<PAGE> 1
As filed with the Securities and Exchange Commission on August 22, 2000
REGISTRATION NO. 333-11910
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM F-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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MAXCOM TELECOMUNICACIONES, S.A. DE C.V. CORPORATIVO EN TELECOMUNICACIONES,
S.A. DE C.V.
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(Exact Name of Registrant as Specified in Its Charter)
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TELECOMMUNICATIONS CORPORATE
MAXCOM TELECOMMUNICATIONS, INC. SERVICES, INC.
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(Translation of Registrant's Name into English)
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MEXICO MEXICO
(State or other Jurisdiction of Incorporation or Organization)
481 481
(Primary Standard Industrial Classification Code Number)
NOT APPLICABLE NOT APPLICABLE
(I.R.S. Employer Identification Number)
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MAGDALENA NO. 211 MAGDALENA NO. 211
COLONIA DEL VALLE COLONIA DEL VALLE
03100 MEXICO, D.F. MEXICO 03100 MEXICO, D.F. MEXICO
(525) 147-1111 (525) 147-1111
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(Address and Telephone Number of Registrant's Principal Executive Offices)
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C T CORPORATION SYSTEM C T CORPORATION SYSTEM
1633 BROADWAY, NEW YORK, NEW YORK 10019 1633 BROADWAY, NEW YORK, NEW YORK 10019
(212) 479-8220 (212) 479-8220
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(Name, Address including Zip Code and Telephone Number, including
Area Code, of Agent for Service of Process)
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With copies to:
CARLOS E. MARTINEZ, ESQ.
PROSKAUER ROSE LLP
1585 BROADWAY
NEW YORK, NEW YORK 10036
(212) 969-3160
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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 462(b) 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. [ ]
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. [ ]
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, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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PROSPECTUS
MAXCOM TELECOMUNICACIONES,
S.A. DE C.V.
EXCHANGE OFFER FOR
$300,000,000 13 3/4% SERIES B SENIOR NOTES DUE 2007
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We are offering to exchange our 13 3/4% series B senior notes due 2007, which we
refer to as the exchange notes, for all of our outstanding 13 3/4% series A
senior notes due 2007, which we refer to as the old notes. An aggregate
principal amount of $300,000,000 of the old notes is outstanding.
TERMS OF THE EXCHANGE OFFER:
- This exchange offer expires at 5:00 p.m., New York City
time, on September 21, 2000, unless extended.
- You will receive one exchange note for each old note that
you tender.
- You may withdraw your tender of the old notes at any time
prior to the expiration date.
TERMS OF THE EXCHANGE NOTES:
- The terms of the exchange notes are substantially identical
to those of the old notes, except that you can freely trade
the exchange notes.
- The exchange notes will mature on April 1, 2007.
- Interest on the exchange notes will be payable
semi-annually in arrears on each April 1 and October 1.
- The exchange notes are unsecured senior indebtedness and
will rank equally with all of our other unsecured senior
indebtedness.
- The exchange notes will be unconditionally guaranteed,
jointly and severally, on an unsecured, senior basis by our
only subsidiary and by some of our future subsidiaries, if
any.
---------------
CONSIDER CAREFULLY THE "RISK FACTORS" BEGINNING ON PAGE 11 OF
THIS PROSPECTUS.
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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 August 22, 2000
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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. WE ARE NOT
MAKING AN OFFER OF THESE SECURITIES IN ANY STATE WHERE THE OFFER IS NOT
PERMITTED. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THIS
PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF THIS
PROSPECTUS.
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TABLE OF CONTENTS
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PROSPECTUS SUMMARY................................................................................................1
RISK FACTORS.....................................................................................................11
THE EXCHANGE OFFER...............................................................................................19
USE OF PROCEEDS..................................................................................................25
CAPITALIZATION...................................................................................................25
EXCHANGE RATES...................................................................................................26
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION...........................................................27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................29
OVERVIEW OF THE MEXICAN TELECOMMUNICATIONS INDUSTRY..............................................................37
SUPERVISION AND REGULATION OF THE MEXICAN TELECOMMUNICATIONS INDUSTRY............................................40
BUSINESS.........................................................................................................46
MANAGEMENT.......................................................................................................58
PRINCIPAL SHAREHOLDERS...........................................................................................62
CERTAIN TRANSACTIONS.............................................................................................66
DESCRIPTION OF THE NOTES.........................................................................................68
BOOK-ENTRY, DELIVERY AND FORM...................................................................................103
UNITED STATES TAXATION..........................................................................................105
MEXICAN TAXATION................................................................................................109
PLAN OF DISTRIBUTION............................................................................................112
LEGAL MATTERS...................................................................................................112
INDEPENDENT AUDITORS............................................................................................112
WHERE YOU CAN FIND ADDITIONAL INFORMATION.......................................................................112
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS......................................................................F-1
GLOSSARY........................................................................................................A-1
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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 U.S. generally accepted accounting
principles, which we refer to as "U.S. GAAP," including in the treatment of the
capitalization of preoperating expenses, the amortization of frequency rights,
the capitalization of interest, vacation expenses and deferred income taxes and
employees' profit sharing and in the presentation of cash flow information. Note
18 to the audited consolidated financial statements, which are part of this
prospectus, contains a reconciliation of our net loss and shareholders' equity
to U.S. GAAP as of and for the years ended December 31, 1998 and 1999.
Mexican GAAP requires that financial statements of Mexican companies such
as Maxcom recognize certain effects of inflation. ACCORDINGLY, ALL DATA IN THE
FINANCIAL STATEMENTS AND IN THE SELECTED FINANCIAL DATA SET FORTH BELOW HAVE
BEEN RESTATED IN CONSTANT PESOS AS OF DECEMBER 31, 1999. References in this
prospectus to "real" amounts are to inflation-adjusted pesos and references to
"nominal" amounts are to unadjusted historical pesos. In calendar years 1996,
1997, 1998 and 1999, the rates of inflation in Mexico, as measured by changes in
the Mexican national consumer price index, were 27.7%, 15.7%, 18.6% and 12.3%,
respectively. The inflation index used for 1996 figures is 1.5416, for 1997
figures is 1.3322 and for 1998 figures is 1.1232. The effect of these inflation
accounting principles has not been reversed in the reconciliation to U.S. GAAP.
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The U.S. 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 Federal Reserve Bank of New York on December 31, 1999, as its
noon buying rate for pesos. The noon buying rate for pesos on December 31, 1999
was Ps.9.480 per U.S. dollar. On August 18, 2000, the noon buying rate for
pesos was Ps. 9.2500 per U.S. dollar. These translations should not be construed
as representations that the peso amounts actually represent such U.S. dollar
amounts or could be converted into U.S. dollars at the rate indicated as of any
dates mentioned in this prospectus.
Sums presented in this prospectus may not add due to rounding.
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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 "Maxcom," "our
company" and "we" as used in this prospectus refer to Maxcom Telecomunicaciones,
S.A. de C.V., the issuer of the notes, and its wholly-owned employment
subsidiary, Corporativo en Telecomunicaciones, S.A. de C.V., as a combined
entity, except where it is made clear that such terms mean only the parent
company. You should pay special attention to the "Risk Factors" section
beginning on page 11 of this prospectus to determine whether an investment in
the exchange notes is appropriate for you. All financial data have been restated
in constant pesos as of December 31, 1999, except as otherwise indicated. For
your convenience, we have included a glossary of telecommunications terms in
Appendix A of this prospectus.
THE COMPANY
We are a growing facilities-based telecommunications company operating in
the competitive local exchange carrier market in Mexico. We commenced commercial
operations on May 1, 1999. We are focused on developing our network and support
infrastructure required to provide local as well as long distance and other
value-added services to targeted small and medium-sized businesses and middle
and high-usage residential customers within our concession areas.
We believe that our concession areas, which include Mexico City, the City
of Puebla and a number of other cities along Mexico's Gulf Coast, are attractive
from a telecommunications growth perspective, due to the combination of a
relatively large population, low subscriber line penetration and strong economic
growth. As of June 30, 2000, we have installed 26,071 lines for 3,442 customers.
We position ourselves as a single-source provider of telecommunications
services to our customers. In addition to our existing local, long distance and
data services, we offer value-added products such as digital high-speed data
connectivity and Internet access. We are currently expanding the functionality
of our network to offer other broadband services.
In order to support our market positioning, we follow a marketing
strategy that is focused on differentiating ourselves from competitors. A key
element in this strategy is superior customer service, centered on what is most
important to our customers. Our order backlog was approximately 13,500 lines at
June 30, 2000.
The construction of our telecommunications network is based on a
smart-build, customer-driven, modular platform that utilizes a combination of
fiber optic, copper wire and microwave transmission technology. This methodology
enables us to provide service quickly to our target markets, reduces the time
lag between the incurrence of capital expenditures and the generation of service
revenues and increases flexibility to accommodate a changing market environment.
We believe that the combination of our attractive wireline and microwave
concession areas, our smart-build network construction strategy, our position as
a customer service-oriented provider and our state-of-the-art network will allow
us to benefit from the expected growth of the Mexican telecommunications
industry.
THE MEXICAN TELECOMMUNICATIONS INDUSTRY
In 1998, the Mexican telecommunications market generated revenues of
U.S.$6.8 billion, with the local wireline telecommunications market accounting
for U.S.$3.4 billion. Pyramid Research, a division of the Economist Intelligence
Unit, Ltd., an independent telecommunications consultant, estimates that by 2003
Mexican telecommunications service revenues will increase to more than U.S.$11.1
billion, with local wireline telecommunications services revenues increasing to
approximately U.S.$6.1 billion during the same period. We believe that there is
a large underserved demand for telecommunications services in our market areas
and that future growth in the Mexican telecommunications market will be driven
principally by five factors:
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- A LARGE AND GROWING ECONOMY. Mexico has the second largest economy
in Latin America in terms of nominal gross domestic product
(U.S.$479.4 billion in 1999). In 1999, the Mexican economy
experienced real gross domestic product growth of 3.7% and is
forecast by Grupo de Economistas Asociados, a Mexican consulting
firm, also known as "GEA," to grow at a rate of 4.5% in 2000, 3.5%
in 2001, 4.3% in 2002 and 4.3% in 2003.
- A SIGNIFICANT INCREASE IN MEXICO'S RELATIVELY LOW TELEDENSITY
RATE. According to the International Telecommunications Union, a
United Nations organization that publishes telecommunications
industry information, also known as "ITU," at the end of 1997, the
teledensity rate in Mexico was 9.6 telephone lines per 100
inhabitants as compared to 19.1 in Argentina, 18.0 in Chile, 11.6
in Venezuela and 10.7 in Brazil. Pyramid Research forecasts that
lines in service in Mexico will grow at a compound annual growth
rate of 13.4% between 1999 and 2003. Moreover, the Mexican
government has announced that it is committed to improving the
teledensity rate in Mexico as part of its overall development
program.
- THE CONTINUING LIBERALIZATION OF THE MEXICAN TELECOMMUNICATIONS
INDUSTRY. The Mexican government has been opening up the
telecommunications industry to private investment and competition
since 1990 when it began to privatize Telmex. The participation of
private and foreign investment has, and is expected to continue
to, accelerate the growth of the Mexican telecommunications
industry.
- THE DEMAND FOR IMPROVED TELECOMMUNICATIONS SERVICE OFFERINGS AT
COMPETITIVE PRICES. We believe that as customers become more aware
of the improved quality and selection of telecommunications
service offerings, demand will increase. In particular, we believe
that demand in Mexico for broadband data and Internet-related
services will grow as data communication becomes increasingly
important to businesses and consumers. We believe that this demand
will also be fueled by a decrease in prices as a result of
increased competition.
- A SIGNIFICANT INCREASE IN MEXICO'S DEMAND FOR WIRELESS SERVICE.
Pyramid Research estimates that the number of cellular and PCS
subscribers in Mexico will increase from 4.7 million in 1999 to
7.8 million in 2003, a compound annual growth rate of 13.5%.
COMPETITIVE STRENGTHS
We believe we have a number of key strengths that will enable us to
capture an increasing share of the growing Mexican local telephony market.
Early mover advantage
We began commercial operations on May 1, 1999. In our markets, we are
currently the only alternative to Telmex in providing wireline local telephony
services to small and medium-sized businesses and middle and high-usage
residential customers. By starting earlier than other new entrants in our
concession markets, we are able to:
- be the first to service the most attractive concentrations of
potential lines, which we refer to as "clusters;"
- secure access to the most convenient public and private rights of
way routes;
- operate in a limited competitive environment in the Gulf region
with relative pricing stability; and
- develop customer loyalty and brand awareness by educating
consumers about our service offerings and telecommunications
services in general, and by offering superior customer service.
Proven state-of-the-art technology with flexible last-mile connectivity
Our network utilizes a combination of proven technologies that enable us
to provide state-of-the-art services and flexibility in providing last-mile
connectivity to both business and residential customers. We currently use fiber
optic, copper wire and microwave transmission technology to enable us to quickly
access and service our targeted markets. This network is supported by
state-of-the-art 5ESS switching technology provided by Lucent Technologies. We
are also investing in the latest operational support systems from leading
hardware and software providers such as
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Metasolv, Ericsson/Hewlett-Packard and Kenan Systems. This technology platform
is designed to allow us to deliver services in a more automated, efficient
manner.
One-stop shopping
We offer our customers an integrated bundle of services that includes
local, long distance, data transport and other value-added services, digital
high-speed data connectivity and Internet access. We are currently expanding the
functionality of our network to offer other broadband services. We are the first
telecommunications provider in Mexico other than Telmex capable of delivering an
integrated local and long distance service to our customers. In addition, we are
currently the only telecommunications company in Mexico capable of providing
services from a central switching location using centrex technology. We believe
that our broad capabilities provide us with a competitive advantage in meeting
the demands of Mexican customers for one-stop shopping of telecommunications
services.
Highly respected equity and technical sponsorship
We are supported by a highly respected base of equity and technical
sponsors experienced in the Mexican market and the telecommunications industry.
Members of the Aguirre Gomez family, our principal controlling shareholders,
have substantial experience in the Mexican communications industry. CT Global
Telecommunications Inc., another of our principal shareholders, is a
wholly-owned subsidiary of CT Communications, Inc., a full service local and
long distance telecommunications provider in the state of North Carolina in the
United States. Additional equity sponsors include experienced Latin American and
telecommunications investors such as BankAmerica International Investment
Corporation, BancBoston Investments, Inc., Bachow Investment Partners III, L.P.
and Latinvest Strategic Investment Fund, L.P.
STRATEGY
We intend to capitalize on our competitive strengths to become a leading
telecommunications provider in our markets in Mexico. Our strategy to achieve
this objective includes the following components:
Capture unmet demand for telephony services
We seek to capture unmet demand by targeting small and medium-sized
businesses and middle and high-usage residential customers that are looking to
expand their telecommunications capacity or that do not currently receive the
type of products and services we offer.
Focus on Mexico City and the Gulf region
We plan to focus on Mexico City because it is the largest
telecommunications market in Mexico. Within the city, the Federal District alone
represented approximately 24.3% of the national market in terms of lines
installed at the end of 1997, but suffers from a very large unmet demand for
telephony services.
The Gulf region has an aggregate population of approximately 10.0 million
people. We plan to focus on the Gulf region because of its potential for growth
given that it is a significantly underserved market, it has the greatest
concentration of oil, natural gas and maritime industries in Mexico, and has not
been an area of initial focus of potential competitors, allowing us to operate
in a limited competitive environment.
Build our network on a demand-driven, modular basis
We build our network based on customer demand. We first identify clusters
in our concession cities and towns through various market research techniques.
We then carry out the network buildout in tandem with increased sales and
promotional efforts targeted at customers within the cluster. This parallel
track minimizes the time lag between the incurrence of capital expenditures and
the generation of service revenues, and allows a choice of technology and
construction method based on the particular needs of the cluster.
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Differentiate product offerings based on features and price
We believe that we can differentiate ourselves from our competitors by
offering a variety of product features that meet the specific needs of our
customers. In the process, we seek to develop customer loyalty and brand
awareness by informing consumers about the telecommunications services that we
offer and by helping them to differentiate between the various
telecommunications services available in the market. In particular, we are
currently the only provider of centrex services in Mexico. We also seek to offer
our services at prices that are between 5% and 15% lower than the prevailing
market price in order to build our customer base.
Build brand identity based on customer focus and service excellence
We emphasize the importance of value and high-quality customer care. Our
marketing program is built around the Su Tono (Your Tone) campaign, which
positions us as a telecommunications company that understands the needs of its
customers and strives to deliver a broad menu of services quickly and
efficiently.
RECENT DEVELOPMENTS
On August 1, 2000, we announced our unaudited results for the second
quarter 2000. Our telecommunications revenues for the first six months of 2000
were Ps.108.3 million, measured in constant Pesos of June 30, 2000. Our
telecommunications revenues increased by 24% to Ps.60.0 million in the second
quarter of 2000 as compared to the first quarter. For the first half of 2000,
our operating loss was Ps.182.6 million and our net loss was Ps.352.0 million.
In June and July 2000, our then Chief Financial Officer, Chief Operating
Officer and Chief Marketing Officer resigned. We are in the process of
interviewing candidates for these positions.
For a fuller description of these and other developments, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Recent Developments."
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Maxcom is headquartered in Mexico City. Our address is Magdalena No. 211,
Colonia del Valle, 03100 Mexico, D.F. and our general phone number is (52) 5
147-1111. Our website address, the contents of which are not part of this
prospectus, is www.maxcom.com.mx.
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THE EXCHANGE OFFER
The exchange offer applies to the U.S.$300,000,000 aggregate principal
amount of old notes issued on March 17, 2000. The form and terms of the exchange
notes are the same as the form and terms of the old notes except that the offer
and sale of the exchange notes have been registered under the Securities Act and
the exchange notes will therefore not bear legends restricting their transfer.
The exchange notes will be entitled to the benefits of the indenture pursuant to
which the old notes were issued. The old notes and the exchange notes are
sometimes referred to collectively in this prospectus as the "notes." See
"Description of the Notes."
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The exchange offer...................................... U.S.$1,000 principal amount of exchange notes in
exchange for U.S.$1,000 principal amounts of old
notes. As of the date of this prospectus, old notes
representing U.S.$300,000,000 aggregate principal
amount are outstanding.
Resale of the exchange notes............................ We believe that the exchange notes may be offered for
resale, resold and otherwise transferred by you
without compliance with the registration and
prospectus delivery provisions of the Securities Act,
if you are not our affiliate and you are acquiring the
exchange notes in the normal course of business. We
base our belief on an interpretation by the staff of
the U.S. Securities and Exchange Commission set forth
in interpretive letters issued to third parties
unrelated to us.
Each broker-dealer that receives exchange notes for
its own account in exchange for old notes, where those
old notes were acquired by that broker-dealer as a
result of its market-making activities or other
trading activities, must acknowledge that it will
deliver a prospectus in connection with any resale of
these exchange notes. See "Plan of Distribution."
Registration rights agreements.......................... Maxcom sold the old notes on March 17, 2000 in a
transaction exempt from registration. In connection
with that sale, we executed a registration rights
agreement for the benefit of the purchasers under
which we agreed to effect this exchange offer. See
"The Exchange Offer -- Purpose and effect."
Expiration date......................................... The exchange offer will expire at 5:00 p.m., New York
City time, on September 21, 2000, or such later date
and time to which it is extended. We will return any
old notes not accepted for exchange for any reason
without expense to you as promptly as practicable
after the expiration or termination of the exchange
offer.
Withdrawal.............................................. You may withdraw your tender of old notes pursuant to
the exchange offer at any time prior to 5:00 p.m., New
York City time, on the expiration date.
Conditions to the exchange offer........................ The exchange offer is subject to some customary
conditions, some of which we may waive. See "The
Exchange Offer -- Conditions."
Procedures for tendering old notes...................... If you wish to accept the exchange offer, you must
complete, sign and date the letter of transmittal, or
a copy of it in
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accordance with the letter's instructions, and mail or
otherwise deliver the letter of transmittal, or the
copy, together with the old notes and any other
required documentation, to The Bank of New York, the
exchange agent, at the address contained in the
section "The Exchange Offer--Exchange agent" in this
prospectus.
If you hold old notes through the Depository Trust
Company and wish to accept the exchange offer you must
do so pursuant to The Depository Trust Company's
Automated Tender Offer Program, by which each
tendering participant will agree to be bound by the
letter of transmittal. By executing or agreeing to be
bound by the letter of transmittal, you will represent
to us that, among other things,
- you are acquiring the exchange notes
acquired pursuant to the exchange offer in
the ordinary course of your business,
- neither you nor anyone else receiving the
notes from you intend to engage in a
distribution of the exchange notes,
- neither you nor anyone else receiving the
notes from you has an arrangement or
understanding with any person to
participate in the distribution of the
exchange notes,
- neither you nor anyone else receiving the
notes from you is an affiliate of Maxcom,
and
- if you are a broker-dealer and you acquired
the old notes for your own account as a
result of market-making or other trading
activities, you will deliver a copy of this
prospectus in connection with any resale of
exchange notes.
We will file a registration statement for a continuous
offering in respect of the old notes if existing
interpretations by the U.S. Securities and Exchange
Commission are changed such that the exchange notes
received by you in the exchange offer are not or would
not be, upon receipt, transferable by non-affiliates
without restriction under the Securities Act. See "The
Exchange Offer -- Purpose and Effect."
Acceptance of old notes and delivery
of exchange notes....................................... We will accept for exchange any and all old notes
which you properly tender prior to 5:00 p.m., New York
City time, on the expiration date. We will issue the
exchange notes promptly following the expiration date.
See "The Exchange Offer -- Terms of the Exchange
Offer."
Exchange agent.......................................... The Bank of New York is serving as exchange agent for
the exchange offer. It can be reached by telephone at
(212) 815-3738 for more information.
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United States tax considerations........................ The exchange pursuant to the exchange offer will not
be a taxable event for U.S. federal income tax
purposes. See "United States Taxation--Exchange
offer."
Effect of not tendering................................. If you choose not to tender your old notes or they are
not accepted, the existing transfer restrictions will
continue to apply. After the completion of the
exchange offer, we will have no further obligation
with respect to the registration of the old notes
under the Securities Act.
THE EXCHANGE NOTES
Notes offered........................................... U.S.$300,000,000 aggregate principal amount of 13 3/4%
series B senior notes due 2007.
Maturity date........................................... April 1, 2007.
Interest rate and payment dates......................... Interest on the exchange notes will accrue at the rate
of 13 3/4% per annum, payable semi-annually in cash in
arrears on April 1 and October 1 of each year,
commencing October 1, 2000.
Optional redemption..................................... We may not redeem the exchange notes prior to
maturity, except that until April 1, 2003, we may
redeem in the aggregate up to 35% of the principal
amount of the exchange notes, at a redemption price of
113.75%, plus accrued and unpaid interest to the date
of redemption, with the net cash proceeds of one or
more public equity offerings that meet certain
conditions.
Subsidiary guarantors................................... Our only subsidiary on the issue date will
unconditionally guarantee the exchange notes. If we
create or acquire a new subsidiary, it will also
guarantee the exchange notes unless we designate the
subsidiary as an "unrestricted subsidiary."
Interest escrow......................................... We have pledged to the trustee, as security for the
benefit of the holders of the notes, a portfolio of
U.S. government securities in an amount sufficient to
provide for payment in full of the first four
semi-annual interest payments due on the notes.
Ranking................................................. The exchange notes will be our senior obligations and
will be unsecured except to the extent of the interest
escrow account and will rank equally in right of
payment with all our existing and future senior
unsecured indebtedness and senior to all our existing
and future subordinated indebtedness. The exchange
notes will be effectively subordinated to any of our
secured indebtedness to the extent of the value of the
assets securing that indebtedness and to any
indebtedness of our future subsidiaries that will not
become guarantors.
Payments of additional amounts.......................... All payments of principal and interest in respect of
the exchange notes will be made free and clear of any
taxes imposed by Mexico or any political subdivision
or taxing
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authority. See "Description of the Notes -- Additional
amounts."
Redemption for tax reasons.............................. Upon the occurrence of certain changes in or
amendments to Mexican tax law requiring the grossing
up of payments in excess of those attributable to a
Mexican withholding tax rate of 4.9%, we may redeem
the exchange notes at 100% of their principal amount
plus accrued and unpaid interest to the date fixed for
redemption. See "Description of the Notes --
Redemption for changes in Mexican withholding taxes."
Change of control....................................... Upon a change of control, as defined in the section
"Description of the Notes -- Change of control," you
may require us to repurchase your exchange notes at a
repurchase price equal to 101% of their principal
amount, plus accrued and unpaid interest to the date
of purchase. See "Description of the Notes -- Change
of control."
Restrictive covenants................................... The indenture governing the exchange notes will, among
other things, restrict our ability and the ability of
our subsidiaries to:
- incur additional indebtedness;
- pay dividends on our capital stock;
- purchase stock or repay subordinated
indebtedness;
- make certain investments;
- undertake certain transactions with
affiliates;
- limit the ability of our subsidiaries to
pay dividends;
- incur liens and enter into sale/leaseback
transactions;
- sell assets;
- sell or issue capital stock of
subsidiaries; and
- undertake certain consolidations or
mergers.
All of these limitations and prohibitions, however,
are subject to a number of important qualifications.
See "Description of the Notes -- Certain covenants."
</TABLE>
RISK FACTORS
See the "Risk Factors" section of this prospectus beginning on page 11
for a full description of risks you should carefully consider before investing
in the exchange notes.
8
<PAGE> 13
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following table presents summary consolidated financial information
of Maxcom and its consolidated subsidiary.
The annual information has been derived from, and should be read in
conjunction with, the audited consolidated financial statements of Maxcom as of
December 31, 1998 and 1999, and for the years ended December 31, 1997, 1998 and
1999, which appear elsewhere in this prospectus. The audited consolidated
financial statements of Maxcom have been audited by BDO International,
independent public accountants.
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------
1997 1998 1999(1) 1999
-------------------- ------------------ ---------------- ------------------
THOUSANDS OF CONSTANT DECEMBER 31, 1999 PESOS
AND THOUSANDS OF U.S. DOLLARS, EXCEPT FOR PER SHARE DATA(2)(3)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Mexican GAAP
Telecommunications revenues................ Ps. 88,197 U.S.$ 9,303
Operating costs and expenses:
Network operating cost................... 43,824 4,623
Selling, general and administrative
expenses 161,561 17,042
Depreciation and amortization............ 74,265 7,834
-------------- ---------------
Total operating costs and
expenses........................ 279,650 29,499
-------------- ---------------
Operating loss............................. (191,453) (20,196)
-------------- ---------------
Comprehensive (income) cost of financing:
Interest expense......................... 46,301 4,884
Interest income.......................... (10,046) (1,060)
Exchange loss, net....................... 9,546 1,007
Gain on net monetary position............ (19,944) (2,104)
-------------- ---------------
Total comprehensive cost of
financing....................... 25,857 2,727
-------------- ---------------
Other income, net.......................... 109 11
-------------- ---------------
Net loss................................... Ps. (217,201) U.S.$(22,912)
Net loss per share......................... (21) (2.23)
U.S. GAAP
Net loss................................... Ps. (58,357) Ps. (97,519) Ps. (275,007) U.S.$(29,009)
Net loss per share......................... (43) (12) (27) (2.83)
BALANCE SHEET DATA:
Mexican GAAP
Cash and cash equivalents.................. Ps. 48,993 Ps. 387,173 Ps. 153,662 U.S.$ 16,209
Restricted cash............................ -- 1,859 18,688 1,971
Working capital(4)......................... 13,555 36,272 4,706 497
Frequency rights........................... 105,160 105,160 102,792 10,843
Telephone network systems and equipment.... 1,152 247,737 788,851 83,212
Preoperating expenses...................... 62,989 168,042 248,136 26,175
Total assets............................... 235,618 991,579 1,435,981 151,475
Total debt................................. -- 210,084 804,349 84,847
Capital stock and additional paid-in
capital.................................. 231,851 761,389 772,963 81,537
Deficit.................................... -- -- (217,201) (22,912)
Shareholders' equity....................... Ps. 231,851 Ps. 761,389 Ps. 555,762 U.S.$ 58,625
U.S. GAAP
Shareholders' equity....................... Ps. 167,866 Ps. 599,885 Ps. 336,452 U.S.$ 35,491
OTHER FINANCIAL DATA:
Mexican GAAP
EBITDA(5).................................. Ps. (117,079) U.S.$(12,351)
Capital expenditures....................... Ps. 106,184 Ps. 273,125 Ps. 633,425 U.S.$ 66,817
Ratio of earnings to fixed charges(6)...... -- -- --
U.S. GAAP
EBITDA(5).................................. Ps. (60,193) Ps. (135,552) Ps. (211,444) U.S.$(22,304)
Ratio of earnings to fixed charges(7)...... -- -- --
</TABLE>
9
<PAGE> 14
NOTES TO SUMMARY HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
(1) We commenced commercial operations on May 1, 1999. In accordance with
Mexican GAAP, our financial statements reflect eight months of
operations.
(2) Pursuant to Mexican GAAP, financial data for all periods in the financial
statements have, unless otherwise indicated, been restated in constant
pesos of December 31, 1999. Restatement into December 31, 1999 pesos is
made by multiplying the relevant nominal peso amount by the inflation
index for the period between the end of the period to which such nominal
peso amount relates and December 31, 1999. The inflation index used in
this prospectus for 1997 figures is 1.3322 and for 1998 figures is
1.1232.
(3) Peso amounts were converted to U.S. dollars at the exchange rate of
Ps.9.480 per U.S.$1.00 reported by the Federal Reserve Bank of New York
as its noon buying rate for pesos on December 31, 1999. Such conversions
are for the convenience of the reader and should not be construed as
representations that the peso amounts actually represent such U.S. dollar
amounts or could be converted into U.S. dollars at the rate indicated, or
at all.
(4) Working capital is defined as current assets (excluding cash and cash
equivalents and restricted cash) less current liabilities (excluding
current maturities of long-term debt).
(5) EBITDA represents earnings before income taxes, comprehensive (income)
cost of financing and depreciation and amortization. We have included
information concerning EBITDA (which is not a measure of financial
performance under Mexican GAAP or U.S. GAAP) because we believe it is a
standard financial statistic commonly reported and widely used by
analysts and other interested parties. We understand that EBITDA is also
used by investors as one measure of an issuer's ability to service or
incur indebtedness. We also understand that EBITDA may be defined
differently by other companies which disclose a similarly titled account.
You should not construe EBITDA as an alternative to operating income or
as a measure of liquidity or cash flows from operating activities. For a
description of the differences between Mexican GAAP and U.S. GAAP, see
"Management's Discussion and Analysis of Financial Condition and Results
of Operations -- U.S. GAAP reconciliation."
(6) Our earnings have been insufficient to cover fixed charges under Mexican
GAAP since we started incurring debt in 1998 and 1999. Fixed charges
include interest expense plus capitalized interest plus the portion of
operating lease rental expense that represents the interest factor. The
fixed charge coverage deficiency for the years ended December 31, 1998
and 1999 amounted to Ps.19.4 million (U.S.$2.0 million) and Ps.224.8
million (U.S.$23.7 million), respectively.
(7) Our earnings have been insufficient to cover fixed charges under U.S.
GAAP since we started incurring debt in 1998 and 1999. Fixed charges
include interest expense plus capitalized interest plus the portion of
operating lease rental expense that represents the interest factor. The
fixed charge coverage deficiency for the years ended December 31, 1998
and 1999 amounted to Ps.110.3 million (U.S.$11.6 million) and Ps.299.1
million (U.S.$31.5 million), respectively.
10
<PAGE> 15
RISK FACTORS
You should carefully consider the following risk factors, as well as
other information set forth in this prospectus, prior to making an investment in
the exchange notes. The risks described below are not the only ones that may
affect the exchange 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 U.S. 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 and has not been independently verified
by us.
FACTORS RELATING TO MAXCOM
You will not be able to evaluate fully our historical performance because we
began commercial operations only recently
We have a very limited operating history, as we began commercial
operations on May 1, 1999. In addition, other than in the City of Puebla, we
have not yet begun operations in the Gulf region of Mexico, which is an area
that we expect to be material to our results of operations. You have limited
meaningful historical operating or financial information about us upon which to
base an evaluation of our performance and an investment in our securities.
We anticipate that we will have negative cash flow until we develop a
sufficiently large customer base
The development of our business and the installation and expansion of our
network, services and customer base require significant expenditures. Our
planned capital expenditures for 2000, 2001, 2002 and 2003 are U.S.$104.5
million, U.S.$108.4 million, U.S.$102.1 million and U.S.$99.2 million,
respectively. These expenditures, together with operating expenses, will
adversely impact our cash flow and profitability until an adequate customer base
is established. We have generated negative cash flow from operating activities
since our incorporation in 1996 and expect to generate insufficient cash flow to
cover our fixed charges through the year 2000. We cannot assure you that we will
be able to establish an adequate customer base to generate sufficient positive
cash flow from our core operations.
If we cannot generate significant revenues, achieve and sustain
profitability or generate positive cash flow from operating activities in the
future, we will not be able to make principal and interest payments with respect
to the notes or meet our other debt service or working capital requirements, and
the value of our notes, as a result, would be materially reduced.
We expect to incur net losses through at least the year 2000
Our anticipated cash flow from operations for the year 2000 will be
insufficient to cover our fixed charges. In addition, we are required to
amortize all previously capitalized general and administrative preoperating
expenses and to depreciate all previously capitalized comprehensive cost of
financing. As a result, we expect to incur net losses through at least the year
2000.
We may not have sufficient administrative, operational or financial resources to
grow as rapidly as we would like
Our expected rapid growth will place a significant strain on our
administrative, operational and financial resources. We anticipate that
continued growth will require us to recruit and hire a substantial number of new
managerial, finance, sales and marketing, accounting and support personnel. If
we are unable to attract and retain personnel who can manage our growth
effectively, our growth may be limited and the quality of our service may be
impaired. This occurrence could adversely affect our results of operations and
financial condition.
We may need additional financing
We may require additional financing in the future to service our
indebtedness 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. See
"Description of the Notes."
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<PAGE> 16
We may be unable to build out our network on a timely manner or without undue
cost
Our ability to achieve our strategic objectives will depend, in large
part, upon the successful, timely and cost-effective buildout of our network.
Factors that could affect such buildout include, among other things:
- our inability to obtain permits to use public rights of way;
- our inability to obtain the financing necessary for such buildout;
- unforeseen delays, costs or impediments relating to the granting
of state and municipal permits for our buildout;
- delays or disruptions resulting from physical damage, power loss,
defective equipment or the failure of third-party suppliers or
contractors to meet their obligations in a timely and
cost-effective manner; and
- regulatory and political risks relating to Mexico, such as the
temporary seizure or permanent expropriation of assets, import and
export controls, political instability, changes in the regulation
of telecommunications and any future restrictions on the
repatriation of profits or on foreign investment.
Although we believe that our cost estimates and buildout schedule are
reasonable, we cannot assure you that the actual construction costs or time
required to complete the buildout will not substantially exceed current
estimates. Any significant cost overrun or delay could materially affect our
cash flow and our ability to repay the notes.
We depend on key personnel; if they were to leave us, we would have insufficient
qualified employees
Our operations are managed by a small number of key management personnel,
the loss of whom could materially affect our operations. In June and July 2000,
our then Chief Executive Officer, Chief Operating Officer and Chief Marketing
Officer resigned and we have been searching for adequate replacements. The
success of our company depends in part upon our ability to hire and retain
highly-skilled and qualified management personnel. The competition for
highly-qualified management personnel in the telecommunications industry is
intense and, accordingly, we cannot assure you that we will be able to hire or
retain the management personnel necessary for our success. See "Management --
Compensation of directors and executive officers" and "Certain Transactions --
Operation services."
We depend on Telmex for interconnection
Telmex exerts significant influence on all aspects of the
telecommunications markets in Mexico, including interconnection agreements. We
use Telmex's network to service virtually all of our customers. Our
interconnection agreement with Telmex expires on September 15, 2002. We cannot
assure you that once this agreement expires we will be able to obtain the
services we require from Telmex at rates, and on terms and conditions, that
permit us to offer services at rates that are both profitable and competitive.
Our increased leverage could affect our ability to service our debt
We are highly leveraged. In 1999, earnings were insufficient to cover
fixed charges by an amount equal to Ps.226.1 million. After giving pro forma
effect to the offering of old notes completed on March 17, 2000 and the
application of its proceeds, we would have been unable to cover our fixed
charges by an amount equal to Ps.600.4 million. The notes account for
substantially all of our indebtedness.
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. In
addition, our high leverage could affect our access to credit or our ability to
pursue business opportunities.
The indenture governing the notes limits but does not prohibit our
incurrence of additional indebtedness and we expect to incur additional
indebtedness in the future. However, our significant level of indebtedness may
impair our ability to raise additional indebtedness on commercially reasonable
terms when required or with terms that will not limit our ability to develop our
business.
12
<PAGE> 17
Furthermore, our significant leverage, through the related debt service
burden, could adversely affect:
- our ability to fund capital expenditures, acquisitions or
operating losses or to refinance existing indebtedness;
- our flexibility in planning for, or reacting to, changes in our
business and market conditions; and
- our ability to compete in our markets.
We may not be able to finance a change of control offer
We will be required to offer to repurchase all the notes if a change of
control (as defined in "Description of the Notes -- Change of control") occurs.
An agreement among our principal shareholders provides that if we do not carry
out a public equity offering prior to May 21, 2005, some of our series N
shareholders will have the right to:
- sell substantially all of our assets;
- merge or consolidate us into another company; or
- require parties to the shareholders agreement to sell their shares
and distribute the proceeds to some series N shareholders.
Although there is doubt as to whether this provision would be enforceable
under Mexican law, any such occurrence would likely constitute a change of
control under the indenture governing the notes. However, it is possible that we
will not have sufficient funds at the time of the change of control to make the
required repurchase. Certain important corporate events, such as leveraged
recapitalizations that would increase the level of our indebtedness, would not
constitute a change of control. See "Principal Shareholders -- Shareholders
agreement" and "Description of the Notes -- Change of Control."
If we do not successfully install and operate accounting, billing, customer
service and management information systems, we may not be able to achieve
desired 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 intend to install the accounting, information and
processing systems necessary to provide services efficiently. However, there can
be no assurance that we will be able to successfully install or operate such
systems or that they will perform as expected.
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, 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 were installed. 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.
FACTORS RELATING TO THE MEXICAN TELECOMMUNICATIONS INDUSTRY
We will face significant competition which may negatively affect our operating
margins
The telecommunications industry in Mexico is becoming highly competitive.
We will compete with our rivals primarily on the basis of features, pricing and
customer service. We will face significant competition from Telmex in all of the
areas where we plan to operate. As the former state-owned telecommunications
monopoly, Telmex has significantly greater financial and other resources than
those available to us, a nationwide network and concession and an established
customer base.
13
<PAGE> 18
We also expect to face significant competition from recent entrants,
particularly in Mexico City. Some of these recent entrants may have
significantly greater financial and other resources than us. In addition, we
could face increased competition if the Mexican government grants more
concessions or if new, competing technologies are developed. Competition may
limit our ability to grow or maintain our customer base or to implement price
increases to keep pace with inflation.
If the Mexican government grants more concessions the value of our concessions
could be severely impaired
The telecommunications industry is regulated by the Mexican government.
Our concessions are not exclusive and the Mexican government could grant
concessions covering the same geographic regions and bandwidths to other
entrants. We cannot assure you that additional concessions to provide services
similar to those we plan to provide will not be granted and that the value of
our concessions will not be adversely affected as a result.
We could lose our concessions if we do not comply fully with their terms
The terms of our concessions require us to satisfy a number of technical,
buildout and financial conditions. We believe we are currently in compliance
with all of these terms. However, we cannot assure you that we will be able to
comply in the future. A failure to comply could result in a termination of our
concessions, and the Mexican government would not be required to compensate us.
If any of our concessions were to be terminated, we could be unable to engage in
our core business and would likely be unable to repay our obligations on the
notes or repurchase the warrants.
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 49%
of our full voting stock. As a result, any future sales of equity securities to
non-Mexicans must involve securities with limited 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 increases our expenses
The fraudulent use of telecommunications networks imposes a significant
cost upon service providers, who must bear the cost of services provided to
fraudulent users. We suffer loss of revenue as a result of fraudulent use, and
also cash costs due to our obligation to reimburse carriers for the cost of
services provided to fraudulent users. Although technology has been developed to
combat this fraudulent use and we installed it in our operations, this
technology does not eliminate fraud entirely. In addition, since we rely on
other long distance carriers for interconnection, some of which do not have
anti-fraud technology in their network, we are particularly exposed to this risk
in our long distance service. Through December 31, 1999, we have incurred
approximately Ps.8.4 million in expenses for the prevention and detection of
fraud.
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 what
we believe to be a technologically-advanced fiber optic network with a microwave
overlay, we cannot assure you that this technology will not be challenged by
competition from new or improved digital technologies in the near future.
Technological changes may adversely affect our competitive position, require
substantial new capital expenditures and/or require write-downs of obsolete
technology.
The Mexican government could temporarily seize or permanently expropriate our
assets under certain circumstances
The Mexican government has the authority to temporarily seize all assets
related to a telecommunications concession in the event of natural disaster,
war, significant public disturbance, threats to internal peace or for economic
reasons, and for other reasons related to national security. In addition, the
Mexican government has the statutory right to permanently expropriate any
telecommunications concession and claim any related assets for reasons of public
interest. Mexican law provides for compensation in connection with losses and
damages related to temporary seizure or expropriation. However, we cannot assure
you that the actual compensation paid would be adequate or that such payment
would be timely.
14
<PAGE> 19
FACTORS RELATING TO MEXICO
If Mexico experiences future political and economic crises, our business could
be affected negatively
We are a Mexican company with all of our operations in Mexico.
Accordingly, the political and economic environment within Mexico can have a
significant impact on our financial condition and results of operations.
The Mexican government has exercised, and continues to exercise,
significant influence over the Mexican economy. Mexican governmental actions
concerning the economy and state-owned enterprises could have a significant
impact on Mexican private sector entities in general and on us in particular,
and on market conditions, prices and returns on Mexican securities, including
our securities. In July 2000, Mexico held national elections, which were won by
Vicente Fox, the candidate of the National Action Party (Partido Accion
Nacional). This represented the first time in over 70 years that a party other
than the Institutional Revolutionary Party (Partido Revolucionario
Institucional) wins the Presidency. In addition, no single party has a majority
on the national congress. We cannot predict the impact this result might have on
the Mexican economy, particularly on the current governmental commitment to the
growth and deregulation of the telecommunications industry.
In the past, Mexico has experienced economic crises, caused by internal
and external factors, characterized by exchange rate instability, high
inflation, high domestic interest rates, economic contraction, a reduction of
international capital flows, a reduction of liquidity in the banking sector and
high unemployment. These economic conditions substantially reduced the
purchasing power of the Mexican population and, as a result, the demand for
telecommunications services.
Crises such as these could have a material adverse effect on our
financial condition and results of operations and on the market value of our
securities.
We may lose money because of peso devaluations
While our revenues are almost entirely denominated in pesos, the majority
of our obligations, and all of our long-term debt, are denominated in U.S.
dollars. We are exposed to peso devaluation risk. The peso has devalued
substantially against the U.S. dollar in the past and may devalue significantly
in the future. For example, the noon buying rate rose from Ps.3.4462 per
U.S.$1.00 on December 19, 1994 to Ps.5.000 per U.S.$1.00 on December 31, 1994
and Ps.7.7400 per U.S.$1.00 on December 31, 1995, representing a 124.6%
devaluation of the peso relative to the U.S. dollar. In 1998, the peso devalued
22.7% relative to the U.S. dollar.
We do not currently have in place hedging arrangements with respect to
this risk because we do not believe them to be cost effective for us. Further
declines in the value of the peso relative to the U.S. dollar could adversely
affect our ability to meet our U.S. dollar-denominated obligations, including
the notes. In addition, any further devaluation of the peso may negatively
affect the value of Mexican securities such as ours. Although the peso
appreciated relative to the U.S. dollar in 1999, there may be significant
devaluations in the future.
Developments in other countries may impact the price of our securities
We cannot assure you that the price of our securities will not be
adversely affected by events elsewhere, especially in the United States and in
emerging market countries. Mexican financial and securities markets are, to
varying degrees, influenced by economic and market conditions in other
countries. Although economic conditions are different in each country, investor
reaction to developments in one country has had and can have significant effects
on the prices of securities of issuers in other countries, including Mexico. The
financial crisis that began in October 1997 in several Asian nations, spread to
Russia and is currently affecting Brazil and Argentina, has had a significant
negative impact on the financial and securities markets in many emerging market
countries, including Mexico. The effects of this crisis may worsen, or new
crises may occur, which may negatively affect the price of our units, notes,
warrants and shares or our financial condition and results of operations.
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 U.S. GAAP, including in the
treatment of the capitalization of preoperating expenses, the
15
<PAGE> 20
amortization of frequency rights, the capitalization of interest, vacation
expenses 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 to U.S. 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 18 to the audited consolidated financial statements.
You may suffer a U.S. dollar shortfall if you obtain a judgment or a
distribution in bankruptcy
In the event that we are declared bankrupt, we will have the right to
discharge our obligations by paying you in pesos at the exchange rate in effect
on the date of the declaration of such bankruptcy. In the event that you are
awarded a judgment from a court enforcing our U.S. dollar-denominated
obligations under the notes, we will have the right to discharge our obligations
by paying you in pesos at the exchange rate in effect on the day of payment of
such judgment. Such rate is currently determined by the Mexican Central Bank
(Banco de Mexico) every banking day in Mexico and published the following
banking day in the Official Gazette of the Federation (Diario Oficial de la
Federacion). As a result of such currency conversion, you could face a shortfall
in U.S. dollars. You should be aware that no separate actions exist or are
enforceable in Mexico for compensation for any such shortfall.
You should also be aware that if we are declared bankrupt, the notes will
cease to accrue interest and payment of obligations under the notes would depend
on the outcome of the bankruptcy proceedings, which are often very lengthy.
We may not be able to make payments in U.S. dollars
In the past, the Mexican economy has experienced 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 foreign currencies generally, and U.S. 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 institute a
restrictive exchange control policy in the future. Any such restrictive exchange
control policy could prevent or restrict our access to U.S. dollars to meet our
U.S. 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.
FACTORS RELATING TO THIS OFFERING AND OUR SECURITIES
There is no active trading market for our securities
The exchange notes are new securities which may not be widely distributed
and do not currently have an active trading market. If the exchange notes are
traded after their initial issuance, they may trade at a discount from their
nominal price, depending upon prevailing interest rates, the market for similar
securities, general economic conditions and our financial condition. We do not
intend to list the exchange notes on any national securities exchange or to seek
the admission of the securities to trading in the Nasdaq National Market.
Although UBS Warburg LLC and Donaldson, Lufkin & Jenrette Securities
Corporation, the initial purchasers in the offering of the old notes, have
informed us that they currently intend to make a market in the exchange notes,
they are not obligated to do so, and any such market making may be discontinued
at any time without notice. Accordingly, we cannot assure you as to the
development or liquidity of any trading market for the exchange notes.
In the event of a bankruptcy, funds remaining in the interest escrow account may
not be disposed of without prior court approval
The right of the trustee under the indenture and the pledge and escrow
agreement to foreclose upon and sell pledged securities in the interest escrow
account upon the occurrence of an Event of Default (as defined in "Description
of the Notes -- Defaults") on the notes is likely to be significantly impaired
by applicable bankruptcy law if a bankruptcy and reorganization case were to be
commenced by or against us or one or more of our subsidiaries. Under applicable
bankruptcy law, secured creditors such as the holders of the notes are
prohibited from foreclosing or disposing of a debtor's property without prior
bankruptcy court approval.
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<PAGE> 21
You may not be able to enforce the guarantees of our subsidiaries
The subsidiary guarantees provide a basis for a direct claim against the
subsidiary guarantors; however, it is possible that the subsidiary guarantees
will not be enforceable. The laws of Mexico do not prevent the subsidiary
guarantees from being valid, binding and enforceable against the subsidiary
guarantors in accordance with their terms, provided they are in compliance with
some requirements under Mexican law. However, 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 one of our subsidiaries, such as a
trustee in bankruptcy or the subsidiary guarantor as debtor-in-possession, were
to find that at the time such obligation was incurred, the subsidiary guarantor,
among other things:
- did not receive fair consideration or reasonably equivalent value
and
- (1) was insolvent, (2) was rendered insolvent, (3) was engaged in
a business or transaction for which its remaining unencumbered
assets constituted unreasonably small capital or (4) intended to
incur or believed that it would incur debts beyond its ability to
pay such debts as they matured,
the court could void the subsidiary guarantor's obligation and direct the return
of any payments made to the subsidiary guarantor or to a fund for the benefit of
its creditors. Moreover, regardless of the factors identified in the prior
clauses (1) through (4), the court could void such obligation and direct
repayment if it found that the obligation was incurred with an intent to hinder,
delay or defraud the creditors.
Under Mexican law there are provisions that affect or may affect
creditors' rights generally or the rights of some creditors in particular. Those
provisions include, among other things:
- a creditor's right to request the nullity of action taken by a
debtor to the prejudice of such creditor; and
- priority given to preferred creditors, pursuant to which labor
claims, claims of tax authorities for unpaid taxes and claims of
secured creditors or creditors with a special privilege under law
will have priority over claims of unsecured creditors.
The measure of insolvency will vary depending upon the law of the
jurisdiction being applied. Generally, however, an entity would be considered
insolvent if the sum of its debts is greater than all of its property (including
collection rights) at a fair valuation or if 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.
In addition, the subsidiary guarantors may be or become subject to
contractual restrictions on their ability to make payments on the subsidiary
guarantees. If a subsidiary guarantor is sold, merged or consolidated in a
transaction in which it is not the surviving entity, it will be released from
all obligations under its subsidiary guarantee so long as the proceeds from such
transaction are applied as described under "Description of Notes -- Certain
covenants -- Limitation on sale of assets and subsidiary stock."
If the subsidiary guarantees are held not to be enforceable, the notes
would effectively be subordinated to all liabilities of the subsidiary
guarantors, including trade payables and accrued liabilities.
FORWARD-LOOKING INFORMATION IS RISKY AND UNCERTAIN
This prospectus includes and incorporates by reference forward-looking
statements. These forward-looking statements relate to analyses and other
information, which are based on forecasts of future results and estimates of
amounts not yet determinable. These statements also relate to our future
prospects, developments and business strategies. You are cautioned not to place
undue reliance on these forward-looking statements.
These forward-looking statements are identified by their use of terms and
phrases such as "anticipate," "believe," "could," "estimate," "expect,"
"intend," "may," "plan," "predict," "project," "will" and similar terms and
phrases, including references to assumptions. These statements are contained in
the sections entitled "Summary," "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Business" and other
sections of this prospectus and in the documents incorporated by reference in
this prospectus.
17
<PAGE> 22
Forward-looking statements in this prospectus include, among others,
expectations regarding the following:
- our capital expenditure requirements for the years 2000 to 2003;
- the growth of the Mexican telecommunications market;
- future competition in the cities and towns where we expect to
operate;
- our ability to develop our operations in accordance with our
plans;
- expected net losses through the year 2000; and
- our ability to build out our network without significant delays or
disruption.
18
<PAGE> 23
THE EXCHANGE OFFER
PURPOSE AND EFFECT
We sold the old notes on March 17, 2000, in a private placement in the
United States and in an offshore transaction outside the United States. In
connection with that offering, we granted the initial purchasers registration
rights, which require that we file a registration statement under the Securities
Act with respect to the exchange notes. Upon the effectiveness of that
registration statement, we are required to offer you the opportunity to exchange
your old notes for a like principal amount of exchange notes, which will be
issued without a restrictive legend and may be reoffered and resold by you (if
you are not our affiliate) without registration under the Securities Act.
Upon the completion of the exchange offer, our obligations with respect
to the registration of the old notes and the exchange notes will terminate. A
copy of the A/B exchange registration rights agreement governing these
registration rights has been filed as an exhibit to the registration statement
of which this prospectus is a part. Following the completion of the exchange
offer, holders of old notes not tendered will not have any further registration
rights and those old notes will continue to be subject to restrictions on
transfer. Accordingly, the liquidity of the market for the old notes could be
adversely affected upon completion of the exchange offer.
HOW TO DETERMINE WHETHER YOU ARE ELIGIBLE TO PARTICIPATE IN THE EXCHANGE OFFER
In order to participate in the exchange offer, you must represent to us,
among other things, that:
- the exchange notes acquired by you pursuant to the exchange offer
are being obtained in the ordinary course of your business or the
business of the person receiving the exchange notes, whether or
not such person is the holder of the old notes;
- neither you nor any person who receives the notes from you is
engaging in or intends to engage in a distribution of the exchange
notes;
- neither you nor any person who receives the notes from you has an
arrangement or understanding with any person to participate in the
distribution of the exchange notes;
- neither you nor any person who receives the notes from you is our
affiliate; and
- if you are a broker-dealer and you acquired the old notes for your
own account as a result of market-making or other trading
activities, you will deliver a copy of this prospectus in
connection with any resale of exchange notes.
Based on an interpretation by the staff of the Securities and Exchange
Commission set forth in interpretive letters issued to third parties unrelated
to us, we believe that, with the exceptions set forth below, exchange notes
issued pursuant to the exchange offer in exchange for old notes may be offered
for resale, resold and otherwise transferred by you, whether or not you are the
holder (other than our affiliates) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that:
- the exchange notes are acquired in the ordinary course of your
business, and
- neither you nor any person who receives the notes from you has an
arrangement or understanding with any person to participate in the
distribution of such exchange notes.
If you tender your old notes in the exchange offer for the purpose of
participating in a distribution of the exchange notes you cannot rely on this
interpretation by the staff of the U.S. Securities and Exchange Commission and
must comply with the registration and prospectus delivery requirements of the
Securities Act. If you are a broker-dealer and receive exchange notes for your
own account in exchange for old notes, where you acquired your old notes as a
result of market-making activities or other trading activities, you must
acknowledge that you will deliver a prospectus in connection with any resale of
the exchange notes. See "Plan of Distribution."
Pursuant to the A/B exchange registration rights agreement, we are
required to file a registration statement for a continuous offering pursuant to
Rule 415 under the U.S. Securities Act in respect of the old notes if existing
interpretations by the staff of the Securities and Exchange Commission are
changed such that the exchange notes
19
<PAGE> 24
received by you in the exchange offer are not, or would not be, upon receipt,
transferable by you (other than you or one of your affiliates) without
restriction under the Securities Act.
Following the completion of the exchange offer, if you do not tender your
old notes you will not have any further registration rights and those old notes
will continue to be subject to certain restrictions on transfer. Accordingly,
the liquidity of the market for your old notes could be adversely affected upon
completion of the exchange offer if you do not participate in the exchange
offer.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this prospectus
and in the letter of transmittal, we will accept any and all old notes validly
tendered and not withdrawn prior to 5:00 p.m., New York City time, on September
21, 2000. We will issue U.S.$1,000 principal amounts of exchange notes in
exchange for each U.S.$1,000 principal amounts of outstanding old notes,
pursuant to the exchange offer.
The form and terms of the exchange notes are identical to the form and
terms of the old notes except that the offer and sale of the exchange notes have
been registered under the Securities Act and they will not bear legends
restricting their transfer. The exchange notes will evidence the same debt as
the old notes and will be issued pursuant to, and entitled to the benefits of,
the indenture pursuant to which the old notes were issued.
As of the date of this prospectus, old notes representing
U.S.$300,000,000 aggregate principal amounts at maturity were outstanding. This
prospectus, together with the letter of transmittal, is being sent to you and to
others believed to have beneficial interests in the old notes. We intend to
conduct the exchange offer in accordance with the applicable requirements of the
Securities Exchange Act of 1934 and the rules and regulations of the Securities
and Exchange Commission promulgated under that act.
We will be deemed to have accepted validly tendered old notes when, as,
and if we have given oral or written notice of such acceptance to The Bank of
New York, the exchange agent. The Bank of New York will act as agent for the
tendering holders for the purposes of receiving the exchange notes from us. If
any tendered old notes are not accepted for exchange because of an invalid
tender, the occurrence of other events described in this prospectus or
otherwise, certificates for any such unaccepted old notes will be returned,
without expense, to you as promptly as practicable after September 21, 2000.
If you tender old notes in the exchange offer, you will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
letter of transmittal, transfer taxes with respect to the exchange of old notes
pursuant to the exchange offer. We will pay all charges and expenses, other than
certain applicable taxes, in connection with the exchange offer. See "-- Fees
and expenses."
CONDITIONS
The exchange offer is not conditioned upon any minimum principal amount
of the old notes being tendered for exchange. However, the exchange offer is
conditioned upon the declaration by the U.S. Securities and Exchange Commission
of the effectiveness of the registration statement of which this prospectus
constitutes a part.
EXPIRATION DATE; EXTENSION; AMENDMENTS
The term "expiration date" means 5:00 p.m., New York City time, on
September 21, 2000, unless we extend the exchange offer, in which case the
expiration date will be the latest date and time to which the exchange offer is
extended. In order to extend the exchange offer, we will notify The Bank of New
York and each participant that holds a book-entry interest in an old note of any
extension prior to 9:00 a.m., New York City time, on the next business day after
the previously scheduled expiration date. We reserve the right to delay
accepting any old notes or to extend the exchange offer, by giving oral or
written notice of such delay, or extension to The Bank of New York.
PROCEDURES FOR TENDERING
Only a holder of old notes may tender old notes in the exchange offer.
Except as set forth under "-- Book entry transfer," to tender old notes in the
exchange offer you must complete, sign and date the letter of transmittal,
20
<PAGE> 25
have the signatures guaranteed if required by the letter of transmittal, and
mail or otherwise deliver the letter of transmittal to The Bank of New York
prior to the expiration date. In addition, either:
- certificates for such old notes must be received by The Bank of
New York along with the letter of transmittal, or
- a timely confirmation of a book-entry transfer of such old notes,
if that procedure is available, into The Bank of New York's
account at The Depository Trust Company, Euroclear and/or
Clearstream pursuant to the procedure for book-entry transfer
described below, prior to the expiration date, or
- you must comply with the guaranteed delivery procedures described
below.
To be tendered effectively, the letter of transmittal and other required
documents must be received by The Bank of New York at the address set forth
under "-- Exchange agent" prior to the expiration date.
Any tender by you that is not withdrawn before the expiration date will
constitute an agreement between you and us in accordance with the terms and
subject to the conditions described in this prospectus and in the letter of
transmittal.
The method of delivery of old notes and the letter of transmittal and all
other required documents to The Bank of New York is at your election and risk.
Instead of delivery by mail, it is recommended that you use an overnight or hand
delivery service. In all cases, sufficient time should be allowed to assure
delivery to The Bank of New York before the expiration date. No letter of
transmittal or old notes should be sent to us. You may request your respective
brokers, dealers, commercial banks, trust companies, or nominees to effect these
transactions for you.
If you are a beneficial owner whose old notes are registered in the name
of a broker, dealer, commercial bank, trust company, or other nominee and you
wish to tender you should contact the registered holder promptly and instruct
the registered holder to tender on your behalf. If a beneficial owner wishes to
tender on the registered holder's behalf, the beneficial owner must, prior to
completing and executing the letter of transmittal and delivering the old notes,
either make appropriate arrangements to register ownership of the old notes in
its name or obtain a properly completed bond power from the registered holder.
The transfer of registered ownership may take considerable time.
Signatures on the letter of transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined below)
unless the old notes are tendered:
- by a registered holder who has not completed the box entitled
"Special Registration Instructions" or "Special Delivery
Instructions" on the letter of transmittal, or
- for the account of an Eligible Institution.
If signatures on a letter of transmittal or a notice of withdrawal, as
the case may be, are required to be guaranteed, the guarantee must be by an
eligible guarantor institution that is a member of or participant in the
Securities Transfer Agents Medallion Program, the New York Stock Exchange
Medallion Signature Program, the Stock Exchange Medallion Program, or an
"eligible guarantor institution" within the meaning of Rule 17Ad-15 under the
Exchange Act (an "Eligible Institution").
If the letter of transmittal is signed by a person other than the
registered holder of any old notes, the old notes must be endorsed or
accompanied by a properly completed bond power, signed by the registered holder
as that registered holder's name appears on the old notes, with the signature
thereon guaranteed by an Eligible Institution. If the letter of transmittal or
any old notes or bond powers are signed by trustees, executors, administrators,
guardians, attorneys-in-fact, officers of corporations, or others acting in a
fiduciary or representative capacity, persons should indicate this when signing,
and evidence satisfactory to us of their authority to so act must be submitted
with the letter of transmittal unless we waive this requirement.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance, and withdrawal of tendered old notes will be determined by
us, which determination will be final and binding. We reserve the absolute right
to reject any and all old notes not properly tendered or any old notes our
acceptance of which would, in the opinion of our counsel, be unlawful. We also
reserve the right to waive any defects, irregularities, or conditions of
21
<PAGE> 26
tender as to particular old notes. Our interpretation of the terms and
conditions of the exchange offer (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 old notes must be cured within such time as we shall determine, in our sole
discretion. Although we intend to notify holders of defects or irregularities
with respect to tenders of old notes, neither we, The Bank of New York, nor any
other person shall incur any liability for failure to give such notification.
Tenders of old notes will not be deemed to have been made until such defects or
irregularities have been cured or waived. Any old notes received by The Bank of
New York that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by The Bank of New
York to the tendering holder, unless otherwise provided in the letter of
transmittal, as soon as practicable following the expiration date.
In addition, we reserve the right in our sole discretion to purchase or
make offers for any old notes that remain outstanding after the expiration date
or, as described under "The exchange offer -- Conditions," to terminate the
exchange offer and, to the extent permitted by applicable law, purchase old
notes in the open market, privately negotiated transactions, or otherwise. The
terms of any such purchases or offers could differ from the terms of the
exchange offer.
BOOK-ENTRY TRANSFER
The Bank of New York will make a request to establish an account with
respect to the old notes at The Depository Trust Company, Euroclear and/or
Clearstream for purposes of the exchange offer within two business days after
the date of this prospectus. Any financial institution that is a participant in
The Depository Trust Company, Euroclear and/or Clearstream's systems may make
book-entry delivery of old notes being tendered by causing The Depository Trust
Company, Euroclear and/or Clearstream to transfer such old notes into The Bank
of New York's account at The Depository Trust Company, Euroclear and/or
Clearstream in accordance with their procedures for transfer.
However, although delivery of old notes may be effected through
book-entry transfer at The Depository Trust Company, Euroclear and/or
Clearstream, the letter of transmittal, with any required signature guarantees
and any other required documents, must, in any case other than as set forth in
the following paragraph, be transmitted to and received by The Bank of New York
at the address set forth under "-- Exchange agent" on or prior to the expiration
date or the guaranteed delivery procedures described below must be complied
with.
The Depository Trust Company's Automated Tender Offer Program ("ATOP") is
the only method of processing exchange offers through The Depository Trust
Company. To accept the exchange offer through ATOP, you must send electronic
instructions to The Depository Trust Company through The Depository Trust
Company's communication system in place of sending a signed, hard copy of the
letter of transmittal. The Depository Trust Company is obligated to communicate
those electronic instructions to The Bank of New York. To tender old notes
through ATOP, the electronic instructions sent to The Depository Trust Company
and transmitted by The Depository Trust Company to The Bank of New York must
contain the character by which you acknowledge your receipt of and agree to be
bound by the letter of transmittal.
GUARANTEED DELIVERY PROCEDURES
If you desire to tender your old notes and the old notes are not
immediately available, or time will not permit you to get your old notes or the
required documents to The Bank of New York before the expiration date, or the
procedure for book-entry transfer cannot be completed on a timely basis, a
tender may be effected if:
- the tender is made through an Eligible Institution,
- prior to the expiration date, The Bank of New York receives from
such Eligible Institution a properly completed and duly executed
letter of transmittal (or a facsimile) and notice of guaranteed
delivery, substantially in the form provided by us (by telegram,
facsimile transmission, mail or hand delivery), setting forth your
name and address and the amount of old notes you are tendering,
stating that the tender is being made and guaranteeing that within
four New York Stock Exchange trading days after the date of
execution of the notice of guaranteed delivery, the certificates
for all physically tendered old notes, in proper form for
transfer, or a confirmation of a book-entry transfer, as the case
may be and other
22
<PAGE> 27
documents required by the letter of transmittal will be deposited
by the Eligible Institution with The Bank of New York, and
- the certificates for all physically tendered old notes, in proper
form for transfer, or a confirmation of a book-entry transfer, as
the case may be, and all other documents required by the letter of
transmittal, are received by The Bank of New York within four New
York Stock Exchange trading days after the date of execution of
the notice of guaranteed delivery.
WITHDRAWAL RIGHTS
You may withdraw your tender at any time prior to 5:00 p.m., New York
City time, on the expiration date.
For your withdrawal of a tender of old notes to be effective, your
written or electronic ATOP transmission notice of withdrawal (for The Depository
Trust Company participants) must be received by The Bank of New York at its
address set forth in this prospectus prior to 5:00 p.m., New York City time, on
the expiration date. Any such notice of withdrawal must:
- specify the name of the person having deposited the old notes to
be withdrawn (the "Depositor");
- identify the old notes to be withdrawn (including the certificate
number or numbers and principal amount of such old notes);
- be signed by you in the same manner as the original signature on
the letter of transmittal by which your old notes were tendered
(including any required signature guarantees) or be accompanied by
documents of transfer sufficient to have the trustee register the
transfer of such old notes into the name of the person withdrawing
the tender; and
- specify the name in which any such old notes are to be registered,
if different from that of the Depositor.
All questions as to the validity, form, and eligibility (including time
of receipt) of such notices will be determined by us. Our determination will be
final and binding on all parties. Any old notes so withdrawn will be deemed not
to have been validly tendered for exchange for purposes of the exchange offer.
We will return any old notes which have been tendered for exchange but which are
not exchanged for any reason to the holder without cost to such holder as soon
as practicable after withdrawal, rejection of tender, or termination of the
exchange offer. Properly withdrawn old notes may be retendered by following one
of the procedures described under "-- Procedures for tendering" at any time on
or prior to the expiration date.
EXCHANGE AGENT
The Bank of New York has been appointed as exchange agent for the
exchange offer. Questions, requests for assistance and requests for additional
copies of this prospectus or of the letter of transmittal should be directed to
The Bank of New York addressed as follows:
<TABLE>
<S> <C> <C>
For information or
confirmation by Telephone:
(212) 815-3738
By Registered or Certified Mail: By Facsimile Transmission: By Hand or Overnight Delivery:
The Bank of New York (212) 815-6339 The Bank of New York
101 Barclay Street 101 Barclay Street
New York, New York 10286 New York, New York 10286
Attention: Tolutope Adeyoju Attention: Tolutope Adeyoju
</TABLE>
FEES AND EXPENSES
We will not make any payments to brokers, dealers, or others soliciting
acceptances of the exchange offer. The principal solicitation is being made by
mail. Additional solicitations may be made in person or by telephone by our
officers and employees.
23
<PAGE> 28
The estimated cash expenses to be incurred in connection with the
exchange offer will be paid by us and are estimated in the aggregate to be
U.S.$250,000, which includes fees and expenses of The Bank of New York,
accounting, legal, printing and related fees and expenses.
TRANSFER TAXES
If you tender your old notes you will not be obligated to pay any
transfer taxes in connection with the tender, except that if you instruct us to
register exchange notes in the name of, or request that old notes not tendered
or not accepted in the exchange offer be returned to, a person other than
yourself, you will be responsible for the payment of any applicable transfer
tax.
24
<PAGE> 29
USE OF PROCEEDS
We will not receive any proceeds from the exchange offer described in
this prospectus.
CAPITALIZATION
The following table sets forth our cash and cash equivalents and our
capitalization on a consolidated basis as of December 31, 1999 and as adjusted
to give effect to the offering of old notes completed on March 17, 2000 and the
application of net proceeds, which were U.S.$280.9 million after deducting
discounts and other expenses of U.S.$19.1 million. The table is also adjusted to
give effect to the U.S.$35 million capital contribution to be made or caused to
be made by some of our existing shareholders by no later than September 30,
2000. This table should be read in conjunction with "Selected Historical
Consolidated Financial and Operating Information," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements and related notes included in this prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
-----------------------------------------------------------------------------------
ACTUAL AS ADJUSTED
---------------------------------------- ---------------------------------------
THOUSANDS OF CONSTANT DECEMBER 31, 1999
PESOS AND THOUSANDS OF U.S. DOLLARS(1)
<S> <C> <C> <C> <C>
Cash and cash equivalents................... Ps. 153,662 U.S.$ 16,209 Ps. 1,457,617 U.S.$ 153,757
Restricted cash............................. 18,688 (2) 1,971 (2) 738,523 (3) 77,903 (3)
------------------ ------------------- ----------------- ------------------
Long-term debt (including
current portion):
Vendor financing(4)......................... Ps. 796,025 U.S.$ 83,969 Ps. -- U.S.$ --
Other....................................... 8,324 878 8,324 878
13 3/4 % Senior Notes due 2007, net (5)(6).. -- -- 2,756,224 290,743
------------------ ------------------- ----------------- ------------------
Total debt............................... 804,349 84,847 2,764,548 291,621
------------------ ------------------- ----------------- ------------------
Shareholders' equity:
Capital stock and additional
paid-in capital.......................... Ps. 772,963 U.S.$ 81,537 Ps. 1,192,519 U.S.$ 125,794
Deficit..................................... (217,201) (22,912) (217,201) (22,912)
------------------ ------------------- ----------------- ------------------
Total shareholders' equity............... 555,762 58,625 975,318 102,882
------------------ ------------------- ----------------- ------------------
Total capitalization.................. Ps. 1,360,111 U.S.$ 143,472 Ps. 3,739,886 U.S.$ 394,503
------------------ ------------------- ----------------- ------------------
</TABLE>
------------------
(1) Peso amounts were converted to U.S. dollars at the noon buying rate of
Ps.9.480 per U.S.$1.00 on December 31, 1999. This conversion should not
be construed as a representation that the peso amounts actually represent
such U.S. dollar amounts or could be converted into U.S. dollars at the
rate indicated, or at all.
(2) This amount reflects cash balances in escrow which were released upon
repayment of vendor financing facilities with proceeds from the offering
of the old notes.
(3) This amount reflects the funds that were deposited in the interest escrow
account for the notes.
(4) We incurred an additional U.S.$17.8 million of indebtedness under our
vendor facilities since December 31, 1999. We repaid all of our vendor
financing with a portion of the proceeds of the offering of the old
notes.
(5) The estimated value of the warrants that were issued to the noteholders
and the initial purchasers in the offering of the old notes has been
reflected as both a debt discount and as additional paid-in capital. The
resulting debt discount in the amount of U.S.$8.6 million will be
amortized over the term of the notes.
(6) The estimated value of warrants granted to those shareholders who
committed to make or cause to be made the U.S.$35 million capital
contribution has been reflected as both a debt discount and as additional
paid-in capital. The resulting debt discount in the amount of U.S.$0.7
million will be amortized over the term of the notes.
25
<PAGE> 30
EXCHANGE RATES
The following table sets forth, for the periods indicated, the
period-end, average, high and low noon buying rate, in each case for the
purchase of U.S. dollars, all expressed in nominal pesos per U.S. dollar. The
noon buying rate at August 18, 2000 was Ps. 9.2500 per U.S.$1.00.
<TABLE>
<CAPTION>
NOON BUYING RATE(1)
--------------------------------------------------------------
PERIOD END AVERAGE(2) HIGH LOW
------------- ---------------- ------------- --------------
<S> <C> <C> <C> <C>
Year ended December 31, 1995....................... Ps.7.740 Ps.6.526 Ps.8.050 Ps.5.270
Year ended December 31, 1996....................... 7.881 7.635 8.045 7.325
Year ended December 31, 1997....................... 8.070 7.967 8.410 7.717
Year ended December 31, 1998....................... 9.901 9.243 10.630 8.040
Year ended December 31, 1999....................... 9.480 9.563 10.600 9.243
</TABLE>
------------------
(1) Source: Federal Reserve Bank of New York.
(2) Average of month-end rates.
The notes constitute substantially all of our indebtedness. Devaluation
of the peso in relation to the U.S. dollar will adversely affect our ability to
meet our U.S. 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 -- Factors
Relating to Mexico -- We may lose money because of peso devaluations."
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 U.S. 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 U.S. dollars, and could also have a material adverse
effect on our financial condition and results of operations.
26
<PAGE> 31
SELECTED HISTORICAL CONSOLIDATED FINANCIAL
INFORMATION
The following table presents selected consolidated financial information
of Maxcom and its consolidated subsidiary. The annual information has been
derived from, and should be read in conjunction with, the audited consolidated
financial statements of Maxcom as of December 31, 1998 and 1999 and for the
years ended December 31, 1997, 1998 and 1999, which appear elsewhere in this
prospectus. The audited consolidated financial statements have been audited by
BDO International, independent public accountants.
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------
1996(1) 1997 1998 1999(2) 1999
------------ --------------- --------------- --------------- -------------------
THOUSANDS OF CONSTANT DECEMBER 31, 1999 PESOS
AND THOUSANDS OF U.S. DOLLARS, EXCEPT FOR PER SHARE DATA(3)(4)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Mexican GAAP
Telecommunications revenues.......... Ps. 88,197 U.S.$ 9,303
Operating costs and expenses:
Network operating cost............... 43,824 4,623
Selling, general and administrative
expenses........................... 161,561 17,042
Depreciation and amortization...... 74,265 7,834
Total operating costs and expenses... 279,650 29,499
Operating loss....................... (191,453) (20,196)
Comprehensive (income) financing cost:
Interest expense................... 46,301 4,884
Interest income.................... (10,046) (1,060)
Exchange loss, net................. 9,546 1,007
Gain on net monetary position...... (19,944) (2,104)
Total comprehensive cost of
financing....................... 25,857 2,727
Other income, net.................... 109 11
Net loss............................. Ps.(217,201) U.S.$ (22,912)
Net loss per share................... (21) (2.23)
U.S.GAAP
Net (loss)........................... Ps. (5,628) Ps.(58,357) Ps. (97,519) Ps.(275,007) U.S.$ (29,009)
Net loss per share................... (1,126) (43) (12) (27) (2.83)
BALANCE SHEET DATA:
Mexican GAAP
Cash and cash equivalents............ Ps. 31 Ps. 48,993 Ps. 387,173 Ps. 153,662 U.S.$ 16,209
Restricted cash...................... -- -- 1,859 18,688 1,971
Working capital(5)................... 129 13,555 36,272 4,706 497
Frequency rights..................... -- 105,160 105,160 102,792 10,843
Telephone network systems and
equipment.......................... 267 1,152 247,737 788,851 83,212
Preoperating expenses................ 5,628 62,989 168,042 248,136 26,175
Total assets......................... 6,823 235,618 991,579 1,435,981 151,475
Total debt........................... -- -- 210,084 804,349 84,847
Capital stock and additional paid-in 6,056 231,851 761,389 772,963 81,537
capital............................
Deficit.............................. -- -- -- (217,201) (22,912)
Shareholders' equity................. Ps. 6,056 Ps.231,851 Ps. 761,389 Ps. 555,762 U.S.$ 58,625
U.S.GAAP Ps. 428 Ps.167,866 Ps. 599,885 Ps. 336,452 U.S.$ 35,491
Shareholders' equity.................
OTHER FINANCIAL DATA:
Mexican GAAP
EBITDA(6)............................ Ps.(117,079) U.S.$ (12,351)
Capital expenditures................. Ps. 267 Ps.106,184 Ps. 273,125 Ps. 633,425 U.S.$ 66,817
Ratio of earnings to fixed
charges(7)......................... -- -- --
U.S.GAAP
EBITDA(6)............................ Ps. (5,702) Ps.(60,193) Ps.(135,552) Ps.(211,444) U.S.$ (22,304)
Ratio of earnings to fixed
charges(8)......................... -- -- --
</TABLE>
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NOTES TO SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
(1) This financial period began on the date of our incorporation, February
28, 1996.
(2) We commenced commercial operations on May 1, 1999. In accordance with
Mexican GAAP, our financial statements reflect eight months of
operations.
(3) Pursuant to Mexican GAAP, financial data for all periods in the financial
statements have, unless otherwise indicated, been restated in constant
pesos of December 31, 1999. Restatement into December 31, 1999 pesos is
made by multiplying the relevant nominal peso amount by the inflation
index for the period between the end of the period to which such nominal
peso amount relates and December 31, 1999. The inflation index used in
this prospectus for 1996 figures is 1.5416, for 1997 figures is 1.3322
and for 1998 figures is 1.1232.
(4) Peso amounts were converted to U.S. dollars at the exchange rate of
Ps.9.480 per U.S.$1.00 reported by the Federal Reserve Bank of New York
as its noon buying rate for pesos on December 31, 1999. Such conversions
are for the convenience of the reader and should not be construed as
representations that the peso amounts actually represent such U.S. dollar
amounts or could be converted into U.S. dollars at the rate indicated, or
at all.
(5) Working capital is defined as current assets (excluding cash and cash
equivalents and restricted cash) less current liabilities (excluding
current maturities of long-term debt).
(6) EBITDA represents earnings before income taxes, comprehensive (income)
cost of financing and depreciation and amortization. We have included
information concerning EBITDA (which is not a measure of financial
performance under Mexican GAAP or U.S. GAAP) because we believe it is a
standard financial statistic commonly reported and widely used by
analysts and other interested parties. We understand that EBITDA is also
used by investors as one measure of an issuer's ability to service or
incur indebtedness. We also understand that EBITDA may be defined
differently by other companies which disclose a similarly titled account.
You should not construe EBITDA as an alternative to operating income or
as a measure of liquidity or cash flows from operating activities. For a
description of the differences between Mexican GAAP and U.S. GAAP, see
"Management's Discussion and Analysis of Financial Condition and Results
of Operations -- U.S. GAAP reconciliation."
(7) Our earnings have been insufficient to cover fixed charges under Mexican
GAAP since we started incurring debt in 1998 and 1999. Fixed charges
include interest expense plus capitalized interest plus the portion of
operating lease rental expense that represents the interest factor. The
fixed charge coverage deficiency for the years ended December 31, 1998
and 1999 amounted to Ps.19.4 million (U.S.$2.0 million) and Ps.224.8
million (U.S.$23.7 million), respectively.
(8) Our earnings have been insufficient to cover fixed charges under U.S.
GAAP since we started incurring debt in 1998 and 1999. Fixed charges
include interest expense plus capitalized interest plus the portion of
operating lease rental expense that represents the interest factor. The
fixed charge coverage deficiency for the years ended December 31, 1998
and 1999 amounted to Ps.110.3 million (U.S.$11.6 million) and Ps.299.1
million (U.S.$31.5 million), respectively.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
All peso amounts discussed in this prospectus are presented in constant
December 31, 1999 pesos in accordance with Mexican GAAP, except as otherwise
indicated.
GENERAL
The following discussion and analysis is intended to facilitate an
understanding and assessment of significant changes and trends in our historical
consolidated results of operations and financial condition and factors affecting
our financial resources. It should be read in conjunction with the audited
consolidated financial statements as of December 31, 1998 and 1999 and for the
years ended December 31, 1997, 1998 and 1999 and related notes.
These consolidated financial statements, which appear elsewhere in this
prospectus, have been prepared in accordance with Mexican GAAP, which differs in
significant respects from U.S. GAAP, including in the treatment of the
capitalization of preoperating expenses, the amortization of frequency rights,
the capitalization of interest, the accrual of vacation expenses and the
deferral of income taxes and employees' profit sharing, and in the presentation
of cash flow information. Note 18 to the audited consolidated financial
statements provides a description of the principal differences between Mexican
GAAP and U.S. GAAP as they relate to us, and a reconciliation to U.S. GAAP of
our net loss and total shareholders' equity as of and for the years ended
December 31, 1998 and 1999.
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 financial
consolidated 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
comparable periods in comparable monetary units. Bulletin B-10 requires us to
restate nonmonetary assets (other than inventory), nonmonetary liabilities and
the components of shareholders' equity using the Mexican national consumer price
index. The effects of these inflation accounting principles have not been
eliminated in the reconciliation to U.S. GAAP.
Except where otherwise indicated, financial data for all periods in the
consolidated financial statements and throughout this prospectus have been
restated in constant pesos as of December 31, 1999, in accordance with the fifth
amendment to Bulletin B-10. References in this prospectus to "real" amounts are
to inflation-adjusted pesos and references to "nominal" amounts are to
unadjusted historical pesos. In calendar years 1997, 1998 and 1999, the rates of
inflation in Mexico, as measured by changes in the Mexican national consumer
price index, were 15.7%, 18.6% and 12.3%, respectively. The inflation index used
for 1997 figures is 1.3322 and for 1998 figures is 1.1232.
In reporting under Mexican GAAP and in accordance with Bulletin B-10, the
Company is 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:
- net interest expense or interest income;
- net foreign exchange gains or losses; and
- net gains or losses on monetary position.
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 gain or loss on monetary position refers to the gains and losses
realized from holding net monetary assets or liabilities and reflects 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.
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OVERVIEW OF MAXCOM
We are a growing facilities-based telecommunications company operating in
the competitive local exchange carrier market in Mexico. We are focused on
developing our network and support infrastructure required to provide local as
well as long distance and other value-added services to targeted businesses and
residential customers within our concession areas. We position ourselves as a
single-source provider of telecommunications services to our customers.
We commenced commercial operations on May 1, 1999 and currently provide
last-mile connectivity to small and medium-sized businesses and middle and
high-usage residential customers in Mexico City and the City of Puebla. In
addition to our existing local and long distance services, we offer value-added
products such as digital high-speed data connectivity and Internet access. We
are currently expanding the functionality of our network to offer other
broadband services.
We were incorporated in February 1996 to take advantage of business
opportunities arising out of the liberalization of Mexico's telecommunications
industry. In February 1997, we were awarded Mexico's first competitive wireline
local/long distance telephony concession, which covers the Federal District of
Mexico and over 100 cities and towns in the Gulf region, and has a term of 30
years. Our concession was expanded in September 1999 to cover over 80% of the
greater Mexico City area, and a total of 115 cities and towns in the Gulf
region. Mexico City, with a population of approximately 20 million people, is
one of the world's most heavily populated metropolitan areas. The Gulf region
has the greatest concentration of oil, natural gas and maritime industries in
Mexico. We were also awarded a nationwide point-to-point and three regional
point-to-multipoint microwave concessions in October 1997, each for 20 years.
From our incorporation in 1996 to the commencement of our commercial
operations in May 1999, we have been engaged in start-up activities requiring
substantial capital expenditures. Consistent with Mexican GAAP, we capitalized
all of our costs as capital investments or as pre-operating expenses. However,
with the commencement of our commercial operations on May 1, 1999, we are no
longer able to capitalize such costs. In addition, we are now required to
amortize all previously capitalized general and administrative expenses and to
amortize all previously capitalized net comprehensive cost of financing. As a
result, we expect to incur net losses through the year 2000.
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/U.S. dollar exchange rate band by 15% and, two days later, by eliminating
the band to allow the peso to fluctuate freely against the U.S. dollar. This
resulted in a major devaluation of the peso relative to the U.S. dollar. Where
the noon buying rate had been Ps.3.4662 per U.S.$1.00 on December 19, 1994, by
December 31, 1994 the noon buying rate had fallen to Ps.5.0000 per U.S.$1.00,
representing a 44.3% devaluation. The peso continued to decline against the U.S.
dollar during 1995, closing at a noon buying rate of Ps.7.7400 per U.S.$1.00 on
December 31, 1995, which represented a 54.8% devaluation relative to the U.S.
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 5.3% and
6.8%, respectively. However, the financial crises 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 U.S. dollar. In 1999, the peso appreciated
4.3% relative to the U.S. dollar.
Peso devaluations have 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, the inflation rate was 12.3%.
The general economic conditions in Mexico resulting from a devaluation of
the peso and the resulting inflation may have a negative impact on our results
of operations and financial condition, primarily as a result of:
- the ensuing decrease in the purchasing power of Mexican consumers,
which results in a decrease in the demand for telephony services;
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<PAGE> 35
- our inability, due to competitive pressures, to increase our
prices in line with inflation; and
- an increase in the peso-carrying amount of our U.S.
dollar-denominated debt, reflecting the additional amounts in
pesos required to meet such debt.
RECENT DEVELOPMENTS
On August 1, 2000, we completed our internal management numbers for the
second quarter of 2000. The following are the most significant items.
Results of operations
Our telecommunications revenues for the first six months of 2000 were
Ps.108.3 million, measured in constant Pesos of June 30, 2000.
Telecommunications revenues increased by 24% to Ps.60.0 million in the second
quarter of 2000 as compared to the first quarter of 2000. This increase was
primarily due to:
- the time lag between the installation of new lines in the first
quarter of 2000 and the full capacity generation of revenues from
those lines; and
- a significant number of low revenue-generating lines and unused
lines were replaced with revenue-generating lines, increasing
telecommunications revenues in the second quarter.
Operating loss for the first half of 2000 was Ps.182.6 million due to
selling, general and administrative expenses of Ps.142.2 million, network
operating costs of Ps.58.3 million and depreciation and amortization related to
preoperating expenses, frequency rights and telephone network systems and
equipment of Ps.90.3 million. Operating loss increased by 27% to Ps.102.8
million in the second quarter of 2000 as compared to the first quarter.
Net loss for the first half of 2000 was Ps.352.0 million, with Ps.266.7
million recorded in the second quarter.
Balance sheet
At June 30, 2000, our total assets were Ps.3,425.1 million, total
liabilities were Ps.3,238.0 million, total debt was Ps.2,912.1 million
(substantially all of which was accounted for by the old notes) and
stockholders' equity was Ps.321.2 million.
Operating developments
At June 30, 2000, we had installed 26,071 lines, a 3% decrease as
compared to 26,855 lines at March 31, 2000 and a 49.5% increase as compared to
17,433 lines at December 31, 1999. We had a total of 3,442 customers at June 30,
2000, a 71% increase as compared to 2,015 customers at March 31, 2000 and a
162.9% increase as compared to 1,309 customers at December 31, 1999. Our order
backlog was approximately 13,500 lines.
While network traffic grew significantly in the second quarter, total
network capacity was saturated by a surge of inbound minutes attributable to the
large number of our subscribers who are internet service providers. We have
taken steps to increase interconnection links with Telmex in order to increase
capacity.
Our average monthly revenues per line, commonly referred to as "ARPUs,"
were U.S.$36.88 and U.S.$577.06 per residential and business line, respectively,
in the second quarter of 2000.
Management
In June and July 2000, Messrs. Gian Carlo Pecchioni, our former Chief
Executive Officer, Rodrigo Sandoval, our former Chief Marketing Officer and
Michael Tatom, our former Chief Operating Officer resigned. We are actively
searching for adequate replacements.
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<PAGE> 36
LIQUIDITY AND CAPITAL RESOURCES
Financing sources and liquidity
We have financed our start-up costs through capital contributions and
vendor financing, as described below:
- U.S.$100.0 million vendor financing facility from Nissho Iwai
American Corporation, bearing an annual interest rate of
three-month LIBOR plus 4.15% due August 12, 2005, of which
U.S.$53.8 million was outstanding at December 31, 1999. We drew
down an additional U.S.$17.8 million in January and February 2000.
Funds from this facility were used to purchase Lucent Technologies
equipment. We used proceeds from the offering of the old notes to
repay all amounts outstanding in full and have terminated this
facility.
- U.S.$20.0 million vendor financing facility from Nissho Iwai
American Corporation, bearing an annual interest rate of
three-month LIBOR plus 4.15% due August 12, 2005, of which
U.S.$13.9 million was outstanding at December 31, 1999. Funds from
this facility were used to purchase NEC equipment. We used
proceeds from the offering of the old notes to repay all amounts
outstanding in full and have terminated this facility.
- U.S.$18.7 million vendor financing from Hewlett Packard de Mexico
bearing an annual interest rate of three-month LIBOR plus 4.15%
due November 25, 2005, of which U.S.$16.3 million was outstanding
at December 31, 1999. We used proceeds from the offering of the
old notes to repay all amounts outstanding in full and have
terminated this facility.
- U.S.$70.0 million raised from private equity investors.
Our debt service relating to the notes for the first two years will be
paid with U.S.$77.9 million of the proceeds of the offering of the old notes
that was deposited in the interest escrow account. We estimate that funds from
operating activities, the proceeds of the offering of the old notes, the U.S.$35
million capital contribution described under "Principal Shareholders -- Capital
contributions" and financing available through our cash reserves and future
lines of credit with vendors and financial institutions will be adequate to meet
our debt service, our working capital requirements and our capital expenditure
needs through 2003.
However, this estimate may be affected if we enter into joint ventures or
acquisitions which are currently not foreseeable. Our future operating
performance and ability to service and repay the notes will be subject to future
economic and competitive conditions and to financial, business and other
factors, many of which are beyond our control.
Indebtedness
Our consolidated debt at December 31, 1999 was Ps.804.3 million, of which
nearly all was long-term debt. All of our consolidated debt outstanding at
December 31, 1999 was denominated in U.S. dollars. After giving effect to the
offering of the old notes and the application of the net proceeds, the notes
represent substantially all of our indebtedness.
The indenture governing the terms of the notes restricts our ability to
incur indebtedness. For a more complete description of this restriction, see
"Description of the Notes -- Certain covenants -- Limitation on Indebtedness."
Capital expenditures
Through December 31, 1999, we have invested Ps.845.2 million in the
buildout of our network, excluding cumulative preoperating expenses of Ps.265.6
million. We have also paid Ps.105.2 million to obtain all of our concessions.
For the period 2000-2003, we plan to make capital expenditures of
approximately U.S.$414.2 million, mainly to continue to build out our network.
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Market risks
Interest rate risk. Substantially all of our outstanding indebtedness at
December 31, 1999 was payable at variable interest rates. As a result, our
earnings were affected by changes in interest rates. However, with the
completion of the offering of the old notes on March 17, 2000 and the
application of the proceeds, substantially all of our indebtedness is now at a
fixed rate. As a result, we do not have any significant interest rate risk.
Foreign exchange risk. Our primary foreign currency exposure relates to
our U.S. dollar-denominated debt. All of our debt obligations at December 31,
1999 were denominated in U.S. dollars. At December 31, 1999, after giving effect
to the completion of the offering of the old notes on March 17, 2000 and the use
of the proceeds, approximately all of our debt obligations would have been
denominated in U.S. dollars. Therefore, we are exposed to currency exchange rate
risks that could significantly affect our ability to meet our obligations. We
currently do not enter into hedging transactions with respect to these foreign
currency risks, but continue to consider the appropriateness of this option.
The exchange rate of the peso to the U.S. dollar is a freely-floating
rate and the peso has experienced significant devaluations in recent years. Any
significant decrease in the value of the peso relative to the U.S. 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. At
December 31, 1999, after giving effect to the offering of the old notes and the
application of the proceeds, an immediate 10% devaluation of the peso relative
to the U.S. dollar would have increased our interest expense by approximately
Ps.37.0 million over a one-year period.
Dividend policy
Our current policy is to reinvest profits into our operations. In
addition, the indenture that governs the terms of the notes limits our ability
to pay cash dividends. For a more complete description of the limitations on the
payment of dividends, see "Description of the Notes -- Certain covenants --
Limitations on restricted payments."
RESULTS OF OPERATIONS
Capitalization of preoperating expenses
We commenced commercial operations on May 1, 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. Accordingly, our financial statements do not include a consolidated
statement of operations for the period from February 28, 1996 (our date of
incorporation) to April 30, 1999.
Beginning on May 1, 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, which amounted to Ps.248.1 million at December 31, 1999, are amortized
on a straight-line basis for a period not exceeding ten years.
Year ended December 31, 1999
Our consolidated statement of operations for the year ended December 31,
1999 covers in effect only our first eight months of operations, which commenced
on May 1, 1999.
Our revenues were Ps.88.2 million. Our revenues include primarily monthly
fees, usage fees, installation charges, interconnection fees and the sale of
telephone sets. We recognize revenues on an accrual basis, except for
interconnection fees, which are recognized upon invoicing.
Our operating costs and expenses were Ps.279.7 million. Selling, general
and administrative expenses and network operating costs represented 57.8% and
15.7% of our operating costs and expenses, respectively. The remaining 26.5%, or
Ps.74.3 million, related to depreciation and amortization of preoperating
expenses, frequency rights and telephone network systems and equipment.
Our comprehensive cost of financing was Ps.25.9 million. Net interest
expense was Ps.36.3 million, mainly resulting from our increased level of
indebtedness under the Nissho Iwai and the Hewlett Packard vendor facilities. In
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<PAGE> 38
addition, we experienced a Ps.9.5 million exchange loss resulting from the
effect of the monthly fluctuation of the peso exchange rate relative to the U.S.
dollar on our net liability U.S. dollar position.
These two factors were offset in part by a Ps.19.9 million monetary gain
resulting from the effect of inflation on our net liability peso position.
We also recorded other income, net of Ps.0.1 million representing
interest earned on value-added tax receivables.
As a result of the above, we recorded a net loss for the period of
Ps.217.2 million.
U.S. GAAP RECONCILIATION
We describe below the principal differences between Mexican GAAP and U.S.
GAAP. See Note 18 to the audited consolidated financial statements for a
reconciliation to U.S. 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 recognition of the effects of inflation in
financial statements has no counterparts under U.S. GAAP. However, since Mexican
GAAP includes the effects of inflation in primary financial statements, the SEC
does not require the restatement of financial statements to recognize the
effects of inflation.
Preoperating expenses
Under Mexican GAAP, all expenses incurred while a company or a project 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 U.S. GAAP, such preoperating expenses
are expensed and reported as deficit accumulated during the development stage in
the shareholders' equity.
Deferred income taxes
Under Mexican GAAP, deferred income taxes and employees' profit sharing
are provided for on the liability method, but only for non-recurring and
identifiable book and tax differences that are expected to reverse themselves
over a definite period of time. Under U.S. GAAP, deferred taxes are recognized
for the tax consequences of all temporary differences, both recurring and
non-recurring, between the financial statements carrying amounts and the tax
basis of existing assets and liabilities.
Realization of tax-loss carry-forwards
In accordance with Mexican GAAP, the tax benefit of a tax-loss
carry-forward should only be recorded when realized and should be reported as an
extraordinary item in the statement of income. Generally, under U.S. GAAP, the
tax benefit of an operating-loss carry-forward must be reported in the same
manner as the source of the income or the loss in the current year. Because the
realization of our tax losses is not considered to be likely, a valuation
allowance has been established for the full amount of the potential deferred tax
assets.
Statement of changes in financial position
In accordance with Mexican GAAP, we present statements of changes in
financial position in constant Mexican pesos. This presentation identifies the
generation and application of resources representing differences between
beginning and ending financial statement balances in constant Mexican pesos.
The changes in the consolidated financial statement balances included in
our audited consolidated financial statements constitute cash flow activity
stated in constant Mexican pesos (including monetary losses which are considered
as cash losses in the financial statements presented in constant Mexican pesos).
SFAS No. 95, does not provide guidance with respect to inflation-adjusted
financial statements. However, U.S. GAAP requires that non-cash
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<PAGE> 39
financing and investing transactions should be excluded from the statement of
cash flows and reported in related disclosures.
Losses per share
In accordance with Mexican GAAP, basic earnings per ordinary share are
calculated based on the weighted-average number of ordinary shares outstanding
during the period. The same procedure is applied to preferred or limited-voting
shares. For diluted earnings per share, net income or loss attributable to
ordinary shares and weighted average number of ordinary shares should be
adjusted by the dilutive effects of the convertible shares, options, warrants
and other potentially dilutive securities, within certain limits. Dilution of
ordinary shares by the potentially dilutive shares included in options and
warrants is determined by modifying only the number of shares in the calculation
of the earnings or losses per share.
Under U.S. GAAP, basic net loss per share includes no dilution and is
computed by dividing losses available to common shareholders' by the weighted
average number of common shares outstanding for the period. Dilutive net loss
per share reflects the potential dilution of securities that could share in the
losses of an entity, similar to existing diluted losses per share. The basic and
diluted number of shares under U.S. GAAP would not be materially different from
what will be presented for Mexican GAAP purposes.
Personnel compensation and seniority premiums
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
U.S. GAAP.
We have no pension plan and have no significant contingent labor
liabilities, due to the fact that the seniority of the vast majority of our
employees is less than one year.
Frequency rights
Under Mexican GAAP, frequency rights are amortized by the straight-line
method over the term of the concession from the start of operations. Under U.S.
GAAP, this item should be amortized during the term of the concession.
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 U.S. 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.
Stock option plans
This item is not specifically addressed by Mexican GAAP. Under U.S. GAAP,
an entity is encouraged to use a fair value method of accounting to measure
compensation cost for its stock options and similar equity instruments awarded
to employees. If the fair value based method is not used, the intrinsic value
method of accounting is required. Under the fair value based method,
compensation costs are generally measured at the grant date based on the value
of the award and are recognized over the service period, which is usually the
vesting period. Under the intrinsic value based method, compensation cost is the
excess, if any, of the quoted market price of the stock on the grant date or
other measurement date over which the employee pays to acquire the stock.
We have adopted U.S. GAAP guidelines and used the fair value method for
our stock option plans.
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RECENT ACCOUNTING PRONOUNCEMENTS
Recent Mexican accounting pronouncements
In April 1999, the Mexican Institute of Public Accountants issued a new
Bulletin D-4, Accounting Treatment for Income Tax, Tax on Assets and Statutory
Employees' Profit Sharing, applicable to all Mexican companies for the year
beginning on January 1, 2000. This standard provides a different method of
calculating deferred income taxes than is currently in force. Under the new
rules, deferred taxes will be recognized for the tax consequences of all
temporary differences, both recurring and non-recurring, between the financial
statements' carrying amounts and the tax basis of existing assets, liabilities
and tax losses. Due to the recent issuance of this standard, our management has
not been able to fully evaluate the impact it may have on our future financial
position and results of operations.
Recent United States accounting pronouncements
SFAS No. 132, "Employers' Disclosure about Pensions and other
Postretirement Benefits" standardizes the disclosure requirements for pensions
and other postretirement benefits and requires additional information on changes
in the benefit obligations and fair values of plan assets. The statement is
effective for financial statements for periods beginning after December 15, 1997
and requires comparative information for earlier years to be restated. However,
we have no pension plans and we do not grant postretirement benefits. The
adoption of the new standard did not have a material effect on the disclosures
in the financial statements.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" requires companies to recognize all derivatives contracts as either
assets or liabilities in the balance sheet and to measure them at fair value. If
certain conditions are met, a derivative may be specifically designated as a
hedge, the objective of which is to match the timing of gain or loss recognition
on the hedging derivative with the recognition of (1) the changes in the fair
value of the hedged asset or liability that are attributable to the hedged risk
or (2) the earnings effect of the hedged forecasted transaction. For a
derivative not designated as a hedging instrument, the gain or loss is
recognized in income in the period of change. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000.
Historically, we have not entered into derivative contracts either to
hedge existing risk or for speculative purposes. Accordingly, we do not expect
the adoption of the new standard to have a material effect on our financial
statements.
Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-up
Activities," provides guidance on the financial reporting of start-up costs or
organization costs. It requires cost of start-up activities and organization
costs to be expensed as incurred. The SOP is effective for financial statements
for fiscal years beginning after December 15, 1998. Our management has adopted
this SOP as reflected in Note 18(k) to the audited consolidated financial
statements.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1, "Accounting of the Cost of Computer
Software Development Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 requires
computer software costs associated with internal use software to be expensed as
incurred until certain capitalization criteria are met. We have adopted SOP 98-1
and its adoption has not had a material impact on our financial position,
results of operations or cash flows.
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OVERVIEW OF THE MEXICAN TELECOMMUNICATIONS INDUSTRY
GENERAL
The telecommunications industry involves the transmission of voice, data
and video communications from point of origination to point of termination. The
Mexican telecommunications industry has been undergoing rapid change in the last
decade due to the introduction of new technologies and the construction of
additional infrastructure, as well as market liberalization, which together have
resulted in increased competition and demand for telecommunications services.
The modernization of the Mexican telecommunications infrastructure began
in 1990 with the privatization of Telmex, the government-controlled
telecommunications monopoly. Since privatization, Telmex and several
concessionaires have begun deploying modern fiber and wireless networks
throughout Mexico. To meet the demand for higher volume and higher quality
wireline services, copper cables are being replaced largely by fiber optic
transmission systems that provide greater capacity at lower cost with higher
quality and reliability.
MARKET LIBERALIZATION
Historically, the Mexican telecommunications industry was dominated by
Telmex, the government-controlled telecommunications monopoly. In December 1990,
the Mexican government initiated the privatization and deregulation of Telmex by
selling a controlling portion of Telmex's equity to a private consortium led by
Grupo Carso, S.A. de C.V., a Mexican conglomerate, as well as to subsidiaries of
Southwestern Bell Corporation and France Telecom S.A. Subsequently, the Mexican
government opened the wireless market by granting nine regional cellular
concessions in Band "A" in order to allow concessionaires to compete with
Telmex.
Local telephony market
In connection with the privatization of Telmex in 1990, the Mexican
government amended Telmex's nationwide concession, which expires in March 2026
and granted Telmex a six-year implied monopoly over local telephony services.
The amended Telmex concession obligated Telmex to expand and increase local
telephony service at a rate of 12% per year beginning in 1992 and to provide
basic telephone service to all population centers of 500 or more inhabitants by
1995. The implied local service monopoly was eliminated in mid-1996 when the
Mexican Communications and Transportation Ministry (Secretaria de Comunicaciones
y Transportes), which we refer to as the "SCT," published regulations governing
the licensing of local services on a competitive basis.
In order to promote competition in the local telephony market, the
Mexican government granted several concessions beginning in 1997, including the
concession awarded to us for wireline local telephony service. Each wireline
local telephony concession granted by the Mexican government generally has a
30-year term, and authorizes, among other things, the provision of local
telephony services and value-added services in a specified region of the
country.
The Mexican government has also been conducting auctions of spectrum
frequencies in the:
- 450 MHz, 1.9 GHz (PCS) and 3.4-3.7 GHz (fixed wireless local loop)
frequency bands;
- 7, 15 and 23 GHz frequency band for nationwide point-to-point
microwave transmission links; and
- 10.5 GHz frequency band for regional point-to-multipoint microwave
transmission service.
Four companies won nationwide concessions for fixed wireless local loop
frequencies, although one later forfeited its right for failure to pay
concession fees. In addition, five companies won concessions in the 1.9 GHz
(PCS) frequencies on either a nationwide or regional basis, although one also
forfeited its right for failure to pay concession fees. See "Business --
Competition."
Long distance telephony market
In connection with the privatization of Telmex in 1990, the Mexican
government granted Telmex an exclusivity period for long distance telephony
services of six years. In August 1996, the exclusivity period granted to
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Telmex to provide domestic and international long distance telephone service
expired and competition commenced in January 1997. In order to promote
competition among domestic and international long distance providers, the
Mexican government granted several concessions, including the concession awarded
to us, for domestic and international long distance services, as well as
value-added services. Each concession generally has a nationwide scope and a
30-year term, and authorizes the provision of domestic and international long
distance services and value-added services.
The long distance concessionaires include among others:
- Alestra, S. de R.L. de C.V., in which AT&T Corp. is a shareholder;
- Avantel, S.A. de C.V., in which MCI WorldCom Inc. is a
shareholder;
- Telinor, S.A. de C.V., commonly known as "Axtel," in which Bell
Canada International is a shareholder; and
- Iusatel, S.A. de C.V., in which Bell Atlantic Corporation is a
shareholder.
International liberalization trends will likely impact the flow of long
distance telephone traffic to and from Mexico. In particular, demand for long
distance services may be stimulated by reforms of domestic
access/interconnection charges and international settlement rates and recent
international trade negotiations. As such charges decline, overall demand for
international and local services may increase.
MEXICAN MARKET CHARACTERISTICS
Population and economic growth
Mexico is the second largest country in Latin America in terms of
population. In 1998 Mexico had an estimated population of 97.2 million and a
population growth rate of approximately 1.4% for the period from 1995 to 1997.
In 1997, 34.9% of the population was under the age of 15, 60.2% between the ages
of 15 and 65 and only 4.9% was over 65. After a decline in 1995, Mexico's real
gross domestic product has grown in the past three years, rising by 6.8% in
1997, by 4.8% in 1998 and by 3.7% in 1999.
Underserved telephony market
Mexico has a relatively low level of wireline penetration with
substantial unmet demand for fixed telephony service. The following table
presents telephone wirelines in service per 100 inhabitants for the United
States and major Latin American countries as of December 31, 1997.
SELECTED TELEDENSITY RATES
<TABLE>
<CAPTION>
LINES IN SERVICE PER
COUNTRY 100 INHABITANTS(1)
------- -------------------------
<S> <C>
United States..................................................................... 64.4
Uruguay........................................................................... 23.2
Argentina......................................................................... 19.1
Chile............................................................................. 18.0
Colombia.......................................................................... 14.8
Venezuela......................................................................... 11.6
Brazil............................................................................ 10.7
Mexico............................................................................ 9.6
Peru.............................................................................. 6.8
</TABLE>
------------------
(1) Source: International Telecommunications Union, Yearbook of Statistics,
January 1999.
According to Pyramid Research, at the end of 1998, the teledensity rate
in Mexico was 10.2 telephone lines per 100 inhabitants. By comparison, the
teledensity rates at the end of 1997 were 19.1 in Argentina, 18.0 in Chile, 11.6
in Venezuela and 10.7 in Brazil.
According to Pyramid Research, the wireline local telephony market
represents approximately 50.0% of Mexico's total telecommunications market, when
measured by revenues, and generated approximately U.S.$3.4
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billion of revenue in 1998. The business segment represents approximately 25% of
the local telephone market, with the balance accounted for by the residential
segment.
Projected growth trends
With the introduction of competition in the Mexican telecommunications
market, teledensity rates and line usage are expected to increase substantially.
Teledensity rates are expected to increase from approximately 10.2 telephone
lines per one hundred inhabitants at the end of 1998 to approximately 11.0 lines
per one hundred inhabitants at the end of 1999. According to Pyramid Research,
between 1999 and 2003, lines in service in Mexico are expected to increase from
10.9 million to 18.1 million, a compound annual growth rate of approximately
13.4%. During the same period, teledensity rates are expected to increase from
11.0 lines per one hundred inhabitants in 1999 to 16.8 lines per one hundred
inhabitants in 2003. In addition, wireless subscribers are estimated to increase
at an annual compound growth rate of 13.5% between 1999 and 2003.
According to Pyramid Research, local, domestic long distance and
international long distance services revenues are expected to experience 15%,
11% and 11% compound annual growth rates, respectively, between 1999 and 2003.
Total local wireline telephony revenues in Mexico are expected to increase from
U.S.$3.4 billion in 1998 to U.S.$6.1 billion in 2003. This growth is expected to
result from a marked increase in the number of lines in service and a slight
increase in local service rates.
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SUPERVISION AND REGULATION OF
THE MEXICAN TELECOMMUNICATIONS INDUSTRY
CURRENT REGULATORY ENVIRONMENT
General
The telecommunications industry in Mexico is subject to the New
Telecommunications Law (Ley Federal de Telecomunicaciones) which was enacted in
1995. However, certain rules set forth under the Ley de Vias Generales de
Comunicacion, the Reglamento de Telecomunicaciones and the rules promulgated
thereunder, generally remain effective and are referred to as the Old
Telecommunications Law.
Under the New Telecommunications Law, the Mexican telecommunications
industry is regulated for administrative and operational matters by COFETEL
(Comision Federal de Telecomunicaciones). COFETEL was created in 1996 as an
autonomous entity from the SCT to regulate and promote the efficient development
of the telecommunications industry in Mexico. COFETEL is responsible for, among
other things:
- enacting regulations and technical standards for the
telecommunications industry;
- ensuring that holders fulfill the terms of their concessions and
permits;
- suspending operators without concessions;
- resolving interconnection controversies between competitors; and
- maintaining a registry of applicable rates.
The SCT retains the authority to grant all concessions and permits.
COFETEL makes recommendations to the SCT on major issues, such as amending
existing telecommunications laws, 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
General. To provide public telephony services in Mexico through a public
network, a service provider must first obtain a concession from the SCT.
Pursuant to the New Telecommunications Law, concessions for public networks may
not exceed a term of 30 years, and concessions for spectrum frequencies may not
exceed a term of 20 years. Generally, concessions may be extended for a term
equivalent to the term for which the concession was originally granted.
Concessions specify, among other things:
- the type and technical specifications of the network, system or
services that may be provided;
- the allocated spectrum frequencies, if applicable;
- the geographical region in which the holder of the concession may
provide the service;
- the required capital expenditure program;
- the term during which such service may be provided;
- the payment, where applicable, required to be made to acquire the
concession, including, where applicable, the participation of the
Mexican government in the revenues of the holder of the
concession; and
- any other rights and obligations affecting the concession holder.
In addition to concessions, the SCT may also grant permits for the
following:
- installing, operating or exploiting transmission-ground stations;
and
- providing telecommunications services as a reseller.
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There is no legally mandated maximum term for these permits, unless
specifically stated in the permit. Under the New Telecommunications Law, a
company needs to register the rates for the telecommunications services that it
wishes to provide with COFETEL in order to be able to provide them to the
public.
Ownership restrictions. Under the New Telecommunications Law and the
Mexican Foreign Investment Law (Ley de Inversion Extranjera), concessions may be
granted only to:
- Mexican individuals; and
- Mexican corporations (1) in which non-Mexicans own 49% or less of
the full voting stock and (2) which are not otherwise controlled
by non-Mexicans.
However, in the case of concessions for cellular communications services,
foreign investment participation may exceed 49% of the voting stock with the
prior approval of the Mexican Foreign Investment Commission of the Mexican
Ministry of Commerce (Secretaria de Comercio y Fomento Industrial).
Pursuant to the Foreign Investment Law, the Mexican Ministry of Commerce
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 in 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 such concession, and such a transfer
does not violate the foreign ownership requirements of the New
Telecommunications Law and the Mexican Foreign Investment Law.
Termination. A concession or a permit may be terminated pursuant to the
New Telecommunications Law upon the following events:
- EXPIRATION OF ITS TERM.
- RESIGNATION BY THE CONCESSION HOLDER OR THE PERMIT HOLDER.
- REVOCATION. A concession or a permit may be revoked prior to the
end of its term under certain circumstances, such as:
- failure to exercise the rights of the concession within 180
days;
- failure to provide interconnection services with other
holders of telecommunications concessions and permits
without just cause;
- loss of the concession or permit holder's Mexican
nationality;
- unauthorized assignment, transfer or encumbrance of the
concession or permit;
- unauthorized interruption of service;
- taking any action that impairs the rights of other
concessionaires or permit holders;
- failure to comply with the obligations or conditions
specified in the concession or permit; and
- failure to pay to 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 of 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
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a statutory expropriation. The amount of the compensation is to be
determined by appraisers. If the party affected by the
expropriation disagrees with the amount appraised, 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.
- DISSOLUTION OR BANKRUPTCY OF THE CONCESSION HOLDER OR THE PERMIT
HOLDER.
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
telecommunications company.
Rates for telecommunications services
Under the Old Telecommunications Law, 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 under the Old Telecommunications Law.
Under the New Telecommunications Law, rates for telecommunications
services (including local, cellular and long distance 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 New Telecommunications Law
prohibits telecommunications providers from cross-subsidizing among their
services and requires that they keep separate accounting for each of their
services.
Recently, the Mexican Antitrust Commission found that Telmex has
substantial market power as defined under Mexico's antitrust statute and,
accordingly, COFETEL must determine whether it will regulate Telmex as a
dominant carrier. Telmex has obtained a provisional injunction against potential
COFETEL actions to regulate Telmex as a dominant carrier.
OUR CONCESSIONS
Local telephony
We obtained our wireline local telephony concession in February 1997,
which was amended in September 1999 to, among other things, expand the areas of
coverage. The concession, which is not exclusive, grants us the right to provide
business, residential and public wireline local telephony services in Mexico
City and 115 cities and towns in the Gulf region, which include, among others,
the cities of Puebla, Veracruz, Tampico, Coatzacoalcos, Reynosa, Merida, Cancun,
Campeche, Chetumal, Ciudad del Carmen and Tuxtla Gutierrez. Our wireline local
telephony concession has a term of 30 years and may be renewable for up to an
equivalent period provided we have complied with all its terms.
The concession expressly permits us to provide the following services:
- basic local telephony;
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- 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;
- the purchase and lease of network capacity from other carriers,
including the lease of digital circuits;
- value-added services;
- operator services;
- data, video, audio and video conference services, except for cable
or other restricted television, continuous music or digital audio;
- credit or debit telephone cards; and
- public telephony.
The concession does not impose any limitations on the setting of our
rates other than the requirement that we file with COFETEL a notification of any
rate change prior to having it take effect.
The concession requires us to comply with service quality specifications
and to install infrastructure on the basis of a predetermined schedule.
According to this schedule, we must install at least an aggregate of 464
kilometers of wired infrastructure in at least 115 cities and towns in the Gulf
region and in Mexico City by the end of 2003. We are currently in compliance
with all the material terms of the concession.
The failure to comply with the terms of the concession could result in a
revocation of the concession. See -- "Concessions and permits -- Termination."
As of June 30, 2000, the level of fines, which are based on a multiple of the
Mexican minimum daily salary, ranged from Ps.75,800 to Ps.3,790,000, depending
on the nature of the infraction.
Long distance
We obtained our nationwide long distance concession in February 1997,
concurrently with our local telephony concession. Our nationwide long distance
concession also has a term of 30 years and may be renewable for up to an
equivalent period provided we have complied with all its terms.
The concession expressly permits us to provide the following services:
- carry switched traffic between long distance centers that do not
belong to the same local centers and that requires the use of a
dialing prefix for its routing;
- 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;
- the purchase and lease of network capacity from other carriers;
and
- nationwide and international long distance telephony.
The concession expressly prohibits the following services:
- those which require a concession for frequency bands of the radio
electric spectrum for specific uses;
- those which require a concession to occupy and exploit
geostationary orbital positions and satellite orbits assigned to
Mexico;
- those which require a concession to operate radio or television
broadcasting systems; and
- cable or other restricted television.
The concession does not impose any limitations on the setting of our
rates other than the requirement that we file with COFETEL a notification of any
rate change prior to having it take effect.
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The concession requires us to comply with service quality specifications
and to install infrastructure on the basis of a predetermined schedule.
According to this schedule, we must provide nationwide long distance service in
at least 115 cities and towns in the Gulf region and in Mexico City by the end
of 2003. Of these, we must:
- install our own fiber optic infrastructure to link eight cities;
and
- provide service in 117 towns and cities using our own or leased
infrastructure.
We are currently in compliance with all the material terms of the concession.
The failure to comply with the terms of the concession could result in
the revocation of the concession and the loss the Ps.6.9 million performance
bond previously issued to the SCT. As of June 30, 2000, the level of fines,
which are based on a multiple of the Mexican minimum daily salary, ranged from
Ps.75,800 to Ps.3,790,000, depending on the nature of the infraction.
Microwave transmissions
Point-to-point. In October 1997, we were awarded seven nationwide
point-to-point microwave concessions. These concessions cover:
- two consecutive bands in the 15 GHz, 56 MHz bandwidth range;
- three consecutive bands in the 23 GHz, 56 MHz bandwidth range; and
- two consecutive bands in the 23 GHz, 100 MHz bandwidth range.
These concessions, which were issued in June 1998, have a term of 20
years. COFETEL will re-auction the frequencies covered by the concessions at
least three years before the expiration date of the concessions. The concessions
require us to provide available capacity to the general public.
These concessions do not impose any limitations on the setting of our
rates other than the requirement that we file with COFETEL a notification of any
rate change prior to having it take effect.
Point-to-multipoint. In October 1997, we were awarded three regional
point-to-multipoint microwave concessions covering Regions 3, 5 and 8, which
include states in the north and southeast of Mexico, and covering the 60 MHz
band in the Gulf region.
These concessions, which were issued in April 1998, have a term of 20
years. COFETEL will re-auction the frequencies covered by the concessions at
least three years before the expiration date of the concessions. These
concessions require us to install a network and offer service to at least 30% of
the population in each region by the end of the second year after the issuance
of the concession. However, we have obtained from COFETEL an extension to April
2000.
These concessions do not impose any limitations on the setting of our
rates other than the requirement that we file with COFETEL a notification of any
rate change prior to having it take effect.
INTERCONNECTION
In accordance with the Mexican telecommunications laws, all local
telecommunications carriers are required to provide interconnection to each
local, long distance and cellular carrier operating in Mexico.
All terms of interconnection (such as point of interconnection) are
negotiated between telecommunications carriers under COFETEL's supervision.
Should telecommunications carriers be unable to agree on the terms of
interconnection (including rates) after a certain period of negotiation, either
carrier may request COFETEL to resolve any interconnection term at issue.
Telecommunications carriers are prohibited from adopting discriminatory
practices in the application of rates or any other terms of interconnection.
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Local interconnection
In November 1998, we entered into an interconnection agreement with
Telmex. This agreement calls for reciprocal interconnection rates for
local-to-local services. The interconnection rate, which is adjusted for
inflation, was Ps.0.3115 per minute for the month of June 2000.
This agreement was amended in February 1999 to incorporate a "bill and
keep" feature through September 15, 2002, provided we maintain a significant
percentage of residential users. Under the "bill and keep" arrangement, if the
imbalance between calls originated by Telmex and terminated by Maxcom and calls
originated by us and terminated by Telmex during a month does not exceed a
predetermined percentage, then no interconnection fee amounts are payable by the
net user of interconnection services. If the imbalance is greater than the
predetermined percentage, then the net user must pay interconnection fees
related to services in excess of the predetermined percentage. The predetermined
percentage through September 15, 2000 is 40%, from September 16, 2000 to
September 15, 2001 is 25% and from September 16, 2001 to September 15, 2002 is
15%. In addition, if the imbalance exceeds 70% in any given month, the "bill and
keep" feature will not apply for that month.
If we fail to maintain a significant percentage of residential users,
then the "bill and keep" arrangement will be terminated and COFETEL may apply
asymmetrical interconnection rates. COFETEL has not yet defined what constitutes
a "significant percentage of residential users."
Through June 30, 2000, no material interconnection fees have been paid.
Mobile interconnection
We have also signed reciprocal interconnection agreements with Radiomovil
Dipsa, S.A. de C.V., commonly known as Telcel, a wholly-owned subsidiary of
Telmex, several subsidiaries of Grupo Iusacell, S.A. de C.V. , and with Pegaso
Communicaciones y Sistemas, S.A. de C.V., commonly known as Pegaso. Telcel and
Grupo Iusacell are the first and second largest mobile telephony service
providers in Mexico, respectively. Telcel is a nationwide cellular operator,
while Grupo Iusacell provides cellular mobile services in central Mexico. Pegaso
is a nationwide PCS mobile operator.
For the month of June 30, 2000, the interconnection fees with these
carriers were Ps. 0.3115 per minute for mobile to wireline interconnection and
Ps.1.90 per minute for wireline to mobile interconnection under the "calling
party pays" mode. The interconnection fee for wireline to mobile interconnection
outside of the "calling party pays" mode was Ps. 0.3115. The interconnection
agreements, provide that transit from Telmex may be used at a rate per minute
which was Ps. 0.0605 for the month of December 1999.
Long distance interconnection
Long distance carriers are required to ensure call termination by
providing transit and direct/or indirect interconnection. Since we view long
distance services as a complement to our core local telephony business, we give
our customers the option to use our long distance services or those of other
providers. As a result, we grant long distance carriers the option to pick up
calls at our facilities.
We have requested interconnection from all long distance carriers. To
date, only Telmex, Bestel, S.A. de C.V. and Iusatel, S.A. de C.V., the long
distance subsidiary of Grupo Iusacell, have agreed to provide interconnection.
We have filed a complaint with COFETEL against six other long distance carriers
who have refused to provide interconnection and expect a resolution by October
2000.
We currently provide our long distance service to our local telephony
customers through our own network and leased facilities.
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BUSINESS
THE COMPANY
We are a growing facilities-based telecommunications company operating in
the competitive local exchange carrier market in Mexico. We commenced commercial
operations on May 1, 1999. We are focused on developing our network and support
infrastructure required to provide local as well as long distance and other
value-added services to targeted businesses and residential customers within our
concession areas. We believe that our concession areas, which include Mexico
City, the City of Puebla and a number of other cities along Mexico's Gulf Coast,
are attractive from a telecommunications growth perspective, due to the
combination of a relatively large population, low subscriber line penetration
and strong economic growth. We anticipate a large and growing demand for
telephony services in these regions. As of June 30, 2000, we have installed
26,071 lines for 3,442 customers.
We position ourselves as a single-source provider of telecommunications
services to our customers. In addition to our existing local, long distance and
data services, we offer value-added products such as digital high-speed data
connectivity and Internet access. We are currently expanding the functionality
of our network to offer other broadband services.
In order to support our market positioning, we follow a marketing
strategy that is focused on differentiating ourselves from competitors. A key
element in this strategy is superior customer service, centered on what is most
important to our customers. According to our market research, our target
customers value highly, among other things, around-the-clock customer care
availability, rapid-response time and timely and accurate billing. We emphasize
that we speak the "same language" as our customers, acting as their partner in
educating them about product offerings and providing reliable services to suit
their growing needs. We have implemented a branding strategy to reaffirm this
message and to strengthen our name recognition. Our order backlog was
approximately 13,500 lines at June 30, 2000.
The Mexican government has announced that the increase in teledensity
rates is one of its top priorities. To help foster this growth, in February
1997, we were awarded Mexico's first competitive wireline local/long distance
telephony concession, which covers the Federal District of Mexico and over 100
cities and towns in the Gulf region, and has a term of 30 years. Our concession
was expanded in September 1999 to cover over 80% of the Greater Mexico City
area, and a total of 115 cities and towns in the Gulf region. Mexico City, with
a population of approximately 20 million people, is one of the world's most
heavily populated metropolitan areas. The Gulf region has the greatest
concentration of oil, natural gas and maritime industries in Mexico. We were
also awarded a nationwide point-to-point and three regional point-to-multipoint
microwave concessions in October 1997, each for 20 years.
The construction of our telecommunications network is based on a
smart-build, customer-driven, modular platform that utilizes a combination of
fiber optic, copper wire and microwave transmission technology. This methodology
enables us to provide service quickly to our target markets, reduces the time
lag between the incurrence of capital expenditures and the generation of service
revenues and increases flexibility to accommodate a changing market environment.
To operate our network, we have constructed two central switching offices
located in Mexico City and the City of Puebla, with a 170-kilometer fiber optic
link connecting the two cities. As of December 31, 1999, we had in service two
state-of-the-art Lucent Technologies 5ESS switches.
We believe that the combination of our attractive wireline and microwave
concession areas, our smart-build network construction strategy, our position as
a customer service-oriented provider and our state-of-the-art network will allow
us to benefit from the expected growth of the Mexican telecommunications
industry.
COMPETITIVE STRENGTHS
We believe we have a number of key strengths that will enable us to
capture an increasing share of the growing Mexican local telephony market.
Early mover advantage
We began commercial operations on May 1, 1999. In our markets, we are
currently the only alternative to Telmex in providing wireline local telephony
services to small and medium-sized businesses and middle and high-usage
residential customers. By starting earlier than other new entrants in our
concession markets, we are able to:
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- be the first to service the most attractive concentrations of
potential lines, which we refer to as "clusters;"
- secure access to the most convenient public and private rights of
way routes;
- operate in a limited competitive environment in the Gulf region
with relative pricing stability; and
- develop customer loyalty and brand awareness by educating
consumers about our service offerings and telecommunications
services in general, and by offering superior customer service.
Proven state-of-the-art technology with flexible last-mile connectivity
Our network utilizes a combination of proven technologies that enable us
to provide state-of-the-art services and flexibility in providing last-mile
connectivity to both business and residential customers. We currently use fiber
optic, copper wire and microwave transmission technology to enable us to quickly
access and service our targeted markets. This network is supported by
state-of-the-art 5ESS switching technology provided by Lucent Technologies. We
are also investing in the latest operational support systems from leading
hardware and software providers such as Metasolv, Ericsson/Hewlett-Packard and
Kenan Systems. This technology platform is designed to allow us to deliver
services in a more automated, efficient manner.
One-stop shopping
We offer our customers an integrated bundle of services that includes
local, long distance, data transport and other value-added services, and expect
to provide digital high-speed data connectivity and Internet access. We are
currently expanding the functionality of our network to offer other broadband
services. We are the first telecommunications provider in Mexico other than
Telmex capable of delivering an integrated local and long distance service to
our customers. In addition, we are currently the only telecommunications company
in Mexico capable of providing services from a central switching location using
centrex technology. We believe that our broad capabilities provide us with a
competitive advantage in meeting the demands of Mexican customers for one-stop
shopping of telecommunications services.
Highly respected equity and technical sponsorship
We are supported by a highly respected base of equity and technical
sponsors experienced in the Mexican market and the telecommunications industry.
Members of the Aguirre Gomez family, our principal controlling shareholders,
have substantial experience in the Mexican communications industry through their
past participation in Grupo Radio Centro, S.A. de C.V., a leading broadcaster.
CT Global Telecommunications Inc., another of our principal shareholders, is a
wholly-owned subsidiary of CT Communications, Inc., a full service local and
long distance telecommunications provider in the state of North Carolina in the
United States. CT Global Telecommunications provides us with operational
support, including highly qualified technical and management personnel.
Additional equity sponsors include experienced Latin American and
telecommunications investors such as BankAmerica International Investment
Corporation, BancBoston Investments, Inc., Bachow Investment Partners III, L.P.
and Latinvest Strategic Investment Fund, L.P.
STRATEGY
We intend to capitalize on our competitive strengths to become a leading
telecommunications provider in our markets in Mexico. Our strategy to achieve
this objective includes the following components:
Capture unmet demand for telephony services
We seek to capture unmet demand by targeting small and medium-sized
businesses and middle and high-usage residential customers that are looking to
expand their telecommunications capacity or that do not currently receive the
type of products and services we offer. We believe that the potential for
expansion in the Mexican telecommunications market is significant given the
current low teledensity rate, which was 10.2 telephone lines per 100 inhabitants
at the end of 1998, the increasing level of competition and the continued
development of the Mexican economy.
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Focus on Mexico City and the Gulf region
According to Pyramid Research, the Mexican telecommunications market,
based on lines in service, is expected to grow in excess of 10% per year for the
years 2000 to 2003. Despite recent growth, there is still substantial unmet
demand for telecommunications services, including in the cities and towns
covered by our concessions.
MEXICO CITY is one of the most densely populated cities in the world and
has a low teledensity rate when compared to other major cities in Europe and the
United States. We plan to focus on Mexico City because it is the largest
telecommunications market in Mexico. Within the city, the Federal District alone
represented approximately 24.3% of the national market in terms of lines
installed at the end of 1997, but suffers from a very large unmet demand for
telephony services.
THE GULF REGION includes, in addition to the city of Puebla, among
others, the cities of Tampico, Veracruz, Reynosa, Campeche, Chetumal, Cancun,
Ciudad del Carmen, Merida, Coatzacoalcos and Tuxtla Gutierrez, and has an
aggregate population of approximately 10.0 million people. We plan to focus on
the Gulf region because of its potential for growth given that:
- the Gulf region is a significantly underserved market, with a
teledensity rate of approximately 6.0 telephone lines per 100
inhabitants;
- the Gulf region has the greatest concentration of oil, natural gas
and maritime industries in Mexico; and
- this region has not been an area of initial focus of potential
competitors, allowing us to operate in a limited competitive
environment.
Build our network on a demand-driven, modular basis
We build our network based on customer demand. We first identify clusters
in our concession cities and towns through various market research techniques.
We then carry out the network buildout in tandem with increased sales and
promotional efforts targeted at customers within the cluster. This parallel
track minimizes the time lag between the incurrence of capital expenditures and
the generation of service revenues, and allows a choice of technology and
construction method based on the particular needs of the cluster. We refer to
this approach as our "smart-build" strategy.
Differentiate product offerings based on features and price
We believe that we can differentiate ourselves from competitors by
offering a variety of product features that meet the specific needs of our
customers. In the process, we seek to develop customer loyalty and brand
awareness by informing consumers about the telecommunications services that we
offer and by helping them to differentiate between the various
telecommunications services available in the market. In particular, we are
currently the only provider of centrex services in Mexico. We also seek to offer
our services at prices that are between 5% and 15% lower than the prevailing
market price in order to build our customer base.
Build brand identity based on customer focus and service excellence
We emphasize the importance of value and high-quality customer care. Our
marketing program is built around the Su Tono (Your Tone) campaign, which
positions us as a telecommunications company that understands the needs of its
customers and strives to deliver a broad menu of services quickly and
efficiently. This is reflected in our decision to use a combination of proven
technologies and the investment in the latest operational support systems which
can address the particular needs of our customers. Our commitment to provide
high-quality service was demonstrated in June 1999 when an earthquake hit the
City of Puebla and disabled communication lines. We were able to provide
telecommunications access to the City Government building and a major hospital
within 24 hours.
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OUR MARKETS
Concession areas
In February 1997, we were awarded the first concession for competitive
local wireline telephony services in the Federal District of Mexico and in 110
cities and towns in the Gulf region. In September 1999, we received the approval
of the SCT and COFETEL to provide local telephony services in several
municipalities contiguous to the Federal District, which are part of Mexico
City, as well as in selected additional cities in the Gulf region. The following
map of Mexico indicates the principal cities covered by our concession:
[MAP]
EXISTING MARKETS
---------------------------
1 Mexico City
2 Puebla
PLANNED MARKETS
---------------------------
3 Reynosa
4 Tampico
5 Veracruz
6 Coatzacoalcos
7 Tuxtla Gutierrez
Our area of coverage includes Mexico City, which has the greatest
concentration of service and manufacturing industries and is also the center of
Mexico's public and financial services sectors. According to the Mexican
National Institute of Statistics, Geography and Information (Instituto Nacional
de Estadistica, Geografia e Informatica), in 1997, Mexico City had a population
of approximately 20 million people. Although Mexico City has the highest
teledensity rate in Mexico, at approximately 16.1 telephone lines per 100
inhabitants, we believe that significant unmet demand for high-quality, local
telephony services in Mexico City remains. We commenced commercial operations in
Mexico City on May 1, 1999.
We have also commenced commercial operations in the City of Puebla.
Puebla is the fourth largest city in Mexico, with a population of approximately
1.7 million people in 1998. Puebla is also one of the largest automobile
production centers in North America.
As of June 30, 2000, we had 21,539 installed lines and an order backlog
of 11,986 lines in Mexico City and 4,532 installed lines and an order backlog of
1,526 lines in the City of Puebla.
The Gulf region includes, in addition to the City of Puebla, among
others, the cities of Veracruz, Tampico, Reynosa, Merida, Cancun, Chetumal,
Campeche, Ciudad del Carmen, Coatzacoalcos and Tuxtla Gutierrez, which have an
aggregate population of approximately 10.0 million people. The Gulf region has
the greatest concentration of oil, natural gas and maritime industries in
Mexico. The Gulf region is a significantly underserved market, with a
teledensity rate of approximately 6.0 telephone lines per 100 inhabitants. We
believe that this region has not been an area of initial focus of potential
competitors. As a result, we believe we will operate in a limited competitive
environment.
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We are currently assessing when to commence operations in other major
cities in the Gulf region such as Veracruz, Tampico and Reynosa. We anticipate
that operations will be commenced only after we have established a strong
position in the Federal District and in the City of Puebla.
Clusters
We have developed a comprehensive marketing strategy that starts by
identifying city areas with the largest potential for new lines, which areas we
refer to as "clusters." We use a variety of techniques to identify potential
clusters, including canvassing, plotting of potential clusters and database
marketing. Once a cluster is identified, a map of the geographic area is
produced and the cluster is defined. A cluster becomes the basis for network
design and deployment and for the launching of focused field sales efforts.
Our cluster strategy is divided into three stages:
- IDENTIFY CLUSTERS through market research. Our market research is
designed to identify small- and medium-sized businesses and
medium- and high-usage residential consumers. Once we identify
potential customers and the clusters or single sites (such as
apartment buildings) within which these potential customers are
located, we design the deployment of the access network to cover
these clusters.
- DEVELOP CLUSTERS through the implementation of a sales plan for
each cluster based on our network deployment schedule. We promote
our services at the same time that we are building the network.
- FILL OUT CLUSTERS by offering our services to all customers within
the cluster.
OUR NETWORK
Buildout strategy
We build out our network on a modular basis. Once a cluster has been
identified, we build our network in tandem with our sales efforts within the
cluster. This approach provides greater flexibility and minimizes the time lag
between the incurrence of capital expenditures and the generation of service
revenues. As of December 31, 1999 we had invested Ps.845.2 million to build our
network, excluding cumulative preoperating expenses of Ps.265.6 million.
Network backbone
At June 30, 2000, our network backbone consisted of one owned
170-kilometer fiber optic link between Mexico City and the City of Puebla with a
Lucent Technologies 5ESS digital switch in each city and an optical regenerator
at the halfway point. Our switch in Mexico City is connected to two different
nodes in the city's public switched network by leased fiber capacity. Our switch
in Puebla is connected to the City of Puebla public switched network by leased
fiber capacity. We also lease facilities to connect to long distance networks.
In June 2000, we finished constructing a fiber optic ring in the City of
Puebla. We also acquired six strands of dark fiber for approximately 175
kilometers in metropolitan rings in Mexico City and obtained an option for
additional capacity in fiber optic rings also in Mexico City. In addition, the
infrastructure is in place to provide local telephony service to five towns
located along our Mexico City-City of Puebla fiber optic link.
Last-mile connectivity
The last-mile connectivity portion of our network is comprised of a mix
of wireline and wireless access technologies. We use point-to-point microwave
transmission technology for fast deployment to single site locations and to
provide backbone to clusters. We have point-to-point frequencies in the 15 and
23 GHz band. We also have a point-to-multipoint concession for the 10.5 GHz band
covering a portion of the Gulf region. We do not currently use this concession
but may use it in the future to provide last-mile connectivity to our customers.
We also use wireline access to provide service to clusters. Clusters
generally have an area ranging between one and six square kilometers. An average
of 25 kilometers of cable plant is required to provide facilities within the
clusters. We use the following two types of outside plant facilities:
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- COPPER FACILITIES. Copper wire feeder and distribution facilities
are placed from the host or remote site along rights of way,
either aerial or underground. Aerial is the preferred method based
on cost of construction. Underground cable is placed using either
the open trench or directional boring methods of construction. The
size of the cable laid is based on the anticipated number of
customers in the cluster forecasted by our marketing research. We
also integrate fiber optic facilities in the distribution plant to
allow us to provide broadband services.
- PAIR GAIN FACILITIES. Fiber optic cable is used in some instances
to serve pair gain units and copper distribution facilities
depending on the economics and governmental restrictions relating
to underground placement. The size of the copper distribution
cable is described above.
Switching
We have a Lucent Technologies 5ESS digital switch in each of Mexico City
and the City of Puebla. Our switch in Mexico City is currently engineered for
65,000 lines and equipped for 9,200 lines, while our switch in the City of
Puebla is engineered for 16,000 lines and equipped for 2,500 lines. Equipped
capacity is expanded modularly and at incremental costs according to customer
demand.
The switches are capable of providing analog lines, E1 digital lines,
digital high-speed data services, centrex services and operator-assisted
services. In addition, they can provide private analog lines, private
clear-channel digital lines, data transmission and value-added services such as
abbreviated dialing, conference, call back, calling number display, call
waiting, hot line, hunt group and voice mail, among others.
Operational support systems
We have a network operations and control center in Mexico City which
oversees, administers and provides technical support to all service areas. Our
center, which uses Hewlett Packard hardware and Lucent Technologies software,
allows us to manage a multi-vendor network, and has the ability to monitor
switching, transmission and microwave elements simultaneously and provide
automatic trouble identification.
Our operational support systems are designed to allow us to differentiate
ourselves in the marketplace by being able to:
- offer a flexible, large selection of services;
- provide tailored service packages;
- quickly introduce products and services;
- deliver near real-time activation and disconnection;
- deliver a high quality of service;
- minimize activation errors; and
- provide accurate and timely billing services.
Our information technology strategy is to implement operational support
systems possessing a high level of functionality and flexibility from the
service order to the delivery of customer invoices. The systems include the
following functional features:
- Spanish language support for invoices and documentation;
- a high degree of integration between a small number of operational
support systems components;
- flow-through of information, provisioning and service activation;
- capabilities to monitor, manage and resolve network problems; and
- allowance for growth on a modular scalable basis.
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OUR SERVICES
General
Our primary focus of service is local telephony, particularly the
provision of high-quality, flexible last-mile connectivity to small and
medium-sized businesses and middle and high-usage residential customers. We
offer long distance service as an integrated value-added service for our local
telephony customers. We do not offer our long distance service separately from
our local telephony service. In addition, although not required by Mexican
regulation, we give our local telephony customers the option to choose either
our long distance services or those of other carriers. As of June 30, 2000, over
90% of our subscribers have also chosen our long distance services.
We are currently capable of providing value-added services such as: call
waiting, call forwarding, three-way calling, call barring and multi-line
hunting. We plan to introduce other value-added services such as fixed
destination code, hot line, caller identification and alarm call service within
a year. We also provide digital high-speed connectivity and Internet access.
Service products
We seek to offer high-quality telephony services combining (1) prices
that are between 5% and 15% below current market levels, (2) a wide range of
value-added solutions, and (3) superior customer service. The following are the
service products we currently offer to our customers:
- RESIDENCIAL LINEAMAX. This is a service for residential customers
that provides a high-quality telephone line. The value-added
solutions offered under this product include voice mail, call
waiting, call forwarding, three-way calling, call blocking, speed
dialing and unlisted numbers.
- COMERCIAL LINEAMAX. This service, which is offered to business
customers, is identical to Residential LineaMax except that it
also includes multi-line hunting.
- CENTRALMAX. This service provides business customers with all the
functions of a private branch exchange using centrex technology,
without having to acquire and maintain the equipment. The
solutions offered under this product include call waiting, call
forwarding, three-way calling, direct inward dialing, direct
outward dialing, intercom dialing, call transfer, speed dialing,
call hold, call pick up, outgoing call barring, single digit
access to attendant and distinctive ringing. Optional solutions
include voice mail, multi-line hunting and attendant services.
- LARGA DISTANCIA LINEAMAX. This service provides domestic and
international long distance.
- TRONCALMAX DIGITAL. This service provides digital trunks for
business customers that need highly reliable access to and from
the public telephone network through their existing private branch
exchange. This service is sold in groups of 30 individual trunks.
The groups can be configured with direct inward dial (DID), direct
outward dial (DOD) or main telephone number assignments.
We plan to offer the following service products to our customers in the
future in order to capitalize on the significant data applications growth
expected in Mexico.
- DIGITAL PRIVATE LINES. We expect that our private lines will be
highly reliable dedicated circuits between two or more physical
locations. They are designed to integrate voice, data and video
private networks over a single physical link. Digital private
lines are in effect leased lines for exclusive/private use with no
limitations in usage, available 365 days a year, with no
restrictions in amount of traffic.
- ATM. High speed connection-oriented communications service which
creates a faster, more efficient way to transmit high volumes of
information. It provides low-delay networking for bandwidth
intensive applications. ATM uses logical connections to provide
quality of service guarantees for the different types of
information: data, video, image, and voice, over local area
networks (LANs) and wide area networks (WANs). It is suited for
data intensive business applications that require near real time
mixed media communications among multiple locations.
- FRAME RELAY. Fast packet, connection oriented data service. It
provides configuration flexibility, high speed interfaces, and a
framework for integrating network architectures, LAN to LAN/WAN
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interconnection, Internet connectivity, and voice and/or video
communications under some circumstances. Frame relay service
supports speeds up to 2Mbps over a single physical access link,
with multiple logical permanent virtual circuits established
between network interfaces at customer locations.
- XDSL. Digital subscriber line is a transmission service that turns
ordinary telephone lines into high speed data connections. It is a
digital data service that provides telecommuting capabilities at
speeds much faster than standard modems. With xDSL it is possible
to have secure, dedicated links to the Internet or a company's LAN
at a high speed transmission.
- INTELLIGENT NETWORKS PLATFORM.
- Virtual private networks provide customers with several
telecommunications service such as simplified dialing,
privacy and security of communications, control calls, over
national and international private networks.
- Free call services. This service allows subscribers to
advertise a toll-free telephone number (the service number)
for their customers or potential customers.
- Calling cards. Calling cards provide the capability to
offer subscribers the option of automatically billing their
calls to an alternate account number. This service is
typically provided as a convenience to subscribers that
have a need to place calls when they are away from their
homes or offices.
- WEB SERVICES. Hosting of web applications, domain name
administration, applications on demand, unified messaging services
and small and medium business enablement content.
PRICING
We generally seek to maintain our prices between 5% and 15% below our
principal competition. We believe, based on an independent study of Mexican
consumers on price elasticity commissioned from Brain, S.A. in January 1999,
that once discounts offered by a local carrier exceed 18% customers start to
perceive such carrier as being of low quality and/or unreliable. Our ability to
introduce new products such as centrex services allows us to portray ourselves
as value-added providers rather than price-cutters.
We offer pricing plans that are simple in order to assure customers of
the integrity of the billing process. Our pricing structure rewards long-term
commitments by increasing discounts in relation to the length of the commitment.
We also provide discounts to high-volume users and Internet service providers
which are likely to generate a significant flow of calls that will terminate in
our network.
We periodically establish a one-time discount offer under which we waive
installation charges for all new customers.
We pay interconnection charges to other carriers on a per minute basis.
However, the common practice in the Mexican market is to charge customers on a
per call basis for local service. We seek to minimize the risk associated with
this mismatch in terms of revenues and costs by targeting customers, such as
radio stations and Internet service providers, who are likely to generate a
significant flow of calls that will terminate in our network. Moreover, for long
holding time customers, we have, in some cases, implemented a per minute charge
plan to be consistent with our interconnection fees that are on a per minute
basis.
MARKETING AND SALES
General
We seek to develop brand name recognition by using our corporate name,
logo and product names consistently to portray a unified image. We conduct
publicity drives within target clusters and to high-volume business and
residential users. In addition, well-known customers such as Lucent
Technologies, BDO International and the Universidad Iberoamericana have lent
their names to our promotion efforts. Periodically, we host telecommunications
seminars to educate our target market and promote our services.
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In our promotional materials, we present ourselves as the "first option
in local telephony," friendly, technologically savvy and with outstanding
customer service. We emphasize that we are ready to join efforts with our
customers to "grow together." We achieve this by educating our customers about
the telecommunications offerings available that best suit their needs. As an
extension of this idea, our advertising stresses the concept that we speak in
the "same tone" as our customers.
We seek to differentiate ourselves from our competitors by our pricing,
consistent quality of service and speed of line activation. In addition, we also
emphasize that we are able to provide a variety of value-added services not
currently offered in the market such as centrex services.
Sales and distribution channels
We focus our sales efforts within clusters using general promotion and
direct sales. We promote our services primarily through advertisements on
billboards and in-building promotions. As we commence the deployment of our
network within a cluster, we intensify our promotion efforts through our direct
sales force in such cluster.
Our direct sales approach is to assign sales representatives or teams to
locations within a cluster that have significant potential for customer growth.
There are two types of locations within a cluster:
- SINGLE-SITE LOCATIONS that have significant potential for our
services; and
- FIBER OPTIC/COPPER CABLE DISTRIBUTION ROUTES that will extend
bi-directionally from host buildings along main routes with
significant potential.
As of June 30, 2000, we employed 54 salespeople. We assign our sales
force based on territory, product or market segment, depending on their
background and experience. The compensation structure for our sales force is
tailored to attract and retain high achievers. Compensation has a base and a
bonus component. The bonus component is comprised of commissions, targeted
bonuses and special recognition payments, all of which are based on performance
after taking churn into account. The bonus component is designed to equal the
base salary for those who meet the sales goals. We believe that the incentive
portion of our compensation structure is greater than that of our competitors,
giving our sales force a better incentive to produce.
Our sales force is recruited from other telecommunications providers and
systems integrators. In addition, we recruit master's degree holders from
Mexican universities. We believe that current labor market conditions in Mexico
allow us to recruit high-quality individuals. Our sales force undergoes
extensive training covering the industry of telecommunications, our products,
our internal procedures and markets, sales, proposal preparation and
presentation skills. In its sales effort, our sales force uses, among other
things, multimedia presentation, corporate videos and corporate and product
brochures.
In addition to our sales force, we are developing other distribution
channels, including store fronts, agents, distributors, outsourcing and
telemarketing.
Customer service
We seek to differentiate ourselves by providing superior and consistent
customer service. Our customer service group is divided into three areas:
- CENTRALIZED ANSWERING POINT. This area responds to calls to our
main number in Mexico City and the City of Puebla. Many
prospective and existing customers use our centralized answering
point for all types of queries. Our hours of operation are 7:30
a.m. to 8:00 p.m. Monday through Friday.
- CUSTOMER CARE CENTER. This center is available 24 hours a day,
seven days a week and handles customer inquiries regarding area
codes, rates, billing and line installation and changes.
- SUPPORT OFFICE. Our support office performs a variety of functions
in processing service orders including order entry for inventory
control, service provisioning, service activation and customer
billing.
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For the convenience of our customers, we have arranged for customers to
pay their bills at the branches of three major Mexican banks. We also have
customer walk-in centers, one in Mexico City and two in Puebla, to assist our
customers with new service requests, bill payments and product information.
CREDIT, BILLING AND COLLECTION
We carry out credit checks on all our potential business customers using
a leading Mexican credit bureau. Based on the result of the credit check, we
assign a credit risk rating to the business customer and, depending on the
credit risk assignment, request a deposit, bond or standby letter of credit.
Normally, for our business customers we require a three-month deposit, which is
calculated based on the expected customer usage levels derived from customer
profiling prepared by our sales force. For high-volume customers we may require
higher deposits, and may collect on a weekly basis and undertake a closer
monitoring of call activity.
For our billing process, we use an Ericsson/Hewlett-Packard billing
mediation platform and a Kenan Systems/Arbor billing platform interfaced with
our customer service system. We collect our billing data from our switches using
an X.25 data network, with magnetic tape as backup. We monitor collections and
abnormal activity, do credit analyses and develop statistics using our Kenan
Systems/Arbor billing platform. Also, we installed a state-of-the-art fraud
management system in the last quarter of 1999.
We perform four weekly billing cycles per month and invoice monthly on a
staggered basis. We prepare and mail bills within five days after the close of
each cycle. If a bill is more than two weeks past-due, we send the customer
reminders by letter and phone. If the bill remains unpaid, we will restrict
service to incoming calls only and eventually suspend service and forward our
unpaid receivables to a collection agency or, if necessary, to a legal agency.
Our maximum exposure for unpaid services is 12 weeks.
COMPETITION
We compete primarily in the local telephony market on the basis of
features, customer service and value. Our direct competitors are wireline and
fixed wireless local telephony operators, although we also face competition
indirectly from mobile wireless operators.
We do not compete directly in the long distance market. Although we
provide long distance service, we position such service as an integrated
value-added service for our local telephony customers. As a result, we do not
offer our long distance service separately from our local telephony service. In
addition, although not required by Mexican regulation, we give our local
telephony customers the option to choose either our long distance services or
those of other carriers. Approximately, over 90% of our customers have chosen
our long distance service.
Telmex
Our main local telephony competitor is Telmex, the former
government-owned telecommunications monopoly. Telmex has significantly greater
financial and other resources than those available to us. In addition, Telmex
has an established customer base which represents substantially all of the
wireline local telephony lines in Mexico. We depend on Telmex for local
interconnection.
Our core strategy is to service underserved markets by targeting new
customers that do not currently receive the type of products and services we
offer. We estimate that seven out of ten lines that we will sell will be new
lines rather than replacements for existing Telmex lines.
New entrants
We expect to face competition in local telephony from new entrants that
have been awarded concessions and which have just begun, or are expected to
begin, commercial operations. The more significant of these entrants are Axtel,
MCM Telecomunicaciones de Mexico, S.A. de C.V., Pegaso Comunicaciones y
Sistemas, S.A. de C.V. and Sistemas Profesionales de Comunicacion, S.A. de C.V.
Axtel was awarded a nationwide local telephony and long distance
concession in June 1996, as well as fixed wireless local loop frequencies in the
3.4-3.7 GHz bandwidth range, in May 1998. Axtel commenced commercial
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services in the northern city of Monterrey in July 1999, in Guadalajara in early
2000 and in Mexico City in April 2000. We believe that Axtel seeks to target
both business and residential customers.
MCM Telecomunicaciones was awarded a wireline local telephony concession
in July 1997. In addition, it has a point-to-point microwave frequency
concession in the 23 GHz band range. MCM Telecomunicaciones operates currently
in Mexico City and plans to commence operations in Guadalajara and Monterrey
sometime in the year 2000. We believe that MCM Telecomunicaciones will focus on
providing service to large corporate customers.
Pegaso, which is a consortium that includes Sprint PCS and Leap
Communications International, Inc., was awarded a mix of 30 and 10 MHz bandwidth
concessions in the 1.9 GHz band, and PCS band concessions covering all of Mexico
in June 1998. Pegaso initiated services in the City of Tijuana in northwestern
Mexico in February 1999 and in Mexico City in late 1999. We believe that Pegaso
plans to commence PCS services in Monterrey and Guadalajara sometime in 2000.
Sistemas Profesionales de Comunicacion, commercially known as "Unefon,"
won nationwide concessions for fixed wireless local loop frequencies in the 1.9
GHz (PCS) and 3.4-3.7 GHz bands in May 1998. Unefon began commercial operations
in Toluca in early 2000 and plans to commence operations in Mexico City later in
the year.
We expect to face significant competition from some of these new entrants
in Mexico City. We believe that having already commenced operations in Mexico
City gives us a significant advantage over these competitors in terms of brand
name recognition, operations and line growth. We are not aware of any current
plans by any of these competitors to provide local telephony services in the
Gulf region in the near future.
PROPERTIES
We currently lease the buildings and/or the land where our operations are
carried out and our microwave transmission equipment and switching centers are
located.
We lease space for administrative offices in Mexico City and the City of
Puebla. Our principal executive offices and headquarters are located in Mexico
City in a modern building leased for a 15-year term expiring on September 30,
2013. This building is comprised of 70,500 square feet plus parking space and
holds one of our Lucent Technologies 5ESS switches. Our offices in Puebla are
leased for a 10-year renewable term expiring on March 25, 2008. Our offices in
Puebla are comprised of 14,100 square feet and holds our other Lucent
Technologies 5ESS switches.
We also have a 10,700 square foot industrial warehouse in Mexico City
leased for a 5-year term expiring on March 30, 2004. In addition, we lease more
than forty other sites which are used as hosts or single site buildings and are
located throughout Mexico City and Puebla. We believe that our facilities are
adequate for our present needs and are suitable for their intended purposes.
EMPLOYEES
As of June 30, 2000, through our wholly-owned employment subsidiary,
Corporativo en Telecomunicaciones, S.A. de C.V., we had 406 employees. Of these,
35 employees were unionized and covered by the terms of a collective bargaining
agreement we entered into with the National Union of Telecommunications,
Communications, Cybernetics, Electric, Electronic and Similar Products Workers
of the Mexican Republic (Sindicato Nacional de Trabajadores de
Telecomunicaciones, Telefonia, Comunicaciones, Cibernetica, Productos
Electricos, Electronicos, Similares y Conexos de la Republica Mexicana). This
agreement is renewable every year and next expires on April 1, 2001. We have not
experienced any strikes or work stoppages and believe that our relations with
our employees are satisfactory.
LEGAL PROCEEDINGS
We are not currently party to any material legal proceedings.
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<PAGE> 61
ENFORCEABILITY OF CIVIL LIABILITIES AGAINST FOREIGN PERSONS
We have been advised by Santamarina y Steta, S.C., our special Mexican
counsel, that no treaty is in effect between the United States and Mexico that
covers the reciprocal enforcement of foreign judgments. Mexican courts have
enforced judgments rendered in the United States by virtue of the legal
principles of reciprocity and comity, consisting of the review in Mexico of the
United States judgment in order to ascertain whether Mexican legal principles of
due process and public policy (orden publico) have been complied without
reviewing the merits of the subject matter of the case. Furthermore, we have
been advised by Santamarina y Steta, S.C. that there is doubt as to the
enforceability, in original actions in Mexican courts, of liabilities predicated
solely on the U.S. federal securities laws and as to the enforceability in
Mexican courts of judgments of U.S. courts obtained in actions predicated upon
the civil liability provisions of the U.S. federal securities laws.
Maxcom is a variable capital corporation (sociedad anonima de capital
variable) organized under the laws of Mexico, and is headquartered, managed and
operates outside of the United States. All of our directors and officers and
some of the experts named in this prospectus reside outside the United States,
principally in Mexico. A substantial portion of the assets of these persons and
of our company is located outside the United States. As a result, it may not be
possible for investors to effect service of process within the United States
upon such persons or Maxcom or to enforce against them in the United States a
judgment obtained in U.S. courts predicated upon the civil liability provisions
of the federal securities laws or other laws of the United States.
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<PAGE> 62
MANAGEMENT
DIRECTORS
Our Board of Directors currently consists of seven series A directors,
two series B directors and four series N directors. The directors of each series
of shares are elected annually at our ordinary general meeting of shareholders.
Our Board of Directors is responsible for the management of our business. See
"Description of Capital Stock." The current members of the Board of Directors of
each series of shares were elected at the shareholders' meeting held on June 5,
2000. None of the members of the Board of Directors of any of the series of
shares needs to be a shareholder. All board members hold their positions for one
year and may be reelected. Under the Mexican Companies Law (Ley General de
Sociedades Mercantiles), we are required to have at least one statutory auditor
(comisario), who is elected by our shareholders at the annual ordinary general
shareholders' meeting. The primary role of the statutory auditor is to report to
our shareholders at the annual ordinary general shareholders' meeting regarding
the accuracy, sufficiency and reasonable basis of the financial information
presented to such shareholders by the Board of Directors.
The following table presents information concerning our current directors
(ages as of December 31, 1999):
<TABLE>
<CAPTION>
NAME POSITION AGE
---- -------- ---
<S> <C> <C>
Adrian Aguirre Gomez....................... Series A Director and Chairman of the Board 49
Maria Guadalupe Aguirre Gomez.............. Series A Director 51
Maria Trinidad Aguirre Gomez............... Series A Director 39
Maria Elena Aguirre Gomez.................. Series A Director 47
Miguel Sepulveda Martinez.................. Series A Director 56
Gilberto Solis Silva....................... Series A Director 53
Raul Guijarro de Pablo..................... Series A Director 43
Michael R. Coltrane........................ Series B Director 53
Barry R. Rubens............................ Series B Director 41
Jacques Gliksberg.......................... Series N Director 41
Graeme Mills............................... Series N Director 40
Salvatore A. Grasso........................ Series N Director 42
Hurdle H. Lea, III......................... Series N Director 40
</TABLE>
Rosa Maria Palme Sierra, Raul Sanchez Rucobo, Gilberto Solis Aguirre,
Adrian Aguirre Palme, Miguel Sepulveda Aguirre, Lourdes Suayfeta Saenz and
Alberto Saavedra Olavarrieta are our Alternate series A directors. Thomas A.
Norman and Richard L. Garner are our Alternate series B directors. Adrienne
Kaga, Iain Whitfield, Paul S. Bachow and Christopher D. Meyn are our Alternate
series N directors. Lourdes Suayfeta Saenz is the Secretary of the Board and
Sergio Hernandez Gonzalez is our statutory auditor.
Adrian, Maria Guadalupe, Maria Trinidad and Maria Elena Aguirre Gomez are
siblings. Gilberto Solis Silva is the spouse of Maria Elena Aguirre Gomez. Raul
Guijarro de Pablo is the spouse of Maria Trinidad Aguirre Gomez. Rosa Maria
Palme Sierra is the spouse of Adrian Aguirre Gomez. Miguel Sepulveda Martinez is
the spouse of Maria Guadalupe Aguirre Gomez. Adrian Aguirre Palme is the son of
Adrian Aguirre Gomez and Rosa Maria Palme Sierra, Gilberto Solis Aguirre is the
son of Gilberto Solis Silva and Maria Elena Aguirre Gomez and Miguel Sepulveda
Aguirre is the son of Miguel Sepulveda Martinez and Maria Guadalupe Aguirre
Gomez.
Set forth below is a brief biographical description of our directors:
Adrian Aguirre Gomez has been a series A director and Chairman of the
Board of Maxcom since Maxcom's incorporation in February 1996. Mr. Aguirre also
sits on the Board of Directors of Corporativo en Telecomunicaciones, S.A. de
C.V., a subsidiary of Maxcom, Grupo Empresarial de Telecomunicaciones, S.A. de
C.V., Recover, S.A. de C.V. and Laguna Real, S.A. de C.V. Previously, Mr.
Aguirre was CEO of Grupo Radio Centro, S.A. de C.V. from November 1968 to May
24, 1999 and a Director until May 1999. Mr. Aguirre is a certified public
accountant and holds an undergraduate degree in accounting from the Instituto
Tecnologico Autonomo de Mexico (ITAM).
Maria Guadalupe Aguirre Gomez has been a series A director of Maxcom
since May 1998. She also sits on the Board of Directors of Sport and Therapy
Center, S.A. de C.V. Previously, Ms. Aguirre sat on the Board of Directors of
Majurame, S.A. de C.V. and Cable Centro, S.A. de C.V. from February 1997 to
April 1999 and was an Alternate Director of Grupo Radio Centro, S.A. de C.V.,
from July 1998 to May 1999. In her capacity as Alternate
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<PAGE> 63
Director, Ms. Aguirre had both director and management responsibilities. Ms.
Aguirre holds an undergraduate degree in communications from the Universidad
Iberoamericana.
Maria Trinidad Aguirre Gomez has been a series A director of Maxcom since
May 1998. She also sits on the Board of Directors of Talento Arte Visual, S.A.
de C.V., Promotora de Radiodifusion del Sureste, S.A. de C.V., Promotora de
Publicidad del Sureste, S.A. de C.V. and Publicidad y Promocion del Sureste,
S.A. de C.V. Previously, Ms. Aguirre was an Alternate Director of Grupo Radio
Centro, S.A. de C.V. from March 10, 1997 to May 7, 1999. Ms. Aguirre holds an
undergraduate degree in communications from the Universidad Iberoamericana.
Maria Elena Aguirre Gomez has been a series A director of Maxcom since
June 1999. She also sits on the Board of Directors of Radiocomunicacion
Profesional, S.A. de C.V., Radiocomunicacion Enfocada, S.A. de C.V. and
Radiocomunicacion Saltillo, S.A. de C.V. Previously, Ms. Aguirre was an
Alternate Director of Grupo Radio Centro, S.A. de C.V. and its subsidiaries and
operating companies from July 1998 to May 1999.
Miguel Sepulveda Martinez has been a series A director of Maxcom since
June 2000. He is an active member of the Orthopedic Research Society. He was the
Chairman of the Sociedad de Rodilla y Artoscopia de Mexico, Medical Association
during 1993 and 1994 and served as Medical Director and member of the Board of
Directors of the Red Cross of Chihuahua from 1996 to 1998. Mr. Sepulveda holds a
Ph.D. from the Instituto Politecnico Nacional and several post-graduate studies
in several universities, such as Tufts University (1988) and Harvard University
(1989).
Gilberto Solis Silva has been a series A director of Maxcom since August
1997. He also sits on the Board of Directors of Grupo Empresarial de
Telecomunicaciones, S.A. de C.V. and is CEO of Radiocomunicacion Profesional,
S.A. de C.V., Radiocomunicacion Enfocada, S.A. de C.V. and Radiocomunicacion
Saltillo, S.A. de C.V. Previously, Mr. Solis sat on the Board of Directors of
Grupo Radio Centro, S.A. de C.V. from 1990 to 1998. Mr. Solis holds an
undergraduate degree in geological engineering from the UNAM.
Raul Guijarro de Pablo has been a series A director of Maxcom since June
1999. He also serves as Treasurer for and sits on the Board of Directors of
Talento Arte Visual, S.A. de C.V. Mr. Guijarro holds an undergraduate degree in
architecture from the Universidad Anahuac.
Michael R. Coltrane has been a series B director of Maxcom since August
1997. Mr. Coltrane is President and Chief Executive Officer of Concord Telephone
Company and CT Communications, Inc. He also sits on the Board of Directors of
Concord Telephone Company, CT Communications, Inc., First Charter Corporation,
U.S. Telecom Holdings Inc., Access/ON Multimedia PMN, Inc., Palmetto MobileNet,
the United States Telephone Industry Association, the North Carolina Telephone
Industry Association and the Alliance of North Carolina Independent Telephone
Companies. Previously, Mr. Coltrane sat on the Board of Directors of, ITC
Holding Company from 1993 to 1995, U.S. Intelco Holdings from 1994 to 1996 and
the Society of International Business Fellows from 1997 to 1999. Mr. Coltrane
holds an undergraduate degree from Davidson College and a masters degree in
business administration from the Wharton School of Business of the University of
Pennsylvania.
Barry R. Rubens has been a series B director of Maxcom since June 2000.
He has been a Senior Vice President, Chief Financial Officer, Secretary and
Treasurer of CT Communications, Inc. (the parent company of CT Global
Telecommunications, Inc.) since 1995. He also served as Vice President-External
Affairs of CT Communications, Inc. from 1992 to 1995. Prior to this, Mr. Rubens
was a senior manager in Ernst & Young's telecommunications practice in
Washington, D.C. Mr. Rubens serves on the executive committee of BellSouth
Carolinas PCS LLC, as a director of Carolinas FiberNet and is an officer and
board member of WirelessOne of North Carolina, LLC.
Jacques Gliksberg has been a series N director of Maxcom since May 1998.
He also sits on the Board of Directors of Acme Paging, L.P., Bank American
International Investment Corporation, Banco Noroco (Venezuela), Structured
Intelligence LLP and Organizacion Rescarven, C.A. (Venezuela). Mr. Gliksberg has
been a managing partner of Bank of America Equity Partners since 1994. Mr.
Gliksberg holds a Bachelor of Arts degree in Economics and Political Science
from the University of Rochester, and a masters degree in business
administration from the J.L. Kellogg Graduate School of Management of
Northwestern University.
Graeme Mills has been a series N director of Maxcom since May 1998. He
also sits on the Board of Directors of BancBoston Capital, Shield Pack, Inc.,
Johnston Industries, Inc., Zelenka Nursey, Inc. and Kinco, Ltd. and is
Vice-
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President of BancBoston Investments Inc., BancBoston Capital Inc. and BancBoston
Ventures Inc. Previously, Mr. Mills was Director of Emerging Market Investment
Banking at BancBoston, N.A. from July 1991 to November 1996. In his capacity as
Director of Emerging Market Investment Banking, Mr. Mills was responsible for
cross border debt raising in Latin America. Mr. Mills holds an undergraduate
degree and a masters degree in commerce from the University of New South Wales.
Salvatore A. Grasso has been a series N director of Maxcom since May
1998. He also sits on the Board of Directors of Acme Paging, L.P., Bachow and
Associates, Inc., Bachow/Coastel Operations, Inc. and Discovery Schools, L.P.
Mr. Grasso is currently Managing Director and Chief Financial Officer of Bachow
and Associates, Inc., Vice-President of Bachow/Coastel Operations, Inc., Bala
Equity, Inc., Bachow Co-Investment, Inc, PBS/ Bachtel, Inc. and Cottonwood
Holdings, Inc., Partner in Bala Equity Partners, L.P., Bachow Co-Investment,
L.P. and Bachtel Development, L.P. Mr. Grasso holds a bachelor of science degree
in accounting from St. Joseph's University and is a certified public accountant
in the State of Pennsylvania.
Hurdle H. Lea, III has been a series N director of Maxcom since May 1998.
Prior to becoming a director, Mr. Lea was an alternate director of Maxcom. He is
currently Vice-President of Globalvest Management Company, L.P. and sits on the
Board of Directors of Globalvest Diversified Fund, LDC, Globalvest Emerging
Income Fund, Ltd., Globalvest Management Company, Inc., Globalvest Opportunity
Latin Fund I, Ltd., Globalvest Russia Fund, LDC, Globalvest Russia Fund, LLC,
Globalvest Russia Fund, Ltd., Latinvest Cable Holdings, LLC, Latinvest Holding,
LDC, Latinvest Online Holding, LDC, Latinvest Opportunity Holdings, LLC,
Utilivest II, LLC and Utilivest III, LLC. Previously, Mr. Lea was Chief
Financial Officer and Managing Director of Pointer Management Company from
1990-1997. Mr. Lea holds a bachelor of science degree in management from the
University of North Carolina at Asheville.
EXECUTIVE OFFICERS
In June and July 2000, Gian Carlo Pecchioni, our former Chief Executive
Officer, Michael Tatum, our former Chief Operating Officer and Rodrigo Sandoval,
our former Chief Marketing Officer, resigned. We are actively searching for
adequate replacements.
The following table sets forth our current executive officers (ages as of
December 31, 1999):
<TABLE>
<CAPTION>
NAME POSITION AGE
---- -------- ---
<S> <C> <C>
Adrian Aguirre Gomez........................... Chairman of the Board, Acting Principal 49
Executive Officer
Alejandro Eduardo Martinez Alvarez............. Chief Financial Officer 54
Salvador Guillermo Ochoa Delgado............... Director of Human Resources 43
</TABLE>
Set forth below is a brief biographical description of each of our
executive officers not otherwise provided above:
Mr. Alejandro Eduardo Martinez Alvarez has been Chief Financial Officer
of Maxcom since 1997. Prior to joining Maxcom, Mr. Martinez was Managing
Director of Eleusis, S.A. de C.V., a financial consulting firm, from 1995 to
1997. Previously, Mr. Martinez was Chief Financial Officer of Deportes Marti,
S.A. de C.V., a retail sporting goods business, from 1993 to 1995. Mr. Martinez
holds an industrial engineering degree from the Universidad de Buenos Aires.
Salvador Guillermo Ochoa Delgado has been Director of Human Resources
since 1999. Prior to joining Maxcom, Mr. Ochoa was Human Resources Director for
Arthur Andersen Mexico (Ruiz Urquiza y Cia.) from August 1998 to June 1999,
Corporate Human Resources Director of Motorola de Mexico, S.A. from January 1997
to July 1998, and Human Resources Director for UPS de Mexico S.A. de C.V. from
May 1992 to December 1996. Mr. Ochoa holds an undergraduate degree in business
administration from the Universidad La Salle.
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
For the year ended December 31, 1999, our executive officers received an
aggregate compensation (including bonuses) of approximately Ps.10.0 million
(U.S.$1.1 million). These amounts represent 4.9% of Maxcom's
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<PAGE> 65
total operating expenses for 1999. Members of our Board of Directors do not
currently receive compensation for acting in such capacity.
As of June 30, 2000, we had 7 expatriates rendering services to Maxcom
under an operating agreement with CT Global Telecommunications, Inc. Under the
operating agreement, Maxcom is required to reimburse CT Global for expenses
related to salaries and other expenses of the expatriates assigned to us. For
the year ended December 31, 1999, we paid CT Global U.S.$4.6 million for
reimbursement of expenses. See "Certain Transactions -- Operations services."
EXECUTIVE STOCK OPTION PLAN
We have implemented an executive compensation plan that includes bonuses
and stock options on our series N shares. This plan covers the years 1998, 1999
and 2000. Options granted under the plan for 1998 have exercise prices for 1998
of U.S.$8.70. Options granted for 1999 have exercise prices for 1999 of
U.S.$10.45, while options to be granted under the plan for 2000 will have
exercise prices of U.S.$12.55.
Our executive stock option plan is divided into two programs based on
whether the beneficiary is considered to be part of senior or junior management.
The executive stock option plan for the senior management is based on company
performance, while the executive stock option plan for the junior management is
based on individual performance. The maximum aggregate amount of series N shares
that can be distributed under our current executive stock option plan is
1,690,000 series N shares, equivalent to 9.9% of our current capital stock on a
fully diluted basis.
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PRINCIPAL SHAREHOLDERS
At June 30, 2000, our issued and outstanding share capital consisted of
1,531,428 series A shares of common stock, 1,471,373 series B shares of common
stock and 7,320,190 series N shares of capital stock with limited voting rights,
each without stated par value.
Our series A shareholders have the ability to elect the majority of the
Board of Directors. All series A shares are beneficially owned, directly and
indirectly, by several members of the Aguirre Gomez family, including Adrian
Aguirre Gomez, Maria Guadalupe Aguirre Gomez, Maria Elena Aguirre Gomez, Maria
Esther Gomez de Aguirre, and Maria Trinidad Aguirre Gomez. Pursuant to our
By-laws, our series A shares represent 51.0% of our voting stock and may only be
held by Mexican nationals.
Although the Aguirre Gomez family holds 51.0% of the voting stock and has
the power to elect the majority of the Board of Directors, its ability to
control Maxcom is substantially limited by the terms of the shareholders
agreement described below under "-- Shareholders agreement."
OUTSTANDING SHARES
The following table presents information concerning the ownership of our
issued and outstanding shares of capital stock at June 30, 2000:
<TABLE>
<CAPTION>
SERIES A SHARES SERIES B SHARES SERIES N SHARES
---------------------- ---------------------- ------------------------
NUMBER % NUMBER % NUMBER %
NAME OF STOCKHOLDER OF SHARES OWNED OF SHARES OWNED OF SHARES OWNED
------------------- --------- --------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Aguirre Gomez Family(1) ................ 1,531,428 100.0% 260,212 3.4%
CT Global Telecommunications, Inc. ..... 1,471,373 100.0% 197,448 2.7
BankAmerica International Investment
Corporation .......................... 2,068,966 28.3
Bachow Investment Partners III, LP ..... 1,724,138 23.6
Latinvest Strategic Investment Fund,
L.P .................................. 1,343,927 18.4
BancBoston Investments, Inc. ........... 862,069 11.8
LA Strategic Capital Partners II ....... 229,885 3.1
Amsterdam Pacific LLC .................. 45,977 0.6
Other Individuals ...................... 587,568 8.1
--------- --------- --------- --------- ---------- ---------
1,531,428 100.0% 1,471,373 100.0% 7,320,190 100.0%
<CAPTION>
TOTAL
--------------------------------------
% OF
NUMBER OF % VOTING
NAME OF STOCKHOLDER SHARES OWNED RIGHTS
------------------- ---------- --------- ---------
<S> <C> <C> <C>
Aguirre Gomez Family(1) ................ 1,782,829 17.3% 51.0%
CT Global Telecommunications, Inc. ..... 1,668,821 16.2 49.0
BankAmerica International Investment
Corporation .......................... 2,068,966 20.0
Bachow Investment Partners III, LP ..... 1,724,138 16.7
Latinvest Strategic Investment Fund,
L.P .................................. 1,343,927 13.0
BancBoston Investments, Inc. ........... 862,069 8.4
LA Strategic Capital Partners II ....... 229,885 2.2
Amsterdam Pacific LLC .................. 45,977 0.4
Other Individuals ...................... 596,379 5.8
---------- --------- ---------
10,322,991 100.0% 100.0%
</TABLE>
------------------------
(1) The shares of Maxcom controlled by the Aguirre Gomez family are held either
individually or through trusts or corporations.
OUTSTANDING OPTIONS AND WARRANTS
We have issued options and warrants to purchase up to 3,358,388 series N
shares. The following table presents information concerning the ownership of
these stock options and warrants:
<TABLE>
<CAPTION>
NUMBER OF
NUMBER OF EXERCISE PRICE PERCENTAGE OF OPTIONS ALREADY
NAME OF OPTION HOLDER OPTIONS(1) PER SHARE OPTIONS VESTED EXERCISED
--------------------- --------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Nissho Iwai American Corporation................. 337,471 U.S.$10.90 100% none
CT Global Telecommunications, Inc.(2)(3)......... 250,000 8.70 40 none
Bachow & Associates, Inc.(2)..................... 100,000 8.70 100 none
Amsterdam Pacific LLC(2)......................... 24,425 8.70 100 none
Executive Stock Option Plan(3)................... 1,690,000 8.70 20 none
Existing shareholders (4)........................ 70,000 0.01 100 100%
UBS Warburg LLC (5).............................. 89,243 0.01 100 none
Donaldson, Lufkin & Jenrette
Securities Corporation (5).................. 22,311 0.01 100 none
Gian Carlo Pecchioni (6)......................... 10,000 0.01 100 none
Old notes investors (7).......................... 764,938 0.01 100 none
</TABLE>
------------------------
(1) Each option entitles the holder to purchase one series N share.
(2) Maximum realization capped at U.S.$40.0 per share.
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(3) Maximum number of options to be issued is subject to our attainment of
certain performance targets for 1999 and 2000.
(4) These options were granted as consideration for the commitment to
contribute an aggregate of U.S.$35 million as described below under
"--Capital contributions." On June 20, 2000, our board of directors
acknowledged receipt of the option holders' notice of exercise of such
options. The issuance of the shares and the payment of the exercise price
is subject to the proposed capital restructuring described below under
"--Proposed capital restructuring."
(5) These warrants were granted as partial compensation for services rendered
in connection with the offering of the old notes.
(6) On July 21, 2000, subject to shareholder approval, Mr. Pecchioni was
granted options to purchase up to 10,000 series N shares.
(7) These warrants were issued in connection with the offering of the old
notes.
Options to creditors and business partners
In order to better align our interests with those of our creditors and
other business partners, we have granted stock options to some of these parties.
- In March 1998, together with a vendor financing facility we
obtained from Nissho Iwai American Corporation, we granted Nissho
Iwai options to purchase up to 337,471 of our series N shares at
U.S.$10.90 per share.
- In May 1998, as part of an operating agreement that we signed with
CT Global Telecommunications, Inc. under which CT Global agreed to
manage the construction of our telephone network, provide
engineering services and run our day-to-day operations, we granted
CT Global options to purchase up to 250,000 of our series N shares
at U.S.$8.70 per share.
- In May 1998, as part of a strategic assistance agreement that we
signed with Bachow & Associates, Inc. under which Bachow agreed to
provide us with consulting and advisory services, we granted
Bachow options to purchase up to 100,000 of our series N shares at
U.S.$8.70 per share.
- In April 1998, under an engagement letter that we signed with
Amsterdam Pacific LLC pursuant to which Amsterdam Pacific agreed
to provide us with investment banking services, we granted
Amsterdam Pacific options to purchase up to 24,425 of our series N
shares at U.S.$8.70 per share.
Executive stock option plan
In May 1998, we adopted an executive stock option plan in order to retain
key executive officers and better align their interest with ours. The executive
stock option plan is administered under a management trust with the assistance
of the trust division of Banco Nacional de Mexico, S.A. (Banamex). Under the
executive stock option plan, a technical committee determines the executive
officers to whom options to purchase series N shares will be granted, as well as
the terms of those options. At June 30, 2000, we had issued options to purchase
up to 1,690,000 series N shares through the executive stock option plan.
Warrants in connection with the offering of the old notes
As part of the offering of old notes completed on March 17, 2000, we
offered to investors an aggregate of 300,000 warrants to purchase 764,938 shares
of our series N capital stock with limited voting rights, at an exercise price
of $0.01 per share. As partial compensation to the initial purchasers for their
services in connection with the offering of the old notes, we gave the initial
purchasers warrants to purchase an aggregate of 111,554 shares of our series N
shares.
If the capital restructuring described below under "-- Proposed capital
restructuring" is implemented before the warrants are exercised, the warrants
will entitle holders to receive an aggregate of 406,374 certificados de
participacion ordinarios, commonly known as "CPOs", each representing one new
series C share of common stock and one series N share, at an exercise price of
$0.02 per CPO.
CAPITAL CONTRIBUTIONS
As a condition to the offering of the old notes, some of our shareholders
agreed to make or cause to be made capital contributions in an aggregate
principal amount of U.S.$35 million by September 30, 2000. This obligation is
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secured by either cash escrow accounts or standby letters of credit from
nationally-recognized U.S. banks. This capital contribution will result in the
issuance of an aggregate of 3,352,504 series N shares (or, if the proposed
capital restructuring described below has occurred, 1,676,252 CPOs). The
purchase price will be U.S.$10.44 per share (or U.S.$20.88 per CPO) if purchased
solely by existing shareholders. Otherwise, the purchase price will be the one
negotiated with an incoming equity investor.
As compensation to those shareholders who are committing to make or cause
to be made the U.S.$35 million capital contribution, we have agreed to grant
those shareholders warrants to purchase an aggregate of 70,000 series N shares,
at an exercise price of U.S.$0.01 per share.
Although the shareholders' obligation to make the additional U.S.$35
million equity contribution is secured by cash escrow accounts or standby
letters of credit, we may be required, in order to comply with foreign
investment laws, to obtain additional shareholder or governmental approvals to
issue equity in consideration of such investment. The failure to obtain such
investment by September 30, 2000 would constitute an event of default under the
notes.
On June 5, 2000, our shareholders authorized an increase in our capital
of U.S.$35 million. The issuance of the shares, the corresponding CPOs and the
funding are still subject to governmental approvals in connection with the
proposed capital restructuring described below in "--Proposed capital
restructuring." We expect to receive these approvals shortly, but in any event
before September 30, 2000.
SHAREHOLDERS AGREEMENT
In May 1998, we and our principal shareholders, BankAmerica International
Investment Corporation, LA Strategic Capital Partners II, BancBoston
Investments, Inc., Bachow Investment Partners III, L.P., Latinvest Strategic
Investment Fund, L.P., Grupo Empresarial de Telecomunicaciones, S.A. de C.V.,
the Aguirre Gomez Trust, CT Global Telecommunications, Inc. Adrian Aguirre
Gomez, Jose Manuel Aguirre Gomez, L.D. Coltrane, III, Michael Coltrane, Samuel
E. Leftwich, Thomas A. Norman and Amsterdam Pacific LLC, entered into a
shareholders agreement relating to our governance.
We and our principal shareholders agreed to take all necessary actions so
that:
- the Board of Directors of Maxcom consists of 13 members and 13
alternate members;
- seven directors and seven alternate directors designated by the
series A shareholders are elected to the Board of Directors;
- two directors and two alternate directors designated by the series
B shareholders are elected to the Board of Directors;
- four directors and four alternates directors designated by the
series N shareholders are elected to the Board of Directors, with
each of BankAmerica International Investment Corporation, Bachow
Investment Partners III, L.P., BancBoston Investments Inc., and
Latinvest Strategic Investment Fund having the right to designate
one director and one alternate director; and
- actions with respect to certain key matters be:
- submitted to the Board of Directors prior to the taking of
any such action; and
- approved by at least two of the directors appointed by the
series N shareholders, or if the series N shareholders only
have a right to elect one director, then approved by at
least that director. See "Description of Capital Stock --
Voting rights."
The shareholders agreement provides that if we register any equity
securities for a primary or secondary public offering prior to May 21, 2002, we
must permit parties to the shareholders agreement to include their shares in
such an offering. We have agreed to bear all expenses of any primary or
secondary public offerings, other than the fees of counsel to the holders of the
registration rights and any underwriting commissions or discounts. If we do not
register our equity securities in a primary or secondary public offering prior
to May 21, 2005, some of our series N shareholders will have the right to retain
an investment banker to:
- sell substantially all of our assets;
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- merge or consolidate us into another company; or
- require parties to the shareholders agreement to sell their
shares, and distribute the proceeds to some series N shareholders.
In addition, in the event of a breach by us or any of our shareholders of
certain provisions of the shareholders agreement, the non-breaching shareholders
will have the right to redeem their shares at a per share price equal to the
greater of (1) nine times EBITDA or (2) fair market value. If for any reason any
of the shareholders wishing to redeem their shares are unable to consummate
their redemption within a specified period of time, such shareholders will have
the right to buy the shares of the breaching shareholder at a fair market value.
PROPOSED CAPITAL RESTRUCTURING
On February 21, 2000, our shareholders resolved to modify our capital
structure in order to give us more flexibility to raise equity capital, without
affecting corporate governance. The proposed capital restructuring, which is
subject to government approvals and the amendment of the existing shareholders'
agreement before it becomes effective, is designed to create additional room for
investment by foreign persons.
We are currently unable to raise equity capital from foreign investors
because they account for 79.96% of our capital stock on a fully diluted basis,
which is the maximum limit set specifically for us by the Mexican foreign
investment authorities.
Under the proposed capital restructuring, 50% of the existing series N
shares will be converted into a new series of common stock, the series C shares,
at an exchange ratio of one-to-one.
The series C and series N shares will be deposited into a trust which
will issue ordinary participation certificates (certificados de participacion
ordinarios) commonly known as "CPOs." Each CPO will represent one series C share
and one series N share.
Although the series C shares have full voting rights, the trustee will
vote those shares according to the vote of the majority of the series A shares,
which are owned by the Aguirre Gomez family.
Any options or warrants for series N shares that are exercised after the
implementation of the capital restructuring will be subject to conversion and
deposit into the trust.
Separate from the proposed capital restructuring, 255,000 series A shares
and 245,000 series B shares will be converted into CPOs on a two-to-one basis.
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CERTAIN TRANSACTIONS
GENERAL POLICY
Our general policy is that we will not, and will not permit our
subsidiary to, enter into any contract or transaction with or for the benefit of
any affiliate (other than transactions between us and our subsidiary), which is
not at a price and on other terms at least as favorable to Maxcom or our
subsidiary as those which could be obtained on an arm's-length basis from an
unaffiliated third party.
OPERATION SERVICES
On October 17, 1997, we entered into an operating agreement with CT
Global Telecommunications, Inc., one of our principal shareholders. This
agreement was amended and restated as of May 21, 1998 and October 1, 1999. Under
this agreement, CT Global was responsible for:
- the planning, supervision, implementation and management of our
network construction and operations, and for the transfer or
responsibility to us following the start-up phase;
- the management, advice and assistance for the overall direction,
planning, coordination and supervision of our day-to-day telephone
operations;
- the provision of our Chief Operating Officer, other management and
other CT Global employees with appropriate experience and
training;
- the design and supervision of the implementation of focused
marketing and sales services;
- the planning, coordination and supervision of our operational
financial affairs, including the preparation of an annual
operating budget; and
- the training of personnel to enable us to assume direct
responsibility for all operations.
Beginning on October 1, 1999 through December 31, 2000, CT Global will be
responsible for:
- continuing to provide us with advisory, consulting and support
services; and
- the administrative responsibilities for all employees seconded to
us.
We pay CT Global a management fee of U.S.$450,000 per year. In addition,
we granted CT Global options to purchase up to 250,000 of our series N shares
and cash incentives provided that we meet start-up and operational targets. CT
Global has already earned options to purchase 100,000 shares. The exercise price
is U.S.$8.70 per share, provided that the maximum value that CT Global may
realize upon the exercise of the options may not exceed U.S.$40.00 per share.
For 1998 and 1999, we paid incentive fees to CT Global of U.S.$450,000 each
year.
We are also required to reimburse CT Global for expenses related to
salaries and other expenses of CT Global personnel assigned to us. For 1998 and
1999, we paid CT Global U.S.$3.5 million and U.S.$4.6 million, respectively, for
reimbursement of expenses.
The amended and restated operating agreement terminates on December 31,
2000.
STRATEGIC ASSISTANCE SERVICES
On May 21, 1998, we entered into a strategic assistance agreement with
Bachow & Associates, Inc., an affiliate of one of our principal shareholders.
The agreement provided that Bachow would help us to:
- develop and implement a budget model template for our annual
operating and capital budgets;
- evaluate and assist in the choice and implementation of a
financial accounting system;
- develop a template for the monthly Board of Directors operational
reporting package;
- evaluate and assist in the choice and implementation of a customer
billing system;
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- design a sales and marketing plan; and
- provide training and guidance to our Chief Financial Officer.
This agreement expired on April 1, 1999. For 1998 and 1999, we paid
Bachow U.S.$0.4 million and U.S.$0.2 million, respectively, for its services. In
addition, Bachow received a right to earn options to purchase 100,000 of our
series N shares at a strike price of U.S.$8.70 per share, upon a successful
completion of the above-mentioned projects. In accordance with the terms of the
strategic assistance agreement, Bachow may elect to have the Company finance up
to 95% of the exercise price with a seven-year term recourse loan that will be
secured by the shares. The maximum value that Bachow may realize upon the
exercise of the options may not exceed U.S.$40.00 per share.
OFFICE LEASE
In 1997 and 1998 we entered into lease agreements which have expired,
with Inmobiliaria Grupo Radio Centro, S.A. de C.V., a corporation controlled by
some members of the Aguirre Gomez family, for the use of 3 floors of office
space in the Grupo Radio Centro building, our former headquarters. For 1997,
1998 and 1999, we paid Inmobiliaria Grupo Radio Centro approximately Ps.1.9
million, Ps.6.1 million and Ps.7.7 million, respectively, for use of the floors.
ADMINISTRATIVE SERVICES
During 1997, 1998 and 1999 we paid Promotora Tecnica de Servicios
Profesionales, S.A. de C.V., a corporation controlled by some members of the
Aguirre Gomez family, approximately Ps.2.2 million, Ps.1.9 million and Ps.1.2
million, respectively, for general administrative and accounting services.
MANAGEMENT AND FINANCIAL SERVICES
In 1997, we paid to Grupo Radio Centro, S.A. de C.V., a corporation
controlled by some members of the Aguirre Gomez family, approximately U.S.$1
million for market, preliminary and general studies related to (1) the
feasibility of the business in the telecommunications environment in Mexico, (2)
the search, negotiations and execution of an agreement with a strategic partner,
(3) the search, negotiations and execution of an agreement with the vendor
finance providers, (4) the obtainment of concession titles and (5) our
participation in the radio frequency auctions process.
INCENTIVE FOR CAPITAL CONTRIBUTIONS
Our Board of Directors resolved on February 15, 2000, that those
shareholders who commit to make or cause to be made a U.S.$35 million capital
contribution by September 30, 2000 be compensated for providing such commitment.
This capital contribution was a condition to the offering of the old notes. The
committing shareholders, which include the Aguirre Gomez family, CT Global
Telecommunications, Inc., BankAmerica International Investment Corporation,
Bachow Investment Partners III, L.P. and BancBoston Investments, Inc., will
receive warrants to purchase an aggregate of 70,000 series N shares, at an
exercise price of U.S.$0.01 per share.
On June 20, 2000, our Board of Directors acknowledged receipt of the
option holders' notice of exercise of such options. The issuance of the shares
and the payment of the exercise price is subject to the proposed capital
restructuring described in "Principal Shareholders--Proposed capital
restructuring."
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DESCRIPTION OF THE NOTES
You can find the definitions of certain terms used in this description
under the subheading "-- Certain definitions." In this description, the word
"Company" refers only to Maxcom Telecomunicaciones, S.A. de C.V. and not its
subsidiary.
The old notes were, and the exchange notes will be, issued under the
indenture between Maxcom, the Guarantor and The Bank of New York, as trustee.
The terms of the exchange notes are identical in all material respects to the
old notes except that, upon completion of the exchange notes, the exchange notes
will be:
- freely transferable, and
- free of any covenants regarding exchange registration rights.
The following description is a summary of the material provisions of the
indenture and does not restate that agreement in its entirety. The summary is
subject to and qualified in its entirety by reference to all provisions of the
indenture, including terms that are defined in the indenture and that are made a
part of the indenture by reference to the Trust Indenture Act of 1939. We urge
you to read the indenture because it, not this description, defines your rights
as holders of the notes. You may request copies of the indenture at our address
set forth under the heading "-- Where You Can Find Additional Information."
BRIEF DESCRIPTION OF THE NOTES AND THE GUARANTEE
These notes:
- are unsecured senior obligations of the Company;
- are pari passu in right of payment to all existing and future
Senior Indebtedness of the Company;
- are senior in right of payment to any future Subordinated
Obligations of the Company;
- are subject to registration with the SEC pursuant to the
Registration Rights Agreement; and
- are unconditionally guaranteed by the Guarantors.
PRINCIPAL, MATURITY AND INTEREST
The Company issued old notes with a maximum aggregate principal amount of
$300 million. The Company issued the notes in denominations of $1,000 and
integral multiples of $1,000. The notes will mature on April 1, 2007.
Interest on these notes will accrue at the rate of 13 3/4% per annum and
will be payable semiannually in arrears on April 1 and October 1, commencing on
October 1, 2000. We will make each interest payment to the holders of record of
these notes on the immediately preceding March 15 and September 15,
respectively. 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
or, if interest has already been paid, from the date it was most recently paid.
Interest will be computed on the basis of a 360-day year comprised of twelve
30-day months.
Additional interest may accrue on the notes in certain circumstances
pursuant to the Registration Rights Agreement.
SUBSIDIARY GUARANTEES
The notes will be guaranteed by each of the Company's current and future
Restricted Subsidiaries. These subsidiary guarantees (the "Subsidiary
Guarantees") will be the joint and several obligations of the Guarantors.
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A Guarantor may not sell or otherwise dispose of all or substantially all
of its assets to, or consolidate with or merge with or into (whether or not such
Guarantor is the surviving Person), another Person, other than the Company or
another Guarantor, unless:
(1) immediately after giving effect to that transaction, no Default or
Event of Default exists; and
(2) either:
(a) the Person acquiring the property in any such sale or disposition
or the Person formed by or surviving any such consolidation or
merger assumes all the obligations of that Guarantor under the
indenture, its Subsidiary Guarantee and the Registration Rights
Agreement pursuant to a supplemental indenture satisfactory to
the trustee; or
(b) the net proceeds of such sale or other disposition are applied in
accordance with the applicable provisions of the indenture.
The Subsidiary Guarantee of a Guarantor will be released:
(1) in connection with any sale or other disposition of all or
substantially all of the assets of that Guarantor (including by way
of merger or consolidation) to a Person that is not (either before
or after giving effect to such transaction) a Subsidiary of the
Company, if the sale or other disposition complies with the asset
disposition provisions of the indenture; or
(2) in connection with any sale of all of the Capital Stock of a
Guarantor to a Person that is not (either before or after giving
effect to such transaction) a Subsidiary of the Company, if the sale
complies with the asset disposition provisions of the indenture.
See "-- Limitation on sales of assets and subsidiary stock."
OPTIONAL REDEMPTION
Except as set forth below or under "Redemption for Changes in Mexican
Withholding Taxes," we will not be entitled to redeem the notes at our option
prior to maturity.
Before April 1, 2003, we may at our option on one or more occasions
redeem notes in an aggregate principal amount not to exceed 35% of the aggregate
principal amount of the notes originally issued at a redemption price (expressed
as a percentage of principal amount) of 113.75%, plus accrued and unpaid
interest to the redemption date, with the Net Cash Proceeds from one or more
Public Equity Offerings following which there is a Public Market; provided that
(1) at least 65% of such aggregate principal amount of notes originally
issued remain outstanding immediately after the occurrence of each
such redemption; and
(2) each such redemption occurs within 60 days after the date of the
related Public 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 must state the portion of the principal amount to be
redeemed. We will issue a new note in principal amount equal to the unredeemed
portion of the original note in the name of its holder upon cancellation of the
original note. Notes called for
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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 the 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.
INTEREST ESCROW
A portion of the Company's obligations under the notes are secured
pursuant to the Pledge and Escrow Agreement (the "Escrow Agreement") between the
Company and the Trustee, as Escrow Agent, by a pledge of a portfolio of U.S.
government securities (the "Pledged Securities"). Upon the consummation of the
offering of the old notes on March 17, 2000, the Company purchased and pledged
to the Trustee, for the benefit of the holders of the notes, the Pledged
Securities, which are in an amount intended to be sufficient upon receipt of
scheduled interest and principal payments, to provide for payment in full when
due of the first four semi-annual scheduled interest payments on the notes. The
Company deposited U.S.$77.9 million of the net proceeds from the sale of the
notes to purchase the Pledged Securities. The Company pledged the Pledged
Securities as security for the payment of the principal of and interest on the
notes and all other obligations of the Company under the indenture and the
notes. On each of the first four-semi annual interest payment dates, the Trustee
will apply the proceeds of a sufficient amount of Pledged Securities to pay the
interest then due.
Upon the acceleration of the maturity of the notes or upon certain
redemptions and repurchases of the notes, the Trustee will apply the proceeds of
a sufficient amount of Pledged Securities to pay the amounts owed by the Company
to holders of the notes at such time. Immediately following the earlier of (a)
the payment in full of the four semi-annual scheduled interest payments on the
notes, if no Default or Event of Default is then continuing, and (b) the day on
which all of the notes have been repurchased, redeemed or defeased, the
remaining Pledged Securities, if any, will be released from the pledge and the
outstanding notes, if any, will be unsecured obligations of the Company. The
ability of holders of the notes to realize upon any such funds or receive
payment from the proceeds of the Pledged Securities may be subject to certain
bankruptcy law limitations in the event of a bankruptcy of the Company.
ADDITIONAL AMOUNTS
All payments made on or with respect to the notes will be made 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
imposed or levied by or on behalf of Mexico or any of its related political
subdivisions or taxing authorities (or by the jurisdiction of incorporation,
seat of management or residence for tax purposes of any successor to the Company
(a "Successor Jurisdiction")), including any related interest, penalties or
additions ("Taxes"), unless the Company is (or any other entity, on the
Company's behalf, is) required by law or by the interpretation or administration
of law.
If we are required to withhold or deduct any amount for or on account of
Taxes from any payment made on or with respect to the notes, we will pay such
additional amounts ("Additional Amounts") as may be necessary so that the net
amount received by each Holder of the notes after such withholding or deduction
(including withholding or deduction imposed upon such Additional Amounts) will
not be less than the amount such Holder would have received if such Taxes had
not been withheld or deducted.
However, no Additional Amounts will be payable with respect to:
(1) any Taxes which are imposed solely by reason of a present or former
connection between the Holder or beneficial owner of the note (or
between a fiduciary, settlor, beneficiary, member of, or possessor
of power over, such Holder or beneficial owner, if such Holder or
beneficial owner is an estate, trust or partnership) and the
jurisdiction imposing such Taxes, other than a connection arising
from the mere holding of, or receipt of payments on, the notes or by
exercising any rights under the notes or the indenture;
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(2) any Taxes to the extent they are imposed solely by reason of the
failure by the Holder or beneficial owner to comply with any
certification, identification, documentation or other reporting
requirements, whether imposed by statute, applicable tax treaty,
regulation or administrative practice; provided that
(A) such compliance is required or imposed as a precondition to
exemption from, or reduction in the rate of, such Taxes,
(B) such Holder may legally comply with such requirements, and
(C) at least 60 days prior to the first payment date with respect to
which we apply this clause (2) (or in the event of any subsequent
change in any such requirements, at least 60 days prior to the
first payment date for which such change is effective) we have
notified the Trustee and all Holders of the notes in writing as
to any such requirements; or
(3) where presentation is required for payment on a note, any Taxes
which are imposed solely by reason of the Holder's presentation of a
note for payment more than 30 days after the date on which the
relevant payment is first made available to the Holder (but only to
the extent that the Holder would have been entitled to Additional
Amounts had the note been presented on any day (including the last
day) within such 30-day period);
(4) any estate, inheritance, gift, sales, transfer, personal property or
similar Taxes imposed with respect to any note;
(5) any Taxes that are only payable other than by withholding or
deduction; or
(6) any combination of (1), (2), (3), (4) or (5) (the Taxes described in
(1) through (6) for which no Additional Amounts are payable are
hereinafter referred to as "Excluded Taxes").
Notwithstanding the foregoing, the limitations on the Company's
obligation to pay Additional Amounts set forth in clause (2) above will not
apply if:
(i) the provision of information, documentation or other evidence
described in such clause (2) would be materially more onerous, in
form, in procedure or in the substance of information disclosed, to
a Holder or beneficial owner of a note than comparable information
or other reporting requirements imposed under US tax law (including
the United States -- Mexico Income Tax Treaty), regulation and
administrative practice (such as IRS Forms 1001, W-8 and W-9); or
(ii) Rule 3.31.9 issued by the Secretaria de Hacienda y Credito Publico
(Ministry of Finance and Public Credit) on March 6, 2000 or a
substantially similar successor of such rule is in effect, unless
(a) the provision of the information, documentation or other
evidence described in clause (2) is expressly required by statute,
regulation, ruling or administrative practice in order to apply Rule
3.31.9 (or successor rule), the Company cannot obtain such
information, documentation or other evidence on its own through
reasonable diligence and the Company otherwise would meet the
requirements for application of Rule 3.31.9 (or successor rule) or
(b) in the case of a Holder or beneficial owner of a note that is a
pension fund or other tax-exempt organization, payments to such
Holder or beneficial owner would be subject to Taxes at a rate less
than that provided by Rule 3.31.9 (or successor rule) if the
information, documentation or other evidence required under clause
(2) above were provided.
In addition, clause (2) above will be construed to require that a
non-Mexican pension or retirement fund or other Holder or beneficial owner of a
note register with the Ministry of Finance and Public Credit of Mexico for the
purpose of establishing eligibility for an exemption from or reduction of Taxes.
We will make any required withholding or deduction and remit the full
amount deducted or withheld to the appropriate taxing authority as and when
required by applicable law. We will furnish to the Trustee, within 30 days after
the date the payment of any Taxes is due, evidence of such payment by us. We
will deliver copies of such evidence to Holders of the notes or the Paying Agent
upon request.
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We will indemnify and hold harmless each Holder of notes and, upon
written request of any Holder of notes, reimburse each such Holder, for the
amount of:
(1) any Taxes (other than Excluded Taxes) levied or imposed and paid by
such Holder as a result of payments made on or with respect to the
notes; provided that reasonable supporting documentation is
provided; and
(2) any Taxes (other than Excluded Taxes) levied or imposed with respect
to any reimbursement under the foregoing clause (1), so that the net
amount received by such Holder after such reimbursement will not be
less than the net amount the Holder would have received if Taxes
(other than Excluded Taxes) on such reimbursement had not been
imposed.
Any payments made pursuant to the preceding sentence will be treated as
Additional Amounts for all relevant purposes.
We will pay any present or future stamp, court, documentary or other
similar Taxes, charges or levies that arise in Mexico or any of its political
subdivisions (or any Successor Jurisdiction) from the execution, delivery,
registration of, or enforcement of rights under, the notes, the indenture or any
related document.
Whenever in the indenture, this prospectus or any related document there
is mentioned, in any context, the payment of principal (and premium, if any),
redemption price, interest or any other amount payable on or with respect to any
note such mention will be deemed to include any Additional Amounts to the extent
that, in such context, Additional Amounts are, were or would be payable in
respect thereof.
The obligation to pay Additional Amounts under the terms and conditions
described above will survive any termination, defeasance or discharge of the
indenture.
REDEMPTION FOR CHANGES IN MEXICAN WITHHOLDING TAXES
If, as a result of any amendment to, or change in, the laws (or any
related regulation or rulings) of Mexico or any related political subdivision or
taxing authority affecting taxation or any amendment to or change in an official
interpretation, administration or application of such laws, regulations or
rulings (including a holding by a court of competent jurisdiction), which
amendment or change of such laws, regulations or rulings becomes effective on or
after the date on which the notes are originally issued, we would or would
become obligated, after taking reasonable measures available to us to avoid such
requirement, to pay Additional Amounts in respect of any note pursuant to its
terms and conditions in excess of the Additional Amounts we would be obligated
to pay if payments made on the notes were subject to withholding or deduction of
Mexican Taxes at a rate of 4.9 percent ("Excessive Additional Amounts"), then,
at our option, the notes may be redeemed in whole, but not in part, at any time,
on giving not less than 30 nor more than 60 days notice mailed to the trustee at
a cash price equal to the sum of:
(1) 100% of the principal amount of the note on the date of redemption;
(2) the related accrued and unpaid interest, if any, to the date of
redemption; and
(3) any Additional Amounts which would otherwise be payable.
Notwithstanding the above,
(A) no such notice of redemption may be given earlier than 60 days
prior to the earliest date on which, but for such redemption, we
would be obligated to pay Excessive Additional Amounts were any
payment on the notes then due and
(B) at the time such notice of redemption is given, such obligation
to pay Excessive Additional Amounts remains in effect.
Prior to publication of any notice of redemption pursuant to this
provision, we will deliver to the Trustee (1) a certificate signed by a duly
authorized officer of our Company stating that we are entitled to effect such
redemption and setting forth a statement of facts showing that the conditions
precedent to our right to so redeem the notes have
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occurred and (2) a written opinion of independent counsel in Mexico reasonably
acceptable to the Trustee to the effect that we have or will become obligated to
pay such Excessive Additional Amounts as a result of such change or amendment.
Once we deliver such notice to the Trustee, it will be irrevocable.
RANKING
Senior indebtedness versus notes
The indebtedness evidenced by these notes will rank pari passu in right
of payment to the Senior Indebtedness of the Company. As of December 31, 1999,
after giving pro forma effect to this offering, the Company's other Senior
Indebtedness would have been approximately U.S.$0.9 million.
Subordinated indebtedness versus notes
The indebtedness evidenced by these notes will rank senior in right of
payment to all future subordinated indebtedness of the Company.
SAME-DAY PAYMENT
The indenture requires us to make payments in respect of notes (including
principal, premium and interest) by wire transfer of immediately available funds
to the U.S. dollar accounts with banks in the U.S. specified by the holders or,
if no such account is specified, by mailing a check to each such holder's
registered address.
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 of the notes 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) 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)
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),
directly or indirectly, of more than 35% of the total voting power
of the Voting Stock of the Company; provided, however, that the
Permitted Holders
(A) 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
(B) 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 (1), such other person shall be deemed to
beneficially own any Voting Stock of a Person (the "specified person") held by
any other Person (the "parent entity"), if such other person is the beneficial
owner (as defined above in this 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 proviso), 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;
(2) individuals who on the Issue Date constituted the Board of Directors
(together with any new directors whose election by the shareholders
of the Company was ratified by a vote of 66 2/3% of the directors of
the Company then still in office who were either directors on the
Issue Date or whose election was
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previously so ratified) cease for any reason to constitute a
majority of the Board of Directors then in office;
(3) the adoption of a plan relating to the liquidation or dissolution of
the Company; or
(4) 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,
in all such cases, a Person that is controlled by the Permitted
Holders), other than a transaction following which (A) in the case
of a merger or consolidation transaction, 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) constitute at least a majority of the voting power of
the Voting Stock of the surviving Person in such merger or
consolidation transaction, and (B) in the case of a sale of assets
transaction, the transferee Person becomes the obligor in respect of
the notes and a Subsidiary of the transferor of such assets.
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 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
Purchasers. Subject to the limitations discussed below, we could, in the future,
enter into certain transactions, including acquisitions, refinancings or other
recapitalizations, that would not constitute a Change of Control under the
indenture, but that could increase the amount of indebtedness outstanding at
such time or otherwise affect our capital structure or credit ratings.
Restrictions on our ability to Incur additional Indebtedness are contained in
the covenants described under "-- Certain covenants -- Limitation on
indebtedness," "-- Limitation on liens" and "-- Limitation on sale/leaseback
transactions." Such restrictions can only be waived with the consent of the
holders of a majority in principal amount of the notes then outstanding. Except
for the limitations contained in such covenants, however, the indenture will not
contain any covenants or provisions that may afford holders of the notes
protection in the event of a highly leveraged transaction.
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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 will be entitled to Incur Indebtedness if, on the date of such
Incurrence and after giving effect thereto no Default has occurred and is
continuing, and
(1) the Consolidated Leverage Ratio would be less than 5.0 to 1; and
(2) the Fixed Charge Coverage Ratio would be at least (i) 1.5 to 1
from the Issue Date to and including December 31, 2001 and (ii)
and 1.7 to 1.0 thereafter.
(b) Notwithstanding the foregoing paragraph (a), so long as no Default
has occurred and is continuing, the Company and the Restricted Subsidiaries will
be entitled to Incur any or all of the following Indebtedness:
(1) Indebtedness of the Company or a Restricted Subsidiary Incurred at
any time after the Issue Date for the purposes of financing the
cost (including the cost of design, construction, acquisition,
installation, development, improvement or integration) of
telecommunications assets (including acquisitions by way of
capital lease and acquisitions of Capital Stock of a Person that
becomes a Restricted Subsidiary as a result of such acquisition to
the extent of the fair value of the telecommunications assets so
acquired) up to U.S.$100.0 million in aggregate principal amount
at any one time outstanding; provided, however, that the Liens to
secure Indebtedness Incurred pursuant to this clause (1) are (A)
limited to the assets and Capital Stock so acquired, and (B) Liens
permitted to be Incurred pursuant to clause (7) of the definition
of "Permitted Liens";
(2) 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 and (B) if the Company or any Guarantor 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, in the case of the Company
or the Subsidiary Guarantee, in the case of any Guarantor;
(3) the notes (including up to $25.0 million in additional notes, if
any, which may be issued pursuant to the 30-day option granted to
the initial purchasers), the Exchange Notes and the related
Subsidiary Guarantees;
(4) Indebtedness outstanding on the Issue Date (other than
Indebtedness described in clause (2) or (3) of this covenant);
(5) Indebtedness of a Restricted Subsidiary Incurred and outstanding
on or prior to the date on which such Restricted Subsidiary was
acquired by the Company (other than Indebtedness Incurred in
connection with, 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); provided, however, that on the date of such acquisition
and after giving pro forma effect thereto, the Company would have
been able to Incur at least $1.00 of additional Indebtedness
pursuant to paragraph (a) of this covenant;
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(6) Refinancing Indebtedness in respect of Indebtedness Incurred
pursuant to paragraph (a) or pursuant to clause (1), (3), (4), (5)
or this clause (6); provided, however, that to the extent such
Refinancing Indebtedness directly or indirectly Refinances
Indebtedness of a Subsidiary Incurred pursuant to clause (5), such
Refinancing Indebtedness shall be Incurred only by such
Subsidiary;
(7) Hedging Obligations directly related to Indebtedness permitted to
be Incurred by the Company pursuant to the indenture;
(8) Indebtedness consisting of Subordinated Obligations which is
Incurred by the Company to finance a required repurchase of
Warrant Shares pursuant to the terms of the Warrant Agreement as
in effect on the Issue Date; provided, however, that any
Indebtedness Incurred pursuant to this clause (8) shall not have a
Stated Maturity on or prior to the first anniversary of the Stated
Maturity of the notes and shall not be mandatorily redeemable,
pursuant to a sinking fund obligation or otherwise, or be
redeemable at the option of the holders thereof, in whole or in
part, on or prior to the first anniversary of the Stated Maturity
of the notes;
(9) Indebtedness consisting of performance and other similar bonds and
reimbursement obligations Incurred by the Company in the ordinary
course of business securing the performance of contractual,
franchise, concession or license obligations of the Company or a
Restricted Subsidiary;
(10) Indebtedness of the Company to the extent the net proceeds thereof
are promptly (i) used to purchase notes pursuant to a Change of
Control Offer or (ii) deposited to defease the notes as described
under "-- Defeasance";
(11) Indebtedness arising from agreements providing for
indemnification, adjustment of purchase price or similar
obligations, from guarantees or from letters of credit, surety
bonds or performance bonds securing such obligations, if the
Company or its Restricted Subsidiaries, in any case Incurred in
connection with the disposition of any business, assets or
Restricted Subsidiary (other than guarantees of Indebtedness
Incurred by any Person acquiring all or any portion of such
business, assets or Restricted Subsidiary for the purpose of
financing such acquisition), in a principal amount not to exceed
the gross proceeds actually received by the Company or a
Restricted Subsidiary in connection with such disposition;
(12) Indebtedness of the Company or any Restricted Subsidiary
constituting reimbursement obligations with respect to letters of
credit issued in the ordinary course of business in respect of
workers' compensation claims or self-insurance, or other
Indebtedness with respect to reimbursement type obligations
regarding workers' compensation claims; provided, however, that
obligations arising upon the drawing of such letters of credit or
the Incurrence of such Indebtedness are reimbursed within 30 days
following such drawing or Incurrence;
(13) the guarantee by the Company or any of the Guarantors of
Indebtedness of the Company or a Subsidiary of the Company that
was permitted to be incurred by another provision of this
covenant; and
(14) Indebtedness of the Company in an aggregate principal amount
which, when taken together with all other Indebtedness of the
Company outstanding on the date of such Incurrence (other than
Indebtedness permitted by clauses (1) through (13) above or
paragraph (a)) does not exceed U.S.$20.0 million; provided that
such Indebtedness is used for working capital and other general
corporate purposes.
(c) Notwithstanding the foregoing, the Company will not Incur any
Indebtedness pursuant to the foregoing paragraph (b) if the proceeds thereof are
used, directly or indirectly, to Refinance any Subordinated Obligations unless
such Indebtedness shall be subordinated to the notes to at least the same extent
as such Subordinated Obligations.
(d) For purposes of determining compliance with this covenant, in the
event that an item of Indebtedness meets the criteria of more than one of the
types of Indebtedness described above, the Company, in its sole discretion, will
(1) classify such item of Indebtedness at the time of Incurrence and only be
required to include the amount and
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type of such Indebtedness in one of the above clauses and (2) be entitled to
divide and classify an item of Indebtedness in more than one of the types of
Indebtedness described above.
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) the remainder of (x) cumulative Consolidated Cash Flow during the
period (taken as a single accounting period) beginning on the
first day of the Company's third fiscal quarter of the year 2000
and ending on the last day of the most recent fiscal quarter
ending at least 45 days prior to the date of such Restricted
Payment minus (y) the product of 2.75 times cumulative
Consolidated Interest Expense during such period; 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 (x)
an issuance or sale to a Subsidiary of the Company and (y) the
issuance or sale by the Company of its Capital Stock related to
the $35.0 million capital contribution described in "Principal
Shareholders -- Capital contributions"), including sales 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 provided that the Company receives cash and that the
Company does not directly or indirectly finance such purchases of
Capital Stock, and 100% of any cash contribution 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); plus
(D) an amount equal to the sum of (x) the net reduction in
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 Investments,
proceeds representing the return of capital (excluding dividends
and distributions to the extent that they are accounted for in
Consolidated Cash Flow in clause (3)(A) above) in each case
received by the Company or any Restricted Subsidiary, and (y) the
portion (proportionate to the Company's equity interest in such
Person) of the fair market value of the net assets of such Person
at the time such Person is designated a Restricted Subsidiary;
provided, however, that the foregoing sum shall not exceed, in
the case of any such Person or Persons, the amount of Investments
(excluding Permitted Investments) previously made (and treated as
a Restricted Payment under this clause (a)(3)) by the Company or
any Restricted Subsidiary in such Person.
(b) The preceding provisions will not prohibit:
(1) any Restricted Payment (other than a Restricted Payment described in
clause (1) of the definition of "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 a substantially concurrent capital
contribution; 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
capital
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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 made
by exchange for, or out of the proceeds of the substantially
concurrent sale of, Indebtedness 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 under clause (a)(3) above;
(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 such dividend shall be
included in the calculation of the amount of Restricted Payments
under clause (a)(3) above;
(4) 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
shall not exceed U.S.$250,000 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
under clause (a)(3) above;
(5) the repurchase of Warrant Shares pursuant to the terms of the
Warrant Agreement as in effect on the Issue Date; or
(6) payments or distributions to dissenting stockholders required by
applicable law, pursuant to or in connection with a consolidation,
merger or transfer of assets that complies with the covenant
described under "-- Merger and consolidation."
(c) Notwithstanding the foregoing, so long as any Warrants are outstanding,
the Company will not, and will not permit any Restricted Subsidiary, directly or
indirectly, (1) to make a Restricted Payment of the type specified in clause
(1), (2) or (3) of the definition of "Restricted Payment" (other than a
Restricted Payment permitted under clause (b)(4) or (b)(5) above) or (2) to make
an Investment, used to effect or support the making of a Restricted Payment of
the type specified in clause (1), (2) or (3) of the definition of "Restricted
Payment," unless the Company shall have offered to repurchase all the Warrants
at their then fair market value as determined by an independent nationally
recognized investment banking firm and repurchased all duly tendered Warrants.
The Company shall provide at least ten Business Days prior written notice before
the repurchase date to each holder of the Warrants describing the transaction in
reasonable detail.
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) any encumbrance or restriction pursuant to an agreement in effect at
or entered into on the Issue Date;
(2) any encumbrance or restriction with respect to a Restricted
Subsidiary in existence at the time 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;
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(3) any encumbrance or restriction pursuant to an agreement effecting a
Refinancing of Indebtedness Incurred pursuant to an agreement
referred to in clause (1) or (2) of this covenant or this clause (3)
or contained in any amendment to an agreement referred to in clause
(1) or (2) of this covenant or this clause (3); provided, however,
that the encumbrances and restrictions with respect to such
Restricted Subsidiary contained in any such refinancing agreement or
amendment are no less favorable to the Noteholders than encumbrances
and restrictions with respect to such Restricted Subsidiary
contained in such predecessor agreements;
(4) any such encumbrance or restriction consisting of customary
non-assignment provisions in concessions, permits, licensing
agreements and leases governing leasehold interests to the extent
such provisions restrict the transfer of the concession, permit,
license or lease or the rights granted or property leased
thereunder;
(5) in the case of clause (c) above, restrictions contained in security
agreements or mortgages securing Indebtedness of a Restricted
Subsidiary to the extent such restrictions restrict the transfer of
the property subject to such security agreements or mortgages;
(6) any 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;
(7) any restriction on the sale or other disposition of assets or
property securing Indebtedness as a result of a Permitted Lien on
such assets or property;
(8) any encumbrance or restriction pursuant to purchase money
obligations for property acquired in the ordinary course of business
that impose restrictions of the nature described in clause (c) above
on the property so acquired;
(9) any encumbrance or restriction existing under or by reason of
applicable law or regulations; and
(10) customary provisions relating to assets or properties in which the
Company has Investments in joint ventures, provided that the Company
was entitled to make the Investment pursuant to the covenant
described under "-- Limitation on restricted payments."
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) at least 75% of the consideration thereof received by the Company or
such Restricted Subsidiary is in the form of cash or cash
equivalents;
(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) within one year from the later of
the date of such Asset Disposition or the receipt of such Net
Available Cash either:
(A) to the extent the Company elects (or is required by the terms of
any Indebtedness), to prepay, repay, redeem or purchase 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); or
(B) to the extent the Company elects, to acquire Additional Assets;
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(4) to the extent of the aggregate balance of Net Available Cash after
application in accordance with paragraph (3) above, the Company or
such Restricted Subsidiary makes an offer to the holders of the
notes (and to, at the election of the Company, holders of other
Senior Indebtedness designated by the Company) to purchase notes
(and such other Senior Indebtedness) pursuant to and subject to the
conditions contained in the indenture; and
(5) to the extent that any portion of Net Available Cash remains after
compliance with clause (4) above, the Company or such Restricted
Subsidiary uses such remaining portion only for purposes not
prohibited in the indenture.
In connection with any prepayment, repayment or purchase of Indebtedness
pursuant to clause (A) of paragraph (3) or paragraph (4) 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 or purchased.
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 are not applied in
accordance with this covenant exceeds U.S.$5.0 million. Pending application of
Net Available Cash pursuant to this covenant (except for clause (a)(5) above),
such Net Available Cash shall be invested in cash or Temporary Cash Investments
or applied to temporarily reduce revolving credit Indebtedness (except for
clauses (A) and (B) above).
For the purposes of this covenant, the following are deemed to be cash or
cash equivalents:
(1) the assumption of Indebtedness of the Company or any Restricted
Subsidiary 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.
(b) In the event of an Asset Disposition that requires the purchase of
the notes (and other Senior Indebtedness) pursuant to clause (a)(4) 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 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, 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 notes (and any other Senior Indebtedness) tendered
pursuant to such offer is less than the Net Available Cash allotted to the
purchase thereof, the Company will be required to apply the remaining Net
Available Cash in accordance with clause (a)(5) above. 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) pursuant to this covenant if the Net Available Cash available
therefor is less than U.S.$5.0 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).
(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 clause by virtue of its compliance with
such securities laws or regulations.
Limitation on affiliate transactions
(a) The Company will not, and will not permit any Restricted Subsidiary
to, enter into or permit to exist any transaction (including the purchase, sale,
lease or exchange of any property, employee compensation arrangements or
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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
U.S.$1.0 million but is less than or equal to U.S.$5.0 million, the
terms of the Affiliate Transaction are set forth in writing and a
majority of disinterested directors of the Company 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 Board of Directors resolution; and
(3) if such Affiliate Transaction involves an amount in excess of
U.S.$5.0 million, the Board of Directors shall also have received a
written opinion from an investment banking firm of national United
States prominence that is not an Affiliate of the Company to the
effect that such Affiliate Transaction is fair, from a financial
standpoint, to the Company and its Restricted Subsidiaries.
(b) The provisions of the preceding paragraph (a) will not apply to:
(1) any Investment (other than a Permitted Investment) or other
Restricted Payment, in each case permitted to be made pursuant to
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 a majority of the disinterested members of 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 U.S.$0.5 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;
(7) any Affiliate Transaction between the Company and a Wholly Owned
Subsidiary or between Wholly Owned Subsidiaries;
(8) the operating agreement with CT Global Telecommunications, Inc., as
in effect on the Issue Date or any amendment thereto or any
transaction contemplated thereby (including pursuant to any
amendment thereto) or in any replacement agreement thereto so long
as any such amendment or replacement agreement is not more
disadvantageous to the holders in any material respect than the
original agreement as in effect on the Issue Date; and
(9) any employment agreement entered into by the Company or any of its
Restricted Subsidiaries in the ordinary course of business
consistent with past practice.
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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 would have been
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.
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 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, other than
Permitted Liens, without effectively providing that the notes shall be secured
equally and ratably with (or prior to) the obligations so secured for so long as
such obligations are so secured.
Any Lien created for the benefit of the Holders of the notes pursuant to
the preceding sentence shall provide by its terms that such Lien shall be
automatically and unconditionally released and discharged upon the release and
discharge of the initial Lien.
Limitation on sale/leaseback transactions
The Company will not, and will not permit any Restricted Subsidiary to,
enter into any Sale/Leaseback Transaction with respect to any property unless:
(1) the Company or such Restricted Subsidiary would be entitled to (A)
Incur Indebtedness in an amount equal to the Attributable Debt with
respect to such Sale/Leaseback Transaction pursuant to the covenant
described under "-- Limitation on indebtedness" and (B) create a
Lien on such property securing such Attributable Debt without
equally and ratably securing the notes pursuant to the covenant
described under "-- Limitation on liens";
(2) the net proceeds received by the Company or any Restricted
Subsidiary in connection with such Sale/Leaseback Transaction are at
least equal to the fair 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
Mexico, the United States of America, any State thereof or the
District of
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Columbia 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 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 U.S.$1.00 of
Indebtedness pursuant to paragraph (a) of the covenant described
under "-- Limitation on indebtedness";
(4) immediately after giving pro forma effect to such transaction, the
Successor Company shall have Consolidated Net Worth in an amount
that is not less than the Consolidated Net Worth of the Company
immediately prior to such transaction; and
(5) 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.
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, but the predecessor Company in the case of a
conveyance, transfer or lease shall not be released from the obligation to pay
the principal of and interest on the notes.
SEC reports
Whether or not required by the SEC, so long as any notes are outstanding,
the Company will furnish to the Holders of the notes, within the time periods
specified in the SEC's rules and regulations all quarterly and annual financial
information that would be required to be contained in a filing with the SEC on
Forms 6-K (provided that the Company shall be deemed to be required to file (1)
such Forms for each of the first three fiscal quarters for each fiscal year and
(2) the information required to be filed with the SEC on Form 8-K, if
applicable, for changes in control, acquisition or disposition of assets,
bankruptcy or receivership and changes in the Company's certifying accountants)
and 20-F (beginning with fiscal year 2000) if the Company were required to file
such Forms, including a "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and, with respect to the annual information
only, a report on the annual financial statements by the Company's certified
independent accountants.
In addition, following the consummation of the Registered Exchange Offer,
whether or not required by the SEC, the Company will file a copy of all of the
information and reports referred to in clauses (1) and (2) above with the SEC
for public availability within the time periods specified in the SEC's rules and
regulations (unless the SEC will not accept such a filing) and make such
information available to securities analysts and prospective investors upon
request. In addition, the Company has agreed that, for so long as any notes
remain outstanding, it will furnish to the Holders and to securities analysts
and prospective investors, upon their request, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act.
Limitation on business activities
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, directly or indirectly, engage in any business other than the
Telecommunications Business.
Future subsidiary guarantors
The Company shall cause each future Restricted Subsidiary to promptly
Guarantee the notes and execute a supplemental indenture providing for such
Subsidiary Guarantee on the terms and conditions set forth in the indenture and
deliver an opinion of counsel satisfaction to the Trustee within 10 Business
Days of the date it was acquired or created.
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Rating agencies
By December 31, 2000, the Company must visit the rating agencies of
Standard & Poor's Ratings Group and Moody's Investors Service, Inc. or their
respective successors, for the purpose of obtaining a rating of the notes.
DEFAULTS
Each of the following is an Event of Default:
(1) a default in the payment of interest or any Additional Amounts on
the notes when due, continued for 30 days;
(2) a default in the payment pursuant to the Escrow Agreement or a
default in payment of principal of any note when due at its Stated
Maturity, upon optional redemption, upon required purchase, upon
declaration 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 the sale or issuance of capital
stock of restricted subsidiaries," "-- Limitation on liens," "--
Limitation on sale/leaseback transactions," "-- SEC reports," "--
Limitation on business activities," "-- Future subsidiary
guarantors" or "-- Rating agencies";
(5) the failure by the Company to comply for 60 days after notice with
its other agreements contained in the indenture;
(6) Indebtedness of the Company 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 $5.0
million (the "cross acceleration provision");
(7) certain events of bankruptcy, insolvency or reorganization of the
Company or a Significant Subsidiary (the "bankruptcy provisions");
(8) any judgment or decree for the payment of money in excess of $5.0
million is entered against the Company or a Significant Subsidiary,
remains outstanding for a period of 60 consecutive days following
such judgment and is not discharged, waived or stayed within 10 days
after notice (the "judgment default provision");
(9) except as permitted by the indenture, any Subsidiary Guarantee shall
be held in any final judicial proceeding to be unenforceable or
invalid or shall cease for any reason to be in full force and effect
or any Guarantor, or any Person acting on behalf of any Guarantor,
shall deny or disaffirm its obligations under its Subsidiary
Guarantee; or
(10) the failure by the Company to receive a $35.0 million non-preferred
equity contribution by September 30, 2000.
However, a default under clauses (4), (5) and (8) 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
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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 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 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 extend the Stated Maturity of any note;
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(4) reduce the amount payable upon the redemption of any note or change
the time at which any note may be redeemed as described under "--
Optional redemption" or "Redemption for changes in Mexican
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) release any Guarantor from any of its obligations under its
Subsidiary Guarantee or the indenture, except in accordance with the
indenture;
(9) make any change in the ranking or priority of any note 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 a way
that would result in the loss of an exemption from any of the Taxes
described thereunder or would otherwise adversely affect any
Noteholder for United States or Mexican tax purposes.
Notwithstanding the preceding, without the consent of any holder of the
notes, the Company 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 under the indenture;
(3) to provide for uncertificated notes in addition to or in place of
certificated notes (provided that the uncertificated notes are
issued in registered form for purposes of Section 163(f) of the
Code, or in a manner such that the uncertificated notes are
described in Section 163(f)(2)(B) of the Code);
(4) to add guarantees with respect to the notes to secure the notes;
(5) to add to the covenants of the Company for the benefit of the
holders of the notes or to surrender any right or power conferred
upon the Company;
(6) to make any change that does not adversely affect the rights of any
holder of the notes; or
(7) to comply with any requirement of the SEC in connection with the
qualification of the indenture under the Trust indenture Act.
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.
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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, the payment of Additional Amounts, 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 Significant Subsidiaries and the judgment
default provision described under "-- Defaults" above and the limitations
contained in clauses (3) and (4) under "-- Certain covenants -- Merger and
consolidation" above ("covenant defeasance").
If the Company exercises its legal defeasance option or its covenant
defeasance option, each Subsidiary Guarantor will be released from all of its
obligations with respect to its Subsidiary Guarantee.
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) or (8) under "-- Defaults" above or because of the failure of the
Company to comply with clause (3) or (4) under "-- Certain covenants -- Merger
and consolidation" above.
In order to exercise either of our defeasance options, we must
irrevocably deposit in trust (the "defeasance trust") with the Trustee money or
U.S. 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 in the United States reasonably acceptable to the Trustee to the
effect that holders of the notes will not recognize income, gain or loss for
U.S. Federal income tax purposes as a result of such deposit and defeasance and
will be subject to U.S. 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 U.S. Federal income tax law); and (2) an Opinion of
Counsel in Mexico reasonably acceptable to the Trustee to the effect that
holders of the notes will not recognize income, gain or loss for Mexican taxes
purposes as a result of such deposit and defeasance and will be subject to
Mexican taxes (including withholding taxes) on the same amounts, in the same
manner and at the same times as would have been the case if such deposit and
defeasance had not occurred.
CONCERNING THE TRUSTEE
The Bank of New York is to be the Trustee under the indenture. We have
appointed The Bank of New York as Registrar and Paying Agent with regard to the
notes.
The indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, 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.
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NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the
Company or any Guarantor will have any liability for any obligations of the
Company under the notes, the Subsidiary Guarantees 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 U.S. 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 without giving effect to
applicable principles of conflicts of law to the extent that the application of
the law of another jurisdiction would be required thereby.
Under Mexican monetary law (Ley Monetaria de los Estados Unidos
Mexicanos), in the event that proceedings were brought in Mexico seeking to
enforce our obligations under the notes in Mexico, we would not be required to
discharge such obligations in Mexico in a currency other than Mexican currency.
According to such law, an obligation in a currency other than Mexican currency,
which is payable in Mexico, may be satisfied in Pesos at the rate of exchange in
effect on the date and in the place payment occurs. Such rate is currently
determined by the Mexican Central Bank (Banco de Mexico) every business banking
day in Mexico and published the following business banking day in the Official
Gazette of the Federation (Diario Oficial de la Federacion).
CONSENT TO JURISDICTION AND SERVICE
We will appoint C T Corporation System, 111 Eighth Avenue, 13th Floor,
New York, New York 10011 as our agent for actions brought under Federal or state
securities laws brought in any Federal or state court located in the Borough of
Manhattan in The City of New York and will submit to such jurisdiction.
CERTAIN DEFINITIONS
"Additional Assets" means any:
(1) property, plant, equipment, concessions, licenses, permits and
leases used in a Related Business;
(2) the Capital Stock of a Person that becomes a Restricted Subsidiary
as a result of the acquisition of such Capital Stock by the Company
or another Restricted Subsidiary; or
(3) Capital Stock constituting a minority interest in any Person that at
such time is a Restricted Subsidiary;
provided, however, that any such Restricted Subsidiary described in clauses (2)
or (3) above is primarily engaged in a Related Business.
"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 5% 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.
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"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)
(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, a disposition that constitutes a Restricted Payment
permitted by the covenant described under "-- Certain covenants
-- Limitation on restricted payments" or a Permitted Investment;
(C) a disposition of assets with a fair market value of less than
$100,000;
(D) exchange of telecommunications assets where the Fair Market Value
of the telecommunications assets received is at least equal to
the Fair Market Value of the telecommunications assets disposed
of or if less, the difference is received in cash, and such cash
is Net Available Cash;
(E) dispositions of obsolete, worn-out, damaged or otherwise
unsuitable or unnecessary equipment or other obsolete assets in
the ordinary course of business;
(F) dispositions of capacity and rights of use in the Company's
network in the ordinary course of business; and
(G) a Restricted Payment permitted by or a Permitted Investment that
is not prohibited by the covenant described above under the
caption "-- Certain covenants -- Limitation on restricted
payments."
"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).
"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 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 a day other than a Saturday, Sunday or other day on
which commercial banking institutions are authorized or required by law to close
in Mexico or New York City.
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"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.
"Capital Stock" of any Person means any and all shares, 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 Cash Flow" for any period means the sum of Consolidated Net
Income, plus the following to the extent deducted in calculating such
Consolidated Net Income:
(1) all income and asset tax expense 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 an item that was prepaid in cash in a prior period,
other than the Company's preoperating expenses that were capitalized
in accordance with GAAP); 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; minus the sum of the following to the
extent it increases Consolidated Net Income:
(1) interest income; and
(2) all non-cash items of the Company and its consolidated Restricted
Subsidiaries (excluding any such non-cash item to the extent that it
results in the receipt of cash payments in any future 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
Consolidated Cash Flow only to the extent (and in the same proportion) that the
net income 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.
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its consolidated Restricted Subsidiaries, plus, to
the extent not included in such total interest expense, and to the extent
Incurred by the Company or its Restricted Subsidiaries, without duplication:
(1) interest expense attributable to capital leases and the interest
expense attributable to leases constituting part of a Sale/Leaseback
Transaction;
(2) amortization of debt discount and debt issuance cost;
(3) capitalized interest;
(4) non-cash interest expenses;
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(5) commissions, discounts and other fees and charges owed with respect
to letters of credit and bankers' acceptance financing;
(6) net payments pursuant to Hedging Obligations;
(7) the product of (a) all dividends, whether paid or accrued and
whether or not in cash, on any series of Preferred Stock of such
Person or any of its Subsidiaries, other than dividends on Equity
Interests payable solely in Equity Interests of the Company (other
than Disqualified Stock) or to the Company or a Subsidiary of the
Company, times (b) a fraction, the numerator of which is one and the
denominator of which is one minus the then current combined federal,
state and local statutory tax rate of such Person, expressed as a
decimal, in each case, on a consolidated basis and in accordance
with GAAP;
(8) interest incurred in connection with Investments in discontinued
operations;
(9) interest accruing on any Indebtedness of any other Person to the
extent such Indebtedness is Guaranteed by (or secured by the assets
of) the Company or any Restricted Subsidiary; and
(10) the cash contributions to any employee stock ownership plan or
similar trust to the extent such contributions are used by such plan
or trust to pay interest or fees to any Person (other than the
Company) in connection with Indebtedness Incurred by such plan or
trust.
"Consolidated Leverage Ratio" as of any date of determination means the
ratio of (x) the aggregate amount of Indebtedness of the Company and its
Restricted Subsidiaries as of such date of determination to (y) Consolidated
Cash Flow for the most recent fiscal quarter ending at least 45 days prior to
such date of determination (the "Reference Period") multiplied by four,
provided, however, that:
(1) if the transaction giving rise to the need to calculate the
Consolidated Leverage Ratio is an Incurrence of Indebtedness, the
amount of such Indebtedness shall be calculated after giving effect
on a pro forma basis to such Indebtedness;
(2) if the Company or any Restricted Subsidiary has repaid, repurchased,
defeased or otherwise discharged any Indebtedness that was
outstanding as of the end of the Reference Period 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 after giving
effect on a pro forma basis to the repayment, repurchase, defeasance
or discharge of Indebtedness and Consolidated Cash Flow 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
Consolidated Cash Flow for the Reference Period shall be reduced by
an amount equal to the Consolidated Cash Flow (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 Consolidated Cash Flow (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, Consolidated Cash Flow 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
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Restricted Subsidiary during the Reference Period, Consolidated Cash
Flow 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.
"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 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 (but not 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 (but not loss) realized
upon the sale or other disposition of any Capital Stock of any
Person;
(5) extraordinary gains or losses; and
(6) the cumulative effect of a change in accounting principles.
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 the 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 Net Worth" means the total of the amounts shown on the
balance sheet of the Company and its consolidated Subsidiaries, determined on a
consolidated basis in accordance with GAAP, as of the end of the most recent
fiscal quarter of the Company ending at least 45 days prior to the taking of any
action for the purpose of which the determination is being made, as the sum of:
(1) the par or stated value of all outstanding Capital Stock of the
Company plus
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(2) paid-in capital or capital surplus relating to such Capital Stock
plus
(3) any retained earnings or earned surplus
less (A) any accumulated deficit and (B) any amounts attributable to
Disqualified Stock.
"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement designed to protect
such Person against fluctuations in 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 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:
(1) 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
(2) any such requirement only becomes operative after compliance with
such terms applicable to the notes, including the purchase of any
notes tendered pursuant thereto.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Exchange Act" means the 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 at
maturity equal to, the notes, in compliance with the terms of the Registration
Rights Agreement.
"Fair Market Value" means, with respect to any asset or property
(including Capital Stock), the price that could be negotiated in an arm's-length
free market transaction, for cash, between a willing seller and a willing buyer,
neither of whom is under pressure or compulsion to complete the transaction.
Fair Market Value shall be determined by the Board of Directors of the Company
acting in good faith and shall be evidenced by a resolution of the Board of
Directors of the Company delivered to the trustee.
"Fixed Charge Coverage Ratio" as of any date of determination means with
respect to any specified Person for any period, the ratio of the Consolidated
Cash Flow to Consolidated Interest Expense of such Person for the most recent
fiscal quarter ending at least 45 days prior to the date of determination. In
the event that the specified Person or any of its Subsidiaries incurs, assumes,
Guarantees, repays, repurchases or redeems any Indebtedness (other than ordinary
working capital borrowings) or issues, repurchases or redeems preferred stock
subsequent to the commencement of the period for which the Fixed Charge Coverage
Ratio is being calculated and on or prior to the date on which the event for
which the calculation of the Fixed Charge Coverage Ratio is made (the
"Calculation Date"), then the Fixed Charge Coverage Ratio will be calculated
giving pro forma effect to such incurrence,
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assumption, Guarantee, repayment, repurchase or redemption of Indebtedness, or
such issuance, repurchase or redemption of preferred stock, and the use of the
proceeds therefrom as if the same had occurred at the beginning of the
applicable reference period.
In addition, for purposes of calculating the Fixed Charge Coverage Ratio:
(1) acquisitions that have been made by the specified Person or any of
its Subsidiaries, including through mergers or consolidations and
including any related financing transactions, during the reference
period or subsequent to such reference period and on or prior to the
Calculation Date will be given pro forma effect as if they had
occurred on the first day of the reference period and Consolidated
Cash Flow for such reference period will be calculated on a pro
forma basis in accordance with Regulation S-X under the Securities
Act, but without giving effect to clause (2) of the proviso set
forth in the definition of Consolidated Net Income;
(2) the Consolidated Cash Flow attributable to discontinued operations,
as determined in accordance with GAAP, and operations or businesses
disposed of prior to the Calculation Date, will be excluded; and
(3) the Consolidated Interest Expense attributable to discontinued
operations, as determined in accordance with GAAP, and operations or
businesses disposed of prior to the Calculation Date, will be
excluded, but only to the extent that the obligations giving rise to
such Consolidated Interest Expense will not be obligations of the
specified Person or any of its Subsidiaries following the
Calculation Date.
"GAAP" means generally accepted accounting principles in Mexico, as
amended from time to time.
"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.
"Guarantors" means each of:
(1) Corporativo en Telecomunicaciones, S.A. de C.V.; and
(2) any other subsidiary that executes a Subsidiary Guarantee in
accordance with the provisions of the indenture;
and their respective successors and assigns.
"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 or Capital Stock 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. The accretion
of principal of a non-interest bearing or other discount security shall be
deemed the Incurrence of Indebtedness.
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"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, banker's 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 Disqualified Stock
of such Person or, with respect to any Preferred Stock of any
Subsidiary of such Person, the principal amount of such Preferred
Stock to be determined in accordance with the indenture (but
excluding, in each case, any accrued dividends);
(6) all obligations of the type referred to in clauses (1) through (5)
of other Persons and all dividends of other Persons for the payment
of which, in either case, such Person is responsible or liable,
directly or indirectly, as obligor, guarantor or otherwise,
including by means of any Guarantee;
(7) all obligations of the type referred to in clauses (1) through (6)
of other Persons secured by any Lien on any property or asset of
such Person (whether or not such obligation is assumed by such
Person), the amount of such obligation being deemed to be the lesser
of the value of such property or assets and the amount of the
obligation so secured; and
(8) to the extent not otherwise included in this definition, Hedging
Obligations of such Person.
The amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date of all unconditional obligations as described
above and the maximum liability, upon the occurrence of the contingency giving
rise to the obligation, of any contingent obligations at such date.
"Interest Rate Agreement" means in respect of a Person any interest rate
swap agreement, interest rate cap agreement or other financial agreement or
arrangement designed to protect such Person against fluctuations in interest
rates.
"Investment" in any Person means any direct or indirect advance (other
than advances to customers in the ordinary course of business that are recorded
as accounts receivable on the balance sheet of the lender), loan 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.
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
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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 the date on which the notes are originally issued.
"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).
"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 noncash 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; and
(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.
"Net Cash Proceeds," with respect to any issuance or sale of Capital
Stock, 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.
"Permitted Holders" means (i) Adrian Aguirre Gomez, Maria Guadalupe
Aguirre Gomez, Maria Elena Aguirre Gomez, Maria Trinidad Aguirre Gomez and Maria
Esther Gomez de Aguirre and their respective estates and heirs (collectively,
the "Aguirre Gomez family members"), (ii) any trust established for the benefit
of, or any company or other entity controlled by, one or more Aguirre Gomez
family members, and any successor or Affiliate thereof, (iii) CT Global
Telecommunications, Inc., and any successor or majority-owned Affiliate, (iv)
BankAmerica International Investment Corporation, and any successor or
majority-owned Affiliate, (v) BancBoston Investments, Inc., and any successor or
majority-owned Affiliate, (vi) Bachow Investment Partners III, L.P., and any
successor or majority-owned Affiliate and (vii) Latinvest Strategic Investment
Fund, L.P., and any successor or majority-owned Affiliate.
"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;
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(2) another Person if as a result of such Investment such other Person
is merged or consolidated with or into, or transfers or conveys all
or substantially all its assets to, the Company or a Restricted
Subsidiary; provided, however, that such Person's primary business
is a Related Business;
(3) cash and Temporary Cash Investments;
(4) receivables owing to the Company or any Restricted Subsidiary if
created or acquired in the ordinary course of business and payable
or dischargeable in accordance with customary trade terms; provided,
however, that such trade terms may include such concessionary trade
terms as the Company or any such Restricted Subsidiary deems
reasonable under the circumstances;
(5) payroll, travel and similar advances to cover matters that are
expected at the time of such advances ultimately to be treated as
expenses for accounting purposes and that are made in the ordinary
course of business;
(6) loans or advances to employees made in the ordinary course of
business consistent with past practices of the Company or such
Restricted Subsidiary;
(7) stock, obligations or securities received in settlement of debts
created in the ordinary course of business and owing to the Company
or any Restricted Subsidiary or in satisfaction of judgments;
(8) any Person to the extent such Investment represents the non-cash
portion of the consideration received for an Asset Disposition as
permitted pursuant to the covenant described under "-- Certain
covenants -- Limitation on sales of assets and subsidiary stock";
(9) any Hedging Obligations permitted to be Incurred under "-- Certain
covenants -- Limitation on indebtedness"; and
(10) other Investments in an aggregate amount not to exceed (A) $10.0
million at any one time outstanding from the Issue Date to and
including December 31, 2000, (B) $20.0 million at any one time
outstanding from January 1, 2001 to and including December 31, 2001
and (C) $25.0 million at any one time outstanding thereafter, so
long as in each case such Investments are made in a
Telecommunications Business.
"Permitted Liens" means, with respect to any Person:
(1) pledges or deposits by such Person under worker's compensation laws,
unemployment insurance laws or similar legislation, or good faith
deposits in connection with bids, tenders, contracts (other than for
the payment of Indebtedness) or leases to which such Person is a
party, or deposits to secure public or statutory obligations of such
Person or deposits of cash or United States government bonds to
secure surety or appeal bonds to which such Person is a party, or
deposits as security for contested taxes or import duties or for the
payment of rent, in each case Incurred in the ordinary course of
business;
(2) Liens imposed by law, such as carriers', warehousemen's and
mechanics' Liens, in each case for sums not yet due or being
contested in good faith by appropriate proceedings or other Liens
arising out of judgments or awards against such Person with respect
to which such Person shall then be proceeding with an appeal or
other proceedings for review and Liens arising solely by virtue of
any statutory or common law provision relating to banker's Liens,
rights of set-off or similar rights and remedies as to deposit
accounts or other funds maintained with a creditor depository
institution; provided, however, that (A) such deposit account is not
a dedicated cash collateral account and is not subject to
restrictions against access by the Company in excess of those set
forth by regulations promulgated by the Federal Reserve Board and
(B) such deposit account is not intended by the Company or any
Restricted Subsidiary to provide collateral to the depository
institution;
(3) Liens for taxes not yet subject to penalties for non-payment or
which are being contested in good faith and by appropriate
proceedings;
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(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) survey exceptions, 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 to secure Indebtedness permitted under the provisions
described in clause (b)(1) under "-- Certain covenants -- Limitation
on indebtedness"; provided that such Liens are limited to the assets
and Capital Stock so acquired;
(8) Liens existing on the Issue Date;
(9) 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);
(10) 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);
(11) Liens securing Indebtedness or other obligations of a Subsidiary of
such Person owing to such Person or a wholly owned Subsidiary of
such Person;
(12) 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; and
(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 clauses (6), (8), (9), (10), (14) or (15);
provided, however, that:
(A) such new Lien shall be limited to all or part of the same
property and assets that secured or, under the written agreements
pursuant to which the original Lien arose, could secure the
original Lien (plus improvements and accessions to, such property
or proceeds or distributions thereof); and
(B) the Indebtedness secured by such Lien at such time is not
increased to any amount greater than the sum of (x) the
outstanding principal amount or, if greater, committed amount of
the Indebtedness described under clauses (6), (8), (9), (10),
(14) or (15) at the time the original Lien became a Permitted
Lien and (y) an amount necessary to pay any fees and expenses,
including premiums, related to such refinancing, refunding,
extension, renewal or replacement;
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(14) Liens Incurred in connection with Capital Lease Obligations
permitted under the indenture; provided that such Liens do not
extend or cover any property other than the property that is the
subject of the Capital Lease Obligation;
(15) Liens Incurred to secure Indebtedness permitted under the provisions
described in clause (b)(14) under "-- Certain covenants --
Limitation on indebtedness"; provided that such Liens are limited to
the assets and Capital Stock so acquired; and
(16) Liens in favor of the Company or any Restricted Subsidiary.
Notwithstanding the foregoing, "Permitted Liens" will not include any
Lien described in clauses (6), (9) or (10) 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
sales 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.
"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.
"Public Equity Offering" means an underwritten primary public offering of
voting or non-voting stock of the Company in the United States pursuant to an
effective registration statement under the Securities Act or in Mexico pursuant
to the Mexican Securities Market Law (Ley de Mercado de Valores) and the
regulations of the CNBV.
"Public Market" means any time after (x) a Public Equity Offering has
been consummated and (y) at least 15% of the total issued and outstanding voting
and non-voting stock of the Company has been distributed in the United States by
means of an effective registration statement under the Securities Act or sales
pursuant to Rule 144 under the Securities Act or in Mexico pursuant to the
Mexican Securities Market Law (Ley de Mercado de Valores) and the regulations of
the CNBV.
"Refinance" means, in respect of any Indebtedness, to refinance, extend,
renew, refund, repay, prepay, 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; and
(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;
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provided further, however, that Refinancing Indebtedness shall not include (A)
Indebtedness of a Subsidiary that Refinances Indebtedness of the Company or (B)
Indebtedness of the Company or a Restricted Subsidiary that Refinances
Indebtedness of an Unrestricted Subsidiary.
"Related Business" means any business in which the Company was engaged on
the Issue Date and any other business related, ancillary or complementary to any
business of the Company in which the Company was engaged on the Issue Date.
"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 dividends or distributions payable
solely in its Capital Stock (other than Disqualified Stock) and
dividends or distributions payable solely to the Company or a
Restricted Subsidiary, and other than 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 or of
any Capital Stock of a Restricted Subsidiary held by any Affiliate
of the Company (other than a Restricted Subsidiary), 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 such Person (other than the purchase,
repurchase 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 or other acquisition);
or
(4) the making of any Investment (other than a Permitted Investment) in
any Person.
"Restricted Subsidiary" means any Subsidiary of the Company that is not
an Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to property
owned by the Company or a Restricted Subsidiary on the Issue Date or thereafter
acquired by the Company or a Restricted Subsidiary whereby the Company or a
Restricted Subsidiary transfers such property to a Person and the Company or a
Restricted Subsidiary leases it from such Person.
"SEC" means the Securities and Exchange Commission.
"Senior Indebtedness" means:
(1) Indebtedness of the Company, whether outstanding on the Issue Date
or thereafter Incurred; and
(2) accrued and unpaid interest (including interest accruing on or after
the filing of any petition in bankruptcy or for reorganization
relating to the Company to the extent post-filing interest is
allowed in such proceeding) in respect of (A) indebtedness of the
Company for money borrowed and (B) indebtedness evidenced by notes,
debentures, bonds or other similar instruments for the payment of
which the Company is responsible or liable
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 obligations are subordinate in right of payment to the notes;
provided, however, that Senior Indebtedness shall not include:
(1) any obligation of the Company to any Subsidiary;
(2) any liability for Federal, state, local or other taxes owed or owing
by the Company;
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(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 of the Company (and any accrued and unpaid interest
in respect thereof) which is subordinate or junior in any respect to
any other Indebtedness or other obligation of the Company; 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.
"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 any Indebtedness of the Company (whether
outstanding on the Issue Date or thereafter Incurred) which is subordinate or
junior in right of payment to the notes pursuant to a written agreement to that
effect.
"Subsidiary" means, with respect to any Person, any corporation,
association, partnership or other business entity of which more than 50% of the
total voting power of shares of Voting Stock is at the time owned or controlled,
directly or indirectly, by:
(1) such Person;
(2) such Person and one or more Subsidiaries of such Person; or
(3) one or more Subsidiaries of such Person.
"Telecommunications Business" means the business of (1) transmitting or
providing services relating to the transmission of voice, video or data through
owned or leased terrestrial transmission facilities, (2) constructing,
installing, maintaining, creating, developing or marketing
communications-related network infrastructure, components, equipment, software
and other devices for use in a telecommunications business and related or
incidental thereto and (3) any other business reasonably related, ancillary or
complimentary to those identified in clause (1) or (2) above.
"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 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, and
which bank or trust company has capital, surplus and undivided
profits aggregating in excess of $50,000,000 (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
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rating at the time as of which any investment therein is made of
"P-1" (or higher) according to Moody's Investors Service, Inc. or
"A-1" (or higher) according to Standard and Poor's Ratings Group;
(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 Ratings Group or "A" by Moody's
Investors Service, Inc.;
(6) Certificados de la Tesoreria de la Federacion (Cetes) or Bonos de
Desarrollo del Gobierno Federal (Bondes) issued by the Mexican
government and maturing not more than 180 days after the acquisition
thereof; and
(7) certificates of deposit, bank promissory notes and bankers'
acceptances denominated in Pesos, maturing not more than 180 days
after the acquisition thereof and issued or Guaranteed by any one of
the five largest banks (based on assets as of the immediately
preceding December 31) organized under the laws of Mexico and which
are not under intervention or controlled by the Fondo Bancario de
Proteccion al Ahorro or any successor thereto.
"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 U.S.$1,000 or less or (B) if such Subsidiary has
assets greater than U.S.$1,000, such designation would be permitted under the
covenant described under "-- Certain covenants -- Limitation on restricted
payments."
The Board of Directors may designate any Unrestricted Subsidiary to be a
Restricted Subsidiary; provided, however, that immediately after giving effect
to such designation (A) the Company could Incur $1.00 of additional Indebtedness
under paragraph (a) of the covenant described under "-- Certain covenants --
Limitation on indebtedness" and (B) no Default shall have occurred and be
continuing. Any such designation by the Board of Directors shall be evidenced to
the Trustee by promptly filing with the Trustee a copy of the resolution of the
Board of Directors giving effect to such designation and an Officers'
Certificate certifying that such designation complied with the foregoing
provisions.
"U.S. 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 or other
interests (including partnership interests) 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, including without
limitation, shares of capital stock with limited voting rights (acciones de
inversion neutra) such as the Company's series N shares, as well as series C
shares deposited in a trust which will issue ordinary participation certificates
or CPOs.
"Wholly Owned Subsidiary" means a Restricted Subsidiary all the Capital
Stock of which (other than directors' qualifying shares) is owned by the Company
or one or more Wholly Owned Subsidiaries.
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BOOK-ENTRY, DELIVERY AND FORM
We will initially issue the exchange notes in the form of one or more
global notes. The global notes will be deposited with, or on behalf of The
Depository Trust Company as our depositary and registered in the name of the
depositary or its nominee. Except as set forth below, the global notes may be
transferred, in whole and not in part, only to the depositary or another nominee
of the depositary. You may hold your beneficial interests in the global notes
directly through the depositary if you have an account with the depositary or
indirectly through organizations which have accounts with the depositary.
The depositary has advised us as follows:
- the depositary is a limited-purpose trust company organized under
the laws of the State of New York, a member of the Federal Reserve
System, a "clearing corporation" within the meaning of the New
York Uniform Commercial Code, and "a clearing agency" registered
pursuant to the provisions of Section 17A of the Exchange Act;
- the depositary was created to hold securities of institutions that
have accounts with the depositary, commonly known as
"participants," and to facilitate the clearance and settlement of
transactions in such securities among its participants through
electronic book-entry changes in accounts of the participants,
thereby eliminating the need for physical movement of securities
certificates;
- the depositary's participants include securities brokers and
dealers (which may include the initial purchasers), banks, trust
companies, clearing corporations and certain other organizations;
and
- access to the depositary's book-entry system is also available to
others such as banks, brokers, dealers and trust companies
(collectively, the "indirect participants") that clear through or
maintain a custodial relationship with a participant, whether
directly or indirectly.
We expect that pursuant to procedures established by the depositary, upon
the deposit of the global notes with the depositary, the depositary will credit,
on its book-entry registration and transfer system, the number of notes
represented by such global notes to the accounts of participants. The accounts
to be credited shall be designated by the initial purchasers.
Ownership of beneficial interests in the global notes will be limited to
participants or persons that may hold interests through participants. Ownership
of beneficial interests in such global notes will be shown on, and the transfer
of those ownership interests will be effected only through, records maintained
by the depositary (with respect to participants' interests), the participants
and the indirect participants (with respect to the owners of beneficial
interests in such global notes other than participants). The laws of some
jurisdictions may require that certain purchasers of securities take physical
delivery of such securities in definitive form. Such limits and laws may impair
the ability to transfer or pledge beneficial interests in the global notes.
So long as the depositary or its nominee is the registered holder and
owner of any global notes, the depositary or such nominee will be considered the
sole legal owner and holder of the securities evidenced by such global notes for
all purposes under the indenture and the Warrant Agreement. Except as set forth
below, as an owner of a beneficial interest in the global notes, you will not
- be entitled to have the securities evidenced by the global notes
registered in your name,
- be entitled to receive physical delivery of certificated notes,
and
- be considered to be the owner or holder of any securities
evidenced by the global notes.
We understand that under existing industry practice, in the event an
owner of a beneficial interest in a global note desires to take any action that
the depositary, as the holder of such global note, is entitled to take, the
beneficial owner may instruct the participant to take such action on its behalf.
We will make payments of principal of, premium, if any, and interest on
notes represented by a global note registered in the name of and held by the
depositary or its nominee to the depositary or its nominee, as the case may be,
as the registered owner and holder of such global note.
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We expect that the depositary or its nominee, upon receipt of any payment
of principal of, premium, if any, or interest on the global notes will credit
participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of such global note as
shown on the records of the depositary or its nominee. We also expect that
payments by participants or indirect participants to owners of beneficial
interests in the global notes held through such participants or indirect
participants will be governed by standing instructions and customary practices
and will be the responsibility of such participants or indirect participants.
We will not have any responsibility or liability for any aspect of the
records relating to, or payments made on the account of, beneficial ownership
interests in any of the global notes or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests or for any
other aspect of the relationship between the depositary and its participants or
indirect participants or the relationship between such participants or indirect
participants and the owners of beneficial interests in the global notes owning
through such participants.
Although the depositary has agreed to the foregoing procedures in order
to facilitate transfers of interests in the global notes among participants of
the depositary, it is under no obligation to perform or continue to perform such
procedures, and such procedures may be discontinued at any time. Neither the
Trustee nor the Company will have any responsibility or liability for the
performance by the depositary or its participants or indirect participants of
their respective obligations under the rules and procedures governing their
operations.
CERTIFICATED NOTES
Subject to certain conditions, the notes and warrants represented by the
global notes are exchangeable for certificated notes in definitive form if
- the depositary notifies us that it is unwilling or unable to
continue as depositary for the global notes or the depositary
ceases to be a clearing agency registered under the Exchange Act
and, in either case, we are unable to locate a qualified successor
within 90 days;
- we in our discretion at any time determine not to have all the
notes represented by the global notes; or
- in the case of the notes, a default entitling the holder of the
notes to accelerate the maturity thereof has occurred and is
continuing.
Any note that is exchangeable as above is exchangeable for certificated
notes issuable in authorized denominations, as applicable, and registered in
such names as the depositary shall direct. Subject to the foregoing, a global
note is not exchangeable, except for a global note of the same aggregate
denomination to be registered in the name of the depositary or its nominee. In
addition, such certificated notes will bear the legend referred to under
"Transfer Restrictions" (unless we determine otherwise in accordance with
applicable law), subject, with respect to such certificated notes, to the
provisions of such legend.
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UNITED STATES TAXATION
This is a summary of the principal U.S. federal income tax consequences
resulting from the beneficial ownership of the notes. This summary does not
purport to consider all the possible U.S. federal tax consequences of the
exchange, purchase, ownership and disposition of the notes and is not intended
to reflect the individual tax position of any beneficial owner. The summary is
based upon the Internal Revenue Code of 1986, as amended (the "Code"), its
legislative history, existing and proposed regulations thereunder, published
rulings and court decisions, all as currently in effect and all subject to
change at any time, perhaps with retroactive effect.
This summary deals only with notes held as capital assets within the
meaning of Section 1221 of the Code by initial purchasers. This summary does not
purport to deal with purchasers in special tax situations, such as financial
institutions, tax-exempt organizations, insurance companies, regulated
investment companies, dealers in securities or currencies, persons holding notes
as a hedge against currency risks or as part of a straddle with other
investments or as part of a "synthetic security" or other integrated investment
(including a "conversion transaction") composed of a note and one or more other
investments, holders who own or will own directly, indirectly or by attribution
(including stock attribution resulting from ownership of the warrants) 10% or
more (by voting power) of Maxcom's voting stock or 10% or more (by value) of
Maxcom's outstanding capital stock, or persons whose functional currency (as
defined in section 985 of the Code) is not the U.S. dollar.
The summary does not include any description of the tax laws of any
state, locality or foreign government that may be applicable to the notes or to
the holders of any of the foregoing. You should note that no rulings have been
or will be sought from the Internal Revenue Service ("IRS") with respect to any
of the U.S. federal income tax consequences discussed below, and we cannot
assure you that the IRS will not take contrary positions. You should consult
your own tax advisors concerning the application of U.S. federal income tax laws
to your particular situation as well as any consequences of the exchange,
purchase, ownership and disposition of the notes arising under the laws of any
other taxing jurisdiction.
As used herein, "U.S. Holder" means a beneficial owner of a note, unit,
warrant or warrant shares who or which is
- a citizen or resident of the United States,
- a corporation created or organized in or under the laws of the
United States or of any state thereof (including the District of
Columbia) or
- any other person or entity who or which is subject to U.S. federal
income taxation on a net income basis with respect to its
worldwide income.
As used in this prospectus, the term "Non-U.S. Holder" means a beneficial
owner of a note that is not a U.S. Holder. In the case of a holder of notes that
is a partnership for U.S. federal income tax purposes, each partner generally
will take into account its allocable share of income or loss from the notes and
will take such income or loss into account under the rules of taxation
applicable to such partner, taking into account the activities of the
partnership and the partner.
U.S. TAX CONSEQUENCES TO U.S. HOLDERS OF NOTES
Payments of interest and additional amounts
Generally, payments of "qualified stated interest" (including Mexican
withholding tax imposed on such interest) and Additional Amounts (if any) will
be taxable to a U.S. Holder as ordinary income. Payments of "qualified stated
interest" and Additional Amounts (if any) on a note generally will be includible
in the income of a U.S. Holder as it accrues or is received, in accordance with
such holder's regular method of accounting for tax purposes. Qualified stated
interest is stated interest that is unconditionally payable at least annually at
a single fixed rate over the entire term of the note.
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Original issue discount
The notes will be treated as issued with OID for U.S. federal income tax
purposes in the amount by which the "stated redemption price at maturity" of a
note exceeds its "issue price." The issue price of each note will be that
portion of the issue price of the investment unit allocated by Maxcom to the
note in the amount set forth above. The stated redemption price at maturity of a
note will equal the total amount of all principal and interest payments to be
made on the note, other than qualified stated interest. However, if the amount
of OID determined under this formula is "de minimis OID," then the notes will be
treated as if there is no OID. The notes will have de minimis OID if the total
amount thereof is less than the product of (a) 0.25% ( 1/4 of 1%), (b) the
number of full years from the issue date to the maturity date of the note and
(c) the stated redemption price at maturity.
A U.S. Holder must include OID on the notes, if any, in income as
ordinary interest income as it accrues on the basis of a constant yield to
maturity. OID must be included in income regardless of whether cash is received
in respect of such income. The amount of OID includible in income by the U.S.
Holder of a note is the sum of the "daily portions" of OID with respect to the
note for each day during the taxable year or portion of the taxable year on
which such U.S. Holder held such note ("accrued OID"). The daily portion is
determined by allocating to each day in any accrual period other than the
initial short accrual period and the final accrual period an amount equal to the
excess of
- the product of a note's adjusted issue price at the beginning of
such accrual period and its yield to maturity (determined on the
basis of compounding at the close of each accrual period and
properly adjusted for the length of the accrual period) over
- the amount of any qualified stated interest payments allocable to
such accrual period.
The "yield to maturity" is the discount rate that, when applied to all
payments under a note, results in a present value equal to the issue price. The
amount of OID allocable to the final accrual period is the difference between
the amount payable at maturity and the adjusted issue price of the note at the
beginning of the final accrual period. The amount of OID allocable to the
initial short period may be computed under any reasonable method. The adjusted
issue price of the note at the start of any accrual period is equal to its issue
price increased by the aggregate amount of accrued OID for each prior accrual
period and reduced by the amount of any cash payments previously made on the
note (other than payments of qualified stated interest).
A U.S. Holder may generally, upon election, use the constant yield to
maturity method applicable to OID to determine the timing of inclusion of all
qualified stated interest and OID on a note, subject to certain limitations.
Such an election will apply to all debt instruments held or acquired by the U.S.
Holder on or after the beginning of the first taxable year to which the election
applies and may not be revoked without the consent of the IRS.
The above treatment assumes that the "stated redemption price at
maturity" for a note does not include any Additional Amounts payable on the
notes. It is possible that the IRS might disagree with this treatment and
contend that the "stated redemption price at maturity" should include the
reasonably expected amount of Additional Amounts payable on the notes. In such
case, the amount of OID on the notes would be increased by such amount.
Sale, exchange or retirement of a note
Except as described below under "--Exchange offer," upon the sale,
exchange or retirement of a note, a U.S. Holder generally will recognize capital
gain or loss equal to the difference between the amount realized on the sale,
exchange or retirement (other than amounts representing accrued and unpaid
interest which are taxable as ordinary income) and such U.S. Holder's adjusted
tax basis in the note. A U.S. Holder's adjusted tax basis in a note generally
will equal the issue price of the note increased by the amount of OID on such
note that is includible in such U.S. Holder's gross income and decreased by the
amount of any cash payments received on the note (other than payments of
qualified stated interest). Capital gain recognized by an individual U.S. Holder
generally will be long term capital gain and subject to a maximum U.S. federal
income tax rate of 20% if the U.S. Holder held the note for more than one year
before sale. U.S. Holders that are corporations are taxed on their net capital
gains at the regular corporate income tax rates. The source of gain or loss
realized by a U.S. Holder in connection with the disposition of notes will be
U.S. source.
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Foreign tax credit
Interest, OID and Additional Amounts. Qualified stated interest, OID and
Additional Amounts (if any) paid on notes will constitute income from sources
outside the United States, and, with certain exceptions, will be grouped
together with other items of "passive" income, for purposes of computing the
foreign tax credit allowable to a U.S. Holder. If the payments of qualified
stated interest, OID and Additional Amounts (if any) were to become subject to a
withholding tax imposed by a foreign country at a rate of 5 percent or more, the
qualified stated interest, OID and Additional Amounts (if any) may be considered
"high withholding tax interest" for purposes of computing the foreign tax
credit. If a U.S. Holder is predominantly engaged in the active conduct of a
banking, insurance, financing or similar business, the payments of qualified
stated interest, OID and Additional Amounts (if any) may be considered
"financial services income" for purposes of computing the foreign tax credit,
provided that such amounts do not constitute "high withholding tax interest," as
described above.
Effect of Mexican withholding taxes. A U.S. Holder will be required to
include the amount of Mexican withholding taxes, if any, imposed on payments on
a note (including any Additional Amounts payable by Maxcom) in gross income as
interest income. Such treatment will be required regardless of whether, as will
generally be true, Maxcom is required to pay Additional Amounts so that the
amount of Mexican withholding taxes does not reduce the net amount actually
received by the holder of the note.
Subject to certain limitations, a U.S. Holder may be entitled to a credit
against its U.S. federal income tax liability, or a deduction in computing its
U.S. federal taxable income, for the amount of Mexican income taxes withheld by
Maxcom (which, as described above, would include amounts withheld on Additional
Amounts paid by Maxcom with respect to Mexican taxes). However, Mexican taxes
may be deducted from a U.S. Holder's taxable income only if such U.S. Holder
does not claim a credit for any Mexican or other foreign taxes paid or accrued
in that taxable year. A U.S. Holder may be required to provide the IRS with a
certified copy of the receipt evidencing payment of such withholding tax imposed
in respect of payments on the notes in order to claim a Mexican tax credit in
respect of such Mexican withholding tax.
Since a U.S. Holder may be required to include in its gross income OID on
the notes in advance of any withholding of Mexican income taxes from payments
relating to the discount (which would generally occur when such discount is paid
in cash), a U.S. Holder may not be entitled to a credit or deduction for these
Mexican withholding taxes in the year the OID is included in the U.S. Holder's
gross income for U.S. federal income tax purposes, and may be limited in its
ability to credit or deduct in full the foreign taxes in the year those taxes
are actually withheld by Maxcom. Prospective purchasers of the notes should
consult their tax advisors concerning the availability and timing of a foreign
tax credit or deduction relating to the payment of Mexican withholding taxes.
EXCHANGE OFFER
The exchange of notes for exchange notes pursuant to the registration
rights agreement should not constitute a taxable exchange. As a result,
- a U.S. Holder should not recognize gain or loss as a result of
exchanging notes for Exchange notes pursuant to the registration
rights agreement;
- the holding period of the exchange notes should include the
holding period of the notes exchanged therefor; and
- the adjusted tax basis of the exchange notes should be the same as
the adjusted tax basis of the notes exchanged therefor immediately
before such exchange.
Upon the occurrence of a registration default, Maxcom would be required
to pay additional interest on the notes. Although the matter is not free from
doubt, if additional interest becomes payable on the notes, such additional
interest should be treated as additional OID with respect to the notes. In that
event, U.S. Holders generally would have to recompute the amount of OID with
respect to the notes by treating the notes as retired and reissued, solely for
purposes of the OID rules, on the date that additional interest becomes payable
for an amount equal to the adjusted issue price of the notes on that date.
107
<PAGE> 112
U.S. TAX CONSEQUENCES TO NON-U.S. HOLDERS OF UNITS
A Non-U.S. Holder generally will not be subject to U.S. federal income or
withholding tax on distributions in respect of the notes, unless such income is
effectively connected with the conduct by the non-U.S. Holder of a trade or
business in the United States.
A Non-U.S. Holder will generally not be subject to U.S. federal income or
withholding tax on gain realized on the sale or the other disposition of notes
unless (i) such gain is effectively connected with the conduct of a United
States trade or business by such Non-U.S. Holder, or (ii) such Non-U.S. Holder
is present in the United States for 183 days or more during the taxable year of
sale or disposition and certain other conditions are met.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Recently finalized Treasury Regulations relating to withholding,
information reporting and backup withholding unify current certification
procedures and forms and clarify reliance standards (the "Final Regulations").
The Final Regulations generally will be effective with respect to payments made
after December 31, 2000. Except as provided below, this section describes rules
applicable to payments made on or before December 31, 2000.
A U.S. Holder of the notes may be subject to information reporting
requirements with respect to distributions made in respect of the notes and
proceeds from the sale or other disposition of notes payable to a U.S. Holder by
a U.S. paying agent or other U.S. intermediary. If information reporting
requirements apply, distributions made to the U.S. Holder will be reported to
the IRS and to the U.S. Holder as may be required under applicable Treasury
regulations. Backup withholding at a rate of 31% will also apply with respect to
any payments made on the notes and proceeds from the sale, exchange, redemption
or retirement of the notes unless such U.S. Holder:
- is a corporation or comes within certain other exempt categories
and, when required, demonstrates that fact, or
- provides a correct taxpayer identification number (social security
number or employer identification number), certifies as to its
exemption from backup withholding and otherwise complies with
applicable requirements of the backup withholding rules.
Certain penalties may be imposed by the IRS on a U.S. Holder that is
required to supply information but does not do so in the proper manner.
A Non-U.S. Holder generally will be exempt from backup withholding and
information reporting requirements, but may be required to comply with
certification and identification procedures in order to obtain an exemption from
backup withholding and information reporting (generally, filing a timely and
properly completed IRS Form W-8BEN).
Any amount withheld under the backup withholding rules from a payment to
a holder is allowable as a credit against such holder's U.S. federal income tax
liability (which might entitle such holder to a refund), provided that such
holder furnishes the required information to the IRS.
You are advised to consult your own tax advisers as to the consequences
of a purchase and sale of notes, including, without limitation,
- the applicability and effect of any state, local or non-U.S. tax
laws to which they may be subject, and of any legislative or
administrative changes in law,
- the U.S. federal income tax consequences of foreign withholding
taxes by Maxcom (and of the payment by Maxcom of Additional
Amounts with respect to such withholding taxes),
- the availability of a credit or deduction for foreign withholding
taxes, and
- the effect, if any, of the Final Regulations on their purchase,
ownership and disposition of the notes.
108
<PAGE> 113
MEXICAN TAXATION
The following is a general discussion of the material consequences of an
investment in the notes under the Mexican Income Tax Law (Ley del Impuesto sobre
la Renta) and rules and regulations thereunder, as currently in effect. This
summary of certain Mexican tax considerations deals only with holders of notes
or of a beneficial interest therein that are not residents of Mexico for Mexican
tax purposes and that do not conduct a trade or business through a permanent
establishment or fixed base in Mexico (a "Foreign Holder").
For purposes of Mexican taxation, an individual is a resident of Mexico
if he has established his domicile in Mexico, unless he has resided in another
country for more than 183 calendar days, whether consecutive or not, in any one
calendar year and can demonstrate that he has become a resident of that country
for tax purposes, and a legal entity is a resident of Mexico if it has been
incorporated under the laws of Mexico, or has established the principal
management of its business or the base of effective direction in Mexico. A
Mexican citizen is presumed to be a resident of Mexico for tax purposes unless
such person can demonstrate otherwise. If a person has a permanent establishment
or fixed base in Mexico, such permanent establishment or fixed base shall be
required to pay taxes in Mexico on income attributable to such permanent
establishment or fixed base in accordance with relevant tax provisions.
UNITED STATES/MEXICO AND OTHER TAX TREATIES
A Convention for the Avoidance of Double Taxation and Prevention of
Fiscal Evasion, together with a related Protocol thereto (collectively, the "Tax
Treaty"), between the United States and Mexico entered into force on January 1,
1994. Provisions of the Tax Treaty that may affect the taxation of certain U.S.
holders of notes are summarized below. 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 several other
tax treaties that may reduce the amount of Mexican withholding tax to which the
notes may be subject. Holders of the notes should consult their own tax advisors
as to the tax consequences, if any, of such treaties.
MEXICAN TAX CONSEQUENCES TO FOREIGN HOLDERS OF THE NOTES
Taxation of interest and principal
Under the Mexican Income Tax Law, payments of interest made by Maxcom in
respect of the notes (including payments of principal in excess of the issue
price of such notes, which, under Mexican law, are deemed to be interest) to a
Foreign Holder will generally be subject to a Mexican withholding tax assessed
at a rate of 10%, if, as is the case, the notes are registered in the National
Registry for Securities and Intermediaries (Registro Nacional de Valores e
Intermediarios). However, when the Reduced Rate Rule, as described below, is not
applicable, interest paid to Holders of notes who are residents of tax haven
jurisdictions, as defined in the Mexican Income Tax Law, are subject to a 40%
withholding tax rate.
Pursuant to the Mexican Income Tax Law and until December 31, 2000,
payments of interest made by issuers of notes in respect of the notes to a
Foreign Holder will be subject to a reduced 4.9% Mexican withholding tax rate
(the "Reduced Rate") if, in addition to registering the notes as set forth
above,
- the effective beneficiary of the interest is a Foreign Holder
which resides for tax purposes in a country which has entered into
a treaty to avoid double taxation with Mexico; and
- the requirements for the application of a lower rate established
in the applicable treaty are satisfied.
Foreign Holders should consult their tax advisors regarding whether they
reside in a country that has entered into such a treaty with Mexico which is
effective, and if so, the conditions and requirements for obtaining benefits
under such treaty.
Pursuant to Rule 3.31.9 (the "Reduced Rate Rule") issued by the Mexican
Ministry of Finance (Secretaria de Hacienda y Credito Publico) on March 6, 2000
and expected to be effective through March 7, 2001, payments of interest with
respect to the notes made by Maxcom to Foreign Holders, regardless of the place
of residence or the tax regime applicable to the Foreign Holder recipient of the
interest, will be subject to withholding taxes imposed at the Reduced Rate if
109
<PAGE> 114
- the notes are registered with the National Registry of Securities
and Intermediaries and copies of approval of such registration are
provided to the Ministry of Finance;
- Maxcom timely files with the Ministry of Finance certain
information relating to the issuance of the notes;
- Maxcom timely files with the Ministry of Finance on a quarterly
basis information on the amount and dates of interest payments
made during each quarter and information representing that "no
party related to Maxcom" (as such terms are defined in the Reduced
Rate Rule), directly or indirectly, is the effective beneficiary
of more than five percent (5%) of the aggregate amount of each
such interest payment; and
- Maxcom maintains records that evidence compliance with the
conditions set forth above.
Maxcom has complied with the first two conditions set forth above and
expects that the last two conditions will be met and, accordingly, expects to
withhold Mexican tax from interest payments at the Reduced Rate during the
effectiveness of such rule. Although it is expected that a rule equivalent to
the Reduced Rate Rule will be in effect from March 7, 2001 and beyond, there can
be no assurance that any such rule will be issued and become effective. In such
event, higher rates may apply.
Apart from the Reduced Rate, other special rates of Mexican withholding
tax may apply. In particular, under the Tax Treaty, the Mexican withholding tax
rate is reduced to 4.9% (provided the notes are regularly and substantially
traded on a recognized securities market; otherwise the Tax Treaty provides for
a maximum withholding tax rate of 15%) (the "Treaty Rate"), for certain holders
that are residents of the United States (within the meaning of the Tax Treaty)
and under certain circumstances contemplated therein. However, during the fiscal
year 2000 the Tax Treaty is not expected, generally, to have any material effect
on the Mexican tax consequences described herein, because, as described above,
under Mexican Income Tax Law and regulations as currently in effect, with
respect to a U.S. Holder that meets the Reduced Rate Rule requirements described
above, Maxcom will be entitled to withhold taxes in connection with interest
payments under the notes at the Reduced Rate. From 2001 and beyond, holders of
the notes should consult their own tax advisors as to the possible application
of the Tax Treaty.
Payments of interest Maxcom makes on the notes to non-Mexican pension or
retirement funds will be exempt from Mexican withholding taxes, if any such fund
is
- the effective beneficiary of the interest;
- duly incorporated under the laws of its country of origin;
- exempt from income tax on the interest income in that country; and
- registered with the Ministry of Finance for that purpose.
Under existing Mexican law and regulations, a Foreign Holder will not be
subject to any Mexican taxes in respect of payments of principal made by Maxcom
with respect to the notes.
Taxation of Additional Amounts
Maxcom has agreed, subject to specified exceptions and limitations, to
pay Additional Amounts to the holders of the notes in respect of the Mexican
withholding taxes mentioned above. See "Description of the Notes -- Additional
amounts." Payments of Additional Amounts with respect to the notes will be
subject to Mexican withholding tax at the same rate generally applicable to
interest paid on the notes.
Holders or beneficial owners of notes may be requested to provide certain
information or documentation necessary to enable Maxcom to establish the
appropriate Mexican withholding tax rate applicable to such holders or
beneficial owners. In the event that the specified information or documentation
concerning the holder or beneficial owner is requested and is not provided on a
timely basis, the obligation of Maxcom to pay Additional Amounts will be
limited. See "Description of the Notes -- Additional Amounts."
110
<PAGE> 115
Taxation of proceeds from the sale or other disposition of notes
Capital gains resulting from the sale or other disposition of the notes
by Foreign Holders will not be subject to Mexican income tax.
Transfer and other taxes
There are no Mexican stamp, registration, or similar taxes payable by a
Foreign Holder in connection with the purchase, ownership or disposition of the
notes. A Foreign Holder of notes will not be liable for Mexican estate, gift,
inheritance or similar tax with respect to the notes.
111
<PAGE> 116
PLAN OF DISTRIBUTION
Each broker-dealer that receives exchange notes in the exchange offer for
old notes held for its own account must acknowledge that it will deliver a
prospectus in connection with any resale of those exchange notes. 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 old notes that were acquired as a result of market-making
activities or other trading activities. We have agreed that until the close of
business on February 18, 2001 (180 days after the date of this prospectus), we
will make this prospectus, as amended or supplemented, available to any
broker-dealer for use in connection with any such resale. In addition, until
November 20, 2000 (90 days after the date of this prospectus), all dealers
effecting transactions in the exchange notes may be required to deliver a
prospectus.
We will not receive any proceeds from any sale of exchange notes by
broker-dealers. Exchange notes 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 granting of options on the exchange notes 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 at 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.
Any broker-dealer that resells exchange notes 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 notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit of any
such resale of exchange notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the Securities
Act. The letter of transmittal that accompanies this prospectus 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.
Until November 20, 2001, we 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. We have
agreed to pay all expenses incident to the exchange offer and will indemnify the
holders of the notes against certain liabilities, including liabilities under
the Securities Act.
LEGAL MATTERS
The validity of the notes offered by this prospectus will be passed upon
by Proskauer Rose LLP New York, New York, United States counsel for Maxcom.
Proskauer Rose LLP may rely, as to Mexican law matters, on the opinion of
Santamarina y Steta, S.C., Mexico City, Mexico, special Mexican counsel to
Maxcom. Santamarina y Steta, S.C. may rely, as to matters of New York law, on
the opinion of Proskauer Rose LLP.
INDEPENDENT AUDITORS
The consolidated financial statements of Maxcom and subsidiaries as of
December 31, 1998 and 1999 and for the years ended December 31, 1997, 1998 and
1999 appearing in this prospectus have been audited by BDO International,
independent public accountants.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
Upon the effectiveness of the registration statement related to this
prospectus, we will become subject to the information requirements of the
Exchange Act of 1934 applicable to foreign private issuers. As a result, we will
be required to file with the Commission an annual report as well as other
information. The indenture governing the notes also requires us to provide you
with certain information including financial information for the first three
fiscal quarters of each year.
The registration statement and related exhibits, as well as reports and
other information filed with the Commission by us may be inspected and copied at
the public reference facilities maintained by the Commission at Room 1024
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's Regional Offices located at Seven World Trade Center, 13th Floor,
New York, New York 10048 and Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois. Copies of these materials may be obtained
from the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates.
112
<PAGE> 117
Written requests to Maxcom for information should be addressed to Maxcom
Telecomunicaciones, S.A. de C.V., Magdalena No. 211, Colonia del Valle, 03100
Mexico, D.F., Attn: Jose Antonio Solbes, Tel.: (52) 5 147-1111.
113
<PAGE> 118
MAXCOM TELECOMMUNICATIONS, S.A. DE C.V. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.................................................................................F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999..............................................F-3
Consolidated Statement of Operations for the period from May 1, 1999 (commencement of operations)
through December 31, 1999.............................................................................F-4
Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1997,
1998 and 1999.........................................................................................F-5
Consolidated Statements of Changes in Financial Position for the years ended December 31, 1997, 1998
and 1999..............................................................................................F-6
Notes to Consolidated Financial Statements for the years ended December 31, 1997, 1998 and 1999...........F-7
</TABLE>
F-1
<PAGE> 119
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
Maxcom Telecomunicaciones, S.A. de C.V.
We have audited the accompanying Consolidated Balance Sheets of Maxcom
Telecomunicaciones, S.A. de C.V. as of December 31, 1998 and 1999, and the
related Consolidated Statements of Operations for the period from May 1, 1999
(commencement of operations) through December 31, 1999, Changes in Shareholders'
Equity and Changes in Financial Position for the years ended December 31, 1997,
1998 and 1999. These Financial Statements are the responsibility of the
Company's Management. Our responsibility is to express an opinion on these
Consolidated Financial Statements based on our audits.
We conducted our audits in accordance with Mexican Generally Accepted
Auditing Standards. These standards require that we plan and perform the audit
to obtain reasonable assurance as to 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
Maxcom Telecomunicaciones, S.A. de C.V. as of December 31, 1998 and 1999, the
Consolidated Result of its Operations for the period from May 1, 1999
(commencement of operations) through December 31, 1999, the Changes in its
Consolidated Shareholders' Equity and the Changes in its Consolidated Financial
Position for the years ended December 31, 1997, 1998 and 1999, in conformity
with Mexican Generally Accepted Accounting Principles.
BDO International
Mexico City,
February 21, 2000
F-2
<PAGE> 120
MAXCOM TELECOMUNICACIONES, S.A. DE C.V.
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF MEXICAN PESOS "Ps" WITH PURCHASING POWER AS OF DECEMBER 31, 1999
AND THOUSANDS OF US DOLLARS "$")
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------
1998 1999 1999
---------- ------------ --------
(NOTE 2)
<S> <C> <C> <C>
ASSETS (NOTE 10)
CURRENT ASSETS:
Cash and cash equivalents (Note 4)................... Ps 387,173 Ps 153,662 $ 16,209
---------- ------------ --------
Restricted cash (Note 10)............................ 1,859 18,688 1,971
---------- ------------ --------
Accounts receivable:
Customers, net of allowance of Ps 3,095........... -- 28,653 3,022
Value added tax refundable (Note 5)............... 49,940 40,687 4,292
Other............................................. 189 318 34
---------- ------------ --------
50,129 69,658 7,348
---------- ------------ --------
Equipment for resale................................. -- 6,720 709
---------- ------------ --------
Prepaid expenses..................................... 6,249 4,198 443
---------- ------------ --------
Total current assets......................... 445,410 252,926 26,680
FREQUENCY RIGHTS, Net (Note 6)......................... 105,160 102,792 10,843
TELEPHONE NETWORK SYSTEMS AND EQUIPMENT (Notes 8 and
10).................................................. 247,737 788,851 83,212
PREOPERATING EXPENSES (Note 9)......................... 168,042 248,136 26,175
OTHER ASSETS........................................... 25,230 43,276 4,565
---------- ------------ --------
Ps 991,579 Ps 1,435,981 $151,475
========== ============ ========
LIABILITIES
CURRENT LIABILITIES:
Current maturities of long-term debt (Note 10)....... Ps 3,321 Ps 3,745 $ 395
CT Global Telecommunications, Inc.................... 8,442 23,973 2,529
Accrued expenses and other accounts payable.......... 5,988 39,510 4,167
Deposits refundable to customers..................... -- 7,309 771
Payroll and other taxes payable...................... 5,676 5,078 536
---------- ------------ --------
Total current liabilities.................... 23,427 79,615 8,398
---------- ------------ --------
LONG-TERM LIABILITIES:
Long-term debt, less current maturities (Note 10).... 206,763 800,604 84,452
---------- ------------ --------
Total liabilities............................ 230,190 880,219 92,850
---------- ------------ --------
SHAREHOLDERS' EQUITY (NOTES 12 AND 13)
Capital stock.......................................... 734,345 743,684 78,448
Additional paid-in capital............................. 27,044 29,279 3,089
Deficit................................................ -- (217,201) (22,912)
---------- ------------ --------
Total shareholders' equity................... 761,389 555,762 58,625
Commitments (Notes 1, 10, 13 and 16)................... -- -- --
---------- ------------ --------
Ps 991,579 Ps 1,435,981 $151,475
========== ============ ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 121
MAXCOM TELECOMUNICACIONES, S.A. DE C.V.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM MAY 1, 1999 (COMMENCEMENT OF OPERATION)
THROUGH DECEMBER 31, 1999
(THOUSANDS OF MEXICAN PESOS "Ps" WITH PURCHASING POWER AS OF DECEMBER 31, 1999
AND THOUSANDS OF US DOLLARS "$", EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1999 1999
---------- ----------
(NOTE 2)
<S> <C> <C>
TELECOMMUNICATIONS REVENUES................................. Ps 88,197 $ 9,303
---------- ----------
OPERATING COSTS AND EXPENSES:
Network operating cost.................................... 43,824 4,623
Selling, general and administrative expenses.............. 161,561 17,042
Depreciation and amortization............................. 74,265 7,834
---------- ----------
Total operating costs and expenses................ 279,650 29,499
---------- ----------
OPERATING LOSS............................................ (191,453) (20,196)
---------- ----------
COMPREHENSIVE (INCOME) COST OF FINANCING:
Interest expense.......................................... 46,301 4,884
Interest income........................................... (10,046) (1,060)
Exchange loss, net........................................ 9,546 1,007
Gain on net monetary position............................. (19,944) (2,104)
---------- ----------
25,857 2,727
---------- ----------
OTHER INCOME, net........................................... 109 11
---------- ----------
NET LOSS.................................................. Ps(217,201) $ (22,912)
========== ==========
Weighted average common shares outstanding.................. 10,264,827 10,264,827
NET LOSS PER SHARE........................................ (21.16) (2.23)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 122
MAXCOM TELECOMUNICACIONES, S.A. DE C.V.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(THOUSANDS OF MEXICAN PESOS "Ps" WITH PURCHASING POWER AS OF DECEMBER 31, 1999)
<TABLE>
<CAPTION>
ADDITIONAL
CAPITAL PAID-IN
STOCK CAPITAL DEFICIT TOTAL
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
BALANCE AS OF DECEMBER 31, 1996............ Ps 87 Ps 5,970 Ps -- Ps 6,057
Increase in capital stock.................. 231,763 (5,970) -- 225,793
--------- -------- ---------- ----------
BALANCE AS OF DECEMBER 31, 1997 (NOTE
12)...................................... 231,850 -- -- 231,850
Increase in capital stock, net of expenses
(Ps.24,395) incurred in connection with a
private placement (Note 12).............. 502,495 -- -- 502,495
Stock options (Note 13).................... -- 27,044 -- 27,044
--------- -------- ---------- ----------
BALANCE AS OF DECEMBER 31, 1998 (NOTE
12)...................................... 734,345 27,044 -- 761,389
Increase in capital stock.................. 9,339 -- -- 9,339
Contributions for future increases of
capital.................................. -- 331 -- 331
Stock options (Note 13).................... -- 1,904 -- 1,904
Net loss................................... -- -- (217,201) (217,201)
--------- -------- ---------- ----------
BALANCE AS OF DECEMBER 31, 1999 (NOTE
12)...................................... Ps743,684 Ps29,279 Ps(217,201) Ps 555,762
========= ======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 123
MAXCOM TELECOMUNICACIONES, S.A. DE C.V.
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(THOUSANDS OF MEXICAN PESOS "Ps" WITH PURCHASING POWER AS OF DECEMBER 31, 1999
AND THOUSANDS OF US DOLLARS "$")
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------
1997 1998 1999 1999
---------- ---------- ---------- --------
(NOTE 2)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss................................ Ps -- Ps -- Ps(217,201) $(22,912)
Depreciation and amortization charged to
operations not requiring use of
resources............................ -- -- 74,265 7,834
---------- ---------- ---------- --------
-- -- (142,936) (15,078)
Net change in restricted cash,
accounts receivable, inventories,
prepaid expenses and accounts
payable and accrued expenses....... -- -- 14,737 1,555
---------- ---------- ---------- --------
Resources used in operating
activities......................... -- -- (128,199) (13,523)
---------- ---------- ---------- --------
FINANCING ACTIVITIES:
Issuance of capital stock............... 231,763 502,495 9,339 985
Additional paid-in capital.............. (5,969) 27,044 2,235 236
Proceeds from loans and notes payable... -- 210,084 594,265 62,686
---------- ---------- ---------- --------
Resources provided by financing
activities......................... 225,794 739,623 605,839 63,907
---------- ---------- ---------- --------
INVESTING ACTIVITIES:
Preoperating expenses................... (57,222) (103,742) (77,726) (8,199)
Net changes in monetary assets and
liabilities.......................... (13,426) (24,576) -- --
---------- ---------- ---------- --------
(70,648) (128,318) (77,726) (8,199)
Telephone network systems and
equipment............................ (1,024) (247,895) (615,379) (64,913)
Frecuency rights........................ (105,160) -- -- --
Other assets............................ -- (25,230) (18,046) (1,904)
---------- ---------- ---------- --------
Resources used in investing
activities......................... (176,832) (401,443) (711,151) (75,016)
---------- ---------- ---------- --------
CASH AND CASH EQUIVALENTS:
Increase (decrease) in cash and cash
equivalents.......................... 48,962 338,180 (233,511) (24,632)
Beginning balance....................... 31 48,993 387,173 40,841
---------- ---------- ---------- --------
Ending balance.......................... Ps 48,993 Ps 387,173 Ps 153,662 $ 16,209
========== ========== ========== ========
Supplemental disclosures:
Cash paid for interest.................. Ps -- Ps 16,063 Ps 39,438 $ 4,160
========== ========== ========== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 124
MAXCOM TELECOMUNICACIONES, S.A. DE C.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED, DECEMBER 31, 1997, 1998 AND 1999
(THOUSANDS OF MEXICAN PESOS "Ps" WITH PURCHASING POWER AS OF DECEMBER 31, 1999
AND THOUSANDS OF US DOLLARS "$")
NOTE 1. INCORPORATION AND BUSINESS
Maxcom Telecomunicaciones, S.A. de C.V. ("Maxcom" or "the Company"), is a
Mexican company incorporated on February 28, 1996 (inception). Its main line of
business is the construction and operation of a telephone network, with the
purpose of providing local, national and international long-distance, data and
other value-added services and private-network services, within the Mexican
Republic.
The Company started its commercial operations in May 1999. Therefore, from
its incorporation through April 30, 1999, the Company was in the preoperating
and development stage. The recoverability of its investment in telephone network
systems and equipment, preoperating expenses and frequency rights depends on the
ability of the Company to obtain financing to complete development, and on the
future profitable commercial exploitation of the telephone network.
Effective February 3, 1997 (supplemented December 7, 1999), Mexico's
Ministry of Communications and Transport (the "SCT") awarded the Company a
concession to install and operate a public telecommunication network in Mexico.
This concession is non-exclusive; its initial term is of 30 years, and it
contains certain renewal rights. The concession grants the Company the right to
provide local telephone services in the Federal District of Mexico and in 124
other cities located in the states of Chiapas, Hidalgo, Mexico, Oaxaca, Puebla,
San Luis Potosi, Tabasco, Tamaulipas, Tlaxcala, Veracruz, Campeche, Quintana Roo
and Yucatan. It also grants the Company the right to provide long-distance, data
and other value-added services. There are conditions for the concession to
remain effective such as building certain networks and providing certain
services on predetermined dates.
In October 1997, the Company was awarded a nationwide point-to-point and
three regional point-to-point and three regional point-to-multipoint microwave
concessions, each for 20 years. See Note 6.
On November 24, 1998, the Company entered into an agreement with Telefonos
de Mexico, S.A. de C.V. ("Telmex") through which both parties agreed to provide
each other with interconnection services to each other's local
telecommunications network. This agreement calls for reciprocal interconnection
rates for local-to-local services through January 1, 2001. On March 23, 1999,
this agreement was renewed and the term was extended to September 15, 2002.
On January 22, 1999, the Company entered into an agreement with Telmex
through which Maxcom agreed to provide Telmex interconnection services for
Telmex's long-distance traffic. This agreement is valid through September 15,
2002, with the possibility of extension after such date.
During 1999, the Company has entered into interconnection and reselling
agreements with several local carriers and cellular phone companies.
NOTE 2. BASIS OF PRESENTATION
As of the year ended December 31, 1998 and 1999 the accompanying
consolidated financial statements include the accounts of Maxcom and Corporativo
en Telecomunicaciones, S.A. de C.V. ("Corporativo" or the "Subsidiary"), a
wholly-owned Mexican subsidiary incorporated on January 19, 1998, whose main
line of business is the rendering of administrative and technical services,
mainly to Maxcom. All intercompany balances and transactions have been
eliminated in the consolidation.
US dollar amounts ("$") shown in the consolidated financial statements have
been included solely for the convenience of the reader and were translated from
Mexican pesos, as a matter of arithmetic computation only, at the December 31,
1999, noon-buying rate of Ps9.48 per US dollar, published by The
F-7
<PAGE> 125
MAXCOM TELECOMUNICACIONES, S.A. DE C.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Federal Reserve Bank of New York. Such translation should not be construed as a
representation that the Mexican peso amounts have been or could be converted
into US dollars at this or any other rate.
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements are expressed in Mexican
pesos, denoted by the symbol "Ps", and have been prepared by applying Mexican
generally accepted accounting principles ("Mexican GAAP"). The significant
accounting policies used by the Company in the preparation of its financial
statements, including the concepts, methods and criteria related to the
recognition of the effects of inflation on the financial information, are
summarized below:
a) RECOGNITION OF THE EFFECTS OF INFLATION
i) Following the methodology set out in Mexican GAAP, the Company
restates its financial statements to reflect the purchasing power
of the Mexican peso as of the most recent reporting date
(December 31, 1999), thereby comprehensively recognizing the
effects of inflation. The financial statements of previous years
have been also restated in terms of the purchasing power of the
Mexican peso as of the most recent reporting date, thus making them
comparable. Therefore, these amounts differ from those previously
reported.
ii) Shareholders' equity accounts include their restatement to express
them in terms of constant pesos. The restatement amounts are
determined by applying factors derived from the National Consumer
Price Index (INPC) to the historical balances.
iii) The result on net monetary position represents the inflationary
gain or loss, as determined by applying factors derived from the
INPC, on the Company's monthly net monetary assets or liabilities
during the period.
iv) Comprehensive income and cost of financing consists of interest
income and expense, exchange gains or losses and the gain or loss
on the net monetary position. In the development stage period, this
caption is applied to preoperating expenses. As the projects enter
into operations, it is applied to the results of operations.
b) CASH AND CASH EQUIVALENTS
Cash equivalents include highly liquid short-term investments and bank
deposits with original due dates of three months or less, which are valued
at market cost plus accrued interest.
c) TELEPHONE NETWORK SYSTEMS AND EQUIPMENT
Telephone network systems and equipment are recorded at acquisition
cost and restated by applying factors derived from the INPC. Depreciation
is calculated by the straight-line method on restated cost based on the
estimated useful lives of the assets. Depreciation is charged to results of
operations. During the development stage depreciation was applied to
preoperating expenses.
d) FREQUENCY RIGHTS
Frequency rights are recorded at acquisition cost and restated by
applying factors derived from the INPC. Amortization is calculated by the
straight-line method over the term of the concession (see Note 6), from the
start of the Company's operations.
e) PREOPERATING EXPENSES
All expenses incurred during the development stage or in specific
projects in progress are capitalized. The amortization of such expenses is
determined by the straight-line method over ten years, once the
corresponding asset commences operations.
F-8
<PAGE> 126
MAXCOM TELECOMUNICACIONES, S.A. DE C.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
f) TRANSACTIONS AND BALANCES IN FOREIGN CURRENCIES
Transactions in foreign currencies are recorded at the rates of
exchange prevailing on the dates they are entered into or settled. Assets
and liabilities denominated in those currencies are stated in Mexican pesos
at the year-end closing rate published in Mexico's Official Gazette.
Exchange gains or losses are applied to comprehensive (income) cost of
financing.
g) INCOME TAX AND STATUTORY EMPLOYEES' PROFIT SHARING
The Company has had no net income since inception and accordingly has
not provided for income taxes and statutory employees' profit sharing.
Accrued recurring timing differences (preoperating expenses
capitalized for book purposes and expenses incurred in connection with a
private placement applied directly to shareholders' equity, both expensed
for tax purposes) amounted to Ps253,660 at December 31, 1999, which may
result in an increase in income tax and employees' profit sharing payable
in future years, at the then prevailing rates. As of December 31, 1999, the
Company had cumulative tax losses of Ps483,468, which may be carried
forward against future taxable profits (expiring in 2006 through 2009).
h) MANAGEMENT ESTIMATES
Generally accepted accounting principles require that, in preparing a
company's financial statements, management make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclose
contingent assets and liabilities at the date of the financial statements.
Actual results could differ from those estimates.
i) FINANCIAL INSTRUMENTS
The Company's financial instruments consist principally of cash, cash
equivalents and restricted cash, accounts receivable and payable, and loans
and notes payable. The carrying amounts of such financial instruments, as
reflected in the balance sheet, approximate their fair value as of December
31, 1998 and 1999.
j) REVENUE RECOGNITION
The Company recognizes revenues from telephone services provided to
customers, from the sale of customer premises equipment and from services
provided to other telephone service companies (such as interconnection
services).
Revenues from services provided to customers are recognized on an
accrual basis.
Revenues from the sale of customer premise equipment are recognized at
the time of the sale and delivery of such equipment.
Advances from customers are classified as current liabilities until
they are refunded. When the contract is rescinded, these deposits are
applied to operations as services rendered.
k) STOCK-BASED COMPENSATION
The Company recognizes compensation expense for its executive stock
option plan using the intrinsic value method of accounting. Under the terms
of the intrinsic value method, compensation cost is the excess, if any, of
the market price of the stock at the grant date, or other measurement date,
over the amount an employee must pay to acquire the stock.
l) NEW ACCOUNTING STANDARDS
In April 1999, the Mexican Institute of Public Accountants issued a
new Bulletin D-4, Accounting Treatment for Income Tax, Tax on Assets and
Statutory Employees' Profit Sharing,
F-9
<PAGE> 127
MAXCOM TELECOMUNICACIONES, S.A. DE C.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
applicable to all Mexican companies for the year beginning on January 1,
2000. This standard provides a different method of calculating deferred
income taxes than is currently in force. Under the new rules, deferred
taxes will be recognized for the tax consequences of all temporary
differences, both recurring and non-recurring, between the financial
statements' carrying amounts and the tax basis of existing assets,
liabilities and tax losses. Due to the recent issuance of this standard,
management has not been able to fully evaluate the impact it may have on
the future financial position and results of operations of the Company.
NOTE 4. CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1999
--------- ---------
<S> <C> <C>
Republic National Bank of New York: $6,625 in a certificate
of deposit, due January 12, 2000. Annual interest rate of
5.94%..................................................... Ps -- Ps 63,670
BancBoston: $5,010 in a certificate of deposit, due January
5, 2000. Annual interest rate of 5.7%..................... -- 47,895
Bank of America: $3,430 in a certificate of deposit, due
January 3, 2000. Annual interest rate of 3.5%............. -- 32,664
Bank of America: $10,000 in a certificate of deposit, due
January 13, 1999. Annual interest rate of 4.95%........... 111,900 --
NationsBank: $10,000 in a certificate of deposit, due
January 13, 1999. Annual interest rate of 4.95%........... 111,900 --
BancBoston: $14,380 in a certificate of deposit, due January
13, 1999. Annual interest rate of 4.68%................... 160,832 --
Other....................................................... 2,541 9,433
--------- ---------
Ps387,173 Ps153,662
========= =========
</TABLE>
NOTE 5. VALUE-ADDED TAX REFUNDABLE
Value-Added Tax ("VAT") is levied on goods and services acquired generally
at a 15% standard rate. In general, VAT does not represent an additional cost to
business enterprises because the amounts paid will normally be offset against
the VAT liability of the Company on the billing to customers. Because the
Company was in its preoperating stage and began commercial operations in May
1999, but has paid VAT on investments, costs and expenses incurred prior to that
date, the VAT paid has resulted in a tax overpayment subject to refund. This tax
is being refunded on a regular basis.
NOTE 6. FREQUENCY RIGHTS
On October 3, 1997, the Federal Telecommunications Commission ("COFETEL")
granted the Company a concession to use and exploit different bands of the
radio-electric spectrum and to establish point-to-point and point-to-multi-point
microwave links. The concession became effective February 28, 1998, and will run
to the year 2018.
The Company paid the SCT the sum of Ps105,160, which will be amortized over
the life of the concession from the start of the Company's operations. As of
December 31, 1999, the Company has recorded amortization expenses of Ps2,368.
F-10
<PAGE> 128
MAXCOM TELECOMUNICACIONES, S.A. DE C.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7. BALANCES AND TRANSACTIONS WITH RELATED PARTIES
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1999
-------- --------
<S> <C> <C>
Transactions (Restated to express constant pesos of December
31, 1999):
Office lease.............................................. Ps 4,441 Ps 2,389
Administrative services................................... 118 577
Compensation in connection with the operation agreement
with CT Global Telecommunications Inc. and others...... 67,369 69,662
======== ========
</TABLE>
NOTE 8. TELEPHONE NETWORK SYSTEMS AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- USEFUL LIFE
1998 1999 (YEARS)
--------- --------- -----------
<S> <C> <C> <C>
Office furniture......................................... Ps 1,743 Ps 3,308 10
Transportation equipment................................. 1,725 7,656 4
Software................................................. 1,558 5,112 3.33
Engineering equipment.................................... 9,327 7,049 10
Computer equipment....................................... 6,491 15,675 3.33
Telecommunication equipment and network.................. -- 447,406 10
Electronic equipment..................................... -- 140,642 10
Radio equipment.......................................... -- 70,418 10
Other.................................................... 1,474 3,680 10
--------- ---------
22,318 700,946
Less -- Accumulated depreciation......................... (1,712) (56,385)
Construction in process:
Telecommunications..................................... 218,368 100,278
Leasehold improvements................................. 8,763 44,012
--------- ---------
Ps247,737 Ps788,851
========= =========
</TABLE>
F-11
<PAGE> 129
MAXCOM TELECOMUNICACIONES, S.A. DE C.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9. ANALYSIS OF CUMULATIVE PREOPERATING EXPENSES
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1997 1998 1999
-------- --------- ---------
<S> <C> <C> <C>
Salaries and wages....................................... Ps 7,972 Ps 39,726 Ps 62,722
Professional fees and services........................... 8,773 26,569 33,896
Administrative, management and financial services, and
office leases paid to related parties:
CT Global Telecommunications Inc....................... 12,324 52,561 86,744
Grupo Radio Centro, S.A. de C.V........................ 8,600 8,600 8,600
Bachow and Associates Inc.............................. -- 3,070 3,573
Advance Telecom........................................ 1,489 1,489 1,489
Inmobiliaria Grupo Radio Centro, S.A. de C.V. (office
lease).............................................. 1,466 5,420 7,761
Promotora Tecnica de Servicios Profesionales, S.A. de
C.V................................................. 1,650 1,756 1,756
Others................................................. 329 1,648 8,682
Office, sites and equipment operating leases............. -- 2,195 6,611
Depreciation............................................. 135 1,328 2,828
Other.................................................... 3,414 14,693 24,420
-------- --------- ---------
46,152 159,055 249,082
-------- --------- ---------
Comprehensive (income) cost of financing:
Interest income........................................ (2,310) (17,836) (22,788)
Interest expense....................................... -- 19,360 28,280
Exchange (gain) loss................................... (5,312) (75,671) (81,193)
Loss (gain) on net monetary position................... 5,467 45,617 48,905
-------- --------- ---------
(2,155) (28,530) (26,796)
-------- --------- ---------
43,997 130,525 222,286
Restatement increment to express in constant pesos....... 18,992 37,517 43,355
-------- --------- ---------
62,989 168,042 265,641
Amortization............................................. -- -- (17,505)
-------- --------- ---------
Preoperating expenses, net............................... Ps62,989 Ps168,042 Ps248,136
======== ========= =========
</TABLE>
F-12
<PAGE> 130
MAXCOM TELECOMUNICACIONES, S.A. DE C.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10. CURRENT AND LONG-TERM DEBT
The balances as of December 31, 1998 and 1999 were:
<TABLE>
<CAPTION>
CURRENT LONG-TERM TOTAL
------- --------- ---------
<S> <C> <C> <C>
DECEMBER 31, 1998:
Nissho Iwai American Corp. (Lucent)(1)............ Ps -- Ps201,918 Ps201,918
Nissho Iwai American Corp. (NEC)(2)............... -- 3,579 3,579
Other............................................. 3,321 1,266 4,587
------- --------- ---------
Total............................................. Ps3,321 Ps206,763 Ps210,084
======= ========= =========
DECEMBER 31, 1999:
Nissho Iwai American Corp. (Lucent)(1)............ -- 510,300 510,300
Nissho Iwai American Corp. (NEC)(2)............... -- 131,454 131,454
Hewlett Packard de Mexico, S.A. de C.V.(3)........ -- 154,271 154,271
Other............................................. 3,745 4,579 8,324
------- --------- ---------
Total............................................. Ps3,745 Ps800,604 Ps804,349
======= ========= =========
</TABLE>
Maturities of the long-term debt are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
YEAR ENDED 1999
---------- ------------
<S> <C>
2000........................................................ Ps 3,745
2001........................................................ 20,282
2002........................................................ 116,353
2003........................................................ 192,142
2004........................................................ 219,185
2005 and therefore.......................................... 252,642
---------
Ps804,349
=========
</TABLE>
---------------
(1) $100 million vendor facility, bearing an annual interest rate of three-month
LIBOR plus 4.15% plus withholding tax (11.47% and 11.34% at December 31,
1999 and 1998, respectively) payable quarterly starting November 13, 2001
through August 12, 2005, of which $53.8 million was outstanding at December
31, 1999, ($20.5 million at December 31, 1998). As of December 31, 1999 the
$46.2 million unused funds from this facility are to be used for the
purchase of Lucent Technologies equipment. However, the right to use this
line of credit expires on February 26, 2000. Subsequent to year end the
Company drew down an additional $17.8 million in January and February 2000.
(2) $20 million vendor facility, bearing an annual interest rate of three-month
LIBOR plus 4.15% plus withholding tax (11.47% at December 31, 1999) payable
quarterly starting November 31, 2001 through August 12, 2005, of which $13.9
million was outstanding at December 31, 1999. As of December 31, 1999, the
$6.2 million unused funds from this facility are to be used for purchase NEC
equipment. However, the right to use this line of credit expires on February
26, 2000.
(3) $18.7 million from Hewlett-Packard, bearing an annual interest rate of
three-month LIBOR plus 4.15% (10.28% at December 31, 1999) payable quarterly
starting February 26, 2002 through November 24, 2005, of which $16.2 million
was outstanding at December 31, 1999. As of December 31, 1999, the $4.9
million unused funds from this facility are to be used to purchase
Hewlett-Packard equipment.
F-13
<PAGE> 131
MAXCOM TELECOMUNICACIONES, S.A. DE C.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The lines of credit of Nissho Iwai American Corp. have the following terms:
- Repayment of principal: 16 quarterly installments starting on November
13, 2001.
- Restrictions: the Company must comply with financial covenants, such as
prohibition for essential changes, additional encumbrances, additional
debt, restricted payments and financial covenants, among others. The
Company was in compliance with such covenants at December 31, 1999.
- Guarantee: lender participates on a pari passu basis on the benefits of a
security package to guarantee the service of those debts. This package
contains several instruments, such as (1) a mortgage of all present and
future assets; (2) a stock trust guarantee secured with 100% of the
Company's common stock (A and B Series shares); and (3) a guarantee trust
to which all of the Company's cash proceeds are channeled.
- Additionally, the Company deposits in advance the quarterly interest of
the indebtedness in an escrow account in favor of Nissho Iwai American
Corp. As of December 31, 1999, the associated restricted cash amounted to
Ps18,688 (Ps1,859 at December 1998).
- Although the Company pays commitment fees, the availability of funds at
the date of disbursement is subject to the conditions prevailing on such
date.
NOTE 11. EMPLOYEE BENEFITS
As of December 31, 1998 and 1999, the Company had no pension plan and it
had the following labor liabilities:
a) INDEMNITIES TO EMPLOYEES
Employees who are dismissed without justification are entitled to
severance compensation determined in accordance with the provisions of
Mexico's Federal Labor Law.
b) SENIORITY PREMIUMS
In the event of dismissal without justification, retirement after 15
years of service or death, employees are entitled to a seniority premium
determined in accordance with the provisions of Mexico's Federal Labor Law.
As of December 31, 1999, these items were not significant because the
seniority of the vast majority of the Company's employees was less than two
years.
NOTE 12. CAPITAL STOCK
Under Mexico's Federal Telecommunications Law and Law on Foreign
Investment, no more than 49% of the full voting capital stock of a Mexican
corporation holding a concession to provide local and long-distance
telecommunication services may be held by foreigners.
The capital stock is represented by registered shares with no par value,
which are divided in A and B Series common shares and N Series limited-voting
shares. A Series shares may only be subscribed, acquired or owned by Mexicans,
while B Series shares may be freely subscribed. N Series shares, which may also
be freely subscribed, are limited-voting shares that may not be computed for
purposes of determining the foreign-investment percentage under the terms of the
Law on Foreign Investment. In compliance with a ruling of the Mexican foreign
investment authorities, according to Company Bylaws, N Series shares may not
represent more than 79.96% of the Company's outstanding capital stock.
F-14
<PAGE> 132
MAXCOM TELECOMUNICACIONES, S.A. DE C.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
All shares confer the same rights to their holders, except for N Series
shares (limited-voting shares) which only confer the right to vote on special
matters described in the General Law on Business Corporations and on key matters
described in the Bylaws.
The Bylaws and a Shareholders' Agreement require a supermajority of votes
to approve certain transactions; they also stipulate that the transfers of
shares may be subject to certain restrictions.
As of December 31, 1997, 1998 and 1999, the Company's outstanding shares
were:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1997 1998 1999
--------- ---------- ----------
<S> <C> <C> <C>
Capital stock:
A Series...................................... 1,531,428 1,531,428 1,531,428
B Series...................................... 1,471,373 1,471,373 1,471,373
N Series...................................... 1,124,213 7,210,190 7,320,190
--------- ---------- ----------
Total outstanding shares........................ 4,127,014 10,212,991 10,322,991
Treasury Shares (N Series)...................... -- -- 4,660,000
--------- ---------- ----------
Total issued shares............................. 4,127,014 10,212,991 14,982,991
========= ========== ==========
</TABLE>
Of the total outstanding shares, 765,714 A Series shares and 763,113 B
Series shares represent the minimum fixed portion, with no withdrawal rights, of
Maxcom's capital stock, while the remaining A Series and B Series shares and the
N Series shares represent the variable portion of the capital stock.
Under the May 1998 shareholders agreement, if the company registers any
equity securities for a primary or secondary public offering prior to May 21,
2002, they must permit parties to the shareholders agreement to include their
shares in such an offering. The company will bear all expenses of any primary or
secondary public offering, other than the fees of counsel to the holders of the
registration rights and any underwriting commission or discounts. If the company
does not register the equity securities in a primary or secondary public
offering prior to May 21, 2005, the series N shareholders will have the right
to: retain an investment banker to sell substantially all of the assets of the
company; merge or consolidate into another company; or require parties to the
shareholders agreement to sell their shares, and distribute the proceeds to
shareholders.
As of December 31, 1997, 1998 and 1999, the Company's capital stock was:
<TABLE>
<CAPTION>
DECEMBER, 31
-----------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Capital stock and advances for future
increases..................................... Ps164,979 Ps586,893 Ps595,841
Restatement for effects of inflation............ 66,871 170,215 170,606
--------- --------- ---------
Total capital stock............................. 231,850 757,108 766,447
--------- --------- ---------
Expenses connected with private placement....... -- (18,283) (18,283)
Restatement increment........................... -- (4,480) (4,480)
--------- --------- ---------
-- (22,763) (22,763)
--------- --------- ---------
Ps231,850 Ps734,345 Ps743,684
========= ========= =========
</TABLE>
During May 1998, Maxcom made a private placement and issued 6,085,977 N
Series shares, which resulted in a capital stock increase of Ps525,258
(Ps421,914 nominal pesos). The expenses incurred (Ps22,763) in connection with
the placement were directly applied to shareholders' equity.
F-15
<PAGE> 133
MAXCOM TELECOMUNICACIONES, S.A. DE C.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13. STOCK OPTIONS
At December 31, 1998 and 1999, the Company has five stock option
transactions outstanding, which are described below. Since Mexican GAAP does not
have standards to value and record this kind of instrument, the Company adopted
the US GAAP guidelines of APB Opinion 14, Accounting for Convertible Debt and
Debt Issued with Stock Purchase Warrants; APB Opinion 25, Accounting for Stock
Issued to Employees; and FASB Statement 123, Accounting for Stock-Based
Compensation.
FASB 123 requires the Company to calculate the fair value of each stock
option at the grant date by using the Black-Scholes option-pricing model. The
following weighted average assumptions were used for grants in 1998: no dividend
yield for all years; expected volatility of 46.10%; risk-free interest rate of
5.15% and expected lives of 4 to 7 years.
a) EXECUTIVE STOCK OPTION PLAN
At a Board of Directors Meeting held in May 1998, an executive stock
option plan was approved. This plan provides that the Company grant
options, on every April 1, commencing in 1999. Under this plan, a technical
committee will determine the executive officers to whom options to purchase
N Series shares will be granted, as well as the terms of those options.
The Company has created two option plans for its executive officers as
follows:
The first award ("option A") consists of a total of 425,000 options
to be awarded as follows: 170,000 on April 1, 1999, at an exercise price
of $8.70; 145,000, on April 1, 2000, at an exercise price of $10.45 and
110,000 on April 1, 2001, at an exercise price of $12.55. The options
vest equally over a five-year period beginning on the date of the grant.
These options were awarded to executive officers who are continuing
to provide professional services to the Company on April 1, 1999. The
only requirement to receive the option is that the executive officers
must be rendering services to the Company at the time of the grant.
The second award ("option B") is granted based on a set formula as
defined in the options plan agreement. Options will be granted to
executive officers at an exercise price of $10.45 at April 1, 2000 and
at an exercise price of $12.55 at April 1, 2001.
Option A is being accounted for as fixed options. Based on APB Opinion
No. 25, compensation expense is determined based on the market or
fair-value price of the stock at the measurement date, less the amount, if
any, that the executive officers are required to pay for the stock.
Since the option price equals the market value on the date of the
grant, there is no intrinsic value for the options and thus there is no
expense associated with these options to record in the financial
statements.
For companies which elect to account for options to employees under
APB 25, FASB 123 requires the Company to provide pro forma information
regarding net income and earnings per share as if compensation cost for the
Company's executive stock option plan has been determined in accordance
with the fair-value based method prescribed in that statement.
As of December 31, 1999, under the accounting provisions of FASB 123,
the Company's net loss and net loss per share would have been as follows:
<TABLE>
<CAPTION>
AS REPORTED PRO FORMA
----------- ----------
<S> <C> <C>
Net loss................................... Ps(217,201) Ps(218,377)
Net loss per share -- basic and diluted.... (21.16) (21.27)
</TABLE>
F-16
<PAGE> 134
MAXCOM TELECOMUNICACIONES, S.A. DE C.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
b) NISSHO IWAI AMERICAN CORP. STOCK OPTIONS
In March 1998, the Company granted options to Nissho Iwai for up to
337,471 N Series shares at fixed exercise prices per share of $10.87
expiring through March 2005. No options have been exercised as of December
31, 1999. These options were issued in connection with a financing
agreement and their cost was valued at approximately $2.2 million. This
value is being amortized over the life of the financing.
c) CT GLOBAL TELECOMMUNICATIONS, INC. (CTGT) STOCK OPTIONS:
On May 21, 1998, the Company granted options to CT Global
Telecommunications for up to 250,000 N Series shares at an exercise price
of $8.70. These options expire two years after CTGT disposes of its shares.
CTGT's right to these options is subject to certain performance objectives.
As of December 31, 1999, CTGT has accomplished some of these objectives,
which gives it the right to exercise up to 35,000 options. The cost of
these options was valued at approximately $87 and was capitalized as
pre-operating expenses. No options have been exercised as of December 31,
1999. The shares subject to these options agreement, are limited to a
maximum gain of $40.00 per share.
d) BACHOW AND ASSOCIATES STOCK OPTION
On May 21, 1998, the Company granted options to Bachow and Associates
for up to 100,000 N Series shares at an exercise price of $8.70 expiring
two years after Bachow and Associates disposes its shares. Bachow and
Associates' right to exercise the options are subject to performance
objectives. As of December 31, 1999, Bachow and Associates has accomplished
all objectives, which gives it the right to exercise the total of the
options. The cost of these options was valued at approximately $119 and was
capitalized as pre-operating expenses. No options have been exercised as of
December 31, 1999. The shares subject to these options agreement, are
limited to a maximum gain of $40.00 per share. During 1999, Bachow and
Associates advanced Ps331 towards the exercise of its options and such
amount is reflected in additional paid-in capital.
e) AMSTERDAM PACIFIC LLC OPTION
On May 21, 1998, the Company granted options to Amsterdam Pacific, in
connection with an equity financing transaction, for up to 24,425 N Series
shares at an exercise price of $8.70 expiring May 21, 2003. As of December
31, 1999, Amsterdam Pacific has the right to exercise its options.
A summary of the status of the Company's stock options as of December
31, 1998 and 1999 and changes during the years then ended, is presented
below.
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
-------- ----------------
<S> <C> <C>
DECEMBER 1998:
Outstanding at beginning of year................ -- $ --
Granted......................................... 711,896 9.73
Forfeited....................................... --
--------
Outstanding at end of year...................... 711,896
========
Options exercisable at year-end................. 414,396
========
Weighted-average fair-value of options granted
during the year (Expressed in US Dollars).... $ 6.21
========
</TABLE>
F-17
<PAGE> 135
MAXCOM TELECOMUNICACIONES, S.A. DE C.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
-------- ----------------
<S> <C> <C>
DECEMBER 1999:
Outstanding at beginning of year................ 711,896 $9.73
Granted......................................... 170,000 8.70
Forfeited....................................... -- --
--------
Outstanding at end of year...................... 881,896 7.86
======== =====
Options exercisable at year-end................. 666,866
========
Weighted-average fair-value of options granted
during the year (Expressed in US Dollars).... $ 3.66
========
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1998 and 1999.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- ------------------------------
WEIGHTED-AVERAGE
---------------------------------
NUMBER OF REMAINING NUMBER WEIGHTED-AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
------------------------ ----------- ---------------- -------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
DECEMBER 31, 1998
8.70.............. 374,425 4.97 8.70 76,925 8.70
10.87.............. 337,471 7.00 10.87 337,471 10.87
DECEMBER 31, 1999
8.70.............. 544,425 5.86 8.70 329,395 8.70
10.87.............. 337,471 7.00 10.87 337,471 10.87
</TABLE>
NOTE 14. POSITION IN FOREIGN CURRENCY
The Company currently does not hedge any of its foreign-denominated assets
or liabilities.
As of December 31, 1998 and 1999, the Company's foreign-currency position
was:
<TABLE>
<CAPTION>
US DOLLARS
------------------------
1998 1999
---------- ----------
<S> <C> <C>
Assets............................................. $35,178 $ 18,953
Liabilities........................................ 19,700 88,552
Year-end exchange rate (Ps per US$1.00)............ Ps9.9395 Ps9.5222
</TABLE>
F-18
<PAGE> 136
MAXCOM TELECOMUNICACIONES, S.A. DE C.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 15. TAX-LOSS CARRY-FORWARDS
The Company has had tax losses since inception and accordingly has not
provided for income taxes. Following is a summary of the reconciliation between
book and tax results:
<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31,
----------------------------------
1997 1998 1999
-------- --------- ---------
<S> <C> <C> <C>
Net loss for the period.......................... Ps -- Ps -- Ps217,201
Preoperating expenses and expenses incurred in
connection with a private placement, which were
considered as tax deduction when incurred...... 21,218 122,740 83,206
Difference between inflationary effects for
accounting and tax purposes.................... (396) 10,087 26,548
Nondeductible items.............................. (172) (65) (2,769)
-------- --------- ---------
Tax loss for the period.......................... Ps20,650 Ps132,762 Ps324,186
======== ========= =========
</TABLE>
In accordance with Mexico's Income Tax Law, tax losses are subject to
restatement by inflation and may be carried forward against future taxable
profits of subsequent years. As of December 31, 1999, the Company's restated
cumulative tax losses were:
<TABLE>
<CAPTION>
EXPIRATION
FISCAL YEAR AMOUNT YEAR
----------- --------- ----------
<S> <C> <C>
1996................................................ Ps 5,870 2006
1997................................................ 20,650 2007
1998................................................ 132,762 2008
1999................................................ 324,186 2009
---------
Ps483,468
=========
</TABLE>
NOTE 16. COMMITMENTS
As of December 31, 1999, the Company had the following commitments:
1. The Company was committed under purchase orders and other commitments
in the amount of $25,919.
2. The Company maintains operating leases on buildings, sites and
transportation equipment, having recorded leasing costs of Ps8,553 in
1998 and Ps26,278 in 1999. Leasing costs were not material in 1997.
The schedule of future minimum lease payments is as follows:
<TABLE>
<S> <C>
2000..................................................... Ps 21,466
2001..................................................... 21,037
2002..................................................... 23,393
2003..................................................... 19,716
2004 and thereafter...................................... 107,579
---------
Ps193,191
=========
</TABLE>
3. Management fee of $450 and an additional $450 bonus (if certain
conditions are met) per year according to an operating agreement with
CT Global Communications, Inc., related party. The operating
agreement terminates on December 31, 2000.
F-19
<PAGE> 137
MAXCOM TELECOMUNICACIONES, S.A. DE C.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 17. SUBSEQUENT EVENTS
The Extraordinary Shareholders' Meeting held February 21, 2000, resolved to
modify the equity structure of the Company by converting 50% of N Series shares
into a new kind of shares, the C Series shares, at a rate of 1:1. The new shares
have full voting and economic rights. They can only be subscribed by the agent
acting as trustee of a Neutral Investment Trust incorporated in accordance with
the Foreign Investment Law. The trust shall in turn issue Certificados de
Participacion Ordinarios (CPOs). Statutorily, the Trustee shall vote C Series
shares in the same manner as A Series shares are voted. This decision is
conditioned upon obtaining certain approvals from the Government. The corporate
governance of the Company remains unaffected.
In February 2000, the Company entered into an engagement with underwriters
to offer $275 million aggregate principal amount of units consisting of senior
notes due in 2007 and warrants to purchase shares of the Company's series N
shares with limited voting rights. The warrants are convertible at an exercise
price of $0.01. The estimated value of the warrants will be recorded as a
discount to the senior notes and as additional paid-in capital. The estimated
value will be amortized as additional interest expense over the life of the
senior notes.
As a condition to the debt offering, some of the shareholders have agreed
to make or cause to be made a $35 million capital contribution by September 30,
2000. As compensation to those shareholders, the Company has agreed to grant
those shareholders warrants to purchase an aggregate of 70,000 series N shares,
at an exercise price of $0.01 per share. The estimated value of these warrants
will be recorded as an additional discount to the senior notes and as additional
paid-in capital. The estimated value will be amortized as additional interest
expense over the life of the senior notes.
NOTE 18. SIGNIFICANT DIFFERENCES BETWEEN MEXICAN AND US GAAP
The consolidated financial statements of the Company have been prepared in
accordance with Mexican GAAP.
Except for the inflation accounting, Mexican GAAP are, in general terms,
similar to US generally accepted accounting principles ("US GAAP"). However,
there are certain areas in which Mexican accounting standards and practices
differ from the requirements of US GAAP. The major differences between Mexican
and US GAAP are as follows:
a) RECOGNITION OF THE EFFECTS OF INFLATION ON FINANCIAL INFORMATION
The provisions of Bulletin B-10, as amended, on the recognition of the
effects of inflation in the financial statements, have no counterparts
under US GAAP. However, as Mexican GAAP include the effects of inflation in
the primary financial statements, the US Securities and Exchange Commission
("SEC") does not require the reversal of the restatement of the financial
statements to recognize the effects of inflation.
b) PREOPERATING EXPENSES
Under Mexican GAAP, all expenses incurred while a company or a project
is in the preoperating or development stages are deferred and considered as
a component of the 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 expenses are expensed and reported as accumulated deficit
during the development stage in shareholders' equity.
F-20
<PAGE> 138
MAXCOM TELECOMUNICACIONES, S.A. DE C.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
c) DEFERRED INCOME TAXES
Under Mexican accounting practices, deferred income taxes and
employees' profit sharing were provided for on the liability method, but
only for non-recurring and identifiable book and tax differences that are
expected to reverse over a definite period of time. Under US GAAP, deferred
taxes are recognized for the tax consequences of all temporary differences,
both recurring and non-recurring, between the financial statements'
carrying amounts and the tax basis of existing assets and liabilities.
Deferred income taxes determined in accordance with SFAS 109 would be
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1997 1998 1999
-------- --------- ---------
<S> <C> <C> <C>
Non-current deferred tax liability on:
Preoperating expenses deducted for tax
purposes............................ Ps(9,127) Ps(44,846) Ps(73,968)
Stock options cost..................... -- (7,468) (7,073)
Expenses incurred in connection with a
private placement and deducted for
tax purposes........................ -- (7,740) (7,740)
-------- --------- ---------
(9,127) (60,054) (88,781)
Non current deferred tax asset on
tax-loss carry-forwards................ 9,017 54,156 169,214
-------- --------- ---------
Deferred tax (liability) asset........... (110) (5,898) 80,433
Deferred-tax asset-valuation allowance... -- -- (80,433)
-------- --------- ---------
Net deferred tax liability............... Ps 110 Ps 5,898 Ps --
======== ========= =========
</TABLE>
d) REALIZATION OF TAX-LOSS CARRY-FORWARDS
In accordance with Mexican GAAP, the tax benefit of a tax-loss
carry-forward should only be recorded when realized and should be reported
as an extraordinary item in the statement of operations. Generally, under
US GAAP, the tax benefit of a tax-loss carry-forward must be reported in
the same manner as the source of the income or the loss in the current
year. Because the realization of the Company's tax losses is considered to
be less uncertain, a valuation allowance has been established for the net
amount of the potential deferred tax asset.
e) STATEMENT OF CHANGES IN FINANCIAL POSITION
In accordance with Mexican GAAP, the Company presents statements of
changes in financial position in constant Mexican pesos. This presentation
identifies the generation and application of resources representing
differences between beginning and ending financial statement balances in
constant Mexican pesos.
The changes in the consolidated financial statement balances included
in this statement constitute cash flow activity stated in constant Mexican
pesos (including monetary losses which are considered as cash losses in the
financial statements presented in constant Mexican pesos). SFAS No. 95
("Statement of Cash Flow"), however, does not provide guidance with respect
to inflation-adjusted financial statements. In addition, US GAAP requires
that non-cash financing and investing transactions should be excluded from
the statement of cash flows and reported in related disclosures.
F-21
<PAGE> 139
MAXCOM TELECOMUNICACIONES, S.A. DE C.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
If the inflation accounting effects were eliminated, cash flows provided by
or used in investing and financing activities would be as follows:
<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31,
--------------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
OPERATIONS:
Resources used in operations under
Mexican GAAP....................... Ps -- Ps -- Ps(128,199)
Adjustments to the net loss for the
period under US GAAP............ -- -- (57,806)
Net loss for the period under US
GAAP............................ (58,357) (97,519) --
Net change in monetary assets and
liabilities..................... (13,426) (24,577) --
Deferred taxes..................... 110 5,787 (5,898)
Depreciation and amortization...... 995 6,510 3,546
Inflationary effects............... 23,132 56,005 96,932
---------- ---------- ----------
Resources used in operations under US
GAAP............................... (47,546) (53,793) (91,425)
---------- ---------- ----------
FINANCING:
Resources provided by financing
activities under Mexican GAAP...... 225,794 739,626 605,839
Less:
Debt applied to fixed assets
acquisition..................... -- (196,030) (594,265)
Inflationary effects............... (64,738) (118,491) (84,290)
---------- ---------- ----------
Resources provided by financing
activities as per US GAAP.......... 161,057 425,105 (72,716)
---------- ---------- ----------
</TABLE>
F-22
<PAGE> 140
MAXCOM TELECOMUNICACIONES, S.A. DE C.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31,
--------------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
INVESTING:
Resources used in investing
activities as per Mexican GAAP..... Ps(176,832) Ps(401,443) Ps(711,151)
(Less) plus:
Net resources used in preoperating
activities for Mexican GAAP and
net changes in monetary assets
and liabilities, which are
considered as operating
activities for US GAAP.......... 70,648 128,318 77,126
Capitalization of interest for US
GAAP purposes................... -- (18,638) (18,163)
Fixed assets acquisition financed
with debt....................... -- 196,030 594,265
Inflationary effects............... 29,430 32,357 31,015
---------- ---------- ----------
Resources used in investing
activities as per US GAAP.......... (76,755) (63,377) (26,908)
---------- ---------- ----------
Increase (decrease) in cash as per US
GAAP............................... 36,756 307,935 (191,049)
Cash at beginning of period under US
GAAP............................... 20 36,776 344,711
---------- ---------- ----------
Cash at end of period under US
GAAP(1)............................ Ps 36,776 Ps 344,711 Ps 153,662
---------- ---------- ----------
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest............... Ps -- Ps 16,063 Ps 39,438
Non-cash transactions:
Fixed assets acquisitions.......... -- 187,044 561,059
Stock options cost................. -- 27,044 1,904
</TABLE>
---------------
(1) Cash at the end of the period under US GAAP is based on historical
pesos and is not adjusted for inflation.
F) LOSSES PER SHARE
In accordance with Mexican GAAP, basic earnings per ordinary share are
calculated based on the weighted-average number of ordinary shares
outstanding during the period. The same procedure is applied to preferred
or limited-voting shares. For diluted earnings per share, net income or
loss attributable to ordinary shares and weighted-average number of
ordinary shares should be adjusted by the dilutive effects of the
convertible shares, options, warrants and other potentially dilutive
securities, within certain limits. Dilution of ordinary shares by the
potentially dilutive shares included in options and warrants is determined
by modifying only the number of shares in the calculation of the earnings
or losses per share.
Under US GAAP, basic net loss per share includes no dilution and is
computed by dividing losses available to common shareholders by the
weighted average number of common shares outstanding for the period.
Dilutive net loss per share reflects the potential dilution of securities
that could share in the losses of an entity, similar to existing diluted
losses per share. The basic and diluted number of shares under US GAAP
would not be materially different from what will be presented for Mexican
GAAP purposes.
F-23
<PAGE> 141
MAXCOM TELECOMUNICACIONES, S.A. DE C.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
g) PERSONNEL COMPENSATION AND SENIORITY PREMIUMS
The Company has no pension plan and it had no significant contingent
labor liabilities as of December 31, 1999, because seniority of the vast
majority of the Company's employees was less than two years.
h) FREQUENCY RIGHTS
Frequency rights are being amortized by the straight-line method over
the term of the concession since the Company commenced operations. Under US
GAAP, this item should be amortized during the term of the concession.
i) CAPITALIZATION OF INTEREST
In accordance with Mexican GAAP, capitalization of interest or, during
inflationary periods, comprehensive (income) cost of financing, incurred in
the period of construction and installation of an asset is permitted. The
interest to be capitalized is that of 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 assets.
j) STOCK OPTION PLAN
This item is not specifically addressed by Mexican GAAP. Under US
GAAP, an entity is encouraged to use a fair-value method of accounting to
measure compensation cost for its stock options and similar equity
instruments awarded to employees. If the fair-value method is not used, the
intrinsic-value method of accounting is required. Under the fair-value
based method compensation cost is generally measured at the grant date
based on the fair-value of the award and is recognized over the service
period, which is usually the vesting period. Under the intrinsic-value
based method, compensation cost is the excess, if any, of the market price
of the stock at grant date or other measurement date over the amount an
employee must pay to acquire the stock. Options issued to non-employees are
valued using the fair-value concept.
As mentioned in Note 13, since the Company adopted US GAAP for these
transactions, there are no differences between Mexican GAAP and US GAAP.
F-24
<PAGE> 142
MAXCOM TELECOMUNICACIONES, S.A. DE C.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
k) RECONCILIATION BETWEEN MEXICAN AND US GAAP
The following is a summary of the estimated adjustments to net loss
and shareholders' equity as of and for the periods ended December 31, 1997,
1998 and 1999, that would have been required if the Company had applied US
GAAP instead of Mexican GAAP:
<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31,
------------------------------------
1997 1998 1999
--------- --------- ----------
<S> <C> <C> <C>
Net loss under Mexican GAAP............ Ps -- Ps -- Ps(217,201)
--------- --------- ----------
Preoperating expenses applied to
operations for US GAAP purposes...... (57,361) (105,053) (97,599)
Capitalization of interest............. -- 18,638 18,163
Amortization of preoperating
expenses............................. -- -- 17,505
Amortization of frequency rights for US
GAAP purposes, considering 20 years
life of the concession............... (886) (5,317) (1,773)
Deferred income tax and employee profit
sharing.............................. (110) (5,787) 5,898
--------- --------- ----------
(58,357) (97,519) (57,806)
--------- --------- ----------
Net loss as per US GAAP................ Ps(58,357) Ps(97,519) Ps(275,007)
========= ========= ==========
Weighted average common shares
outstanding.......................... 1,371,943 8,134,883 10,264,827
========= ========= ==========
Net loss per share..................... Ps (43) Ps (12) Ps (27)
========= ========= ==========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------------
1997 1998 1999
--------- --------- ----------
<S> <C> <C> <C>
Shareholders' equity as per Mexican
GAAP................................. Ps231,851 Ps761,389 Ps 555,762
Unrecorded (for US GAAP purposes)
deficit accumulated during the
development stage.................... (63,985)(1) (161,504) (219,310)
--------- --------- ----------
Shareholders' equity as per US GAAP.... Ps167,866 Ps599,885 Ps 336,452
========= ========= ==========
</TABLE>
---------------
(1) Includes 1996 net loss amounting to Ps 5,628.
l) NEW US ACCOUNTING STANDARDS
SFAS No. 132, "Employers' Disclosure about Pensions and other
Postretirement Benefits" standarizes the disclosure requirements for
pensions and other postretirement benefits and requires additional
information on changes in the benefit obligations and fair values of plan
assets. The statement is effective for financial statements for periods
beginning after December 15, 1997 and requires comparative information for
earlier years to be restated. However, the Company has no pension plans nor
grants postretirement benefits. The adoption of the new standard did not
have a material effect on the disclosures in the financial statements.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" requires companies to recognize all derivatives contracts as
either assets or liabilities in the balance sheet and to measure them at
fair value. If certain conditions are met, a derivative may be specifically
designated as a hedge, the objective of which is to match the timing of
gain or loss recognition on the
F-25
<PAGE> 143
MAXCOM TELECOMUNICACIONES, S.A. DE C.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
hedging derivative with the recognition of (i) the changes in the fair
value of the hedged asset or liability that are attributable to the hedged
risk or (ii) the earnings effect of the hedged forecasted transaction. For
a derivative not designated as a hedging instrument, the gain or loss is
recognized in income in the period of change. SFAS No. 133 is effective for
all fiscal quarters of fiscal years beginning after June 15, 2000.
Historically, the Company has not entered into derivative contracts
either to hedge existing risk or for speculative purposes. Accordingly, the
Company does not expect adoption of the new standard to have a material
effect on its financial statements.
Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-up
Activities," provides guidance on the financial reporting of start-up costs
or organization costs. It requires cost of start-up activities and
organization costs to be expensed as incurred. The SOP is effective for
financial statements for fiscal years beginning after December 15, 1998.
The Company's management has adopted this SOP as reflected in note 18 (k).
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1, "Accounting of the Cost of
Computer Software Development Obtained for Internal Use" ("SOP 98-1"). SOP
98-1 requires computer software costs associated with internal use software
to be expensed as incurred until certain capitalization criteria are met.
The Company has adopted SOP 98-1 and its adoption has not had a material
impact on the Company's financial position, results of operations or cash
flows.
F-26
<PAGE> 144
APPENDIX A
GLOSSARY
<TABLE>
<S> <C>
ATM.................................. Asynchronous Transfer Mode. An information transfer standard
that is one of a general class of packet technologies that
relay traffic by way of an address contained within the
first five bytes of a standard fifty-three-byte-long packet
or cell. The ATM format can be used by many different
information systems, including local area networks, to
deliver traffic at varying rates, permitting a mix of voice,
data and video (multimedia).
band................................. A range of frequencies between two defined limits.
bandwidth............................ the relative range of analog frequencies or digital signals
that can be passed through a transmission medium, such as
glass fibers, without distortion. The greater the bandwidth,
the greater the information carrying capacity. Bandwidth is
measured in Hertz (analog) or Bits Per Second (digital).
capacity............................. Refers to ability to transmit voice or data over
telecommunications equipment.
carrier.............................. A provider of telecommunications transmission services by
fiber, wire or radio.
centrex service...................... A business telephone service developed originally by Lucent
Technologies which offers private branch exchange type
features directly from the local telephone company central
office, such as voicemail, call pick-up group, abbreviated
dialing and multi-line hunting.
COFETEL.............................. Comision Federal de Telecomunicaciones, the Mexican Federal
Telecommunications Commission.
digital.............................. Describes a method of storing, processing and transmitting
information through the use of distinct electronic or
optical pulses that represent the binary digits 0 and 1.
Digital transmission/switching technologies employ a
sequence of discrete, distinct pulses to represent
information, as opposed to the continuously variable analog
signal.
E1................................... A digital telephony format that carries data at the rate of
2.048 Mbps (DS-1 level). E-1 is the European and Latin
American version of North American T-1, though T-1 is 1.544
Mbps.
fiber optic technology............... Fiber optic systems use laser-generated light to transmit
voice, data and video in digital format through ultra-thin
strands of glass. Fiber optic systems are characterized by
large circuit capacity, good sound quality, resistance to
external signal interference and direct interface to digital
switching equipment and digital microwave systems. A pair of
fiber optic strands using advanced transmission technologies
is capable of carrying over 258,000 simultaneous telephone
calls. Because optical signals disperse over distance, they
must be regenerated/amplified at sites located along the
fiber optic cable. Fiber optic systems using earlier
generation fiber require frequent intervals between
regeneration/amplifier sites. Greater distances between
regeneration/ amplifier sites afforded by the use of
advanced fiber generally translate into substantially lower
installation and operating costs and fewer potential points
of failure.
</TABLE>
A-1
<PAGE> 145
<TABLE>
<S> <C>
fixed wireless local loop............ A wireless local telephony service using the 3.4-3.7 GHz
frequency band.
Gulf region.......................... 115 cities and towns in eleven states in eastern Mexico,
which includes the cities of Puebla, Tampico, Veracruz,
Reynosa, Cancun, Chetumal, Merida, Ciudad del Carmen,
Campeche, Coatzacoalcos and Tuxtla Gutierrez, among others.
Hertz................................ The unit measuring the frequency with which an alternating
electromagnetic signal cycles through the zero-value state
between lowest and highest states. One hertz (abbreviated
Hz) equals one cycle per second. KHz (kilohertz) stands for
thousands of hertz; MHz (megahertz) stands for millions of
hertz and GHz (gigahertz) stands for billions of hertz.
LAN.................................. Local area network, a private data communications network
linking a variety of data devices, such as computer
terminals, personal computer terminals, personal computers
and microcomputers, all housed in a defined building, plant
or geographic area.
microwave technology................. Although limited in capacity compared with fiber optic
systems, digital microwave systems offer an effective and
reliable means of transmitting lower volume and narrower
bandwidths of voice, data and video signals over
intermediate and longer distances. Microwaves are very high
frequency radio waves that can be reflected, focused and
beamed in a line-of-sight transmission path. As a result of
their electro-physical properties, microwaves can be used to
transmit signals through the air, with relatively little
power. To create a communications circuit, microwave signals
are transmitted through a focusing antenna, received by an
antenna at the next station in the network, then amplified
and retransmitted. Because microwaves disperse as they
travel through the air, this transmission process must be
repeated at repeater stations, which consist of radio
equipment, antennae and back-up power sources, located on
average every 30 kilometers along the transmission route.
Mbps................................. MegaBits per second. A measurement of speed for digital
signal transmission expressed in millions of bits per second
(Mbps).
Multi-line hunting................... A value-added service that allows for multiple calls to be
received with a single telephone number.
PCS.................................. Personal Communications Services. PCS has come to represent
two things: first, a digital wireless communications service
operating over the 1.9 GHz band; and second, more
generically, a wireless communications service utilizing a
digital network that offers typical features such as voice,
video and data applications, short messaging, voicemail,
caller identification, call conferencing and call
forwarding. Generic PCS suppliers promote this service on
the ability of its features to be customized, or "bundled,"
to the needs of the individual customers.
point-to-multipoint microwave
transmission......................... A transmission using microwave technology by which a single
signal goes from one origination point to many destination
points.
</TABLE>
A-2
<PAGE> 146
<TABLE>
<S> <C>
point-to-point microwave
transmission......................... A transmission using microwave technology by which a signal
goes from one point to another, usually connected by some
dedicated transmission line.
SCT.................................. Secretaria de Comunicaciones y Transportes, the Mexican
Communications and Transportation Ministry.
switch............................... A device that opens or closes circuits or selects the paths
or circuits to be used for transmission of information.
Switching is the process of interconnecting circuits to form
a transmission path between users.
teledensity.......................... Teledensity is a measure of telephony service in a
population. It is calculated by dividing the total
subscriber base (number of lines in service) by the
inhabitants and multiplying by 100. It is generally used as
a comparative measure of network development. All
teledensity figures are reported in subscribers per 100
inhabitants.
WAN.................................. Wide area network, a large-scale, high speed communications
network used primarily for interconnecting local area and
metro area networks located in different cities, states or
countries.
</TABLE>
A-3
<PAGE> 147
MAXCOM TELECOMUNICACIONES,
S.A. DE C.V.
Exchange Offer for
$300,000,000 13 3/4%
Series B Senior Notes due 2007
---------------------------------------
PROSPECTUS
---------------------------------------
August 22, 2000
DEALER PROSPECTUS DELIVERY OBLIGATIONS
Until November 20, 2000, all dealers that effect transactions in these
securities, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealers' obligation to deliver
a prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
<PAGE> 148
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Mexican law, when an officer of a corporation such as Maxcom acts
within the scope of his or her authority, the corporation will answer for any
resulting liabilities or expenses.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
<S> <C>
1.3(a) -- By-laws (estatutos) of Maxcom Telecomunicaciones, S.A. de C.V.*
1.3(b) -- By-laws (estatutos) of Corporativo en Telecomunicaciones, S.A. de C.V.*
4.1 -- Indenture dated as of March 17, 2000 among Maxcom Telecomunicaciones, S.A. de C.V., Corporativo en
Telecomunicaciones, S.A. de C.V. and The Bank of New York, as trustee.*
4.2 -- Form of Note (contained in Exhibit 4.1)*
4.3 -- A/B Exchange Registration Rights Agreement dated as of March 17, 2000 between Maxcom
Telecomunicaciones, S.A. de C.V., Corporativo en Telecomunicaciones, S.A. de C.V., UBS Warburg LLC
and Donaldson, Lufkin & Jenrette Securities Corporation.*
4.4 -- Pledge and Escrow Agreement dated as of March 17, 2000 from Maxcom Telecomunicaciones, S.A. de C.V.
to The Bank of New York, as escrow agent and as securities intermediary.*
5.1 -- Opinion of Santamarina y Steta, S.C. special Mexican counsel to Maxcom Telecomunicaciones, S.A. de
C.V., regarding the validity of the notes registered hereby.
5.2 -- Opinion of Proskauer Rose LLP, special U.S. counsel to Maxcom Telecomunicaciones, S.A. de C.V.,
regarding the validity of the notes registered hereby.
8.1 -- Opinion of Proskauer Rose LLP, special U.S. counsel to Maxcom Telecomunicaciones, S.A. de C.V.,
regarding tax matters.
10.1 -- Stock subscription plan of Maxcom Telecomunicaciones, S.A. de C.V. approved and put into effect by
the Board of Directors of Maxcom Telecomunicaciones, S.A. de C.V. in its session held on May 15,
1998 and amended in its session held on February 25, 1999.*
10.2 -- Agreement for the use of infrastructure and installation of fiber optic cable on the highways
between Puebla and Mexico, dated August 18, 1998, between Amaritel, S.A. de C.V. (the predecessor
of Maxcom Telecomunicaciones, S.A. de C.V.) and Iusatel, S.A. de C.V.*
10.3 -- Interconnection Agreement for long distance services, dated January 22, 1999, between Amaritel and
Telefonos de Mexico (Telmex) valid for a period of two years between February 1, 1999 and January 1,
2001. The agreement establishes that it would remain in effect after the expiration date if no further
agreement for its termination or renewal has been entered into, in accordance with article 42 of the
Mexican Telecommunications law.*
10.4 -- Local Interconnection Service Agreement, dated November 24, 1998, between Amaritel, S.A. de C.V.
and Telefonos de Mexico, S.A. de C.V.*
10.5 -- Amendment to Local Interconnection Service Agreement, dated February 25, 1999, between Amaritel,
S.A. de C.V. and Telefonos de Mexico, S.A. de C.V., originally entered into on November 24, 1998.*
</TABLE>
<PAGE> 149
<TABLE>
<S> <C>
10.6 -- Metropolitan Network Capacity Sale Agreement, dated April 28, 2000, between Maxcom Telecomunicaciones,
S.A. de C.V. and Metro Net, S.A. de C.V.
10.7 -- Telecommunications Service Agreement dated November 15, 1999, between Maxcom and Telefonos de
Mexico, S.A. de C.V.*
10.8 -- Telecommunications Service Agreement dated March 9, 1999, between Maxcom and Bestel S.A. de C.V.,
according to which Bestel will provide long distance and private calls services to Maxcom.*
10.9 -- Concession for the installation and operation of telecommunications services granted to Amaritel,
S.A. de C.V. by the Secretary of Telecommunications and Transport on December 20, 1996.*
10.10 -- Amendment to Concession for the installation and operation of telecommunications services granted to
Amaritel by the Secretary of Telecommunications and Transport on December 20, 1996, dated September 8,
1999, extending the coverage of such concession to include various additional municipalities of the
State of Mexico.*
10.11 -- Amendment to Concession for the installation and operation of telecommunications services granted to
Amaritel by the Secretary of Telecommunications and Transport on December 20, 1996, dated December 7,
1999, authorizing Maxcom to employ whatever technologies it deems appropriate in providing
telecommunications services to various municipalities.*
10.12 -- Concession for a public telecommunications network in Regions 3, 5 and 8 granted to Amaritel, S.A.
de C.V. by the Secretary of Telecommunications and Transport on April 29, 1998.*
10.13 -- Concession for the operation of point-to-multipoint microwave telecommunications services in Region
5 granted to Amaritel, S.A. de C.V. by the Secretary of Telecommunications and Transport on April
23, 1998.*
10.14 -- Concession for the operation of point-to-multipoint microwave telecommunications services in Region
3 granted to Amaritel, S.A. de C.V. by the Secretary of Telecommunications and Transport on April
23, 1998*
10.15 -- Concession for the operation of point-to multipoint microwave telecommunications services in Region
8 granted to Amaritel, S.A. de C.V. by the Secretary of Telecommunications and Transport on April
29, 1998.*
10.16 -- Concessions for the nationwide operation of point-to-point microwave telecommunications services
using five frequency bands in the 56 MHz bandwidth, each granted to Amaritel, S.A. de C.V. by the
Secretary of Telecommunications and Transport on June 4, 1998.*
10.17 -- Concessions for the nationwide operation of point-to-point microwave telecommunications services
using two frequency bands in the 100 MHz bandwidth, each granted to Amaritel, S.A. de C.V. by the
Secretary of Telecommunications and Transport on June 4, 1998.*
10.18 -- Amendment to Concession for the operation of point-to-multipoint telecommunications services in Regions
3, 5, 8 granted to Amaritel, S.A. de C.V. by the Secretary of Telecommunications and Transport on
April 1, 1998, dated October 12, 1999, regarding the start date for the initiation of services.*
10.19 -- Amendment to Concession for the installation and operation of telecommunications services granted
to Amaritel, S.A. de C.V. by the Secretary of Telecommunications and Transport on December 20,
1996, dated September 24, 1999 eliminating financial restrictions.*
12.1 -- Computation of Ratio of Earnings to Fixed Charges.
21.1 -- List of subsidiaries of Maxcom Telecomunicaciones, S.A. de C.V. and of Corporativo en
Telecomunicaciones, S.A. de C.V.*
</TABLE>
<PAGE> 150
<TABLE>
<S> <C>
23.1 -- Consent of BDO International, independent public accountants and auditors of Maxcom
Telecomunicaciones, S.A. de C.V.
23.2 -- Consent of Santamarina y Steta, S.C., special Mexican counsel to Maxcom Telecomunicaciones, S.A. de
C.V. (contained in Exhibit 5.1).
23.3 -- Consent of Proskauer Rose LLP, special U.S. counsel to Maxcom Telecomunicaciones, S.A. de C.V.
(contained in Exhibit 5.2).
24.1 -- Powers of attorney for Maxcom Telecomunicaciones, S.A. de C.V. (included on signature page to
Registration Statement).
24.2 -- Powers of attorney for Corporativo en Telecomunicaciones, S.A. de C.V. (included on signature page
to Registration Statement).
25.1 -- Statement of eligibility as Trustee under the Trust Indenture Act of 1939 of the Bank of New York
on Form T-1 pursuant to the indenture dated as of March 17, 2000.*
99.1 -- Form of letter of transmittal of the notes.*
99.2 -- Form of notice of guaranteed delivery.*
99.3 -- Form of letter to DTC participants.*
99.4 -- Form of letter to clients.*
</TABLE>
------------------------
* Previously filed with Registration Statement 333-11910 submitted on May
5, 2000.
(b) FINANCIAL STATEMENT SCHEDULES
Schedule II--Valuation and Qualifying Accounts.*
------------------------
* Previously filed with Registration Statement 333-11910 submitted on May
5, 2000.
ITEM 22. UNDERTAKINGS
Each of the undersigned registrants hereby undertakes:
(1) 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 Securities and Exchange Commission 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 be governed by the final adjudication of such issue.
(2) The undersigned registrant hereby undertakes (i) to respond to
requests for information that is incorporated by reference into the
prospectus pursuant to Item 4, 10(b), 11, or 13 of 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 United
States for the purpose of responding to such requests. The
undertaking in subparagraph (i) above includes information contained
in documents filed subsequent to the effective date of this
Registration Statement through the date of responding to the
request.
<PAGE> 151
(3) The undersigned registrant hereby undertakes 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 this Registration Statement when it
became effective.
<PAGE> 152
SIGNATURE PAGE
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant, Maxcom Telecomunicaciones, S.A. de C.V. certifies that it has
reasonable grounds to believe that it meets all of the requirements for filing
on Form F-4 and has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Mexico,
Mexico, on August 22, 2000.
MAXCOM TELECOMUNICACIONES, S.A. DE C.V.
By: /s/Alejandro Martinez Alvarez
---------------------------------------
Name: Alejandro Martinez Alvarez
Title: Attorney-in-fact
By: /s/Gonzalo Alarcon Iturbide
---------------------------------------
Name: Gonzalo Alarcon Iturbide
Title: Attorney-in-fact
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant, Corporativo en Telecomunicaciones, S.A. de C.V. certifies that it
has reasonable grounds to believe that it meets all of the requirements for
filing on Form F-4 and has duly caused this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Mexico, Mexico, on August 22, 2000.
CORPORATIVO EN TELECOMUNICACIONES, S.A. DE C.V.
By: /s/Alejandro Martinez Alvarez
-----------------------------------------
Name: Alejandro Martinez Alvarez
Title: Attorney-in-fact
By: /s/Gonzalo Alarcon Iturbide
-----------------------------------------
Name: Gonzalo Alarcon Iturbide
Title: Attorney-in-fact
<PAGE> 153
MAXCOM TELECOMUNICACIONES, S.A. DE C.V.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
By: /s/ Adrian Aguirre Gomez Series A Director, Chairman of the Board
----------------------------------------------- and Acting Principal Executive Officer August 22, 2000
Name: Adrian Aguirre Gomez (Principal Executive Officer)
By /s/ Alejandro Eduardo Martinez Alvarez Chief Financial Officer
----------------------------------------- (Principal Financial and Accounting Officer) August 22, 2000
Name: Alejandro Eduardo Martinez Alvarez
By: /s/ Salvador Guillermo Ochoa Delgado
-----------------------------------------
Name: Salvador Guillermo Ochoa Delgado Director of Human Resources August 22, 2000
By: /s/ Maria Guadalupe Aguirre Gomez
-----------------------------------------
Name: Maria Guadalupe Aguirre Gomez Series A Director August 22, 2000
By: /s/ Maria Trinidad Aguirre Gomez
-----------------------------------------
Name: Maria Trinidad Aguirre Gomez Series A Director August 22, 2000
By: /s/ Maria Elena Aguirre Gomez
-----------------------------------------
Name: Maria Elena Aguirre Gomez Series A Director August 22, 2000
By: /s/ Gilberto Solis Silva
-----------------------------------------
Name: Gilberto Solis Silva Series A Director August 22, 2000
By: /s/ Raul Guijarro de Pablo
-----------------------------------------
Name: Raul Guijarro de Pablo Series A Director August 22, 2000
By: /s/ Miguel Sepulveda Martinez
-----------------------------------------
Name: Miguel Sepulveda Martinez Series A Director August 22, 2000
By: /s/ Michael R. Coltrane
-----------------------------------------
Name: Michael R. Coltrane Series B Director August 22, 2000
</TABLE>
<PAGE> 154
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
By: /s/ Barry R. Rubens
-----------------------------------------
Name: Barry R. Rubens Series B Director August 22, 2000
By: /s/ Jacques Gliksberg
-----------------------------------------
Name: Jacques Gliksberg Series N Director August 22, 2000
By: /s/ Graeme Mills
-----------------------------------------
Name: Graeme Mills Series N Director August 22, 2000
By: /s/ Salvatore Grasso
-----------------------------------------
Name: Salvatore Grasso Series N Director August 22, 2000
By: /s/ Hurdle H. Lea, III
-----------------------------------------
Name: Hurdle H. Lea, III Series N Director August 22, 2000
</TABLE>
<PAGE> 155
CORPORATIVO EN TELECOMUNICACIONES, S.A. DE C.V.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
By: /s/ Adrian Aguirre Gomez Director, Chairman of the Board and Acting
----------------------------------------------- Principal Executive Officer August 22, 2000
Name: Adrian Aguirre Gomez (Principal Executive Officer)
By: /s/ Alejandro Eduardo Martinez Alvarez Chief Financial Officer
----------------------------------------- (Principal Financial and Accounting Officer) August 22, 2000
Name: Alejandro Eduardo Martinez Alvarez
By: /s/ Adrian Aguirre Gomez
-----------------------------------------
Name: Adrian Aguirre Gomez Director August 22, 2000
By: /s/ Maria Guadalupe Aguirre Gomez
-----------------------------------------
Name: Maria Guadalupe Aguirre Gomez Director August 22, 2000
By: /s/ Maria Trinidad Aguirre Gomez
-----------------------------------------
Name: Maria Trinidad Aguirre Gomez Director August 22, 2000
By: /s/ Gilberto Solis Silva
-----------------------------------------
Name: Gilberto Solis Silva Director August 22, 2000
By: /s/ Raul Guijarro de Pablo
-----------------------------------------
Name: Raul Guijarro de Pablo Director August 22, 2000
By: /s/ Miguel Sepulveda Martinez
-----------------------------------------
Name: Miguel Sepulveda Martinez Director August 22, 2000
By: /s/ Michael R. Coltrane
-----------------------------------------
Name: Michael R. Coltrane Director August 22, 2000
By: /s/ Barry R. Rubens
-----------------------------------------
Name: Barry R. Rubens Director August 22, 2000
</TABLE>
<PAGE> 156
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
By: /s/ Jacques Gliksberg
-----------------------------------------
Name: Jacques Gliksberg Director August 22, 2000
By: /s/ Graeme Mills
-----------------------------------------
Name: Graeme Mills Director August 22, 2000
By: /s/ Salvatore Grasso
-----------------------------------------
Name: Salvatore Grasso Director August 22, 2000
By: /s/ Hurdle H. Lea, III
-----------------------------------------
Name: Hurdle H. Lea, III Director August 22, 2000
By: /s/ Maria Elena Aguirre Gomez
-----------------------------------------------
Name: Maria Elena Aguirre Gomez Director August 22, 2000
</TABLE>
