 7) (1,138,106) (1,262,446) (1,642,629)
Depreciation and amortization (860,574) (810,544) (644,719)
---------------- ----------------- ----------------
(2,807,107) (2,685,201) (2,808,663)
---------------- ----------------- ----------------
Operating income (loss) 112,408 (232,789) (565,804)
---------------- ----------------- ----------------
Comprehensive financing result:
Interest expense (218,305) (432,165) (411,782)
Interest income 19,358 10,176 9,953
Foreign exchange (loss) gain, net (319,443) (618,226) 99,643
Monetary position gain 92,809 280,515 216,934
---------------- ----------------- ----------------
Comprehensive financing result, net (425,581) (759,700) (85,252)
---------------- ----------------- ----------------
Other income (expenses), net (notes 14 and 21) 1,714,456 (27,590) (30,908)
---------------- ----------------- ----------------
Special item (note 20) (10,417) (32,421) (63,027)
---------------- ----------------- ----------------
---------------- ----------------- ----------------
Income (loss) before income taxes, tax on
asset and employee statutory profit sharing 1,390,866 (1,052,500) (744,991)
---------------- ----------------- ----------------
Deferred income tax (note 16) (493,451) 241,717 132,296
Deferred employees statutory profit sharing (note 16) - - 27,979
---------------- ----------------- ----------------
Total income tax (expense) benefit, tax on asset and
employee's statutory profit sharing (493,451) 241,717 160,275
---------------- ----------------- ----------------
Net income (loss) $ 897,415 (810,783) (584,716)
================ ================= ================
The accompanying notes are an integral part of the consolidated financial statements.
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Consolidated Statements of Changes in Financial
Position (Thousand pesos of constant purchasing power as of December 31, 2003)
[Enlarge/Download Table]
Years ended December 31,
--------------------------------------------------------
2003 2002 2001
--------------------------------------------------------
Operating activities:
Net income (loss) $ 897,415 (810,783) (584,716)
Add charges (deduct credits) to operations not requiring
(providing) resources:
Depreciation 772,561 723,777 538,978
Amortization 88,013 86,767 105,741
Accrual for seniority premiums 681 231 790
Deferred income tax and employee statutory
profit sharing 493,451 (241,717) (160,275)
Gain on debt restructuring (1,858,462) - -
----------------- ----------------- ------------------
Resources provided by (used in) operations 393,659 (241,725) (99,482)
Net (investment in) financing from operations (233,996) 230,179 (204,144)
----------------- ----------------- ------------------
Resources provided by (used in) operating activities 159,663 (11,546) (303,626)
----------------- ----------------- ------------------
Financing activities:
Increase in common stock 2,663,759 51,941 1,019,039
Additional paid-in capital (2,043) (31,655)
(14,815)
(Payments) proceeds from loans, net (1,508,491) 630,558 741,680
Deferred financing costs (18,452) 27,020 9,707
Other long-term accounts payable (38,978) 63,837 147,648
----------------- ----------------- ------------------
Resources (used in) provided by financing activities 1,083,023 771,313 1,886,419
----------------- ----------------- -----------------
Investing activities:
Acquisition and construction of property, systems
and equipment, net (460,124) (565,367) (1,582,754)
Pre-operating expenses - - (2,600)
Other assets (96,577) (1,417) (9,784)
----------------- ----------------- -----------------
Resources used in investing activities (556,701) (566,784) (1,595,138)
----------------- ----------------- -----------------
Increase (decrease) in cash and cash equivalents 685,985 192,983 (12,345)
Cash and cash equivalents at beginning of year 326,989 134,006 146,351
----------------- ----------------- -----------------
Cash and cash equivalents at end of year $ 1,012,974 326,989 134,006
================= ================= =================
The accompanying notes are an integral part of the consolidated financial statements.
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders'
Equity (Thousand pesos of constant purchasing power as of December 31, 2003)
[Enlarge/Download Table]
Additional Cumulative Total
Common paid-in deferred income stockholders'
stock capital Deficit tax effect equity
-------------- ------------ ----------- ---------------- ------------
Balances as of December 31, 2000 $ 3,003,409 181,836 (1,102,286) 112,361 2,195,320
Common stock contribution (note 18a) 1,019,039 (31,655) - - 987,384
Comprehensive loss - - (584,716) - (584,716)
-------------- ------------ ----------- ---------------- ------------
Balances as of December 31, 2001 4,022,448 150,181 (1,687,002) 112,361 2,597,988
Common stock contribution (note 18a) 51,941 (2,043) - - 49,898
Comprehensive loss - - (810,783) - (810,783)
-------------- ------------ ----------- ---------------- ------------
Balances as of December 31, 2002 4,074,389 148,138 (2,497,785) 112,361 1,837,103
Common stock contribution (note 18a) 2,663,759 (14,815) - - 2,648,944
Cumulative effect of vacation accrual (note 3a) - - (1,352) - (1,352)
Comprehensive income - - 897,415 - 897,415
-------------- ------------ ----------- ---------------- ------------
Balances as of December 31, 2003 $ 6,738,148 133,323 (1,601,722) 112,361 5,382,110
============== ============ =========== ================ ============
The accompanying notes are an integral part of the consolidated financial
statements.
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2003 and 2002
(Thousand pesos of constant purchasing power as of December 31, 2003)
(1) Organization and description of business
Axtel, S.A. de C.V. and subsidiaries (the Company or AXTEL) is a Mexican
corporation engaged in operating and/or exploiting a public
telecommunication network to provide voice, sound, data, text, and image
conducting services, and local, national, and international long-distance
calls. To provide these services and carry out the Company's activity, a
concession is required (see note 22 d). In June 1996, the Company obtained
a concession from the Mexican Federal Government to install, operate and
exploit public telecommunication networks for an initial period of thirty
years.
The Company's capital structure has Mexican majority share ownership, with
58.52% of shares with voting rights owned by Telinor Telefonia, S. de R.L.
de C.V. The remaining 41.48% is distributed among other entities.
AXTEL offers different access technologies, including fixed wireless
access, point-to-point, point-to-multipoint, a fiber optic radio links and
copper technology, depending on the communication needs of the clients.
The Company has been granted the following licenses over the spectrum of
frequencies necessary to provide the services:
o 60MHz for Point-to-Multi-Point in the 10.5GHz band to cover each one of the
nine regions of the Mexican territory. The acquisition of these twenty-year
concessions, with an extension option, represented an investment of
$136,814 for the Company.
o 112MHz for Point-to-Point in the 15GHz band and a 100MHz in the 23GHz band
with countrywide coverage. The acquisition of these twenty-year
concessions, with an extension option, represented an investment of $68,998
for the Company.
o 50MHz in the 3.4GHz. The licenses obtained allow coverage in the nine
regions of the country, and the investment was $706,500 for a period of
twenty years with an extension option.
2
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2003)
The Company has commercial services in Monterrey, Mexico City, Guadalajara,
Puebla, Toluca and Leon.
(2) Summary of significant accounting policies
The accounting policies and practices followed by the Company in the
preparation of the consolidated financial statements are described below:
(a) Financial statement presentation
The accompanying consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in Mexico
(Mexican GAAP), which include the recognition of the effects of
inflation on the financial information, and are expressed in Mexican
pesos of constant purchasing power as of December 31, 2003 based on
the National Consumer Price Index (NCPI) published by Banco de Mexico.
The following national consumer price indexes (NCPI) were used to
recognize the effects of inflation:
Inflation
NCPI %
-------------- --------------
December 2003 390.299 3.99
December 2002 375.324 5.70
December 2001 355.084 5.00
December 2000 338.175 9.08
For purposes of disclosure in the notes to the financial statements,
references to pesos or "$", are to Mexican pesos; likewise, references
to dollars, are to dollars of the United States of America.
3
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2003)
(b) Principles of consolidation
The consolidated financial statements include the assets, liabilities,
equity and results of operations of the subsidiaries listed below. The
balances and transactions between companies have been eliminated in
the preparation of the consolidated financial statements.
% ownership
------------------
Instalaciones y Contrataciones, S.A. de C.V. 99.998%
Impulsora e Inmobiliaria Regional, S.A. de C.V. 99.998%
Servicios Axtel, S.A. de C.V. 99.998%
(c) Cash equivalents
Cash equivalents are expressed at the lower of acquisition cost plus
accrued interest as of the most recent balance sheet date or net
estimated realizable value. Interest and foreign currency exchange
fluctuation are included in the statements of operations as part of
the comprehensive financing result. Cash equivalents includes $4,497
and $7,491 of restricted cash for the payment of interest.
(d) Inventories
Inventories are carried at the lower of restated cost and net
realizable value. The restated cost is determined by application of
the NCPI factor to current costs.
(e) Property, systems and equipment
Property, systems and equipment are recorded at acquisition cost and
restated by NCPI factors.
Comprehensive financing results incurred during construction or
installation periods is capitalized as part of the cost of the assets.
Depreciation of property, systems and equipment is calculated using
the straight-line method, based on useful lives estimated by Company
management. Useful lives are described in note 10.
Leasehold improvements are amortized over the shorter of the useful
life of the improvement and the term of the lease.
Maintenance and minor-repair expenses are expensed as incurred.
4
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2003)
(f) Telephone concession rights
Telephone concession rights are restated by NCPI factors and amortized
under the straight-line method over a period of 20 years (the initial
term of the concession).
(g) Pre-operating expenses
Pre-operating expenses include administrative services, technological
advice and comprehensive financing results incurred through June 1999
and the expenses incurred during 2000 in opening offices in other
cities throughout the country. The Company started providing business
services beginning in 2001. These expenses were capitalized, and
restated by NCPI factors and are amortized under the straight-line
method over a period of 10 years (see note 11).
(h) Other assets
Other assets mainly include deferred financing costs, guarantee
deposits, and notes issuance costs (see notes 12 and 14).
(i) Seniority premiums
The accumulated seniority premium benefits to which workers are
entitled by law are recognized in the results of each period at the
current value of the obligation, based on actuarial calculations
prepared by independent experts.
Other benefits to which employees may be entitled, principally
severance benefits and vacations, are recognized as an expense in the
year in which they are paid.
(j) Financial instruments
To reduce the risks resulting from foreign exchange rate fluctuations
of the peso with respect to the dollar, the Company uses selected
exchange rate option contracts that meet the characteristics of
derivative financial instruments. The fluctuations in the exchange
rates established in the market and those established in such
contracts are recognized in the comprehensive financing result (CFR).
5
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2003)
(k) Income tax (IT) tax on assets (TA) and employee's statutory profit
sharing (ESPS)
IT is accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Deferred ESPS is recognized for timing differences arising from the
reconciliation of book income to income for profit sharing purposes
with respect to which it may reasonably be estimated that a future
liability or benefit will arise and there is no indication that the
liabilities or benefits will not materialize.
(l) Inflation adjustment of common stock, other contributions and deficit
This adjustment is determined by multiplying stockholder contributions
and deficit by NCPI factors, which measure accumulated inflation from
the dates contributions were made and losses arising through the most
recent year end. The resulting amounts represent the constant value of
stockholders' equity.
(m) Comprehensive loss
The comprehensive loss represents the net income or loss for the year
plus the effect of those items reflected directly in stockholders'
equity, other than capital contributions, reductions and
distributions.
(n) Cumulative deferred income tax effect
The Company adopted Bulletin D-4, "Accounting for income tax, tax on
assets and employee statutory profit sharing" effective January 1,
2000, which required the adoption of the asset and liability method
for determining deferred income taxes. The cumulative effect
represents the cumulative previously unrecognized deferred taxes as of
the date of adoption.
(o) Comprehensive financing result (CFR)
The CFR includes interest, currency exchange differences and the
monetary effect, less the amounts capitalized, as part of fixed
assets.
6
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2003)
Foreign currency transactions are recorded at the rate of exchange
prevailing on the date of execution or settlement. Foreign currency
assets and liabilities are translated at the exchange rate in force at
the balance sheet date. Exchange differences arising from assets and
liabilities denominated in foreign currencies are recognized in the
results of operations.
Monetary position gains and losses are determined by multiplying the
difference between monetary assets and liabilities at the beginning of
each month, including the deferred taxes, by inflation factors through
year-end. The aggregate of these results represents the monetary gain
or loss for the year arising from inflation, which is recognized in
the CFR.
(p) Revenue recognition
The Company's revenues are recognized when earned, as follows:
o Telephone service - Based on monthly service fees, measured usage
charges based on the number of calls made and other service
charges to customers.
o Activation - At the time the equipment is installed
o Equipment - At the time of sale
(q) Business and risk concentration
The Company rendered services to one client that represents
approximately 18%, 16% and 5% of total net revenues during 2003, 2002
and 2001, respectively. This client's accounts receivable balances as
of December 31, 2003 and 2002 represent approximately 1% of total
accounts receivable in both years. The Company provides an allowance
for doubtful accounts based on management's analyses and estimations.
The allowance expense is included as selling and administrative
expenses in the consolidated statement of operations.
(r) Contingencies
Liabilities for loss contingencies are recorded when it is probable
that a liability has been incurred and the amount of the assessment
and/or remediation can be reasonably estimated. When a reasonable
estimation can not be made, qualitative disclosure is provided in the
notes to the consolidated financial statements. Contingent revenues,
earnings or assets are not recognized until their realization is
virtually assured.
7
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2003)
(s) Impairment of property, systems and equipment and other non-current
assets
The Company evaluates periodically the adjusted values of its
property, systems and equipment and other non-current assets to
determine whether there is an indication of potential impairment.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net revenues
expected to be generated by the asset. If such assets are considered
to be impaired, the impairment is measured by the amount by which the
carrying amount of the asset exceeds the expected net revenues. Assets
to be disposed of are reported at the lower of the carrying amount or
realizable value.
(t) Use of estimates
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities, the disclosure of contingent assets and liabilities
as of the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results may
differ.
(3) Accounting changes
(a) Liabilities, accruals, contingent assets and liabilities, and
commitments-
In December 2001, the Mexican Institute of Public Accountants issued
the new Bulletin C-9, "Liabilities, Accruals, Contingent Assets and
Liabilities, and Commitments." New Bulletin C-9, effective for fiscal
years beginning after December 31, 2002, supersedes former Bulletins
C-9, "Liabilities," and C-12, "Contingencies and Commitments." New
Bulletin C-9 establishes additional guidance clarifying the accounting
for liabilities, accruals, and contingent assets and liabilities, and
establishes new standards for the use of present value techniques to
measure liabilities, and accounting for the early extinguishment of
liabilities and convertible debt. Additionally, new Bulletin C-9
establishes new rules for disclosing commitments arising from current
business operations.
The Company adopted this Bulletin in 2003 and, as a result, recognized
as initial effect vacation accrual $1,352 which was recorded directly
in stockholders equity, net of its deferred income tax effect of $697.
As of December 31, 2003, the vacation accrual amounts is $7,221 and is
included in accounts payable and accrued liabilities in the
accompanying consolidated financial statements.
8
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2003)
(b) Intangible assets-
In January 2002, the Mexican Institute of Public Accountants issued
the new Bulletin C-8, "Intangible Assets," effective for fiscal years
beginning after December 31, 2002. New Bulletin C-8 supersedes former
Bulletin C-8, "Intangibles," and establishes that qualifying project
development costs be capitalized as intangible assets if the criteria
for intangible asset recognition are met. The principal criteria are
that these costs be identifiable, that there is reasonable certainty
that these costs will generate future benefits to the Company, and
that the Company has control over such benefits. Other costs, not
meeting the new criteria and incurred after the effective date of new
Bulletin C-8, should be expensed as incurred. Pre-operating expenses
previously recognized under former Bulletin C-8 will continue to be
amortized, subject to periodic impairment evaluations. Development
costs incurred in a pre-operating stage may be capitalized after
meeting certain conditions, under new Bulletin C-8.
This Bulletin also requires that intangibles acquired in a business
combination be accounted for at fair value at the date of the purchase
and be separately reported, unless their cost cannot be reasonably
determined, in which case, they should be reported as goodwill. Also,
if there is no active market for these assets, they should be
written-down to the excess of their book value over the purchase price
or to zero. These assets are also subject to periodic impairment
evaluations. Amortization of goodwill should be reported in operating
expenses on the statements of operations.
The initial adoption of this Bulletin had no material effects on the
financial position nor the result of operations of the Company.
(4) Foreign currency exposure
Monetary assets and liabilities denominated in dollars as of December 31,
2003 and 2002 are as follows:
(Thousands of dollars)
-----------------------------------
2003 2002
---- ----
Current assets 85,048 2,931
Current liabilities (36,146) (60,892)
Long-term liabilities (180,266) (488,530)
--------------- -----------------
Foreign currency
liability position, net (131,364) (546,491)
=============== =================
9
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2003)
The US dollar exchange rates as of December 31, 2003 and 2002 were $11.2360
and $10.3125, respectively. As of February 20, 2004, the exchange rate was
$10.9058.
As of December 31, 2003, the Company had foreign exchange derivative
instruments (see note 6).
As of December 31, 2003 and 2002, the Company had the following
non-monetary assets of foreign origin, the replacement cost of which may
only be determined in dollars:
(Thousands of dollars)
----------------------------------
2003 2002
---- ----
Inventories 1,029 1,470
Systems and equipment, gross 663,225 621,846
--------------- ---------------
664,254 623,316
=============== ===============
Following is a summary for the years ended December 31, 2003, 2002 and
2001, of transactions carried out with foreign entities, excluding imports
and exports of machinery and equipment:
(Thousands of dollars)
--------------------------------------------
2003 2002 2001
---- ---- ----
Interest expense 14,926 38,475 36,829
Commissions 11,174 1,978 2,594
Administrative and technical
advisory services 243 3,325 2,500
-------- ------------- --------------
26,343 43,778 41,923
======== ============= ==============
(5) Accounts receivable
Accounts receivable consist of the following:
2003 2002
---- ----
Trade $ 488,562 590,226
Less allowance for doubtful accounts 66,719 241,585
----------- -----------
Accounts receivable, net $ 421,843 348,641
=========== ===========
10
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2003)
The activity in the allowance for doubtful accounts for the years ended
December 31, 2003, 2002 and 2001 was as follows:
2003 2002 2001
---- ---- ----
Balances at beginning of year $ 232,316 73,461 34,757
Bad debt expense 57,658 158,855 251,673
Write-offs (223,255) - (212,969)
----------- ----------- -----------
Balances at end of year not
adjusted for inflation 66,719 232,316 73,461
Effects of inflation - 9,269 7,285
----------- ----------- -----------
Balances at year end at constant pesos $ 66,719 241,585 80,746
=========== =========== ===========
(6) Derivative instruments
The Company minimizes the risk associated with foreign currency position by
entering into transactions with high-quality counterparties whose credit
rating is higher than AA.
The contracts entered into are European-style-type option contracts, which
establish a floor and a ceiling exchange rate between the peso and the US
dollar at specified dates on specified notional amounts.
As of December 31, 2003, the Company has a contract outstanding with the
following characteristics:
[Enlarge/Download Table]
Changes in the
fair value
Notional Notional recorded within
Inception and amount/exchange rate - amount/exchange rate - the CFR earnings
expiration dates floor ceiling item
--------------------------------- ------------------------ ------------------------ --------------------
Sept 23, 2003/March 17,
2004 55,400/11.08 56,500/11.30 560
(7) Related-party transactions
Until March 2003 Bell Canada International Inc. (Bell Canada) was a
related-party of the Company. During 2002 and 2001, AXTEL received
administrative and technical advisory services from Bell Canada for
approximately $2.5 million dollars, each year.
11
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2003)
(8) Prepaid expenses
Prepaid expenses consist of the following:
2003 2002
---- ----
Nortel Networks $ 161,153 -
Other 22,733 19,004
--------------- ---------------
Total prepaid expenses $ 183,886 19,004
=============== ===============
In accordance with the debt-restructuring agreement (See note 14b) all new
purchases from Nortel should be either secured through the issuance of a
letter of credit or prepaid.
(9) Inventories
Inventories consist of the following:
2003 2002
---- ----
Telephones and caller identification devices $ 4,095 3,620
Installation material 4,161 4,836
Tools 1,312 1,670
Network spare parts 7,823 6,415
Other 4,161 4,996
------------- -----------
Total inventories $ 21,552 21,537
============= ===========
(10) Property, systems and equipment
Property, systems and equipment are analyzed as follows:
[Enlarge/Download Table]
Useful
2003 2002 lives
---- ---- -----
Land $ 35,849 40,853
Building 116,552 116,115 25 years
Computer and electronic equipment 847,413 711,094 3 years
Transportation equipment 14,439 13,864 4 years
Furniture and fixtures 88,443 82,810 10 years
Network equipment 5,766,985 5,536,154 6 to 28 years
Leasehold improvements 131,854 102,281
Construction in progress 413,377 369,317
-------------- --------------
7,414,912 6,972,488
Less accumulated depreciation 2,222,551 1,467,690
-------------- --------------
Property, systems and equipment, net $ 5,192,361 5,504,798
============== ==============
12
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2003)
The Company has capitalized CFR as a component of the acquisition cost of
property, systems and equipment, aggregating $2,171 as of December 31,
2003.
All of the assets indicated above secure the lines of credit and the
contracts with Hewlet Packard de Mexico, S. de R.L. de C.V., SR Telecom
Inc. and Siemens Financial Services Inc. (see note 14). The line of credit
with Agilent Technologies Mexico, S. de R.L. de C.V., as well as other
long-term financing is secured by specific collaterals.
(11) Pre-operating expenses, net
The capitalized pre-operating expenses incurred up to June 1999 and
expenses incurred during 2000 in opening operations in new cities are as
follows:
2003 2002
---- ----
Salaries $ 176,004 176,004
Legal and financial advisory 100,519 100,519
Operating expenses 54,695 54,695
Depreciation 8,735 8,735
Comprehensive financing result (22,044) (22,044)
Service and other revenues (12,460) (12,460)
Other 34,739 34,739
-------------- ---------------
340,188 340,188
Less accumulated amortization 140,060 104,674
-------------- ---------------
Pre-operating expenses, net $ 200,128 235,514
============== ===============
(12) Other assets
Other assets consist of the following:
2003 2002
---- ----
Deferred financing costs $ - 134,250
Notes issuance costs 59,849 -
Guarantee deposits 14,132 12,898
Other 35,269 4,016
------------- ----------------
109,250 151,164
Less accumulated amortization - 37,585
------------- ----------------
Other assets, net $ 109,250 113,579
============= ================
13
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2003)
Deferred financing costs were incurred in connection with the Company's
credit with Nortel and were amortized under the straight-line method over
the life of the related debt. On March 20, 2003, the debt with Nortel was
restructured, and the total unamortized deferred financing costs amounting
to $92,188 related to this debt were charged as expense (see notes 14 and
21).
Notes issuance cost mainly consists of legal and audit fees, documentation,
advising, printing, rating agencies, registration fees and out of pocket
expenses incurred in relation to the issuance of notes payable and will be
amortize over the life of the related debt.
(13) Notes payable
The notes payable as of December 31, 2003 and 2002 and their main
characteristics are as follows:
[Enlarge/Download Table]
2003 2002
Revolving line of credit with SR Telecom Canada Inc. denominated in U.S.
dollars. The payments are made 50% net 30 days and 50% net 360 days. The
interest rate is LIBOR plus 6.25 percent points applicable only to the
360-day portion $ 4,172 12,989
Revolving line of credit with Banco Mercantil del Norte S.A. (Banorte) used
for letters of credit, denominated in U.S. dollars up to 360 days 14,098 36,461
Other short-term financing with several institutions and/or suppliers with
interest rates fluctuating between 10% and 11% 5,730 2,355
--------------- ---------------
Total short-term notes payable $ 24,000 51,805
=============== ===============
(14) Long-term debt
Long-term debt as of December 31, 2003 and 2002 and its main
characteristics is as follows:
[Enlarge/Download Table]
2003 2002
---- ----
U.S. $175,000,000 in aggregate principal amount of 11% Senior Notes due
2013. Interest will be payable semi-annually in arrears on June 15, and
December 15 of each year commencing June 15, 2004. $ 1,966,300 -
Nortel Networks Ltd. denominated in U.S. dollars, payable in ten semiannual
installments beginning in 2003 and through 2007. The interest rate was
LIBOR plus 5 percentage points (6.96% in 2002). Interest is payable
semiannually - 5,101,956
14
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2003)
Hewlett Packard de Mexico, S. de R. L. de C.V. denominated in U.S. dollars,
payable in 36 monthly installments with a 6-month grace period maturing in
2005. The interest rate is 9.8 % 4,464 59,812
Promissory Notes with Hewlett Packard Operations Mexico, S. de R.L. de C.V.
denominated in U.S. dollars, payable in 12 quarterly installments maturing in
September 2006. The interest rate is 9.5% 21,569 -
Line of credit with Siemens Financial Services Inc. denominated in U.S.
dollars. The payments are made in six semiannual installments through 2005.
The interest rate is LIBOR plus 5.5 percentage points (6.35% average in 2003
and 7.24% in 2002). Interest is payable semiannually 51,525 25,001
Line of credit with Agilent Technologies Mexico S. de R.L. de C.V.
denominated in U.S. dollars. The payments are made in six semiannual
installments through 2005. The interest rate is 9.8% 2,416 3,459
Other long-term financing with several credit institutions with rates
fluctuating between 9% and 10% for those denominated in dollars and TIIE
(Mexican average interbank rate) plus six percentage points for those
denominated in pesos 32,121 16,984
-------------- ---------------
Total long-term debt 2,078,395 5,207,212
Less current maturities 54,408 179,347
-------------- ---------------
Long-term debt, excluding current maturities $ 2,023,987 5,027,865
============== ===============
Annual installments of long-term debt are as follows:
Year Amount
2005 $ 40,637
2006 17,050
2007 -
2008 and thereafter 1,966,300
----------------
$ 2,023,987
================
The following are the most important changes in the Company long-term debt
during 2003 and 2002:
a) On March 18, 2003, the Company obtained a loan for 75 million dollars
from Banco Mercantil del Norte, S.A. (Banorte) at a variable Libor
interest rate to 90 days plus certain basis points, payable quarterly.
The loan payments were set in four equal consecutive quarterly
installments of 4.5 million and one last installment of 57 million,
beginning 24 months after the credit disposition date, which was March
20, 2003. On December 17, 2003 this loan was paid. (See note 14d).
15
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2003)
b) On March 20, 2003, the Company entered into a debt-restructuring
agreement with Nortel Networks Limited and Nortel Networks de Mexico
(Nortel), as follows: payment in cash of 125.2 million dollars,
issuance by the Company of a promissory note for 24.2 million dollars
and the capitalization of debt of 178.5 million dollars in exchange
for 250,836,980 Series "N" shares of common stock (see note 18). As a
result of this transaction, Axtel recognized a gain on the forgiveness
of debt of approximately $1,858,000 pesos (See note 21). The
promissory note for 24.2 million dollars was paid in December 2003.
(See note 14 d). After this transaction and in accordance with the
debt restructuring agreement all new purchases from Nortel should be
either secured through the issuance of a letter of credit or prepaid
(See note 8).
c) On May 2003 the Company entered in an agreement with Bell Canada
International (BCI) to terminate all of the rights and obligations of
both parties under the technical services agreement and a secondment
agreement dated as of October 6, 1997, including Axtel's obligations
to pay fees in the future based on the Company's financial performance
and in full settlement of any and all claims that BCI may have against
Axtel arising out of or related to the above mentioned agreements. The
termination agreement was for 15,585,000 dollars, which is included in
other income (expense) line item; originally payable as follows:
2,734,000 dollars at closing of the agreement, 1,129,000 dollars in
June 2003, 1,152,000 dollars in September 2003, 1,175,000 dollars in
December 2003 and 9,395,000 dollars, maturing thirty seven (37) months
after closing payable without interest and in a single installment. As
of December 31, 2002 the long term portion was discounted at an
interest rate of 10%. On December 17, 2003 this debt was paid (Se note
14d).
d) On December 16, 2003, the Company completed an offering of senior
unsecured notes, for a value of US $175 Millions (1,996 million pesos)
maturing on December 15, 2013. Interest on the Notes are payable
semiannually at a annual rate of 11%, beginning on June 15, 2004.
The indenture of the notes contain certain affirmative and negative
covenants.
With the proceeds of the offering the Company prepaid in full the Banorte
facility, the Nortel promissory note and the BCI Indebtedness.
16
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2003)
Each of the Company's consolidated subsidiaries, Instalaciones y
Contrataciones, S.A. de C.V. (Instalaciones), Impulsora e Inmobiliaria
Regional, S.A. de C.V. (Impulsora) and Servicios Axtel, S.A. de C.V.
(Servicios), are guaranteeing the notes with unconditional guaranties that
are unsecured. The subsidiaries have no revenues or cash flows other than
those derived from their parent. The following tables show certain
condensed financial information of the subsidiaries' financial statements
after elimination of inter-company amounts, assets, revenues and cash flows
which are not material to the consolidated group:
[Enlarge/Download Table]
As of and for the year ended December 31, 2003
Instalaciones Impulsora Servicios Combined
Guarantors
Total assets 6,655 11,184 92,738 110,577
==================== =============== ============= =================
Stockholders' equity 3,029 1,817 17,755 22,601
==================== =============== ============= =================
Service revenues 44,622 1,960 720,593 767,175
==================== =============== ============= =================
Income (loss) before taxes (483) 216 (1,779) (2,046)
==================== =============== ============= =================
Resource provides (used) by operating
activities (568) 657 (1,044) (955)
==================== =============== ============= =================
(1) Includes inter-company balances amounting to $81,704
As of and for the year ended December 31, 2002
Instalaciones Impulsora Servicios Combined
Guarantors
Total assets 5,233 12,122 95,164 112,519
==================== =============== ============== =================
Stockholders' equity 2,948 468 22,135 25,551
==================== =============== ============== =================
Service revenues 36,068 2,052 773,251 811,371
==================== =============== ============== =================
Income (loss) before taxes (1,763) 266 (26,732) (28,269)
==================== =============== ============== =================
Resource provides (used) by operating
activities (1,922) 1,300 (40,324) (40,946)
==================== =============== ============== =================
(1) Includes inter-company balances amounting to $83,519.
17
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2003)
Some of the debt agreements that remain outstanding establish certain
covenants, the most important of which refer to limitations on dividend
payments and comprehensive insurance on pledged assets, among others. At
December 31, 2003, the Company was in compliance in all its covenants and
obligations.
(15) Seniority premiums
The cost of the obligations and other elements of seniority premiums
mentioned in note 2(i) have been determined based on independent actuarial
calculations as of December 31, 2003 and 2002.
The components of the net periodic cost for the years ended December 31,
2003, 2002 and 2001 are the following:
2003 2002 2001
---- ---- ----
Net periodic cost
Labor cost $ 576 175 720
Financial cost 62 41 38
Amortization of transition obligation 1 1 (13)
Variances in assumptions and experience
adjustments 16 - 12
Inflationary effect 26 14 33
------- -------- --------
Net periodic cost $ 681 231 790
======= ======== ========
The actuarial present value of plan benefit obligations is as follows:
2003 2002
---- ----
Present benefit obligation $ 2,064 1,271
-------- -----------
Present value of benefits attributable to
future salary increases 70
127
-------- -----------
Projected benefit obligation (PBO) 2,191 1,341
Items pending amortization:
Variances in assumptions and
experience adjustments (407) -
Transition liability (8) (9)
Minimum additional liability 224 -
-------- -----------
Net projected liability recognized
on the balance sheets
$ 2,000 1,332
======== ===========
18
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2003)
The most significant assumptions used in the determination of the net
periodic cost of plan are the following:
2003 2002
---- ----
Discount rate 4.00% 4.00%
=========== ===========
Rate of increase in future salary levels 1.00% 1.00%
=========== ===========
Estimated inflation for the period 4.00% 5.70%
=========== ===========
Amortization period of the transition liability 11 years 11 years
=========== ===========
(16) Income tax (IT), tax on assets (TA), employee statutory profit sharing
(ESPS) and tax loss carryforwards
The parent company and its subsidiaries file their tax returns on a
stand-alone basis, and the consolidated financial statements show the
aggregate of the amounts determined by each company.
In accordance with the current tax legislation, companies must pay either
the IT or TA, whichever is greater. Both taxes recognize the effects of
inflation, in a manner different from MexGAAP.
The TA law establishes a 1.8% tax on assets adjusted for inflation in the
case of inventory, property, systems and equipment and deducted from
certain liabilities. TA levied in excess of IT for the year can be
recovered in the succeeding ten years, updated for inflation, provided that
in any of such years IT exceeds TA.
A new Income Tax Law was enacted on January 1, 2002. This law provides for
a 1% annual reduction in the income tax rate beginning in 2003, so that the
income tax rate would be 32% in 2005. As a result of these changes, during
the years ended December 31, 2003, 2002 and 2001 the Company recognized an
increase (decrease) in net deferred tax assets of $(19,320) $15,603 and
$(89,833) in 2003, 2002 and 2001, respectively.
19
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2003)
The tax (expense) benefit attributable to the income (loss) before IT
differed from the amount computed by applying the tax rate of 34% in 2003
and 35% in 2002 and 2001 to pretax loss, as a result of the items mentioned
below:
[Enlarge/Download Table]
2003 2002 2001
---- ---- ----
Computed "expected" income tax
(expense) benefit $ (472,895) 368,375 260,747
Increase (decrease) resulting from:
Effects of inflation, net 3,786 (26,011) (9,584)
Increase in beginning-of-the-year balance of the
valuation allowance for deferred tax assets allocated
to income tax expense (8,623) (1,078) (205)
Adjustments to deferred tax assets and liabilities for
enacted changes in tax rates (19,320) 15,603 (89,833)
Non-deductible expenses (1,600) (41,264) (5,584)
Other 5,201 (73,908) (23,245)
-------------- -------------- ---------------
Deferred income tax (expense) benefit $ (493,451) 241,717 132,296
============== ============== ===============
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as of
December 31, 2003 and 2002 are presented below:
[Download Table]
2003 2002
---- ----
Deferred tax assets:
Net operating loss carryforwards $ 499,499 1,089,941
Allowance for doubtful accounts and write-off 173,430 161,163
Accrued liabilities 22,189 18,539
Tax on assets 8,596 -
Accrued vacations 2,455 -
----------- -----------
Total gross deferred tax assets 706,169 1,269,643
Less valuation allowance 11,053 2,430
----------- -----------
Net deferred tax assets 695,116 1,267,213
----------- -----------
Deferred tax liabilities:
Property, systems and equipment 215,893 262,970
Telephone concession rights 153,027 151,451
Pre-operating expenses 65,032 76,396
Other assets 1,850 32,930
Inventories 7,328 7,323
----------- -----------
Total deferred tax liabilities 443,130 531,070
----------- -----------
Deferred tax assets, net $ 251,986 736,143
=========== ===========
20
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2003)
The Company assesses realizability of deferred tax assets based on the
existence of taxable temporary differences expected to reverse in the same
periods as the realization of deductible temporary differences or in later
periods in which the tax loss carryforwards can be applied and when, in the
opinion of Company management, there will be enough future taxable income
for the realization of such deductible temporary differences. However, the
amounts of realizable deferred tax assets could be reduced if the taxable
income is lower. As of December 31, 2003, a deferred tax asset valuation
allowance was established for tax loss carryforwards from the subsidiaries
and TA from the Company. No deferred tax asset valuation allowance was
established for AXTEL tax loss carryforwards, since, in the opinion of
Company management, there is a high probability that there will be enough
future taxable income to realize the net deferred tax assets.
According to the IT law, the tax loss of a year, restated by inflation, may
be carried to the succeeding ten years. The tax losses have no effect on
ESPS. As of December 31, 2003, the tax loss carryforwards expire as
follows:
Inflation-adjusted
tax loss
Year Carryforwards
---- -------------
2009 $ 564
2010 929,090
2011 210,256
2012 421,025
-------------------
$ 1,560,935
===================
Effective January 1, 2002, the Company transferred all of its personnel to
a subsidiary Company, which eliminated any deferred ESPS liability.
(17) Other long-term accounts payable
As of December 31, 2003 and 2002 the long-term accounts payable consist of
the following: 2003 2002
Guarantee deposits (note 22a) $ - 139,411
Interest payable (note 22a) - 16,636
Long-term trade payables 2,172 55,438
---------------- ----------------
$ 2,172 211,485
================ ================
As of December 31, 2003, the guarantee deposits and interest payable
corresponding to Spectra Site Communications Mexico, S. de R.L. de C.V.
(see note 22a) were presented as other current accounts payable in
accordance with the terms and clauses agreed in the contract.
21
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2003)
(18) Stockholders' equity
The main characteristics of stockholders' equity are described below:
(a) Common stock structure
The main characteristics and issuances of common stock for 2003, 2002
and 2001 are described below:
[Enlarge/Download Table]
Amount Additional
(thousand Amount (nominal Amount paid-in capital
Date dollars) pesos) (constant pesos) (constant pesos)
---- -------- ------ ---------------------------------
April 30, 2001 25,000 $ 238,450 271,570 (1,805)
August 31, 2001 45,000 429,210 484,211 (19,882)
October 31, 2001 10,000 95,380 105,999 (3,017)
December 31, 2001 15,000 143,070 157,259 (6,951)
---------------- ---- ---------------- ---------------- ----------------
Total 2001 95,000 $ 906,110 1,019,039 (31,655)
---------------- ---- ---------------- ---------------- ----------------
February 28, 2002 5,000 $ 47,690 51,941 (2,043)
---------------- ---- ---------------- ---------------- ----------------
Total 2002 5,000 $ 47,690 51,941 (2,043)
---------------- ---- ---------------- ---------------- ----------------
February 28, 2003 35,336 $ 389,854 400,693 (7,925)
October 7, 2003 203,164 2,202,544 2,263,066 (6,890)
---------------- ---- ---------------- ---------------- ----------------
Total 2003 238,500 $ 2,592,398 2,663,759 (14,815)
================ ==== ================ ================ ================
At a General Stockholders' Meeting, held on February 28, 2003 the
stockholders approved the following:
1. Cancellation of the stockholders' outstanding contribution of 10 million
dollars according to the resolutions of the General Stockholders' Meeting
held on March 30, 2001, releasing the Company's stockholders from their
obligation to make this contribution to capital. Consequently, a 10
million-dollar decrease was approved of the variable portion of common
stock of the Company.
22
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2003)
2. Additional contribution to the variable portion of common stock for an
amount equivalent in Mexican pesos to 60 million dollars payable in
cash. Consequently, it was approved to issue 2,156,184,303 shares,
which will be distributed as follows: 1,041,437,018 Series A shares
Variable; 549,355,873 Series B shares Variable; 451,232,470 Series C
shares Variable and 114,158,942 Series N shares, all of them with no
par value. In addition the Shareholder's Meeting also resolved that
all Series "B" shares were to be exchanged for either Series "A"
shares, in the case of investors of Mexican nationality, or Series "C"
shares, in the case of investors of non-Mexican nationality.
3. Additional contribution to the variable portion of common stock of the
Company for up to the amount equivalent in Mexican pesos to 200
million dollars through the capitalization of liabilities payable to
Nortel (See note 14). Consequently, it was approved to issue
250,836,980 registered shares, with no par value and no right to vote.
All the shares were Series "N" shares of the Company's common stock in
favor of Nortel, that when issued, will represent 9.9% of the total
number of shares issued and paid of the Company's common stock.
In addition, the Company entered in a subscription agreement with Nortel
Networks Limited (Nortel), where Nortel agrees to subscribe for 250,836,980
nominative, non par value and non-voting Series "N" Shares for a total
subscription price of $1,984,961 ($178.5 million dollars). Such
subscription price shall be considered to be satisfied by means of the debt
capitalization as contemplated in the Restructuring Agreement (see note
14). Upon subscription of the shares, such shares represent 9.9% of the
total issued and outstanding shares of the common stock of the Corporation.
Also, the Company entered in a subscription agreements with LAIF X Sprl,
Tapazeca Sprl and New Hampshire Insurance Company whereby these entities
agreed to subscribe and pay for 115,068,613 Series "B" shares, and
426,843,722 Series "C" shares all of which are nominative, non par value
and voting shares, and 36,181,412 Series "N" shares which are nominative,
non par value and non-voting for a total subscription price of
US$16,086,577 dollars.
23
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2003)
The Company common stock consists of 1,253,233,984 Series "A" shares,
888,152,627 Series "C" shares and 392,320,255 series "N" shares.
Series "A" and "C" shares have the right to vote, and series "N"
shares have no par value and no voting rights. Series "A" is
restricted to Mexican individuals or corporations.
(b) Stockholders' equity restrictions
Stockholder contributions, restated as provided in the tax law,
totaling of $6,816,416 may be refunded to stockholders tax-free.
No dividends may be paid while the Company has a deficit.
(19) Rental, installation, service and other revenues
Revenues consist of the following:
2003 2002 2001
Measured service $ 603,445 633,984 531,757
Rents 745,905 594,730 614,625
Cellular 758,983 552,554 359,276
Long-distance 296,061 289,767 299,770
Interconnection 223,384 136,228 88,268
Internet 67,724 69,430 62,936
Activation 72,423 51,067 151,765
Value added services 48,286 44,311 29,888
Equipment sales 8,679 10,210 31,396
Other 94,625 70,131 73,178
------------ ------------- -------------
$ 2,919,515 2,452,412 2,242,859
============ ============= =============
(20) Special item
In order to improve productivity and comply with the strategic plans, the
Company restructured some of its operating areas during the years ended
December 31, 2003, 2002 and 2001. The costs of restructuring, comprising
compensation and benefits to personnel, were $10,417, $32,421 and $63,027,
respectively, and are presented as a special item in the statements of
operations for the years ended December 31, 2003, 2002 and 2001.
24
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2003)
(21) Other income (expenses), net
Other income (expenses) consist of the following:
[Enlarge/Download Table]
2003 2002 2001
----------------- --------------- -----------------
Gain on debt-restructuring $ 1,858,462 - -
Nortel prepayment 30,622 - -
Nortel withholding cancellation 29,777 - -
Banorte prepayment (79,109) - -
BCI termination agreement (120,214) - -
Other (5,082) (27,590) (30,908)
----------------- --------------- -----------------
Other income (expenses), net $ 1,714,456 (27,590) (30,908)
================= =============== =================
(22) Commitments and contingencies
As of December 31, 2003, there are the following commitments and
contingencies:
(a) On January 24, 2001 a contract was signed with Spectra Site
Communications Mexico, S. de R.L. de C.V. (Spectra Site) expiring on
January 24, 2004, to provide the Company with services to locate,
construct, set up and sell sites within the Mexican territory. As part
of the operation, the Company agreed to build 650 sites, subject to
approval and acceptance by Spectra Site and, in turn, sell or lease
them under an operating lease plan.
On January 24, 2001, the Company received 13 million dollars from
Spectra Site to secure the acquisition of the 650 sites at 20,000
dollars per site. These funds are not subject to restriction per the
contract for use and destination. However, the contract provides for
the payment of interest at a Prime rate in favor of Spectra Site on
the amount corresponding to the number of sites that as of June 24,
2004 had not been sold or leased in accordance with the terms of the
contract. As of December 31, 2003, the Company has recognized a
liability to cover such interest for $24,267, presenting it as a
short-term liability in the balance sheet as of December 31, 2003.
As of December 31, 2003, the Company has completed the construction of
206 sites pending the approval and acceptance of Spectra Site.
25
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2003)
During 2002, Spectra Site Communications filed an Ordinary Mercantile
Trial against the Company before the Thirtieth Civil Court of Mexico
City, demanding the refund of the guarantee deposit mentioned above,
plus interest and trial-related expenses. The Company countersued
Spectra Site for unilateral rescission of the contract. As of December
31, 2003, the trial is at a stage where evidence is being shown, and
thus it is impossible to determine whether there is a contingency for
the Company.
(b) The Company is involved in a number of lawsuits and claims arising in
the normal course of business. It is expected that the final outcome
of these matters will not have significant adverse effects on the
Company's financial position and results of operations.
(c) In compliance with commitments made in the acquisition of concession
rights, the Company has granted surety bonds to the Federal Treasury
and to the Ministry of Communication and Transportation of $30,172 and
to other service providers for $41,397.
(d) The concessions granted by the Ministry of Communications and
Transportation (SCT), mentioned in note 1, establish certain
obligations of the Company, including, but not limited to: (i) filing
annual reports with the SCT, including identifying main shareholders
of the Company, (ii) reporting any increase in common stock, (iii)
providing continuous services with certain technical specifications,
(iv) filing monthly reports about disruptions, (v) filing the
services' tariff, and (vi) providing a bond.
(e) The Company leases some equipment and facilities under operating
leases. Some of these leases have renewal clauses. Lease expense for
2003, 2002 and 2001 was $195,038, $210,655 and $261,714, respectively.
The annual payments under these leases as of December 31, 2003 are as
follows:
[Download Table]
Contracts in:
-----------------------------------------------------------------
Pesos Dollars UDIS
(thousands) (Investment units)
---------------- --------------- ---------------------------
2004 $ 54,471 7,164 54,833
2005 47,508 4,630 54,833
2006 34,411 3,448 54,833
2007 29,113 2,920 54,833
2008 23,841 2,644 54,833
Thereafter 47,784 13,572 45,694
--------------
---------------- ---------------
$ 237,128 34,378 319,859
================ =============== ==============
26
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2003)
(f) As of December 31, 2003, the Company has placed purchase orders which
are pending delivery from suppliers for approximately $625,115.
(g) The Company has certain supply contracts establishing commitments to
purchase an established minimum amount per year. These contracts are
for a term of five years
(h) Those arising from labor obligations mentioned in note 2(i).
(23) New accounting pronouncements
Financial instruments with characteristics of liabilities, equity, or both
In May 2003, the Mexican Institute of Public Accountants issued Bulletin
C-12, "Financial Instruments with Characteristics of Liabilities, Equity,
or Both." Bulletin C-12, is effective for fiscal years beginning after
December 31, 2003, although earlier application is permitted. Bulletin C-12
puts together regulations contained in other bulletins related to issuance
of complex financial instruments, and adds regulations necessary for a
comprehensive resolution of general problems. Therefore, Bulletin C-12
defines the basic differences between liabilities and equity; establishes
rules for the classification and valuation of the liability and equity
components of combined financial instruments, upon initial recognition; and
establishes rules for disclosure of combined financial instruments. Under
Bulletin C-12, financial instruments should be classified as liabilities or
equity at the beginning of the year of adoption, and comparative financial
information for prior years should not be restated, nor a
cumulative-effect-type adjustment recognized in the year of adoption.
The Company estimates that the adoption of the new Bulletin C-12 will not
have a material effect on its financial position or results of operations.
(24) Differences between Mexican and United States accounting principles
The consolidated financial statements of the Company are prepared according
to accounting principles generally accepted in Mexico (Mexican GAAP), which
differ in certain significant respects from those applicable in the United
States (US GAAP).
The consolidated financial statements under Mexican GAAP include the
effects of inflation provided for by Bulletin B-10, whereas the financial
statements prepared under US GAAP are presented on a historical cost basis.
The following reconciliation does not eliminate the inflation adjustments
for Mexican GAAP, since they represent an integral measurement of the
effects of the changes in the price levels in the Mexican economy and, as
such, are considered a more meaningful presentation than the financial
reports based on historic costs for book purposes for Mexico and the United
States.
27
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2003)
The main differences between Mexican GAAP and US GAAP and their effect on
consolidated net loss and stockholders' equity as of December 31, 2003,
2002 and 2001 is presented below, with an explanation of the adjustments.
[Enlarge/Download Table]
Year ended December 31,
-----------------------------------------------------
2003 2002 2001
-----------------------------------------------------
Net income (loss) reported under Mexican GAAP .............. $ 897,415 (810,783) (584,716)
--------------- ---------------- --------------
Approximated US GAAP adjustments
1. Deferred income taxes (see 24a).......................... 484,854 (241,717) (132,296)
2. Deferred employee statutory profit sharing (see 24a) .... - - 90,853
3. Amortization of start up cost (see 24c).................. 35,386 35,771 35,810
4. Start up costs of the year (see 24c)..................... - - (32)
5. Allowance for post retirement benefits (see 24d)......... 188 11,045 (10,334)
6. Revenue recognition (see 24b)............................ 28,912 61,026 (27,994)
7. Deferred financing cost amortization (see 24f)........... 13,286 (2,204) (4,418)
8. Accrued vacations (see 24d).............................. - 1,221 (2,412)
9. Capitalized interest (see 24e)........................... (988) - 25,077
10. Gain on the forgiveness of debt (see 24g)................ 1,280,676 - -
--------------- ---------------- --------------
Total approximate US GAAP adjustments....................... 1,842,314 (134,858) (25,746)
--------------- ---------------- --------------
Approximate net income (loss) under US GAAP................. $ 2,739,729 (945,641) (610,462)
=============== ================ ==============
Year ended December 31,
-----------------------------------
2003 2002
-----------------------------------
Total stockholders' equity reported under Mexican GAAP...... $ 5,382,110 1,837,103
--------------- ----------------
Approximate US GAAP adjustments
1. Deferred income taxes (see 24a).......................... (251,986) (736,143)
2. Start up costs (see 24c)................................c (200,128) (235,514)
3. Revenue recognition (see 24b)............................ (73,369) (102,281)
4. Allowance for post retirement benefits (see 24d)......... (27,184) (27,372)
5. Deferred financing cost amortization (see 24f)........... - (13,286)
6. Accrued vacations (see 24d).............................. - (2,050)
7. Capitalized interest (see 24e)........................... 24,753 25,741
--------------- ----------------
Total approximate US GAAP adjustments....................... (527,914) (1,090,905)
--------------- ----------------
Total approximate stockholders' equity under US GAAP........ $ 4,854,196 746,198
=============== ================
28
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2003)
The term "SFAS" as used in this document refers to Statement of Financial
Accounting Standards.
(a) Deferred income taxes (IT) and employee's statutory profit sharing
("ESPS")
Deferred IT are accounted for under the asset and liability method.
All of the Company's pretax income (loss) and reported income tax
(expense) benefit is derived from domestic operations.
Deferred ESPS is recognized only for timing differences arising from
the reconciliation of book income to income for profit sharing
purposes, which can be reasonably presumed to result in a future
liability or benefit, with no indication that the liabilities or
benefits will not materialize.
For US GAAP purposes, the Company accounts for income taxes and
employee statutory profit sharing under SFAS 109 "Accounting for
Income Taxes," which uses the asset and liability method to account
for deferred tax assets and liabilities. Under the asset and liability
method, deferred tax assets and liabilities are recognized for the
future tax consequences of "temporary differences," by applying the
enacted statutory tax rates applicable to future years to the
differences between the book amounts of the financial statements and
the tax bases of existing assets and liabilities and the tax loss
carryforwards. The amount of deferred income taxes charged or credited
to the operations in each period, for US GAAP purposes, is based on
the difference between the beginning and ending balances of the
deferred tax assets and liabilities for each period, expressed in
nominal pesos. The deferred tax effect of a change in the tax rate is
recognized in the results of operations of the period in which the
change is enacted.
29
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2003)
The tax (expense) benefit attributable to the income (loss) before IT
differed from the amount computed by applying the tax rate of 34% in
2003 and 35% in 2002 and 2001 to pretax loss, as a result of the items
mentioned below:
[Enlarge/Download Table]
2003 2002 2001
---- ---- ----
Computed "expected" income tax
(expense) benefit $ (931,508) 330,975 213,662
Increase (decrease) resulting from:
Effects of inflation, net 3,786 (26,011) (9,584)
Increase in beginning-of-the-year balance of
the valuation allowance for deferred tax
assets allocated to income tax expense 492,398 (188,906) (132,649)
Gain on the forgiveness of debt 435,430 - -
Adjustments to deferred tax assets and
liabilities for enacted changes in tax rates (19,320) 15,603 (89,833)
Non-deductible expenses (1,600) (41,264) (5,584)
Other 20,814 (90,397) 23,988
-------------- -------------- ---------------
Deferred income tax (expense) benefit $ - - -
============== ============== ===============
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities as of December 31,
2003 and 2002 for US GAAP are presented below:
[Download Table]
2003 2002
Deferred tax assets:
Net operating loss carryforwards............... $ 499,499 1,089,941
Allowance for doubtful accounts................ 173,430 161,163
Deferred revenues.............................. 24,945 34,776
Seniority premium and allowance for
post retirement benefits.................... 8,698 9,185
Accrued vacations.............................. 2,445 656
Accrued liabilities............................ 22,189 18,539
Tax on assets.................................. 8,596 -
---------------- --------------
Total gross deferred tax assets........ 739,802 1,314,260
Less valuation allowance....................... (355,633) (856,654)
---------------- --------------
Net deferred tax assets................ 384,169 457,606
---------------- --------------
30
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2003)
[Enlarge/Download Table]
Deferred tax liabilities:
Property, systems and equipment ..................... 223,814 270,461
Telephone concession rights.......................... 153,027 151,451
Other assets......................................... - 28,371
Inventories.......................................... 7,328 7,323
---------------- --------------
Total deferred tax liabilities............... 384,169 457,606
---------------- --------------
Net deferred tax liabilities under US GAAP - -
Less net deferred tax assets recognized
under Mexican GAAP.............................. 251,986 736,143
---------------- --------------
US GAAP adjustment to stockholders' equity........... $ (251,986) (736,143)
================ ==============
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary
differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Since the
Company has not generated taxable income in its three years of
operations, a deferred tax asset valuation allowance of $355,633 and
$856,654 as of December 31, 2003 and 2002, respectively, was recorded
for US GAAP. This represents a (decrease) and increase in the
valuation allowance of $(501,021) and $195,322 for the years ended
December 31, 2003 and December 31, 2002, respectively.
31
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2003)
(b) Revenue recognition
On December 3, 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" (SAB 101). This bulletin
summarizes the point of view of the SEC in the recognition of revenues
in the financial statements according to US GAAP. The SEC concluded
that only when all the following conditions are met is revenue
recognition appropriate:
a) there is persuasive evidence of an agreement; b) the delivery was
made or the services rendered; c) the sales price to the purchaser is
fixed or determinable; and d) collection is reasonable assured.
SAB 101, specifically in Topic 13A, Question 5, discusses the
situation of recognizing as revenue certain non-refundable cash items.
SAB 101 provides that the seller should not recognize non-refundable
charges generated in certain transactions when there is continuous
involvement by the vendor.
One of the examples provided by SAB 101 is activation revenues from
telecommunication services. The SAB concludes that unless the charge
for the activation service is an exchange for products delivered or
services rendered that represent the culmination of a separate
revenue-generating process, the deferral method of revenue is
appropriate.
Based on the provisions and interpretations of SAB 101, for purposes
of the US GAAP reconciliation, the Company has deferred the activation
revenues over a three-year period starting in the month such charge is
originated. This period was determined based on Company experience.
The net effect of the deferral and amortization is presented in the
above US GAAP reconciliation.
(c) Start-up costs
In April 1998, the AICPA issued Statement of Position 98-5, "Report of
Start-up Costs" (SOP 98-5), which requires start-up costs, including
organization costs, to be expensed as incurred. SOP 98-5 is effective,
except for certain investment companies, for fiscal years beginning
after December 15, 1998. Under Mexican GAAP, this type of costs were
recognized when incurred as a deferred asset and amortized over a
period of 10 years. The Company has reversed the amortization of
$35,386, $35,771 and $35,810 in 2003, 2002 and 2001, as shown in the
US GAAP reconciliation, and has reduced stockholders' equity by
$200,128 and $235,514 to write off the unamortized balance at each
year end.
32
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2003)
(d) Other employee benefits
Vacation
For years ended December 31, 2002 and before, under Mexican GAAP the
vacation expense was recognized when taken rather than during the
period the employees earn it. In order to comply with SFAS 43, for the
years ended December 31, 2002 and 2001, the Company recorded an
increase or decrease in net income of $1,221, and ($2,412),
respectively. Starting on January 2003, Mexican GAAP requires the
recognition of vacation expense when earn (see note 3a).
Severance
Under Mexican GAAP (Bulletin D-3), severance payments should be
recognized in earnings in the period in which they are paid, unless
such payments are used by an entity as a substitution of pension
benefits, in which case, they should be considered as a pension plan.
Under US GAAP, post-employment benefits for former or inactive
employees, excluding retirement benefits, are accounted for under the
provisions of SFAS 112, which requires recognition of certain
benefits, including severance, over an employee's service life. For
the years ended December 31, 2003, 2002 and 2001 the Company recorded
an increase or decrease in net income of $188, $11,045 and $(10,334),
respectively, and recognized an accrual amounting to $27,184 and
$27,372 as of December 31, 2003 and 2002, respectively.
(e) Capitalized interest
Under Mexican GAAP, the Company capitalizes interest on property,
systems and equipment under construction. The amount of financing cost
to be capitalized is comprehensively measured in order to include
properly the effects of inflation. Therefore, the amount capitalized
includes: (i) the interest cost of the debt incurred, plus (ii) any
foreign currency fluctuations that result from the related debt, and
less (iii) the monetary position result recognized on the related
debt. Under US GAAP, only interest is considered an additional cost of
constructed assets to be capitalized and depreciated over the lives of
the related assets.
The US GAAP reconciliation removes the foreign currency gain or loss
and the monetary position result capitalized for Mexican GAAP derived
from borrowings denominated in foreign currency.
(f) Deferred financing cost amortization
Under Mexican GAAP, the Company amortizes deferred financing cost
under the straight-line method over the life of the related debt. For
US GAAP, this cost is amortized on the interest method over the life
of the related debt.
33
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2003)
(g) Gain on the forgiveness of debt
As disclosed in note 14 to the financial statements, on March 20,
2003, the Company entered into a debt-restructuring agreement with
Nortel Networks Limited and Nortel Networks de Mexico (Nortel). The
Company paid Nortel $125.2 million dollars in cash, issued a new note
for $24.2 million dollar and capitalized 178.5 million dollars in
exchange for 250,836,980 Series "N" shares of common stock to settled
all the debt outstanding with Nortel as of the date of the
transaction.
For US GAAP, and as required by SFAS 15 "Accounting for Debtors and
Creditors for Troubled Debt Restructurings", the equity provided by
the Company to Nortel was recorded at the fair market value resulting
in a net gain on the forgiveness of the debt of approximately
$3,139,138.
(h) Supplemental cash flow information under US GAAP
Under Mexican GAAP, statements of changes in financial position
identify the sources and uses of resources based on the differences
between beginning and ending consolidated financial statement balances
in constant pesos. Monetary position results and unrealized foreign
exchange results are treated as cash items in the determination of
resources provided by operations. Under US GAAP (SFAS 95), statements
of cash flows present only cash items and exclude non-cash items. SFAS
95 does not provide guidance with respect to inflation-adjusted
financial statements. The differences between Mexican GAAP and US GAAP
in the amounts reported are mainly due to: (i) elimination of
inflationary effects of monetary assets and liabilities from financing
and investing activities against the corresponding monetary position
result in operating activities, (ii) elimination of foreign exchange
results from financing and investing activities against the
corresponding unrealized foreign exchange result included in operating
activities, and (iii) the recognition in operating, financing and
investing activities of the US GAAP adjustments.
The following table summarizes the cash flow items as required under
SFAS 95 provided by operating, financing and investing activities,
giving effect to the US GAAP adjustments, excluding the effects of
inflation required by Bulletin B-10. The following information is
presented in thousands of pesos on a historical peso basis and is not
presented in pesos of constant purchasing power:
[Enlarge/Download Table]
Years Ended December 31,
-----------------------------------------------
2003 2002 2001
---------------- ------------------------------
Net cash (used in) provided by operating activities........... (11,160) 668,419 (363,561)
Net cash provided by (used in) financing activities........... 1,038,913 (210,035) 993,751
Net cash used in investing activities......................... (329,221) (265,855) (635,081)
---------------- ------------------------------
33
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2003)
Net cash flows from operating activities reflect cash payments for
interest and income taxes as follows:
Years Ended December31,
---------------------------------------------
2003 2002 2001
-------------- --------------- --------------
Interest paid......... 463,711 103,958 318,390
Income taxes paid..... 8,597 - -
-------------- --------------- --------------
During the years ended December 31, 2003, 2002 and 2001, the Company
acquired property, systems and equipment through notes payable
financing amounting to approximately $119,655, $243,523 and $785,953,
respectively.
(i) Condensed financial information under US GAAP
The following table presents consolidated condensed statements of
operations for the years ended December 31, 2003, 2002 and 2001,
prepared under US GAAP, and includes all differences described in this
note as well as certain other reclassifications required for purposes
of US GAAP:
[Enlarge/Download Table]
Years Ended December 31,
----------------------------------------------
Statements of operations 2003 2002 2001
----------------------------------------------
Revenues...................................................... 2,944,503 2,513,438 2,214,865
Operating income (loss)....................................... 170,933 (123,726) (570,766)
Comprehensive financing result................................ (407,322) (761,904) (64,593)
Other income (expenses) income, net........................... 2,984,715 (60,011) 24,897
Tax on assets................................................. (8,597) - -
----------------------------------------------
Consolidated net income (loss)................................ 2,739,729 (945,641) (610,462)
==============================================
The following table presents consolidated condensed balance sheets at
December 31, 2003 and 2002, prepared under US GAAP, including all
differences and reclassifications as compared to Mexican GAAP
described in this note 24:
[Enlarge/Download Table]
At December 31,
--------------------------------------
Balance sheets 2003 2002
----------------- ------------------
Current assets.............................................. 1,660,247 730,611
Property, systems and equipment............................. 5,217,114 5,530,539
Deferred charges............................................ 824,696 864,124
----------------- ------------------
Total assets......................................... 7,702,057 7,125,274
----------------- ------------------
Current liabilities 719,149 1,008,741
Long-term debt.............................................. 2,023,987 5,027,865
Other non-current liabilities............................... 104,725 342,470
----------------- ------------------
Total liabilities.................................... 2,847,861 6,379,076
----------------- ------------------
Stockholders' equity................................. 4,854,196 746,198
----------------- ------------------
Total liabilities and stockholders' equity........... 7,702,057 7,125,274
----------------- ------------------
34
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2003)
(j) Fair value of financial instruments
The carrying amount of cash, trade accounts receivable, other accounts
receivable, trade accounts payable, other accounts payable and accrued
expenses and short-term debt, approximates fair value because of the
short-term maturity of these financial assets and liabilities.
The carrying value of the Company's long-term debt and the related
fair value based on quoted market prices for the same or similar
instruments or on current rates offered to the Company for debt of the
same remaining maturities (or determined by discounting future cash
flows using borrowing rates currently available to the Company) at
December 31, 2003 is summarized as follows:
Carrying amount Estimated fair value
--------------------------------------------
Long-term debt....... 175,000 59,978
--------------------------------------------
(k) Segment information
The Company believes that it operates in one business segment.
Management does review the business as consisting of two revenues
information streams (Mass market and Business Market), however it is
not possible to attribute direct or indirect costs to the individual
streams other than selling expenses. Additionally management believes
that the two revenue streams are so similar that they can be expected
to have essentially the same economic characteristics.
(l) Recently Issued Accounting Standards
In December 2003, the FASB issued FASB Interpretation No. 46 (revised
December 2003), Consolidation of Variable Interest Entities, which
addresses how a business enterprise should evaluate whether it has a
controlling financial interest in an entity through means other than
voting rights and accordingly should consolidate the entity. FIN 46R
replaces FASB Interpretation No. 46 Consolidation of Variable Interest
Entities, which was issued in January 2003. The Company will be
required to apply FIN 46R to variable interests in VIEs created after
December 31, 2003. For variable interests in VIEs created before
January 1, 2004, the Interpretation will be applied beginning on
January 1, 2005. For any VIEs that must be consolidated under FIN 46R
that were created before January 1, 2004, the assets, liabilities and
noncontrolling interests of the VIE initially would be measured at
their carrying amounts, with any differences between the net amount
added to the balance sheet and any previously recognized interest
begin recognized as the cumulative effect of an accounting change. If
determining the carrying amounts is not practicable, fair value at the
date FIN 46R first applies may be used to measure the assets,
liabilities and noncontrolling interest of the VIE.
35
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of December 31, 2003)
FASB Statements No. 150, Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity, was issued in May
2003. This Statement establishes standards for the classification and
measurement of certain financial instruments with characteristics of
both liabilities and equity. The Statement also includes required
disclosures for financial instruments within its scope. For the
Company, the Statement was effective for instruments entered into or
modified after May 31, 2003 and otherwise will be effective as of
January 1, 2004, except for mandatory redeemable financial
instruments. For certain mandatory redeemable financial instruments,
the Statement will be effective for the Company on January 1, 2005.
The effective date has been deferred indefinitely for certain types of
mandatory redeemable financial instruments. The Company currently does
not have any financial instruments that are within the scope of this
Statement.
$175,000,000
AXTEL, S.A. DE C.V.
11% SENIOR NOTES DUE 2013
[GRAPHIC OMITTED][GRAPHIC OMITTED]
_____________
PROSPECTUS
, 2004
______________
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Mexican law, when an officer or director of a corporation acts
within the scope of his authority, the corporation will answer for any resulting
liabilities or expenses. In addition, we have purchased directors' and officers'
liability insurance for our directors and executive officers.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The exhibits and financial statement schedules filed as a part of this
Registration Statement are as follows:
List of Exhibits:
EXHIBIT NUMBER EXHIBIT
3.1* Corporate By-laws (Estatutos Sociales) of Axtel, S.A. de C.V.
("Axtel"), together with an English translation.
4.1* Indenture, dated as of December 16, 2003, among Axtel, the
Subsidiary Guarantors named therein and The Bank of New York,
as Trustee, governing Axtel's $175,000,000 aggregate principal
amount of 11% Senior Notes due 2013.
4.2* Specimen Global Note representing Axtel's 11% Senior Notes due
2013.
4.3* Form of Specimen Global Note representing the exchange notes.
4.4* Registration Rights Agreement, dated as of December 16, 2003
among Axtel, the Subsidiary Guarantors named therein and
Credit Suisse First Boston LLC.
5.1** Opinion of Cahill Gordon & Reindel LLP as to the validity of
the exchange notes under New York law.
5.2** Opinion of D&A Morales y Asociados, S.C. as to the validity of
the exchange notes under Mexican law.
9.1* Unanimous Shareholders Agreement, dated as of October 6, 1997,
among Bell Canada International (Mexico Telecom) Limited,
Telinor Telefonia, S.A. de C.V. ("Telinor"), Worldtel Mexico
Telecom Ltd. and Axtel (formerly known as Telefonia
Inalambrica Del Norte, S.A. de C.V.)
9.2* Joinder Agreement, dated as of March 20, 2003, among Axtel and
Nortel Networks Limited
10.1* 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.
10.2* Amendment, dated December 19, 2002, of concession title
granted by the Ministry in favor of Axtel, dated June 17,
1996, together with an English translation of such amendment
10.3* Concession title granted by the Ministry in favor of Axtel,
dated October 7, 1998, together with an English translation of
such concession title.
10.4* Concession title granted by the Ministry in favor of Axtel,
dated April 1, 1998, together with an English translation of
such concession title.
10.5* Concession title granted by the Ministry in favor of Axtel,
dated June 4, 1998, together with an English translation of
such concession title.
10.6* Engagement Letter, dated as of May 15, 2002, by and among
Axtel and The Blackstone Group L.P.
10.7* Restructuring Agreement, dated as of March 20, 2003 by and
among Axtel, Nortel Networks Limited, Nortel Networks de
Mexico, S.A. de C.V. and Toronto Dominion (Texas), Inc.
10.8* Assignment and Assumption Agreement, dated as of December 23,
2003, among Nortel Networks Limited, Nortel Networks de
Mexico, S.A. de C.V., Nortel Networks UK Limited, Airspan
Communications Limited and Axtel.
10.9 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.).
12.1* Statement regarding computation of ratio of earnings to fixed
charges (according to Mexican GAAP).
12.2* Statement regarding computation of ratio of earnings to fixed
charges (according to U.S. GAAP).
21.1* List of Subsidiaries of Axtel.
23.1** Consent of Cahill Gordon & Reindel LLP (contained in Exhibit
5.1).
23.2** Consent of D&A Morales y Asociados, S.C. (contained in Exhibit
5.2).
23.3* Consent of KPMG Cardenas Dosal, S.C., relating to the audited
financial statements of Axtel.
24.1* Signed copies of the powers of attorney (included on the
signature pages of this Registration Statement).
25.1* Form T-1 Statement of Eligibility and Qualification of The
Bank of New York with respect to the exchange notes.
99.1* Form of Letter of Transmittal.
99.2* Form of Notice of Guaranteed Delivery.
99.3* Form of Instructions to Registered Holder and/or Book-Entry
Transfer Facility Participant from Beneficial Owner of Senior
Notes due 2013.
99.4* Form of Exchange Agent Agreement.
-2-
____________________________
* Filed herewith.
** To be filed by amendment
There are no Financial Statement Schedules included with this filing.
ITEM 22. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) that, for purposes of determining any liability under the
Securities Act of 1933, each filing of the registrant's annual report
pursuant to section 13(a) or section 15(d) of the Securities Exchange
Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to section 15(d) of the Securities
Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering
of such securities at that time shall be deemed to be the initial bona
fide offering thereof;
(2) insofar as indemnification for liabilities arising under
the Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the
opinion of the SEC such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act
and will governed by the final adjudication of such issue;
(3) to respond to requests for information that is
incorporated by reference into this prospectus pursuant to Items 4,
10(b), 11 or 13 of this Form F-4, within one business day of receipt of
such request, and to send the incorporated documents by first class
mail or other equally prompt means; and (ii) to arrange or provide for
a facility in the U.S. for purposes of responding to such requests. The
undertaking in subparagraph (i) above includes information contained in
documents filed subsequent to the effective date of the registration
statement through the date of responding to the request; and
(4) to supply by means of a post-effective amendment all
information concerning a transaction and the company being acquired
involved therein, that was not the subject of and included in the
registration statement when it became effective.
-3-
-2-
SIGNATURES OF AXTEL, S.A. de C.V.
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement on Form F-4 to be signed
on its behalf by the undersigned, thereunto duly authorized in Monterrey, Mexico
on April 5, 2004.
Axtel, S.A. de C.V.
By: /s/ Patricio Jimenez Barrera
----------------------------------
Name: Patricio Jimenez Barrera
Title: Chief Financial Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Tomas Milmo Santos and Patricio Jimenez
Barrera, his or her true and lawful attorney-in-fact and agent, with full power
of substitution and resubstitution for such person and in his or her name, place
and stead, in any and all capacities, to sign any and all amendments (including
post effective amendments) to this Registration Statement on Form F-4, and to
file the same with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent, full power and authority to do and perform each and
every act and thing requisite or necessary to be done in and about the premises,
as fully and to all intents and purposes as he or she might or could do in
person, hereby ratifying and confirming that said attorney-in-fact and agent, or
their substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement on Form F-4 has been signed by the following persons in
the capacities and on the dates indicated.
[Download Table]
SIGNATURE TITLE DATE
/s/ Tomas Milmo Santos Chairman, Series A Director and April 5, 2004
---------------------------- Chief Executive Officer
Tomas Milmo Santos
/s/ Patricio Jimenez Barrera Chief Financial Officer and April 5, 2004
---------------------------- Principal Accounting Officer
Patricio Jimenez Barrera
/s/ Tomas Milmo Zambrano Series A Director April 5, 2004
----------------------------
Tomas Milmo Zambrano
/s/ Alberto Santos de Hoyos Series A Director April 5, 2004
----------------------------
Alberto Santos de Hoyos
---------------------------- Series A Director April 5, 2004
Lorenzo Zambrano Trevino
/s/ Alberto Garza Santos Series A Director April 5, 2004
----------------------------
Alberto Garza Santos
/s/ Hector Medina Aguiar Series A Director April 5, 2004
----------------------------
Hector Medina Aguiar
---------------------------- Series C Director April 5, 2004
Everett J. Santos
/s/ Bertrand Guillot Series C Director April 5, 2004
----------------------------
Bertrand Guillot
---------------------------- Series C Director April 5, 2004
Iain Aitken
/s/ Lawrence H. Guffey Series C Director April 5, 2004
----------------------------
Lawrence H. Guffey
---------------------------- Series N Director April 5, 2004
Elias Makris
SIGNATURES OF IMPULSORA E INMOBILIARIA REGIONAL, S.A. de C.V.
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement on Form F-4 to be signed
on its behalf by the undersigned, thereunto duly authorized in Monterrey, Mexico
on April 5, 2004.
Impulsora e Inmobiliaria Regional, S.A. de C.V.
By: /s/ Patricio Jimenez Barrera
----------------------------------
Name: Patricio Jimenez Barrera
Title: Chief Financial Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Tomas Milmo Santos and Patricio Jimenez
Barrera, his or her true and lawful attorney-in-fact and agent, with full power
of substitution and resubstitution for such person and in his or her name, place
and stead, in any and all capacities, to sign any and all amendments (including
post effective amendments) to this Registration Statement on Form F-4, and to
file the same with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent, full power and authority to do and perform each and
every act and thing requisite or necessary to be done in and about the premises,
as fully and to all intents and purposes as he or she might or could do in
person, hereby ratifying and confirming that said attorney-in-fact and agent, or
their substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement on Form F-4 has been signed by the following persons in
the capacities and on the dates indicated.
[Enlarge/Download Table]
Signature Title Date
/s/ Tomas Milmo Santos Chief Executive Officer and Sole Director April 5, 2004
----------------------------
Tomas Milmo Santos
/s/ Patricio Jimenez Barrera Chief Financial Officer April 5, 2004
----------------------------
Patricio Jimenez Barrera
SIGNATURES OF INSTALACIONES Y CONTRATACIONES, S.A. de C.V.
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement on Form F-4 to be signed
on its behalf by the undersigned, thereunto duly authorized in Monterrey, Mexico
on April 5, 2004.
Instalaciones y Contrataciones, S.A. de C.V.
By: /s/ Patricio Jimenez Barrera
----------------------------------
Name: Patricio Jimenez Barrera
Title: Chief Financial Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Tomas Milmo Santos and Patricio Jimenez
Barrera, his or her true and lawful attorney-in-fact and agent, with full power
of substitution and resubstitution for such person and in his or her name, place
and stead, in any and all capacities, to sign any and all amendments (including
post effective amendments) to this Registration Statement on Form F-4, and to
file the same with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent, full power and authority to do and perform each and
every act and thing requisite or necessary to be done in and about the premises,
as fully and to all intents and purposes as he or she might or could do in
person, hereby ratifying and confirming that said attorney-in-fact and agent, or
their substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement on Form F-4 has been signed by the following persons in
the capacities and on the dates indicated.
[Enlarge/Download Table]
Signature Title Date
/s/ Tomas Milmo Santos Chief Executive Officer and Sole Director April 5, 2004
----------------------------
Tomas Milmo Santos
/s/ Patricio Jimenez Barrera Chief Financial Officer April 5, 2004
----------------------------
Patricio Jimenez Barrera
SIGNATURES OF SERVICIOS AXTEL, S.A. de C.V.
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement on Form F-4 to be signed
on its behalf by the undersigned, thereunto duly authorized in Monterrey, Mexico
on April 5, 2004.
Servicios Axtel, S.A. de C.V.
By: /s/ Patricio Jimenez Barrera
----------------------------------
Name: Patricio Jimenez Barrera
Title: Chief Financial Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Tomas Milmo Santos and Patricio Jimenez
Barrera, his or her true and lawful attorney-in-fact and agent, with full power
of substitution and resubstitution for such person and in his or her name, place
and stead, in any and all capacities, to sign any and all amendments (including
post effective amendments) to this Registration Statement on Form F-4, and to
file the same with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent, full power and authority to do and perform each and
every act and thing requisite or necessary to be done in and about the premises,
as fully and to all intents and purposes as he or she might or could do in
person, hereby ratifying and confirming that said attorney-in-fact and agent, or
their substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement on Form F-4 has been signed by the following persons in
the capacities and on the dates indicated.
[Enlarge/Download Table]
Signature Title Date
/s/ Tomas Milmo Santos Chief Executive Officer and Sole Director April 5, 2004
----------------------------
Tomas Milmo Santos
/s/ Patricio Jimenez Barrera Chief Financial Officer April 5, 2004
----------------------------
Patricio Jimenez Barrera
SIGNATURE OF AUTHORIZED REPRESENTATIVE
Pursuant to the requirements of the Securities Act of 1933, the
undersigned, the duly authorized representative in the United States of Axtel,
S.A. de C.V., has signed this Registration Statement on Form F-4 in the City of
Newark, State of Delaware on April 5, 2004.
SIGNATURE TITLE
/s/ Donald J. Puglisi Authorized Representative in the
---------------------------- United States
Donald J. Puglisi
Managing Director
Puglisi and Associates
EXHIBIT INDEX
DESCRIPTION
EXHIBIT NUMBER EXHIBIT
3.1* Corporate By-laws (Estatutos Sociales) of Axtel, S.A. de C.V.
("Axtel"), together with an English translation.
4.1* Indenture, dated as of December 16, 2003, among Axtel, the
Subsidiary Guarantors named therein and The Bank of New York,
as Trustee, governing Axtel's $175,000,000 aggregate principal
amount of 11% Senior Notes due 2013.
4.2* Specimen Global Note representing Axtel's 11% Senior Notes due
2013.
4.3* Form of Specimen Global Note representing the exchange notes.
4.4* Registration Rights Agreement, dated as of December 16, 2003
among Axtel, the Subsidiary Guarantors named therein and
Credit Suisse First Boston LLC.
5.1** Opinion of Cahill Gordon & Reindel LLP as to the validity of
the exchange notes under New York law.
5.2** Opinion of D&A Morales y Asociados, S.C. as to the validity of
the exchange notes under Mexican law.
9.1* Unanimous Shareholders Agreement, dated as of October 6, 1997,
among Bell Canada International (Mexico Telecom) Limited,
Telinor Telefonia, S.A. de C.V. ("Telinor"), Worldtel Mexico
telecom Ltd. and Axtel (formerly known as Telefonia
Inalambrica Del Norte, S.A. de C.V.)
9.2* Joinder Agreement, dated as of March 20, 2003, among Axtel and
Nortel Networks Limited
10.1* Concession title granted by the Mexican Ministry of
Communications and Transportation (the "Ministry") in favor of
Axtel, dated June 17, 1996, together with an English
translation of such concession title.
10.2* Amendment, dated December 19, 2002, of concession title
granted by the Ministry in favor of Axtel, dated June 17,
1996, together with an English translation of such amendment
10.3* Concession title granted by the Ministry in favor of Axtel,
dated October 7, 1998, together with an English translation of
such concession title.
10.4* Concession title granted by the Ministry in favor of Axtel,
dated April 1, 1998, together with an English translation of
such concession title.
10.5* Concession title granted by the Ministry in favor of Axtel,
dated June 4, 1998, together with an English translation of
such concession title.
10.6* Engagement Letter, dated as of May 15, 2002, by and among
Axtel and
The Blackstone Group L.P.
10.7* Restructuring Agreement, dated as of March 20, 2003 by and
among Axtel, Nortel Networks Limited, Nortel Networks de
Mexico, S.A. de C.V. and Toronto Dominion (Texas), Inc.
10.8* Assignment and Assumption Agreement, dated as of December 23,
2003, among Nortel Networks Limited, Nortel Networks de
Mexico, S.A. de C.V., Nortel Networks UK Limited, Airspan
Communications Limited and Axtel.
10.9 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.).
12.1* Statement regarding computation of ratio of earnings to fixed
charges (according to Mexican GAAP).
12.2* Statement regarding computation of ratio of earnings to fixed
charges (according to U.S. GAAP).
21.1* List of Subsidiaries of Axtel.
23.1** Consent of Cahill Gordon & Reindel LLP (contained in Exhibit
5.1).
23.2** Consent of D&A Morales y Asociados, S.C. (contained in Exhibit
5.2).
23.3* Consent of KPMG Cardenas Dosal, S.C., relating to the audited
financial statements of Axtel.
24.1* Signed copies of the powers of attorney (included on the
signature pages of this Registration Statement).
25.1* Form T-1 Statement of Eligibility and Qualification of The
Bank of New York with respect to the exchange notes.
99.1* Form of Letter of Transmittal.
99.2* Form of Notice of Guaranteed Delivery.
99.3* Form of Instructions to Registered Holder and/or Book-Entry
Transfer Facility Participant from Beneficial Owner of Senior
Notes due 2013.
99.4* Form of Exchange Agent Agreement.
____________________________
* Filed herewith.
** To be filed by amendment
-2-
Dates Referenced Herein and Documents Incorporated by Reference
↑Top
Filing Submission 0000950162-04-000450 – Alternative Formats (Word / Rich Text, HTML, Plain Text, et al.)
Copyright © 2024 Fran Finnegan & Company LLC – All Rights Reserved.
About — Privacy — Redactions — Help —
Sun., Apr. 28, 9:59:32.2pm ET 
